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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
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<S> <C>
/ / Preliminary| Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
WASHINGTON MUTUAL, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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WASHINGTON MUTUAL, INC.
1201 Third Avenue, Suite 1500
Seattle, Washington 98101
November 12, 1996
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Washington Mutual, Inc. ("Washington Mutual"), which will be held at the Four
Seasons Olympic Hotel, 411 University Street, Seattle, Washington, at 10:00
a.m., December 18, 1996. I look forward to greeting as many of our shareholders
as possible.
At the special meeting, holders of Washington Mutual common stock will
be asked to vote on a proposal to approve a transaction (the "Transaction")
pursuant to which Washington Mutual will merge with Keystone Holdings, Inc.
("Keystone Holdings"), and the direct and indirect subsidiaries of Keystone
Holdings, including American Savings Bank, F.A. ("ASB"), will become
subsidiaries of Washington Mutual. Integral components of the Transaction are
certain agreements, which provide for (i) Washington Mutual's acquisition of
certain warrants representing the right to purchase shares of the parent company
of ASB; and (ii) granting certain registration rights to recipients of
Washington Mutual common stock in the Transaction. In connection with the
Transaction, Washington Mutual will issue 47,883,333 shares of common stock as
follows: 25,883,333 shares to Keystone Holdings Partners, L.P. ("KHP"), the sole
shareholder of Keystone Holdings; 14,000,000 shares to the FSLIC Resolution Fund
("FRF"), the holder of the warrants; and 8,000,000 shares to an escrow for the
benefit of KHP and the FRF.
In addition, at the special meeting, holders of Washington Mutual
common stock and holders of each series of Washington Mutual preferred stock
will be asked to vote on a proposal to approve an amendment to Washington
Mutual's Restated Articles of Incorporation (the "Articles") to increase the
number of authorized shares of common stock from 100,000,000 shares to
350,000,000 shares. Approval of the amendment to the Articles is necessary in
order to implement the Transaction.
More complete information about the Transaction and the amendment to
the Articles is included in the accompanying Notice of Special Meeting of
Shareholders and the Proxy Statement. YOUR BOARD OF DIRECTORS BELIEVES THE
PROPOSALS ARE IN THE BEST INTERESTS OF WASHINGTON MUTUAL AND ITS SHAREHOLDERS
AND, ACCORDINGLY, RECOMMENDS THAT YOU VOTE "FOR" EACH OF THEM.
In addition to the specific matters to be acted upon, there will be a
report on the progress of Washington Mutual and an opportunity to ask questions
of general interest to shareholders.
Whether or not you attend the special meeting, it is important that
your shares be represented and voted at the special meeting. Therefore, I urge
you to sign, date and promptly return the enclosed proxy in the enclosed
postage-paid envelope. If you decide to attend the special meeting and vote in
person, you will, of course, have that opportunity. If you are planning to
attend the special meeting, we would greatly appreciate it if you would let us
know by so indicating in the appropriate place on your proxy.
Sincerely,
Kerry K. Killinger
Chairman, President and Chief Executive Officer
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WASHINGTON MUTUAL, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 18, 1996
The Special Meeting of Shareholders of Washington Mutual, Inc.
("Washington Mutual"), will be held at the Four Seasons Olympic Hotel, 411
University Street, Seattle, Washington, on December 18, 1996, at 10:00 a.m.
for the following purposes:
1. To approve a transaction (the "Transaction") pursuant to which
Washington Mutual will merge with Keystone Holdings, Inc. ("Keystone
Holdings"), and the direct and indirect subsidiaries of Keystone
Holdings, including American Savings Bank, F.A. ("ASB") will become
subsidiaries of Washington Mutual. Approval of the Transaction
constitutes approval of its integral components as follows:
(a) The Agreement for Merger and the form of the Plan of
Merger included therein, dated as of July 21, 1996 (the
"Merger Agreement"), by and among Washington Mutual, Keystone
Holdings Partners, L.P. ("KHP"), Keystone Holdings, New
American Holdings, Inc., New American Capital, Inc., N.A.
Capital Holdings, Inc. ("NACH Inc."), and ASB, pursuant to
which Keystone Holdings will merge with and into Washington
Mutual and, as a result, the direct and indirect subsidiaries
of Keystone Holdings, including ASB, will become subsidiaries
of Washington Mutual;
(b) The Warrant Exchange Agreement, dated as of July 21, 1996,
by and among the parties to the Merger Agreement, together
with the Federal Deposit Insurance Corporation (the "FDIC"),
as manager of the Federal Savings and Loan Insurance
Corporation Resolution Fund (the "FRF") (the FDIC in its
capacity as manager of the FRF is referred to herein as the
"FDIC-Manager"), and certain affiliates of Keystone Holdings
and KHP, pursuant to which the FRF has agreed to exchange
certain warrants representing the right to purchase shares of
NACH Inc., a subsidiary of Keystone Holdings and the parent
corporation of ASB, for shares of Washington Mutual common
stock to be issued in the Transaction;
(c) The issuance by Washington Mutual of 47,883,333 shares of
common stock as follows: 25,883,333 shares to KHP for
immediate distribution to its general and limited partners
(the "Investors"); 14,000,000 shares to the FRF; and 8,000,000
shares (the "Litigation Escrow Shares") to an escrow for the
benefit of the Investors and the FRF;
(d) An escrow agreement to be entered into by and among
Washington Mutual, KHP and the FDIC-Manager pursuant to which
the Litigation Escrow Shares (or a portion thereof) will be
released, 64.9% to the Investors and 35.1% to the FRF, or
their respective assigns, to the extent that Washington Mutual
receives net cash proceeds from certain litigation that
Keystone Holdings and its affiliates are pursuing against the
United States, which litigation is being assumed by Washington
Mutual in the Transaction; and
(e) The Registration Rights Agreement dated as of July 21,
1996, by and among Washington Mutual, KHP and the
FDIC-Manager, pursuant to which Washington Mutual will be
required to use its best efforts to register for resale to the
public under the Securities Act of 1933, as amended, shares of
common stock received in the Transaction.
2. To approve an amendment to Washington Mutual's Restated Articles of
Incorporation (the "Articles") to increase the number of authorized
shares of common stock from 100,000,000 shares to 350,000,000 shares.
<PAGE> 4
APPROVAL OF THE AMENDMENT TO THE ARTICLES IS REQUIRED IN ORDER TO
IMPLEMENT THE TRANSACTION.
Both of these proposals are more fully described in the Proxy
Statement, which follows. Only holders of shares of Washington Mutual common
stock and holders of shares of each outstanding series of Washington Mutual
preferred stock of record at the close of business on October 24, 1996 are
entitled to notice of, and to vote at, this special meeting, and any and all
adjournments thereof. Holders of Washington Mutual common stock are entitled to
assert dissenters' rights in connection with the Transaction.
Holders of Washington Mutual common stock will be asked to vote on both
proposals. Holders of each outstanding series of Washington Mutual preferred
stock will be asked to vote with the holders of Washington Mutual common stock
only on the proposal to amend the Articles to increase the number of authorized
shares of common stock.
By Order of the Board of Directors,
Seattle, Washington William L. Lynch
November 12, 1996 Secretary
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IMPORTANT
Whether or not you expect to attend in person, we urge you to vote on
the proposals, sign, date, and return the enclosed proxy at your earliest
convenience. This will ensure the presence of a quorum at the Special Meeting.
PROMPTLY VOTING, SIGNING, DATING, AND RETURNING THE PROXY WILL SAVE WASHINGTON
MUTUAL THE EXPENSE AND EXTRA WORK OF ADDITIONAL SOLICITATION. An addressed
envelope for which no postage is required if mailed in the United States is
enclosed for that purpose. Sending in your proxy will not prevent you from
voting your stock at the Special Meeting if you desire to do so, as your proxy
is revocable at your option in the manner described in the Proxy Statement.
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WASHINGTON MUTUAL, INC.
1201 Third Avenue, Suite 1500
Seattle, Washington 98101
PROXY STATEMENT
For the Special Meeting of Shareholders To Be Held
December 18, 1996
This Proxy Statement is being furnished to shareholders of Washington
Mutual, Inc. (the "Company" or "Washington Mutual"), in connection with the
solicitation of proxies by the Board of Directors of Washington Mutual (the
"Washington Mutual Board") for use at the Special Meeting of Shareholders to be
held at 10:00 a.m. on December 18, 1996, or any adjournments thereof (the
"Special Meeting"). The persons named as proxies are William L. Lynch and Marc
R. Kittner.
At the Special Meeting, holders of Washington Mutual common stock, no
par value per share (the "Common Stock"), will be asked to consider and vote on
a proposal to approve a transaction (the "Transaction") pursuant to which
Washington Mutual will acquire Keystone Holdings, Inc. ("Keystone Holdings") and
the direct and indirect subsidiaries of Keystone Holdings, including American
Savings Bank, F.A. ("ASB"). Consummation of the Transaction requires the
implementation of the following agreements and the completion of the following
actions:
Washington Mutual has entered into that certain Agreement for Merger,
which includes the form of Plan of Merger contained therein, dated as of July
21, 1996 (the "Merger Agreement"), among Washington Mutual, Keystone Holdings
Partners, L.P. ("KHP"), Keystone Holdings, New American Holdings, Inc. ("New
Holdings'), New American Capital, Inc. ("New Capital"), N.A. Capital Holdings,
Inc. ("NACH Inc."), and ASB (Keystone Holdings, New Holdings, New Capital, NACH
Inc. and ASB are collectively referred to in this Proxy Statement as the
"Keystone Entities"), pursuant to which Keystone Holdings will merge with and
into Washington Mutual (the "Merger") and, as a result, the direct and indirect
subsidiaries of Keystone Holdings, including ASB, will become subsidiaries of
Washington Mutual.
The parties to the Merger Agreement, together with the Federal Deposit
Insurance Corporation (the "FDIC"), as manager of the Federal Savings and Loan
Insurance Corporation ("FSLIC") Resolution Fund (the "FRF") (the FDIC in its
capacity as manager of the FRF is referred to herein as the "FDIC-Manager"), and
certain affiliates of Keystone Holdings and KHP have also entered into that
certain Warrant Exchange Agreement dated as of July 21, 1996 (the "Warrant
Exchange Agreement"). Pursuant to the Warrant Exchange Agreement, the
FDICManager has agreed to exchange certain warrants (the "Warrants")
representing the right to purchase shares of NACH Inc., a subsidiary of Keystone
Holdings and the parent corporation of ASB, for shares of Common Stock (the
"Warrant Exchange").
In the Transaction, Washington Mutual will issue 47,883,333 shares of
Common Stock as follows: 25,883,333 shares to KHP (the "Keystone Initial
Shares") for immediate distribution to its general and limited partners (the
"Investors"); 14,000,000 shares to the FRF (the "FRF Initial Shares"); and
8,000,000 shares (the "Litigation Escrow Shares") to an escrow for the benefit
of the Investors and the FRF. The Keystone Initial Shares and the FRF Initial
Shares are referred to collectively as the "Initial Shares." If, prior to the
consummation of the Transaction, the Common Stock undergoes a stock split, stock
dividend, recapitalization or similar transaction, the number of shares to be
issued in the Transaction will be adjusted accordingly. All references in this
Proxy Statement to any number of shares of Common Stock to be issued in the
Transaction refer to such number as so adjusted. After the Transaction and
assuming all of the Litigation Escrow Shares are released, the Investors will
own approximately 31.1 million shares of Common Stock, or approximately 25.9% of
the Common Stock then outstanding (based on the number of shares outstanding on
the record date for the Special Meeting plus the Initial Shares and Litigation
Escrow Shares). In addition, to the extent that the FDIC-Manager does not sell
the FRF Initial Shares as soon as practicable after the Effective Date pursuant
to the Registration Rights Agreement, the FRF will own approximately 14.0% of
the Common Stock then outstanding (based on the number of shares outstanding
<PAGE> 6
on the record date for the Special Meeting plus the Initial Shares and
Litigation Escrow Shares). See "THE TRANSACTION -- Significant Shareholders and
"THE TRANSACTION -- Registration Rights."
The last reported sales price of a share of Common Stock on The Nasdaq
Stock Market on October 24, 1996 was $39.44. Based on such sales price, the
value of the Keystone Initial Shares and the FRF Initial Shares would be
approximately $1,020,774,000 and $552,125,000, respectively, and the value of
the Litigation Escrow Shares would be $315,500,000. The actual sales price of a
share of Common Stock as of the effective date of the Transaction and the value
of the shares to be issued may vary materially from such amounts.
Washington Mutual, KHP and the FDIC-Manager will enter into an escrow
agreement pursuant to which the Litigation Escrow Shares (or a portion thereof)
will be released, 64.9% to the Investors and 35.1% to the FRF, or their
respective assigns, to the extent that Washington Mutual receives net cash
proceeds from certain litigation that Keystone Holdings and certain of its
affiliates are pursuing against the United States, which litigation is being
assumed by Washington Mutual in the Transaction.
In addition, Washington Mutual, KHP and the FDIC-Manager have entered
into that certain Registration Rights Agreement, dated as of July 21, 1996 (the
"Registration Rights Agreement"), which provides that Washington Mutual will be
required to use its best efforts to register for resale to the public under the
Securities Act of 1933, as amended (the "Securities Act"), shares of Common
Stock received in the Transaction.
In addition, the holders of Common Stock will be asked to vote
separately and as a group with the holders of each of the Washington Mutual
9.12% Noncumulative Perpetual Preferred Stock, Series C (the "Series C
Preferred"), $6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D
(the "Series D Preferred"), and 7.60% Noncumulative Perpetual Preferred Stock,
Series E (the "Series E Preferred") (collectively, the "Preferred Stock") to
consider and vote on a proposal to approve an amendment to the Company's
Restated Articles of Incorporation (the "Articles") to increase the number of
authorized shares of Common Stock from 100,000,000 shares to 350,000,000 shares.
THE IMPLEMENTATION OF THE TRANSACTION IS CONDITIONED ON THE APPROVAL OF THE
AMENDMENT TO THE ARTICLES.
YOUR BOARD OF DIRECTORS BELIEVES THE PROPOSALS ARE IN THE BEST
INTERESTS OF WASHINGTON MUTUAL AND ITS SHAREHOLDERS AND, ACCORDINGLY, RECOMMENDS
THAT YOU VOTE "FOR" EACH OF THEM.
The mailing address of the principal executive offices of Washington
Mutual is 1201 Third Avenue, Suite 1500, Seattle, Washington 98101, and its
telephone number is (206) 461-2000.
The accompanying Notice of Special Meeting, this Proxy Statement and
the accompanying proxy are being first sent to shareholders on or about
November 12, 1996.
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TABLE OF CONTENTS
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SUMMARY................................................................................................ 5
The Participants.............................................................................. 5
The Special Meeting and Votes Required........................................................ 6
The Transaction............................................................................... 7
Management and Operations of Washington Mutual Following the Transaction...................... 11
Market Prices and Dividends................................................................... 12
SELECTED HISTORICAL FINANCIAL DATA..................................................................... 13
Summary Consolidated Financial Data of Washington Mutual...................................... 13
Summary Consolidated Financial Data of Keystone Holdings...................................... 15
Summary Historical and Pro Forma Combined Financial Data...................................... 17
SELECTED HISTORICAL, PRO FORMA AND EQUIVALENT PRO FORMA PER SHARE DATA................................. 20
THE SPECIAL MEETING.................................................................................... 21
General....................................................................................... 21
Matters To Be Considered at the Special Meeting............................................... 21
Record Date and Voting........................................................................ 21
Proxies and Voting Instructions............................................................... 21
Quorum; Votes Required........................................................................ 22
Solicitation of Proxies....................................................................... 22
THE TRANSACTION........................................................................................ 22
General....................................................................................... 22
Effective Date and Time of the Transaction.................................................... 24
Background of the Transaction................................................................. 24
Reasons for the Transaction; Recommendation of the Washington Mutual Board.................... 26
Opinion of Financial Advisor.................................................................. 28
Risk Factors.................................................................................. 32
Significant Shareholders...................................................................... 34
Registration Rights........................................................................... 34
Regulatory Approvals.......................................................................... 35
FRF Matters................................................................................... 36
Conditions to the Transaction................................................................. 37
Covenants of Keystone Holdings................................................................ 38
Covenants of Washington Mutual................................................................ 39
Accounting Treatment.......................................................................... 39
Dissenters' Rights............................................................................ 40
Resales of Washington Mutual Common Stock..................................................... 41
Federal Income Tax Consequences............................................................... 42
Other Terms of the Merger Agreement and Warrant Exchange Agreement............................ 42
THE LITIGATION ESCROW.................................................................................. 44
General....................................................................................... 44
The Case...................................................................................... 45
Control of the Case........................................................................... 45
Rights in the Litigation Escrow Shares........................................................ 46
MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE
TRANSACTION............................................................................................ 46
General....................................................................................... 46
Board of Directors............................................................................ 46
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Operations After the Transaction.............................................................. 47
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS............................................ 49
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENT OF FINANCIAL POSITION............................... 51
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME.......................................... 55
INFORMATION CONCERNING WASHINGTON MUTUAL............................................................... 57
Washington Mutual............................................................................. 57
The Reorganization............................................................................ 57
Washington Mutual's Principal Operating Subsidiaries.......................................... 58
Principal Holders of Common Stock............................................................. 59
Principal Holders of Preferred Stock.......................................................... 60
Security Ownership of Directors and Executive Officers........................................ 60
Market Prices and Dividends................................................................... 62
Dividend Policy............................................................................... 62
DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK......................................................... 63
PROPOSED AMENDMENT TO WASHINGTON MUTUAL ARTICLES OF INCORPORATION -
INCREASE IN AUTHORIZED SHARES.......................................................................... 64
Current Capitalization........................................................................ 64
Certain Effects of the Proposed Amendment..................................................... 65
Certain Anti-Takeover Provisions in Washington Mutual's Articles and Bylaws................... 65
INDEPENDENT AUDITORS................................................................................... 67
AVAILABLE INFORMATION.................................................................................. 67
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................ 68
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING.......................................................... 68
OTHER MATTERS.......................................................................................... 69
APPENDICES
APPENDIX A - INFORMATION CONCERNING KEYSTONE HOLDINGS................................................. A-1
APPENDIX B - CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS ...................................B-1
APPENDIX C - AGREEMENT FOR MERGER......................................................................C-1
APPENDIX D - WARRANT EXCHANGE AGREEMENT................................................................D-1
APPENDIX E - FORM OF ESCROW AGREEMENT..................................................................E-1
APPENDIX F - REGISTRATION RIGHTS AGREEMENT.............................................................F-1
APPENDIX G - OPINION OF CS FIRST BOSTON CORPORATION....................................................G-1
APPENDIX H - CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
RELATING TO DISSENTERS' RIGHTS............................................................H-1
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement, the Appendices hereto or in documents incorporated
herein by reference. This summary is not intended to be complete and is
qualified in its entirety by the more detailed information contained elsewhere
in this Proxy Statement, the Appendices hereto and the other documents
incorporated herein by reference. Shareholders are urged to read this Proxy
Statement, the Appendices hereto and the documents incorporated herein by
reference in their entirety.
THE PARTICIPANTS
WASHINGTON MUTUAL. Washington Mutual is a Washington corporation that
provides a broad range of financial services to individuals and small businesses
in Washington, Oregon, Utah, Montana and Idaho through its subsidiary
operations. The principal subsidiaries of Washington Mutual include its banking
subsidiaries, Washington Mutual Bank ("WMB") and Washington Mutual Bank fsb
("WMBfsb"), and its insurance subsidiary, WM Life Insurance Co. ("WM Life").
Financial services of Washington Mutual include the traditional savings bank
activities of accepting deposits from the general public and making residential
loans, consumer loans and limited types of commercial real estate loans
(primarily multi-family residential property loans) and, more recently, certain
commercial banking activities. Washington Mutual, through its subsidiaries, also
issues and markets annuity contracts and is the investment advisor to and
distributor of mutual funds.
As of June 30, 1996, Washington Mutual operated a total of 297
financial centers and 23 loan centers in Washington, Oregon, Utah, Montana and
Idaho. At June 30, 1996, Washington Mutual had total consolidated assets of
$22.3 billion, total deposits of $11.0 billion and stockholders' equity of $1.6
billion. The principal executive offices of Washington Mutual are located in the
Washington Mutual Tower, 1201 Third Avenue, Suite 1500, Seattle, Washington
98101, and its telephone number is (206) 461-2000.
For additional information concerning Washington Mutual, see
"INFORMATION CONCERNING WASHINGTON MUTUAL," "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
KEYSTONE HOLDINGS. Keystone Holdings, a Texas corporation, is a holding
company whose principal operating subsidiary is ASB, a California-based
federally chartered savings bank. As of June 30, 1996, Keystone Holdings had
consolidated assets of $20.5 billion, deposits of $12.7 billion and
stockholder's equity of $550.4 million. The principal business of ASB consists
of attracting funds in the form of retail deposits through its branches and
obtaining funds from borrowings, and investing those funds in single-family
mortgage loans. ASB is one of the largest originators of single-family
adjustable-rate mortgages ("ARMs") in California. ASB also originates a smaller
volume of multi-family residential loans (the majority of which are secured by
properties with 36 or fewer units) and loans secured by mobile home parks, which
are classified as commercial mortgage loans. In addition, ASB owns subsidiary
service corporations that engage in securities and insurance brokerage.
As of June 30, 1996, ASB operated a total of 158 branches and 62 loan
origination offices, all of which were located in California except for a loan
origination office located in Phoenix, Arizona. ASB expects to open three
additional loan origination offices, one in each of Las Vegas, Nevada and Denver
and Boulder, Colorado, prior to year end 1996. The California branches and loan
origination offices are concentrated in the Los Angeles and San Francisco
metropolitan areas. A majority of ASB's loan origination offices are located in
close proximity to ASB's branch offices.
Keystone Holdings commenced operations in December 1988 as an indirect
holding company for ASB. Keystone Holdings and ASB were formed to effect the
December 1988 acquisition (the "1988 Acquisition") of certain assets and
liabilities of the failed savings and loan association subsidiary (the "Failed
Association") of Financial Corporation of America. The 1988 Acquisition utilized
a "good bank/bad bank" structure, with ASB, the "good bank," acquiring
substantially all of the Failed Association's performing loans and fixed assets.
New West Federal Savings and Loan Association, the "bad bank," was formed to
acquire substantially all of the Failed Association's underperforming and
certain other assets, with a view towards their liquidation. New West Federal
5
<PAGE> 10
Savings and Loan and its subsidiaries ("New West") are indirect subsidiaries of
Keystone Holdings. Although Keystone Holdings beneficially owns the stock of New
West, it does not have a financial interest in New West because of certain
contractual provisions with, and indemnifications from, the FRF. As a result,
New West is not included in the Consolidated Financial Statements of Keystone
Holdings. The consummation of the Transaction is conditioned on the divestiture
of New West prior to the effective date of the Transaction (the "Effective
Date"). In connection with the 1988 Acquisition, the predecessor to the FRF
received the Warrants, which will be exchanged for Common Stock in the
Transaction. See "APPENDIX A, INFORMATION CONCERNING KEYSTONE HOLDINGS" and "THE
TRANSACTION -- Conditions to the Transaction."
For additional information concerning Keystone Holdings, see "APPENDIX
A, INFORMATION CONCERNING KEYSTONE HOLDINGS" and "APPENDIX B, CONSOLIDATED
FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS."
THE SPECIAL MEETING AND VOTES REQUIRED
TIME, DATE AND PLACE. The Special Meeting will be held at 10:00 a.m.,
local time, on December 18, 1996, at the Four Seasons Olympic Hotel, 411
University Street, Seattle, Washington. See "THE SPECIAL MEETING--General."
MATTERS TO BE CONSIDERED. At the Special Meeting, shareholders of
Washington Mutual will be asked to consider and vote upon a proposal to approve
the Transaction and a proposal to amend the Articles to increase the number of
authorized shares of Common Stock and to transact such other business as may
properly come before the Special Meeting. See "THE SPECIAL MEETING -- Matters to
be Considered at the Special Meeting."
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM. The Washington Mutual
Board has fixed the close of business on October 24, 1996 as the record date
(the "Record Date") for the determination of the holders of Washington Mutual
Common Stock and Preferred Stock ("Washington Mutual Shareholders") entitled to
receive notice of and to vote at the Special Meeting.
As of the Record Date, there were outstanding 72,307,510 shares of
Common Stock, 2,752,500 shares of Series C Preferred, 1,399,900 shares of Series
D Preferred and 1,970,000 shares of Series E Preferred. Each share of Common
Stock is entitled to one vote on each of the matters properly presented at the
Special Meeting. Each share of Series C Preferred, Series D Preferred and Series
E Preferred is entitled to one vote only on the proposal to amend the Articles.
For the vote on the proposal to approve the Transaction, the presence, in person
or by proxy, of the holders of a majority of the outstanding shares of Common
Stock will constitute a quorum. For the purpose of the votes on the proposal to
amend the Articles, the presence, in person or by proxy, of the holders of a
majority of (i) the outstanding shares of Common Stock (for the separate vote of
holders of Common Stock) and (ii) the aggregate of the outstanding shares of
Common Stock and Preferred Stock (for the vote of holders of Common Stock and
Preferred Stock as a group) will constitute a quorum, respectively. See "THE
SPECIAL MEETING -- Record Date and Voting" and "THE SPECIAL MEETING -- Quorum;
Votes Required."
VOTES REQUIRED. Assuming a quorum is present, the affirmative vote of
the holders of a majority of the shares of Common Stock outstanding on the
Record Date is required to approve the Transaction. Approval of the amendment to
the Articles requires the affirmative votes of the holders of (i) two-thirds of
the shares of Common Stock and Preferred Stock outstanding on the Record Date
voting together as a voting group and (ii) two-thirds of the shares of Common
Stock outstanding on the Record Date voting as a separate voting group.
Accordingly, a failure to submit a proxy (or to vote in person at the Special
Meeting), an abstention by a Washington Mutual Shareholder or a broker non-vote,
which is an indication by a broker that it does not have discretionary authority
to vote on a particular matter, will have the same effect as a "NO" vote with
respect to the vote on both proposals. For shares of Common Stock or Preferred
Stock held in street name by a broker, the failure of a Washington Mutual
Shareholder to give such broker voting instructions with regard to any proposal
on which such shareholder is entitled to vote will result in a broker non-vote
and will have the same effect as a "NO" vote with respect to such proposal. See
"THE SPECIAL MEETING -- Record Date and Voting" and "THE SPECIAL MEETING --
Quorum; Votes Required."
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YOUR BOARD OF DIRECTORS BELIEVES THE PROPOSALS ARE IN THE BEST
INTERESTS OF WASHINGTON MUTUAL AND ITS SHAREHOLDERS AND, ACCORDINGLY, RECOMMENDS
THAT YOU VOTE "FOR" EACH OF THEM.
THE TRANSACTION
GENERAL. Subject to the terms and conditions of the Merger Agreement,
on the Effective Date, Keystone Holdings will merge with and into Washington
Mutual, with Washington Mutual as the surviving corporation. The separate
existence of Keystone Holdings will cease upon the effectiveness of the Merger
and the direct and indirect subsidiaries of Keystone Holdings, including ASB,
will become subsidiaries of Washington Mutual. Additionally, and as a condition
to the consummation of the Merger, the FDIC-Manager has agreed, pursuant to the
Warrant Exchange Agreement to effect the Warrant Exchange. Upon the Effective
Date, Washington Mutual will directly or indirectly wholly-own all of the
subsidiaries of Keystone Holdings, including ASB (other than New West). See "THE
TRANSACTION."
In the Transaction, Washington Mutual will issue 47,883,333 shares of
Common Stock, as follows: 25,883,333 Keystone Initial Shares; 14,000,000 FRF
Initial Shares; and 8,000,000 Litigation Escrow Shares to an escrow for the
benefit of the Investors and the FRF (the "Litigation Escrow"). The Keystone
Initial Shares and the contingent right to receive the portion of the Litigation
Escrow Shares attributable to KHP will be distributed to the Investors
immediately following consummation of the Transaction, based upon their pro rata
interest in KHP. After the Transaction and assuming all of the Litigation Escrow
Shares are released, the Investors will own approximately 31.1 million shares of
Common Stock, or approximately 25.9% of the Common Stock then outstanding (based
on the number of shares outstanding on the Record Date plus the Initial Shares
and Litigation Escrow Shares). In addition, to the extent that the FRF Initial
Shares are not sold in the Initial Underwriting, the FRF will own approximately
14.0% of the Common Stock then outstanding (based on the number of shares
outstanding on the Record Date plus the Initial Shares and Litigation Escrow
Shares). See "THE TRANSACTION -- General," "THE TRANSACTION -- Significant
Shareholders" and "THE TRANSACTION -- Registration Rights."
KHP, Keystone Holdings and certain of its subsidiaries are plaintiffs
in a lawsuit against the United States (the "Case"), alleging, among other
things, that they entered into a contract with the FSLIC and the Federal Home
Loan Bank Board ("FHLBB"), and that the U.S. government breached that contract,
causing damage to the plaintiffs. See "THE LITIGATION ESCROW -- The Case."
Pursuant to the Merger Agreement, upon consummation of the Transaction,
Washington Mutual will succeed to the right to prosecute the Case and will
receive any recovery in the Case. Prior to the Effective Date, Washington
Mutual, KHP, the FDIC-Manager and a mutually agreeable escrow agent for the
Litigation Escrow Shares ("Escrow Agent") will enter into an escrow agreement
substantially in the form included as Appendix E hereto (the "Escrow
Agreement"). Pursuant to the terms of the Escrow Agreement, the Escrow Agent
will hold the Litigation Escrow Shares for six years, subject to extension in
certain circumstances. See "THE LITIGATION ESCROW."
Upon Washington Mutual's receipt of net cash proceeds from a judgment
or settlement of the Case, if any ("Case Proceeds"), all or part of the
Litigation Escrow Shares will be released, 64.9% to the Investors and 35.1% to
the FRF. The number of Litigation Escrow Shares released will be equal to the
Case Proceeds, reduced by certain tax and litigation-related costs and expenses,
divided by the "Average Price." The "Average Price" means the arithmetic average
of the closing prices of the Common Stock on The Nasdaq Stock Market for the 10
trading days immediately preceding the third trading day before the Effective
Date. While Litigation Escrow Shares are held in the Litigation Escrow, the
FDIC-Manager and the Investors will have the right to vote their respective
percentage of the Litigation Escrow Shares. If not all of the Litigation Escrow
Shares are distributed prior to the expiration of the Litigation Escrow, any
remaining Litigation Escrow Shares will be returned to Washington Mutual for
cancellation. See "THE LITIGATION ESCROW."
The ultimate outcome of the Case is uncertain, and there can be no
assurance that any recovery in the Case will result in Case Proceeds that exceed
the value of the Litigation Escrow Shares plus costs and expenses.
7
<PAGE> 12
Generally, Washington Mutual will not benefit financially from the Case unless
Case Proceeds exceed such an amount and, in negotiating the Transaction,
Washington Mutual ascribed no value to the possibility that the Case Proceeds
would exceed such amount. As a result, it is uncertain what, if any, impact
recovery in the Case will have on the financial position of Washington Mutual.
Washington Mutual, KHP and the FDIC-Manager have entered into the
Registration Rights Agreement, pursuant to which Washington Mutual will be
required, if the Transaction closes, to use its best efforts to register for
resale to the public under the Securities Act shares of Common Stock issued in
the Transaction. Pursuant to the Registration Rights Agreement, Washington
Mutual has agreed to file and use its best efforts to cause to become effective
with the Securities and Exchange Commission (the "SEC") as soon as practicable
after the Effective Date, on a date mutually acceptable to Washington Mutual and
the participants in such underwriting, a registration statement covering the
sale of between 7.5 million and 20 million shares of Common Stock (the "Initial
Underwriting"). It is currently expected that the FDIC-Manager will sell the FRF
Initial Shares in the Initial Underwriting, although there are no assurances
that the FDIC-Manager will sell all or any of such shares. See "THE TRANSACTION
- -- Resales of Washington Mutual Common Stock."
EFFECTIVE DATE AND TIME OF THE TRANSACTION. The Transaction will become
effective at the time (the "Effective Time") of both (i)(a) the filing of
articles of merger with the Washington Secretary of State and (b) the filing of
articles of merger with the Texas Secretary of State, or at such time after such
filings as may be provided in such articles of merger and (ii) the consummation
of the Warrant Exchange. The "Effective Date" is the day on which the Effective
Time occurs. See "THE TRANSACTION -- Effective Date and Time of the
Transaction."
AMENDMENT TO ARTICLES. In order to implement the Transaction, it is
necessary to increase the number of authorized shares of Common Stock.
Additionally, the Washington Mutual Board believes that having additional shares
available would offer other long-term advantages to Washington Mutual and its
shareholders. Accordingly, the Washington Mutual Board has unanimously
recommended that the number of authorized shares of Common Stock be increased
from 100,000,000 shares to 350,000,000 shares. See "PROPOSED AMENDMENT TO
WASHINGTON MUTUAL ARTICLES OF INCORPORATION -- INCREASE IN AUTHORIZED SHARES."
REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE WASHINGTON MUTUAL
BOARD. The Washington Mutual Board has carefully considered the terms of the
Merger Agreement, the Warrant Exchange Agreement, the Escrow Agreement and the
Registration Rights Agreement and has approved the Transaction as being in the
best interests of Washington Mutual and the Washington Mutual Shareholders. THE
WASHINGTON MUTUAL BOARD UNANIMOUSLY RECOMMENDS THAT WASHINGTON MUTUAL
SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE TRANSACTION AND FOR THE
PROPOSAL TO AMEND THE ARTICLES TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK.
The recommendation of the Washington Mutual Board is based upon a
number of factors, including the terms of the Transaction documents, the
benefits expected to result from the combination of Washington Mutual and
Keystone Holdings, information concerning the financial condition, results of
operations and prospects of Washington Mutual on a stand-alone and combined
basis with Keystone Holdings, and the fairness opinions of CS First Boston
Corporation ("CS First Boston") as financial advisor to the Washington Mutual
Board. See "THE TRANSACTION -- Background of the Transaction," "THE TRANSACTION
- -- Reasons for the Transaction; Recommendation of the Washington Mutual Board"
and "THE TRANSACTION -- Opinion of Financial Advisor."
OPINION OF FINANCIAL ADVISOR. CS First Boston has served as financial
advisor to the Washington Mutual Board, and has delivered its written opinions,
dated as of July 21, 1996 and as of the date of this Proxy Statement, to the
Washington Mutual Board that the consideration to be issued to KHP and the FRF
in the Transaction is fair, from a financial point of view, to Washington
Mutual. Washington Mutual has agreed to pay CS First Boston a fee of $2.5
million for its services in connection with the Transaction. See "THE
TRANSACTION -- Opinion of Financial Advisor." THE FULL TEXT OF CS FIRST BOSTON'S
OPINION DATED THE DATE OF THIS PROXY STATEMENT (THE "CS FIRST BOSTON OPINION"),
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON ITS
REVIEW,
8
<PAGE> 13
IS ATTACHED HERETO AS APPENDIX G. WASHINGTON MUTUAL SHAREHOLDERS ARE URGED TO
READ SUCH OPINION IN ITS ENTIRETY.
RISK FACTORS. In deciding whether to approve the Transaction and the
proposal to amend the Articles to increase the number of authorized shares of
Common Stock, Washington Mutual Shareholders should carefully review the matters
set forth under "THE TRANSACTION -- Risk Factors," including the risk that the
benefits expected from the Transaction may not be fully achieved and that the
combined companies may be adversely affected by future economic conditions.
SIGNIFICANT SHAREHOLDERS. After the Transaction and assuming all of the
Litigation Escrow Shares are released from the Litigation Escrow, the Investors
will own approximately 31.1 million shares of Common Stock, or approximately
25.9% of the Common Stock then outstanding (based on the number of shares
outstanding on the Record Date plus the Initial Shares and Litigation Escrow
Shares). In addition, to the extent that the FRF Initial Shares are not sold in
the Initial Underwriting, the FRF will own approximately 14.0% of the Common
Stock then outstanding (based on the number of shares outstanding on the Record
Date plus the Initial Shares and Litigation Escrow Shares). Robert M. Bass ("Mr.
Bass"), one of the principal Investors, will beneficially own approximately
11.4 million shares of Common Stock or approximately 9.5% of the Common Stock
then outstanding (based on the number of shares outstanding on the Record Date
plus the Initial Shares and Litigation Escrow Shares). Except for restrictions
on selling Common Stock arising from certain agreements between the Company and
certain Investors relating to the accounting treatment of the Merger (the
"Affiliate Letters") and from applicable securities laws, the Investors,
including Mr. Bass, will not be restricted in their ability to buy, sell or vote
their shares of Common Stock and certain Investors, particularly Mr. Bass, and
the FDIC-Manager, to the extent that the FRF Initial Shares are not sold in the
Initial Underwriting, will be able to affect voting on matters presented to
shareholders of Washington Mutual. See "THE TRANSACTION -- Significant
Shareholders" and "THE TRANSACTION -Accounting Treatment."
REGISTRATION RIGHTS. Washington Mutual has agreed to provide certain
registration rights to the Investors and the FRF, and their permitted assigns
and transferees, with regard to the shares of the Common Stock issued in the
Transaction. Pursuant to the Registration Rights Agreement, Washington Mutual
has agreed to file with the SEC and use its best efforts to cause to become
effective as soon as practicable after the Effective Date, on a date mutually
acceptable to Washington Mutual and the participants in the Initial
Underwriting, a registration statement with respect to the Initial Underwriting
of not less than 7.5 million and not more than 20 million of the Initial Shares.
Washington Mutual has further agreed to use its best efforts to cause the
registration under the Securities Act of all of the Initial Shares not sold in
the Initial Underwriting on or as soon as practicable after the date nine months
after the Effective Date and to provide certain additional registration rights
in certain circumstances to the holders of the Initial Shares and Litigation
Escrow Shares. See "THE TRANSACTION -- Registration Rights."
REGULATORY APPROVALS. The Transaction is subject to the prior approval
of the Office of Thrift Supervision ("OTS"), the receipt of which regulatory
approval is a condition to consummation of the Transaction. Washington Mutual
has filed an application for the required regulatory approval, but there can be
no assurance that such application will be approved or, if approved, that such
approval will not contain conditions or requirements that cause such approval to
fail to satisfy the conditions set forth in the Transaction documents. As of the
date of this Proxy Statement, three community groups have filed protests with
the OTS with regard to the Transaction. The OTS will consider these protests
in connection with consideration of the Company's application as a whole. The
Company believes that the protests are without merit and has responded to the
OTS to that effect. Consummation of the Transaction is also conditioned on the
receipt of certain confirmations and certain regulatory approvals relating to
the ownership of Common Stock by KHP, Mr. Bass and certain related entities and
on the receipt of confirmation from the OTS and receipt of confirmation or
waiver from the FDIC that Washington Mutual will not be deemed to control Family
Savings Bank (a minority-owned financial institution in which Keystone Holdings
owns 14.7% of the outstanding common stock and all of the outstanding preferred
stock). See "THE TRANSACTION -Regulatory Approvals" and "THE TRANSACTION --
Conditions to the Transaction."
9
<PAGE> 14
FRF MATTERS.
FRF Agreements. In connection with the 1988 Acquisition, the
Keystone Entities and the predecessor to the FRF entered into a number of
agreements (the "FRF Agreements"). Pursuant to the Warrant Exchange Agreement,
upon the Effective Time, certain of the FRF Agreements (or portions thereof)
relating to the Warrants will be terminated. Additionally, pursuant to the
Merger Agreement, KHP and the Keystone Entities have agreed to use their best
efforts to: (i) obtain consents necessary so that the FRF Agreements can be
assumed by a subsidiary of Washington Mutual; (ii) resolve, without material
liability to Washington Mutual or the Keystone Entities, any material
outstanding differences between KHP and the Keystone Entities, on the one hand,
and the FDIC-Manager, on the other hand, relating to the FRF Agreements; and
(iii) facilitate a renegotiation of the FRF Agreements to simplify the remaining
effective provisions thereof. See "THE TRANSACTION -- FRF Matters" and "APPENDIX
A, INFORMATION CONCERNING KEYSTONE HOLDINGS -- Keystone Holdings -- The 1988
Acquisition." The Company anticipates that at the Effective Date, assuming the
renegotiation of the FRF Agreements, the only material continuing obligations
under the FRF Agreements will be (i) the obligation of the FDIC-Manager to
indemnify Washington Mutual and certain subsidiaries in certain circumstances
and (ii) the obligation of Washington Mutual to share certain tax savings with
the FDIC-Manager. See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING
THE TRANSACTION -- Operations After the Transaction."
New West Divestiture. In the 1988 Acquisition, New West was
structured to be the "bad bank" that acquired substantially all of the
underperforming loans and certain other assets from the Failed Association while
ASB acquired substantially all of the performing loans. Pursuant to FRF
Agreements, New West indemnified ASB and one of its affiliates from liability
arising out of certain management responsibilities for New West. As conditions
of the consummation of the Transaction, (i) the stock of New West, together with
any obligations and liabilities in connection with the ownership, business or
operation of New West, will be transferred by Keystone Holdings to, or assumed
by, an entity not being acquired by Washington Mutual and (ii) the indemnities
provided by New West to ASB and one of its affiliates will be provided by the
FRF. The divestiture of New West must be effected without any substantial cost
to any Keystone Entity. See "THE TRANSACTION -- FRF Matters."
CONDITIONS TO THE TRANSACTION. The respective obligations of Washington
Mutual, KHP and the Keystone Entities to consummate the Transaction are subject
to certain conditions, including the receipt of regulatory approval, approval by
the Washington Mutual Shareholders of the Transaction and the amendment to the
Articles to increase the number of authorized shares of Common Stock, and
certain other conditions customary in a transaction of this nature. Additional
conditions include (i) the transfer of all shares of stock in New West to an
entity other than a Keystone Entity, (ii) consummation of the Warrant Exchange
concurrently with the closing of the Merger, (iii) receipt of a letter from
Deloitte & Touche LLP stating that the Transaction may be accounted for as a
pooling of interests, (iv) resolution of any material outstanding differences
between KHP and Keystone Holdings, on the one hand, and the FDIC-Manager, on the
other hand, and (v) receipt by KHP of all necessary consents and modifications
so that the FRF Agreements may be assumed by a subsidiary of Washington Mutual.
Additionally, the obligation of the FDIC-Manager to consummate the Warrant
Exchange Agreement is subject to certain conditions, including the consummation
of the Merger, execution and delivery of the Registration Rights Agreement and
the Escrow Agreement and certain other conditions customary in a transaction of
this nature. As of the date of this Proxy Statement, substantially all of these
conditions remain to be satisfied. See "THE TRANSACTION -- Conditions to the
Transaction," "THE TRANSACTION -- Regulatory Approvals" and "THE TRANSACTION --
FRF Matters."
ACCOUNTING TREATMENT. The Transaction is intended to be treated as a
pooling-of-interests for accounting purposes. Accordingly, under generally
accepted accounting principles, the assets and liabilities of Keystone Holdings
will be recorded on the books of Washington Mutual at their values on the books
of Keystone Holdings at the time of consummation of the Transaction. If
completed as proposed, no goodwill will be created in the Transaction. See "THE
TRANSACTION -- Accounting Treatment."
DISSENTERS' RIGHTS. Holders of Common Stock who do not vote in favor of
the Transaction may be entitled to certain dissenters' rights under Washington
law. Such dissenters' rights are described under "THE TRANSACTION -- Dissenters'
Rights" and "APPENDIX H, CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION
ACT."
10
<PAGE> 15
RESALES OF WASHINGTON MUTUAL COMMON STOCK. At the Effective Time, the
shares of Common Stock to be issued to KHP and the FRF in connection with the
Transaction will not have been registered under the Securities Act. All such
Common Stock will be issued pursuant to an exemption from the registration
provisions of the Securities Act provided by Section 4(2) of such Act and will
be "restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act. Common Stock received in the Transaction will be
transferable only pursuant to an effective registration statement or to a valid
exemption from registration under the Securities Act, and, except for the Common
Stock issued to the FRF and to certain Investors, will be subject to further
restrictions contained in the Affiliate Letters. Pursuant to the Registration
Rights Agreement, Washington Mutual has agreed to file and use its best efforts
to cause to become effective with the SEC as soon as possible after the
Effective Date a registration statement covering the sale of between 7.5 million
and 20 million shares of Common Stock in the Initial Underwriting and to provide
certain other registration rights to KHP, the Investors and the FDICManager. It
is currently expected that the FDIC-Manager will sell the FRF Initial Shares
after the Effective Date in the Initial Underwriting, although there can be no
assurance that the FDIC-Manager will sell all or any of such shares. See "THE
TRANSACTION -- Registration Rights" and "THE TRANSACTION -- Resales of
Washington Mutual Common Stock."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to
qualify as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"). Shareholders of Washington Mutual
who do not dissent will not experience any federal income tax consequences as a
result of voting on the proposals described herein at the Special Meeting or as
a result of the consummation of the Transaction. Cash received by shareholders
of Washington Mutual pursuant to their exercise of dissenters' rights will be
wholly or partially taxed. See "THE TRANSACTION -- Federal Income Tax
Consequences."
OTHER TERMS OF THE MERGER AGREEMENT AND THE WARRANT EXCHANGE AGREEMENT.
The Merger Agreement or the Warrant Exchange Agreement may be terminated, and
the Merger or Warrant Exchange abandoned, at any time before the Effective Time,
either before or after approval of the Transaction by the Washington Mutual
Shareholders, by either party if, among other reasons, the Transaction has not
become effective by June 30, 1997, unless the failure of such occurrence is due
to the failure of the party seeking termination to perform its respective
covenants and agreements under such agreement. Additionally, the Merger
Agreement and the other Transaction documents may be amended by the parties
thereto after approval of the Transaction at the Special Meeting, provided that
the amount of consideration paid by Washington Mutual in the Transaction may not
be changed without the further approval of the shareholders of Washington
Mutual. See "THE TRANSACTION -- Other Terms of the Merger Agreement and the
Warrant Exchange Agreement."
MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE TRANSACTION
At the Effective Time, Keystone Holdings will merge with and into
Washington Mutual, with Washington Mutual as the surviving corporation. The
separate existence of Keystone Holdings will cease upon completion of the
Transaction and ASB will become a wholly-owned subsidiary of Washington Mutual.
The Articles of Incorporation and Bylaws of Washington Mutual will be the
Articles of Incorporation and Bylaws of the surviving corporation after the
completion of the Transaction.
As of the Effective Date, two representatives mutually agreeable to Mr.
Bass and Washington Mutual will be appointed to fill then-vacant seats in two
different classes of the Washington Mutual Board. After the Effective Time, if
the term of one of such directors would otherwise expire in connection with an
annual shareholders meeting of Washington Mutual, the Washington Mutual Board
will renominate one such mutually agreeable representative if Mr. Bass and
certain of his affiliates beneficially own a specified number of shares of
Common Stock. If Mr. Bass and such affiliates own a lesser number of shares, the
term of such director will expire and the remaining representative will continue
on the Washington Mutual Board. The Washington Mutual Board will have no
obligation to nominate a mutually agreeable representative if Mr. Bass and such
affiliates do not maintain beneficial ownership of a specified number of shares
or at least 5% of Washington Mutual's outstanding Common Stock on the record
date for such meeting. As of the date of this Proxy Statement, Washington Mutual
and Mr. Bass have not selected the representatives to serve as Washington Mutual
directors. See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE
TRANSACTION -- Board of Directors."
11
<PAGE> 16
Following the transaction, Washington Mutual will retain a majority of
ASB's current management team in the management of ASB, including Robert T.
Barnum, its current President and Chief Operating Officer. After the completion
of the Merger, Washington Mutual will effect certain back office consolidations
and computer systems conversions and will recognize certain Transaction-related
expenses and additions to loan loss reserves. See "MANAGEMENT AND OPERATIONS OF
WASHINGTON MUTUAL FOLLOWING THE TRANSACTION."
MARKET PRICES AND DIVIDENDS
Washington Mutual Common Stock is traded on The Nasdaq Stock Market
under the symbol "WAMU." The table below sets forth, for the calendar quarters
indicated, the reported high and low sale prices of Washington Mutual Common
Stock as reported on The Nasdaq Stock Market, based on published financial
sources, and the dividends declared on such stock:
<TABLE>
<CAPTION>
Washington Mutual
Common Stock
------------
High Low Dividends
---- --- ---------
<S> <C> <C> <C>
1994 First Quarter .................. $25.00 $19.13 $0.16
Second Quarter.................. 21.50 18.25 0.17
Third Quarter................... 21.63 19.63 0.18
Fourth Quarter.................. 20.63 15.75 0.19
1995 First Quarter .................. 20.75 16.63 0.19
Second Quarter.................. 24.75 20.00 0.19
Third Quarter................... 26.75 22.50 0.19
Fourth Quarter.................. 29.50 24.75 0.20
1996 First Quarter................... 32.25 27.63 0.21
Second Quarter.................. 30.38 26.13 0.22
Third Quarter................... 39.25 28.50 0.23
Fourth Quarter (through
October 24, 1996)............. 39.88 36.50 0.24
</TABLE>
As of the Record Date, there were approximately 15,900 shareholders of
record of Washington Mutual Common Stock and the last reported sales price per
share on the Record Date was $39.44. On July 19, 1996, the last full day of
trading before the first public announcement of the Transaction, the last
reported sales price per share was $30.13. See "INFORMATION CONCERNING
WASHINGTON MUTUAL -- MARKET PRICES AND DIVIDENDS" and "DESCRIPTION OF WASHINGTON
MUTUAL CAPITAL STOCK."
12
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA OF WASHINGTON MUTUAL
The following table presents certain summary historical consolidated
financial data for Washington Mutual. This table is based upon and should be
read in conjunction with the Consolidated Financial Statements of Washington
Mutual and the notes thereto (as restated), which are incorporated herein by
reference from the Company's current report on Form 8-K dated October 18, 1996,
as amended. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"INFORMATION CONCERNING WASHINGTON MUTUAL." Additionally, all per common share
information has been adjusted for two 50 percent stock dividends paid on
February 14, 1992, and August 13, 1993, each of which had the effect of a
three-for-two stock split. Because of the significant increase in Washington
Mutual's size as a result of the acquisition of Pacific First Bank (which was
accounted for by the purchase method) early in 1993, the financial results for
the years ended and as of December 31, 1993, 1994, and 1995, are not generally
comparable to prior periods or dates. All information presented below for the
six-month periods ended June 30, 1996 and 1995 is unaudited and reflects all
adjustments that are, in the opinion of Washington Mutual management, necessary
for a fair statement of the results for the periods presented and is not
necessarily indicative of the operating results for the entire year. The
information as of June 30, 1996 and for the six months ended June 30, 1996 is
not necessarily indicative of the operating results for the entire year.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------------ ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ------------ ------------ ------------ ------------- -------------
SUMMARIZED STATEMENTS OF INCOME: (dollars in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 834,171 $ 757,463 $1,578,960 $1,258,550 $1,081,309 $ 813,893 $ 777,812
Interest expense..................... 485,032 458,959 960,724 651,871 520,750 456,876 520,021
Net interest income.................. 349,139 298,504 618,236 606,679 560,559 357,017 257,791
Provision for loan losses ........... 5,825 5,650 11,150 20,400 35,225 14,887 22,407
Other income......................... 73,514 58,409 117,874 118,502 152,575 97,748 101,317
Other expense........................ 224,779 209,413 417,655 415,300 394,874 253,024 204,130
Income taxes......................... 71,161 48,827 107,504 108,159 98,864 64,459 45,920
Extraordinary items, net of
FIT effect (1)..................... -- -- -- -- (8,953) (4,638) --
Cumulative effect of change in tax
accounting method.................. -- -- -- -- 13,365 -- --
----------------------------------------------------------------------------------------------
Net income .......................... $ 120,888 $ 93,023 $ 199,801 $ 181,322 $ 188,583 $ 117,757 $ 86,651
==============================================================================================
Net income attributable to common
stock.............................. $ 111,678 $ 83,731 $ 181,217 $ 162,738 $ 175,025 $ 112,882 $ 81,776
==============================================================================================
Net income per share:
Primary............................ $1.55 $1.22 $2.59 $2.45 $2.70 $1.95 $1.61
Fully diluted...................... 1.50 1.18 2.51 2.38 2.57 1.85 1.52
Average number of shares:
Primary............................ 71,982,173 68,784,703 70,061,144 66,361,794 64,808,073 57,823,509 50,662,063
Fully diluted...................... 77,401,033 74,203,950 75,480,391 71,781,041 70,870,441 63,612,956 56,952,721
Dividends declared and paid:
Common............................. $31,002 $25,229 $52,410 $45,335 $30,936 $21,231 $13,979
Preferred.......................... 9,210 9,292 18,584 18,584 13,559 4,875 4,875
</TABLE>
- --------------------
(1) Extraordinary items include the call of subordinated capital notes,
resulting in pre-tax losses of $2.2 million and $3.1 million during 1993 and
1992, respectively, and penalties for prepayment of FHLB advances, resulting in
pre-tax losses of $10.8 million and $3.6 million during 1993 and 1992,
respectively.
13
<PAGE> 18
<TABLE>
<CAPTION>
As of June 30, As of December 31,
1996 1995 1995 1994 1993 1992 1991
------------- ------------- -------------- ------------- ------------- ------------- -------------
(dollars in thousands)
SUMMARIZED STATEMENTS
OF FINANCIAL POSITION:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets..................... $22,323,472 $21,042,692 $22,420,379 $19,175,991 $16,513,432 $10,531,744 $ 8,529,135
Loans and loans held for sale.... 13,800,209 13,209,882 13,035,250 12,845,203 11,267,713 7,035,586 5,526,541
Trading, investment and
mortgage-backed securities..... 7,405,545 6,714,713 7,941,139 5,348,565 4,210,173 2,810,983 2,368,001
Deposits......................... 11,026,719 10,826,482 11,306,436 10,432,888 9,976,961 6,624,584 5,910,396
Borrowings (includes annuities).. 9,468,550 8,417,216 9,187,778 7,212,889 5,050,645 2,735,696 1,806,986
Stockholders' equity............. 1,647,073 1,520,379 1,660,084 1,364,258 1,252,888 1,045,289 694,134
</TABLE>
OTHER FINANCIAL DATA:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
--------------------------- ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ------------- ----------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets.......... 7.88% 8.00% 8.03% 7.58% 8.00% 9.20% 10.06%
Cost of deposits and borrowings.. 4.78 5.09 5.06 4.10 4.00 5.41 6.97
Net interest spread.............. 3.10 2.91 2.97 3.48 4.00 3.79 3.09
Net interest margin.............. 3.31 3.12 3.14 3.65 4.15 4.04 3.34
Operating efficiency ratio ...... 53.18 58.67 56.74 57.27 55.37 55.64 56.84
Return on average assets......... 1.09 0.94 0.97 1.03 1.31 1.24 1.05
Return on average stockholders'
equity........................... 14.73 13.21 13.31 13.77 16.89 15.26 14.33
Dividend payout ratio............ 25.65 26.74 25.74 24.50 15.98 15.43 13.06
Ratios of combined earnings to
fixed charges:
Excluding interest on deposits. 1.78x 1.64x 1.66x 2.03x 2.70x 2.41x 1.86x
Including interest on deposits. 1.40x 1.31x 1.32x 1.44x 1.54x 1.41x 1.25x
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31,
1996 1995 1995 1994 1993 1992 1991
------------- ------------- ----------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as a
percentage of total assets..... 0.46% 0.40% 0.42% 0.42% 0.68% 1.27% 1.58%
Loan loss reserves/total loans... 1.05 1.06 1.10 1.03 1.06 0.83 1.01
Loan loss reserves/nonperforming
assets......................... 139.75 167.09 151.23 164.08 105.89 43.46 41.39
</TABLE>
14
<PAGE> 19
SUMMARY CONSOLIDATED FINANCIAL DATA OF KEYSTONE HOLDINGS
The following table sets forth certain summary historical consolidated
financial data of Keystone Holdings and is based upon and should be read in
conjunction with the Consolidated Financial Statements of Keystone Holdings,
including the respective notes thereto, and the other information in this Proxy
Statement regarding Keystone Holdings. The information as of June 30, 1996 and
for the six-month periods ended June 30, 1995 and 1996 is unaudited and reflects
all adjustments that are, in the opinion of Keystone Holdings' management,
necessary for a fair statement of results for the periods presented and is not
necessarily indicative of the operating results for the entire year. See
"APPENDIX A, INFORMATION CONCERNING KEYSTONE HOLDINGS" and "APPENDIX B,
CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS."
<TABLE>
<CAPTION>
For the Six-Month
Period Ended June 30, For the Year Ended December 31,
-------------------------- --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ------------- ----------- ------------- -------------- -------------- -----------
OPERATING DATA: (dollars in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................. $706,720 $636,301 $1,337,126 $1,036,863 $1,117,269 $1,357,076 $1,629,827
Interest expense................. 469,096 470,602 962,712 683,487 691,146 845,613 1,125,609
Net interest income.............. 237,624 165,699 374,414 353,376 426,123 511,463 504,218
Provision for losses on loans.... 35,180 34,533 63,837 101,609 123,503 143,650 63,400
Other income..................... 34,624 39,757 72,433 88,902 81,050 66,552 74,489
Other expenses................... 134,870 136,130 264,827 266,827 279,694 298,599 312,218
Federal and state income taxes... 27,685 (5,439) 12,289 897 11,245 31,983 85,221
Cumulative effect of change in
accounting principal........... -- -- -- -- -- 60,045 --
Minority interest in earnings of
consolidated subsidiaries...... (20,896) (14,708) (21,092) (22,621) (10,474) (883) (874)
--------------------------------------------------------------------------------------------------
Net earnings..................... $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257 $ 162,945 $ 116,994
==================================================================================================
Common dividends declared........ $60,000 $5,500 $ 5,587 $22,500 $18,000 $ 97,300 $ 49,000
Common dividends paid............ 35,000 5,500 5,587 $76,300 49,000
</TABLE>
<TABLE>
<CAPTION>
At June 30, At December 31,
1996 1995 1995 1994 1993 1992 1991
------------- ------------- -------------- ------------- ------------- ------------- -------------
(dollars in thousands)
SUMMARIZED BALANCE SHEET
DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets..................... $20,480,706 $19,213,564 $19,703,656 $18,402,403 $17,214,076 $17,262,741 $17,001,906
Loans............................ 12,854,633 14,339,180 11,175,031 12,643,590 9,808,060 9,601,942 8,364,912
Trading, investment and
mortgage-backed securities..... 6,720,966 3,159,220 7,394,103 3,373,497 3,194,395 1,940,993 1,711,163
Deposits......................... 12,728,966 13,303,300 13,005,029 12,815,489 13,367,640 13,988,968 13,973,699
Borrowings....................... 6,494,532 4,934,988 5,391,857 4,733,678 2,880,979 2,377,784 2,263,486
Stockholder's equity............. 550,398 593,810 668,559 534,124 578,235 497,438 444,946
</TABLE>
15
<PAGE> 20
OTHER FINANCIAL DATA:
The following tables set forth certain other financial data of Keystone Holdings
for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
-------------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets.............. 7.45% 6.91% 7.23% 6.22% 6.73% 8.00% 9.86%
Cost of deposits and borrowings...... 5.05 5.17 5.28 4.18 4.26 5.10 6.96
Net interest spread.................. 2.40 1.74 1.95 2.04 2.47 2.90 2.91
Net interest margin.................. 2.51 1.80 2.02 2.12 2.57 3.01 3.05
Operating efficiency ratio........... 49.54 66.26 59.27 60.33 55.15 51.66 53.95
Return on average assets............. 0.54 0.27 0.44 0.29 0.48 0.92 0.68
Return on average equity............. 17.09 9.17 15.15 9.04 15.30 32.37 26.35
Dividend payout ratio................ 111.90 21.55 6.59 44.71 21.88 59.71 41.88
Equity to assets ratio............... 3.16 2.90 2.90 3.21 3.12 2.85 2.58
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31,
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as a percentage
of total assets.................... 1.07% 1.55% 1.24% 1.84% 2.38% 2.48% 1.73%
Allowance for credit losses/gross
receivables and recourse obligations 0.48 0.67 0.55 0.80 1.10 1.08 0.75
Allowance for credit losses/nonaccrual
receivables and recourse obligations 61.48 58.88 61.17 51.30 48.55 42.88 30.36
</TABLE>
16
<PAGE> 21
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth (i) consolidated historical summary
financial data for the periods and as of the dates indicated for Washington
Mutual and for Keystone Holdings and (ii) summary pro forma combined financial
data for the periods and as of the dates indicated, giving effect to the
Transaction as if it had been consummated on January 1, 1993, for income
statement information and on June 30, 1996, for balance sheet information. Pro
forma adjustments made to arrive at the pro forma combined amounts are based on
the pooling of interests method of accounting.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and
accompanying notes of Washington Mutual included in the documents described
under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," the consolidated
financial statements and accompanying notes of Keystone Holdings included in
this Proxy Statement as "APPENDIX B, CONSOLIDATED FINANCIAL STATEMENTS OF
KEYSTONE HOLDINGS," and the pro forma combined financial statements and
accompanying discussion and notes set forth under "PRO FORMA COMBINED FINANCIAL
INFORMATION." The Pro Forma Combined Summary Financial Data is intended for
informational purposes only and is not necessarily indicative of the future
financial position or future results of operations of the combined company or of
the financial position or the results of operations of the combined company that
would have actually occurred had the Merger been in effect as of the date or for
the periods presented.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year ended December 31,
---------------------------- ---------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- -------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
WASHINGTON MUTUAL:
Net interest income....................... $ 349,139 $ 298,504 $ 618,236 $ 606,679 $ 560,559
Provision for loan losses................. 5,825 5,650 11,150 20,400 35,225
Other income (expense), net............... (151,265) (151,004) (299,781) (296,798) (242,299)
Federal income taxes...................... 71,161 48,827 107,504 108,159 98,864
--------------------------------------------------------------------------
Net income from continuing operations..... 120,888 93,023 199,801 181,322 184,171
Extraordinary items, net of federal
income taxes............................ -- -- -- -- (8,953)
Cumulative effect in change of
tax method.............................. -- -- -- -- 13,365
--------------------------------------------------------------------------
Net income................................ $ 120,888 $ 93,023 $ 199,801 $ 181,322 $ 188,583
==========================================================================
Net income attributable to
common stock............................ $ 111,678 $ 83,731 $ 181,217 $ 162,738 $ 175,025
==========================================================================
KEYSTONE HOLDINGS:
Net interest income....................... $ 237,624 $ 165,699 $ 374,414 $ 353,376 $ 426,123
Provision for loan losses................. 35,180 34,533 63,837 101,609 123,503
Other income (expense), net............... (100,246) (96,373) (192,394) (177,925) (198,644)
Federal and state income taxes............ 27,685 (5,439) 12,289 897 11,245
--------------------------------------------------------------------------
Earnings from continuing operations....... 74,513 40,232 105,894 72,945 92,731
Minority interest in earnings of consolidated
subsidiaries............................ (20,896) (14,708) (21,092) (22,621) (10,474)
--------------------------------------------------------------------------
Net earnings ............................. $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257
==========================================================================
Net earnings attributable to common stock. $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257
==========================================================================
</TABLE>
17
<PAGE> 22
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year ended December 31,
---------------------------- ---------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- -------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
PRO FORMA INCLUDING KEYSTONE HOLDINGS:(1)
Net interest income....................... $ 586,763 $ 464,203 $ 992,650 $ 960,055 $ 986,682
Provision for loan losses................. 41,005 40,183 74,987 122,009 158,728
Other income (expense), net............... (251,511) (247,377) (492,175) (474,723) (440,943)
Federal and state income taxes............ 98,846 43,388 119,793 109,056 110,109
--------------------------------------------------------------------------
Net earnings from continuing operations... 195,401 133,255 305,695 254,267 276,902
Extraordinary items, net of federal income
taxes................................... -- -- -- -- (8,953)
Cumulative effect of accounting change.... -- -- -- -- 13,365
Minority interest in earnings of consolidated
subsidiaries (2)........................ (6,978) (6,938) (15,793) (13,992) (13,991)
--------------------------------------------------------------------------
Net earnings.............................. $ 188,423 $ 126,317 $ 289,902 $ 240,275 $ 267,323
==========================================================================
Net earnings attributable to common stock. $ 179,213 $ 117,025 $ 271,318 $ 221,691 $ 253,765
==========================================================================
</TABLE>
- ----------------
(1) Transaction-related Expenses. Nonrecurring Transaction-related expenses
anticipated to be recorded are not included in the Pro Forma Including
Keystone Holdings statement of income for the six months ended June 30,
1996. See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE
TRANSACTION -- Operations After the Transaction -- Transaction Expense
and Addition to Loan Loss Reserve" and "Notes to Pro Forma Combined
Consolidated Statements of Income." Nonrecurring Transaction-related
expenses expected to be recorded by Washington Mutual are summarized in
the following table (dollars in thousands):
<TABLE>
<S> <C>
Additional loan loss reserves(a)....................................................... $ 125,000
Severance and management payments...................................................... 46,000
Holding company debt call premiums..................................................... 15,000
FRF tax settlement..................................................................... 10,500
Other charges.......................................................................... 47,000
---------
Total charges........................................................................ 243,500
Tax benefit............................................................................ (86,200)
Negative adjustment to ASB's deferred tax asset........................................ 50,000
-------
Net charges.......................................................................... $ 207,300
=========
</TABLE>
- ------------------
(a) See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AFTER THE
TRANSACTION -- Operations After the Transaction -- Transaction Expenses
and Addition to Loan Loss Reserve" for a discussion of the differences
in philosophy between Washington Mutual and ASB regarding provisions
for loan loss and reasons for the increase in the loan loss provision.
(2) The Transaction is intended to be accounted for as a
pooling-of-interests. The pro forma adjustments in the unaudited Pro
Forma Including Keystone Holdings statements of income for the three
years ended December 31, 1995 and the six months ended June 30, 1996 and
1995 reflect dividends paid to the holders of $80.0 million in New
Capital's cumulative redeemable preferred stock.
- -----------------
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------
Pro Forma
Washington Keystone Including Keystone
Mutual Holdings Holdings (1)
------ -------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Loans $13,800,209 $12,854,633 $26,529,842
Assets 22,323,472 20,480,706 42,560,678
Borrowings (including annuities) 9,468,550 6,494,532 15,963,082
Stockholders' equity 1,647,073 550,398 2,217,150
Nonperforming assets as a percentage of total
assets 0.46% 1.07% 0.76%
Loan loss reserves/total loans 1.05 0.70 0.88
Loan loss reserves/nonperforming assets 139.75 40.92 72.48
</TABLE>
18
<PAGE> 23
(1) The Pro Forma Including Keystone Holdings stockholder's equity has been
adjusted to reflect the issuance of 14,000,000 shares of the Common
Stock to effect the Warrant Exchange. The Warrants are included in
Keystone Holdings' balance sheet as a minority interest.
19
<PAGE> 24
SELECTED HISTORICAL, PRO FORMA AND EQUIVALENT PRO FORMA PER SHARE DATA
The following table shows certain per share data of Washington Mutual
Common Stock on an historical basis and pro forma reflecting the Transaction.
This table does not show historical per share data for Keystone Holdings because
Keystone Holdings is privately held. The table should be read in conjunction
with the financial information appearing in this paragraph and the documents
incorporated herein by reference. The pro forma and equivalent pro forma per
share data in the following table are presented for comparative purposes only
and are not necessarily indicative of the combined financial position or results
of operations in the future or what the combined financial position or results
of operations would have been had the Transaction been consummated during the
period or as of the date for which this pro forma table is presented.
<TABLE>
<CAPTION>
Washington Mutual Pro Forma Including
Per Common Share Historical Keystone Holdings
- ---------------- ---------- -----------------
<S> <C> <C>
PRIMARY NET INCOME FROM CONTINUING
OPERATIONS:
For the year ended December 31,
1993............................................. $2.63 $2.38
1994............................................. 2.45 2.09
1995............................................. 2.59 2.47
For the six months ended June 30, 1996............. 1.55 1.60
FULLY DILUTED NET INCOME FROM CONTINUING
OPERATIONS:
For the year ended December 31,
1993............................................. $2.51 $2.32
1994............................................. 2.38 2.06
1995............................................. 2.51 2.42
For the six months ended June 30, 1996............. 1.50 1.56
CASH DIVIDENDS (1):
For the year ended December 31,
1993............................................. $0.50 $0.50
1994............................................. 0.70 0.70
1995............................................. 0.77 0.77
For the six months ended June 30, 1996............. 0.43 0.43
BOOK VALUE:
As of December 31, 1995............................ $19.97 $20.70
As of June 30, 1996................................ 19.73 $17.88
</TABLE>
(1) Pro forma cash dividends per common share represent historical
dividends per share paid by Washington Mutual.
20
<PAGE> 25
THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to Washington Mutual
Shareholders in connection with the solicitation of proxies by the Washington
Mutual Board for use at the Special Meeting to be held at 10:00 a.m. local time
on December 18, 1996, at the Four Seasons Olympic Hotel, 411 University Street,
Seattle, Washington, and at any adjournments or postponements thereof for the
purposes set forth herein.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
As more fully described in this Proxy Statement, the purpose of the
Special Meeting is to consider and vote upon (i) a proposal to approve the
Transaction, pursuant to which, among other things, Keystone Holdings will be
merged with and into Washington Mutual with Washington Mutual as the surviving
corporation, and (ii) a proposal to amend the Company's Articles to increase the
number of authorized shares of Common Stock from 100,000,000 shares to
350,000,000 shares. See "THE TRANSACTION" and "PROPOSED AMENDMENT TO WASHINGTON
MUTUAL ARTICLES OF INCORPORATION -- INCREASE IN AUTHORIZED SHARES."
RECORD DATE AND VOTING
At the close of business on the Record Date, October 24, 1996, there
were 72,307,510 shares of Common Stock outstanding. Each share of Common Stock
is entitled to one vote in each of the matters properly presented at the Special
Meeting. At the close of business on the Record Date there were 2,752,500 shares
of Series C Preferred, 1,399,900 shares of Series D Preferred and 1,970,000
shares of Series E Preferred outstanding. Each share of Preferred Stock is
entitled to one vote on the proposal to approve the amendment to the Articles.
Only shareholders of record at the close of business on the Record Date will be
entitled to notice of and to vote at the Special Meeting.
PROXIES AND VOTING INSTRUCTIONS
All shares of Common Stock and Preferred Stock represented by proxies
that are properly completed, dated and executed will be voted at the Special
Meeting in accordance with the instructions given thereon by the Washington
Mutual Shareholder. If a properly executed proxy is received without voting
instructions, the shares of Common Stock and Preferred Stock represented by such
proxy will be voted FOR approval of all matters on which such shares are
entitled to vote at the Special Meeting. However, brokers do not have
discretionary authority to vote shares held in street name on either of the two
proposals and the failure of beneficial owners of such shares to give voting
instructions to such broker will result in a broker non-vote and such shares
will be counted as "NO" votes in all matters on which such shares are entitled
to vote at the Special Meeting. As of the date of this Proxy Statement, the
Washington Mutual Board is not aware of any business to be acted on at the
Special Meeting other than as described herein. If, however, any other matters
properly come before the Special Meeting, including, among other things,
consideration of a motion to adjourn or postpone the Special Meeting to another
time and/or place (including, without limitation, for the purpose of soliciting
additional proxies), the proxy also confers discretionary authority on the
persons named as proxies to vote upon such matters; provided, however, that
proxies voting against the Transaction may not be used by management to vote for
adjournment pursuant to such discretionary authority. A Washington Mutual
Shareholder giving a proxy has the power to revoke it at any time before it is
voted. The proxy may be revoked by written notice to the Secretary received at
Washington Mutual's offices at 1201 Third Avenue, Suite 1500, Seattle,
Washington 98101, before December 18, 1996, or by written notice delivered
in person at the Special Meeting to the Secretary prior to the commencement of
the Special Meeting. Attendance at the Special Meeting will not, in and of
itself, constitute revocation of a previously granted proxy.
21
<PAGE> 26
QUORUM; VOTES REQUIRED
For the vote on the proposal to approve the Transaction, the presence,
in person or represented by proxy, of the holders of a majority of the Common
Stock issued and outstanding and entitled to vote at the Special Meeting will
constitute a quorum. For the votes on the proposal to amend the Company's
Articles, the presence, in person or represented by proxy, of the holders of a
majority of (i) the Common Stock issued and outstanding and entitled to vote at
the Special Meeting (for the separate vote of the holders of Common Stock) and
(ii) the aggregate shares of Common Stock and Preferred Stock issued and
outstanding and entitled to vote at the Special Meeting (for the vote of the
holders of Common Stock and Preferred Stock as a group) will constitute a
quorum, respectively.
Under applicable law and the Company's Articles and bylaws, and
assuming that a quorum is present, approval of the Transaction requires the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding as of the Record Date. Approval of the proposed amendment to the
Articles requires the affirmative vote of the holders of at least (i) two-thirds
of the combined shares of Common Stock and Preferred Stock outstanding as of the
Record Date voting together as a group and (ii) two-thirds of the shares of
Common Stock outstanding as of the Record Date voting separately. In determining
whether the Transaction or the proposed amendment to the Articles has received
the requisite number of affirmative votes, abstentions and broker non-votes will
be counted and will have the same effect as a vote against each such proposal.
Approval of the amendment to the Articles is required in order to implement the
Transaction.
YOUR BOARD OF DIRECTORS BELIEVES THE PROPOSALS ARE IN THE BEST
INTERESTS OF WASHINGTON MUTUAL AND ITS SHAREHOLDERS AND, ACCORDINGLY, RECOMMENDS
THAT YOU VOTE "FOR" EACH OF THEM.
SOLICITATION OF PROXIES
In addition to mailing this Proxy Statement to shareholders who hold
shares directly, the Company has asked banks and brokers to forward copies of
this Proxy Statement to persons for whom they hold shares of Common Stock or
Preferred Stock and request that such persons give such banks and brokers voting
instructions and authority to execute the proxies. The Company will reimburse
the banks and brokers for their reasonable out-of-pocket expenses in doing so.
Officers and regular employees of the Company may, without being additionally
compensated, solicit proxies by mail, telephone, telegram, facsimile or personal
contact. Washington Mutual also intends to employ and pay the fees and expenses
(estimated to be $7,500) of D.F. King & Co., Inc., a firm engaged in the
business of soliciting the return of proxies. All proxy soliciting expenses will
be paid by the Company in connection with the solicitation of votes for the
Special Meeting.
WASHINGTON MUTUAL SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN
THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO WASHINGTON MUTUAL IN
THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
THE TRANSACTION
The following information, insofar as it relates to matters contained
in the Merger Agreement, the Warrant Exchange Agreement, the Escrow Agreement,
the Registration Rights Agreement and the CS First Boston Opinion, is qualified
in its entirety by reference to the other information contained elsewhere in
this Proxy Statement, including the Appendices hereto, and the documents
incorporated herein by reference. Copies of the Merger Agreement, the Warrant
Exchange Agreement, the Escrow Agreement, the Registration Rights Agreement and
the CS First Boston Opinion are incorporated herein by reference and attached
hereto as Appendices C, D, E, F and G, respectively. WASHINGTON MUTUAL
SHAREHOLDERS ARE URGED TO READ ALL THE APPENDICES IN THEIR ENTIRETY.
GENERAL
Subject to the terms and conditions of the Merger Agreement, on the
Effective Date, Keystone Holdings will merge with and into Washington Mutual,
with Washington Mutual as the surviving corporation. The separate
22
<PAGE> 27
existence of Keystone Holdings will cease upon the effectiveness of the
Transaction and the direct and indirect subsidiaries of Keystone Holdings,
including ASB but excluding New West, will become subsidiaries of Washington
Mutual. Additionally, and as a condition to the consummation of the Merger, the
FDIC-Manager has agreed, pursuant to the Warrant Exchange Agreement, to effect
the Warrant Exchange. Upon the Effective Date, Washington Mutual will directly
or indirectly wholly-own all of the subsidiaries of Keystone Holdings, including
ASB but excluding New West.
In the Transaction, Washington Mutual will issue 47,883,333 shares of
Common Stock, as follows: 25,883,333 shares to KHP, 14,000,000 shares to the FRF
and 8,000,000 shares to the Litigation Escrow for the benefit of KHP and the
FRF. The Keystone Initial Shares and the contingent right to receive the portion
of the Litigation Escrow Shares attributable to KHP will be distributed to the
Investors immediately following consummation of the Transaction based upon their
pro rata interest in KHP. See "THE TRANSACTION -Significant Shareholders." After
the date of execution of the Transaction documents, the number of shares to be
issued to KHP in the Transaction was reduced from 26,000,000 shares to
25,883,333 shares, and KHP's percentage interest in the Litigation Escrow Shares
was reduced from 65% to 64.9%.
KHP, Keystone Holdings and certain of its subsidiaries are plaintiffs
in a lawsuit against the United States. In the Case, among other things,
plaintiffs allege that they entered into a contract with the FSLIC and the
FHLBB, and that the U.S. government breached that contract, causing damage to
the plaintiffs. See "THE LITIGATION ESCROW -- The Case." Pursuant to the Merger
Agreement, upon consummation of the Transaction, Washington Mutual will succeed
to the right to prosecute the Case and will receive any recovery in the Case. At
the Effective Time, as consideration for the possible future recovery of Case
Proceeds, Washington Mutual will issue the Litigation Escrow Shares to the
Escrow Agent to be held for the benefit of the Investors and the FRF. Pursuant
to the terms of the Escrow Agreement, the Escrow Agent will hold the Litigation
Escrow Shares for up to six years, subject to extension under certain
circumstances. If the date on which the escrow obligations expire occurs before
all distributions are completed, any remaining Litigation Escrow Shares will be
returned to Washington Mutual.
See "THE LITIGATION ESCROW."
Upon Washington Mutual's receipt of Case Proceeds, all or part of the
Litigation Escrow Shares will be released, 64.9% to the Investors and 35.1% to
the FRF. The number of Litigation Escrow Shares released will be equal to the
Case Proceeds, reduced by certain tax and litigation-related costs and expenses,
divided by the Average Price. While Litigation Escrow Shares are held in the
Litigation Escrow, the FRF and the Investors will have the right to vote their
respective percentage of the Litigation Escrow Shares. See "THE LITIGATION
ESCROW."
The ultimate outcome of the Case is uncertain, and there can be no
assurance that any recovery in the Case will result in Case Proceeds that exceed
the value of the Litigation Escrow Shares plus costs and expenses. Generally,
Washington Mutual will not benefit financially from the Case unless Case
Proceeds exceed such an amount and, in negotiating the Transaction, Washington
Mutual ascribed no value to the possibility that the Case Proceeds would exceed
such amount. As a result, it is uncertain what, if any, impact recovery in the
Case will have on the financial position of Washington Mutual.
Washington Mutual, KHP and the FDIC-Manager have entered into the
Registration Rights Agreement, pursuant to which Washington Mutual will be
required to use its best efforts to register for resale to the public under the
Securities Act shares of Common Stock issued in the Transaction. Pursuant to the
Registration Rights Agreement, Washington Mutual has agreed to file and use its
best efforts to cause to become effective with the SEC as soon as practicable
after the Effective Date, on a date mutually agreeable to Washington Mutual and
the participants in the Initial Underwriting, a registration statement for the
Initial Underwriting covering the sale of between 7.5 million and 20 million
shares of Common Stock. It is currently expected that the FDIC-Manager will sell
the FRF Initial Shares in the Initial Underwriting, although there are no
assurances that the FDIC-Manager will sell all or any of such shares. "THE
TRANSACTION -- Resales of Washington Mutual Common Stock."
23
<PAGE> 28
EFFECTIVE DATE AND TIME OF THE TRANSACTION
The Transaction will become effective at the time of both (i) (a) the
filing of articles of merger with the Washington Secretary of State and (b) the
filing of articles of merger with the Texas Secretary of State, or at such time
after such filings as may be provided in such articles of merger, and (ii) the
consummation of the Warrant Exchange. The parties are unable to predict when or
if the Effective Time will occur. The Effective Date will be the date on which
the Effective Time occurs.
BACKGROUND OF THE TRANSACTION
In the last several years, Washington Mutual's management has sought
opportunities to expand into the California market and has examined a number of
potential acquisitions that would give it the opportunity to do so. The Company
held merger discussions with and conducted due diligence reviews of two
California institutions during this period, neither of which resulted in an
acquisition. ASB was another institution in which the Company was interested and
during this period the Company had a variety of informal contacts with Keystone
Holdings, but no opportunity for discussion of a possible transaction was
available.
Keystone Holdings is a holding company whose principal operating
subsidiary is ASB. Keystone Holdings had consolidated assets of $20.5 billion,
deposits of $12.7 billion and stockholder's equity of $550.4 million at June 30,
1996. The principal business of ASB consists of attracting funds in the form of
retail deposits through its branches and from borrowings, and investing those
funds in single-family mortgage loans.
In late 1995, Washington Mutual's management advised Lehman Brothers,
the investment banker who had been retained by Keystone Holdings to advise it in
connection with the possible sale of ASB, that the Company was interested in
meeting with the principal Investors to discuss the possibility of a
transaction. On January 11, 1996, the Company and Keystone Holdings entered into
reciprocal confidentiality agreements as a prerequisite to investigating a
possible merger of Keystone Holdings and Washington Mutual. No affiliation
existed between the Company and Keystone Holdings prior to such time.
On January 19, 1996, Mr. Bass, Bernard J. Carl, J. Taylor Crandall, and
David Bonderman, the principal Investors, met with Kerry K. Killinger, the
Company's President and Chief Executive Officer, and the other members of the
Company's Executive Committee, including Craig E. Tall, Executive Vice President
of Corporate Development, Thomas J. Kappock, Executive Vice President and Chief
Financial Officer, Lee D. Lannoye, Executive Vice President of Corporate
Administration and Credit, Deanna W. Oppenheimer, Executive Vice President of
Corporate Marketing and Consumer Bank Distribution, and S. Liane Wilson,
Executive Vice President of Corporate Operations, at the Company's executive
offices in Seattle, Washington. The meeting consisted primarily of a
presentation by Mr. Killinger of the background and current status of Washington
Mutual, brief presentations by each member of the Executive Committee regarding
his or her area of responsibility, and a discussion of the possible benefits of
a merger of Washington Mutual and Keystone Holdings.
Following the Seattle meeting, the Company and Keystone Holdings
exchanged information regarding the businesses and operations of the two
companies and their subsidiaries. There were numerous contacts and conversations
between the Company and Keystone Holdings or the investment banker for Keystone
Holdings over the next several months for the purpose of continuing to exchange
and clarify business and operations information regarding both companies.
Additional conversations between Washington Mutual and Keystone Holdings or KHP
also took place during the weeks following the January meeting, in which the
parties began preliminary discussions regarding pricing parameters, accounting
issues, potential structures for the transaction and the status of the Case. It
was recognized during these discussions that any understanding reached between
KHP and Washington Mutual would require the involvement of the FDIC-Manager and
that no final agreement could be reached and no transaction could be consummated
without the FDIC-Manager's concurrence.
On February 16, 1996, Mr. Killinger telephoned Mr. Bass and Mr.
Crandall and presented a preliminary transaction proposal to them. During the
telephone call it was agreed that there was sufficient basis of interest to
proceed with merger discussions.
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On February 19, 1996, a meeting took place at the offices of the
Company's counsel in Seattle, Washington among Mr. Tall, legal counsel and other
representatives of Washington Mutual, and Mr. Bonderman, Mr. Carl, Mr. Crandall,
and legal counsel and other representatives of Keystone Holdings. A preliminary
proposal regarding the form and the terms of a merger of Keystone Holdings with
Washington Mutual was developed but no agreement was reached. Following the
meeting, Mr. Killinger and several representatives from the Washington Mutual
Board, including Douglas P. Beighle, John W. Ellis, William G. Reed, Jr. and
Louis H. Pepper, met with Mr. Bass, Mr. Bonderman, Mr. Carl and Mr. Crandall to
discuss the merits of a possible merger.
At a meeting of the Washington Mutual Board on February 20, 1996, Mr.
Killinger and Mr. Tall reported on the possibility of the transaction and Mr.
Beighle, Mr. Ellis, Mr. Reed and Mr. Pepper reported on their participation in
the meeting with the Keystone Holdings representatives. The Washington Mutual
Board discussed the financial effect of a merger on the Company, the possibility
of adding two new Directors to the Washington Mutual Board following a merger
and the potential ownership of large blocks of Washington Mutual Common Stock by
Mr. Bass and the FRF. The Washington Mutual Board authorized Mr. Killinger to
proceed with merger discussions. The parties continued informal discussions
regarding the terms of a proposed transaction in the weeks following the
February 20, 1996 meeting.
In early March of 1996 Washington Mutual engaged CS First Boston to act
as the Company's investment advisor and to assist it in further analyzing the
operations of Keystone Holdings, formulating valuation models and refining
proposals for the structure of the transaction.
A more detailed proposal for the merger of Keystone Holdings with
Washington Mutual, based on the Company's initial analysis of Keystone Holdings,
was presented by Mr. Tall to Mr. Carl and Mr. Crandall at a meeting that took
place in New York, New York on March 25, 1996. Washington Mutual proposed that
the transaction be a merger of Keystone Holdings with and into the Company
pursuant to which KHP would receive shares of Common Stock. Keystone Holdings
rejected the proposed transaction price as insufficient. Over the next several
weeks, Keystone presented additional information to Washington Mutual for its
analysis. The parties also continued discussions regarding tax issues, possible
structures for the transaction, accounting issues, continuing relations between
ASB and the FDIC-Manager, the status of the Case, possible representation on the
Washington Mutual Board and other issues potentially affecting the valuation of
Keystone Holdings and the terms of a transaction.
On April 10, 1996, the Company furnished a revised proposal to Keystone
Holdings. Although no agreement was reached on specific valuations, the parties
agreed to pursue a merger structure in which KHP would receive an unspecified
number of shares of Common Stock in exchange for its shares of Keystone Holdings
stock, a portion of which would be in consideration of the value of the Case,
which Washington Mutual would assume in a merger. Additional information
exchange and discussions followed and at the end of April, in a series of
telephone conversations between Mr. Tall and Mr. Crandall, and between Mr.
Killinger and Mr. Bass, the parties reached tentative agreement on a transaction
price of 46 million shares of Common Stock, 6 million shares of which would be
attributable to the Case, subject to resolution of various outstanding issues
between the parties. The parties believed that such valuation would provide a
basis for commencing discussions with the FDIC-Manager.
On April 29 and 30, 1996, Mr. Tall, Mr. Crandall, Mr. Carl and various
advisors of each of Washington Mutual and Keystone Holdings met in Seattle,
Washington to continue discussions on open issues in the transaction and to
begin drafting transaction documents.
During May and June 1996, KHP, Keystone Holdings and the FDIC-Manager
discussed issues regarding the effect of a merger on the relations between
Keystone Holdings, ASB and the FDIC-Manager, the valuation of the FRF's interest
in the parent of ASB and other issues that could potentially affect the
structure or terms of a transaction. Additionally, during this period, after
initial contacts with Keystone Holdings, the FDIC-Manager retained a financial
advisor and outside legal counsel to assist it in negotiations.
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<PAGE> 30
During this same period, the Company continued its analysis of Keystone
Holdings and ASB and the effect of potential tax legislation on ASB and the
consequent effect on the financial aspects of a merger. By mid-June, the parties
had significantly narrowed the range of outstanding issues.
On June 18, 1996, the Washington Mutual Board met with its legal
counsel and representatives of CS First Boston to review the proposed
transaction and the terms and structure that were being considered, as embodied
in a draft merger agreement and registration rights agreement, as well as the
remaining unresolved transaction issues. Following presentations by the
Company's management, the Washington Mutual Board considered the financial
effect of the transaction, the strategic fit of ASB and the effect of the
transaction on shareholder value, the composition of the Washington Mutual Board
and distribution of ownership of the Common Stock. It also discussed the
analysis of the business and operations of Keystone Holdings and its
subsidiaries, including ASB, that had been prepared by management.
Representatives of CS First Boston presented an oral fairness opinion to the
Washington Mutual Board and discussed the CS First Boston analysis of financial
aspects of the transaction. The Washington Mutual Board voted to approve the
Merger, authorized the issuance of up to 46 million shares of Common Stock as
consideration in the Transaction and authorized Mr. Killinger, Mr. Tall and
other representatives of the Company to negotiate the final terms of the Merger
Agreement, Registration Rights Agreement, the Warrant Exchange Agreement and any
related agreements on a basis consistent with that presented at the meeting. The
Washington Mutual Board also voted to exempt KHP from the provisions of the
Washington Mutual Rights Agreement, conditioned on the immediate distribution of
the Keystone Initial Shares to the Investors, and to approve the amendment to
the Articles to increase the number of authorized shares of Common Stock. See
"PROPOSED AMENDMENT TO WASHINGTON MUTUAL ARTICLES OF INCORPORATION -- INCREASE
IN AUTHORIZED SHARES."
During the period of July 10 through July 19, 1996, representatives of
Washington Mutual and Keystone Holdings met in Washington, D.C. to negotiate
final terms of the Warrant Exchange Agreement and the Registration Rights
Agreement with the FDIC-Manager. Numerous discussions also took place during
that time on the final terms of the Merger Agreement, including the terms of the
Escrow Agreement, the cost to prosecute the Case, and the management of the Case
following its assumption by Washington Mutual. Following one of these
discussions, the parties agreed to increase the number of shares of Common Stock
to be paid in connection with the Case to up to eight million shares, subject to
approval by the Washington Mutual Board.
On July 19, 1996, the Washington Mutual Board met telephonically with
Mr. Tall, the Company's legal counsel and CS First Boston to review the proposed
final terms of the Transaction. CS First Boston orally advised the Washington
Mutual Board that it considered the consideration to be paid by Washington
Mutual in the transaction fair from a financial point of view to Washington
Mutual and that CS First Boston would issue a written opinion to that effect.
The Washington Mutual Board approved the issuance of up to 48 million shares of
Common Stock in connection with the Transaction and authorized Mr. Killinger,
Mr. Tall and other representatives of Washington Mutual to negotiate the final
terms and conditions of the Merger Agreement, the Warrant Exchange Agreement,
the Registration Rights Agreement and other related agreements.
On July 20 and July 21, 1996, the parties met in New York City to
negotiate the final terms of the Transaction agreements. The agreements were
signed prior to the opening of business on July 22, 1996 and the proposed
acquisition was publicly announced.
REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE WASHINGTON MUTUAL BOARD
The Washington Mutual Board believes that Keystone Holdings and ASB are
a unique strategic fit, which will allow Washington Mutual to expand into
California with a financially strong institution that has similar business
strategies, strong management and complementary product capabilities.
In 1995, the Washington Mutual Board revised its 5-year strategic plan.
The strategies enumerated in the strategic plan include strengthening Washington
Mutual's consumer banking franchise throughout the
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West; diversifying its business mix by deploying capital to higher growth
business lines, such as commercial banking;decreasing Washington Mutual's
sensitivity to movements in interest rates; improving margins of its core
businesses; operating more efficiently; and maintaining strong asset quality.
The Washington Mutual Board believes that the Transaction satisfies
elements of this strategic plan. In particular, the following benefits were
identified by the Washington Mutual Board:
- Strengthens Consumer Banking Franchise in West. The
Transaction will give Washington Mutual immediate access to
the consumer banking market in California. ASB has a
state-wide presence in California, with over 200 branches and
loan offices concentrated in the Los Angeles and San Francisco
areas. The Transaction will add more than 500,000 new
households to Washington Mutual's customer base.
- Decreases Washington Mutual's Sensitivity to Interest Rate
Changes. ASB's loan and investment portfolios consist
primarily of ARMs and variable rate mortgage-backed
securities. This will complement Washington Mutual's
portfolios, which contain a much higher percentage of fixed
rate mortgages, and will accelerate Washington Mutual's
efforts to reduce the sensitivity of its results of operations
to changes in prevailing interest rates.
- Expense Savings. The consolidation of certain head office
functions and back office operations is expected to achieve
annual savings of operating costs projected by management at
$25 million and $50 million (pre-tax) in 1997 and 1998,
respectively.
The benefits described above are forward-looking statements and actual
results may vary materially from such projections. See "THE TRANSACTION -- Risk
Factors," for factors that may cause such variances.
The Washington Mutual Board considered certain potentially negative
factors in its deliberations regarding the Transaction, such as the risk that
economic conditions in California where ASB has the bulk of its real estate
assets could deteriorate, the fact that following the Transaction a significant
amount of Common Stock would be held by a single shareholder or group of
shareholders, the level of competition the Company would face in California, the
effect on the Company's capital of a special SAIF assessment and the Company's
potential inability following the Transaction to refinance certain outstanding
debt and preferred equity of subsidiaries of Keystone Holdings. See "MANAGEMENT
AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE TRANSACTION -- Operations
After the Transaction." The Washington Mutual Board determined, however, that
the benefits of the Transaction discussed above outweighed the potential
negative factors.
In reaching its conclusion, the Washington Mutual Board considered
information provided at its February 20, 1996, June 18, 1996 and July 19, 1996
board meetings, including, among other things, (i) information concerning the
financial performance and condition, business operations, capital levels, asset
quality, loan portfolio breakdown and prospects of ASB and information
concerning the two companies on a combined basis; (ii) the structure of the
Transaction, including the accounting treatment of the Transaction and the fact
that Washington Mutual's shareholders would retain approximately 66% of the
common equity of the combined company; (iii) the terms of the Merger Agreement,
Warrant Exchange Agreement, Registration Rights Agreement, Escrow Agreement, and
other documents to be executed in the Transaction; (iv) the state of the
California economy; (v) the presentation and recommendation made by the
management of Washington Mutual; (vi) current industry, economic and market
conditions and trends, including the likelihood of continuing consolidation and
increasing competition in the banking and financial services industries; (vii)
the possibility of achieving significant cost savings, operating efficiencies
and synergies as a result of the Transaction; (viii) the CS First Boston Opinion
as to the fairness from a financial point of view of the consideration paid by
Washington Mutual; (ix) the terms of other recent comparable combinations of
savings and loan holding companies; and (x) the effect of the Transaction on the
depositors, employees, customers and communities served by each company.
In reaching its decision to approve the Transaction and recommend the
Transaction to the shareholders of Washington Mutual, the Washington Mutual
Board did not assign any relative or specific weights to the various factors
considered and individual directors may have given differing weights to
different factors.
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THE WASHINGTON MUTUAL BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE
TRANSACTION AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF COMMON STOCK VOTE FOR
APPROVAL OF THE TRANSACTION.
In evaluating the recommendation of the Washington Mutual Board,
holders of Common Stock should carefully consider the matters described under
"THE TRANSACTION -- Risk Factors."
OPINION OF FINANCIAL ADVISOR
Washington Mutual has retained CS First Boston to act as its financial
advisor in connection with the Merger. CS First Boston has rendered its written
opinions to the Washington Mutual Board, dated July 21, 1996 and the date of
this Proxy Statement, to the effect that, based upon and subject to the factors
and assumptions set forth in such opinions, and as of the date of each such
opinion, the consideration to be paid by Washington Mutual in the Transaction
(the "Transaction Consideration") was fair to Washington Mutual from a financial
point of view. No limitations were imposed by the Washington Mutual Board upon
CS First Boston with respect to investigations made or procedures followed by CS
First Boston in rendering its opinions.
THE FULL TEXT OF THE CS FIRST BOSTON OPINION, WHICH SETS FORTH
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE
REVIEW UNDERTAKEN BY CS FIRST BOSTON, IS ATTACHED HERETO AS APPENDIX G.
WASHINGTON MUTUAL SHAREHOLDERS ARE URGED TO READ THE CS FIRST BOSTON OPINION IN
ITS ENTIRETY. CS FIRST BOSTON'S OPINIONS ARE DIRECTED ONLY TO THE FAIRNESS OF
THE CONSIDERATION TO BE PAID BY WASHINGTON MUTUAL IN THE TRANSACTION AND DO NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE AT THE SPECIAL MEETING. THE SUMMARY SET FORTH IN THIS PROXY STATEMENT OF
THE OPINIONS OF CS FIRST BOSTON IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE CS FIRST BOSTON OPINION ATTACHED HERETO AS APPENDIX G.
In arriving at its opinions, CS First Boston reviewed certain publicly
available business and financial information relating to Keystone Holdings and
Washington Mutual, as well as the Merger Agreement and the Warrant Exchange
Agreement. CS First Boston also reviewed certain other information, including
financial forecasts, provided to it by Keystone Holdings and Washington Mutual,
and met with the managements of Keystone Holdings and Washington Mutual to
discuss the business and prospects of Keystone Holdings and Washington Mutual.
CS First Boston also considered certain financial data of Keystone
Holdings and Washington Mutual, and compared that data with similar data for
other publicly held companies in businesses similar to those of Keystone
Holdings and Washington Mutual and considered the financial terms of certain
other business combinations which have recently been effected. CS First Boston
also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which it deemed
relevant. CS First Boston also relied upon the views of the managements of
Keystone Holdings and Washington Mutual concerning the business, operational and
strategic benefits and implications of the Transaction, including financial
forecasts provided by Keystone Holdings and Washington Mutual relating to the
synergistic values and operating cost savings expected to be achieved through
the combination of the operations of Keystone Holdings and Washington Mutual.
In connection with its review, CS First Boston has not assumed any
responsibility for independent verification of any of the foregoing information
and has relied on its being complete and accurate in all material respects. With
respect to the financial forecasts referred to above, CS First Boston has
assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Keystone
Holdings and Washington Mutual as to the future financial performance of
Keystone Holdings and Washington Mutual. In addition, CS First Boston has not
made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Keystone Holdings or Washington Mutual, nor has CS
First Boston been furnished with any such evaluations or appraisals. CS First
Boston's opinions necessarily were based upon financial, economic, market and
other conditions as they existed and could be evaluated on the dates of such
opinions. CS First Boston did not express any opinion as to what the value of
the Common Stock actually will be when issued to KHP and the FRF pursuant to the
Transaction, or the prices at which such securities will trade subsequent to the
Transaction.
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CS First Boston also noted in its opinions that it is not an expert in
legal matters and, accordingly, solely for purposes of its opinions, CS First
Boston assumed, with the consent of the Washington Mutual Board, that an
additional 8.0 million shares of Common Stock will be deposited into the
Litigation Escrow at the Effective Date and that all of such Litigation Escrow
Shares will ultimately be issued to the Investors and the FRF. In making such
assumptions, however, CS First Boston did not express any view as to the outcome
of the Case.
The following is a summary of the material analyses CS First Boston
performed in arriving at its opinion dated July 21, 1996 as to the fairness to
Washington Mutual of the Transaction Consideration. CS First Boston arrived at
its opinion based on the results of all of the analyses described below assessed
as a whole and did not draw any specific conclusions from or with regard to any
one method of analysis.
KEYSTONE HOLDINGS VALUATION ANALYSIS. CS First Boston arrived at values
for Keystone Holdings using four valuation methodologies: a comparable companies
analysis; a comparable transactions analysis; a discounted cash flow analysis;
and a contribution analysis. These methodologies are discussed below:
Comparable Companies Analysis. CS First Boston reviewed and
compared certain financial information for Keystone Holdings with
corresponding information for the following companies (the "Comparable
Companies") that it believed to be appropriate for comparison: H.F.
Ahmanson and Co., Great Western Financial Corp., Golden West Financial
Corp., and Cal Fed Bancorp ("CFB"). For each of the Comparable
Companies CS First Boston calculated estimated 1996 and 1997 price to
earnings multiples, price to book value and tangible book value
multiples, and the deposit premiums implied by current market prices.
CS First Boston also calculated such multiples by applying a 30%
premium to market prices for the Comparable Companies in order to
approximate the average control premium paid in the Comparable
Transactions (as defined below). In the case of CFB, CS First Boston
adjusted its market price to exclude the value of its pending goodwill
lawsuit, based on the aggregate public market value of the certificates
in its litigation trust.
This analysis indicated that (i) the mean multiple of price to
estimated 1996 net income for the Comparable Companies was 11.9x (15.5x
with the control premium), compared to 10.2x implied for Keystone
Holdings by the Transaction Consideration; (ii) the mean multiple of
price to estimated 1997 net income for the Comparable Companies was
9.8x (12.8x with the control premium), compared to 8.3x implied for
Keystone Holdings; (iii) the mean multiple of price to book value for
the Comparable Companies was 1.33x (1.73x with the control premium),
compared to 1.36x implied for Keystone Holdings; (iv) the mean multiple
of price to tangible book value for the Comparable Companies was 1.41x
(1.84x with the control premium), compared to 1.36x implied for
Keystone Holdings; and (v) the deposit premium for the Comparable
Companies was 3.7% (7.3% with the control premium), compared to 2.5%
implied for Keystone Holdings. The hypothetical range of implied values
for Keystone Holdings derived from this analysis ranged from
approximately $1.17 billion to $1.40 billion without a control premium
and from approximately $1.53 billion to $1.85 billion with the control
premium. CS First Boston noted that based on the closing price of
Washington Mutual Common Stock on June 17, 1996, the value of the
Transaction Consideration was approximately $1.2 billion, which was
within the hypothetical range of values derived from the foregoing
analysis and which therefore supported CS First Boston's opinion as to
the fairness to Washington Mutual of the Transaction Consideration.
The book values used in these analyses were as of March 31,
1996, and the market prices of the Comparable Companies were based on
closing prices on June 12, 1996. Estimated earnings for Keystone
Holdings were based on management's projections, and for the Comparable
Companies were based on First Call estimates as of June 12, 1996. First
Call is a data service that monitors and publishes a compilation of
earnings estimates produced by selected research analysts regarding
companies of interest to institutional investors.
Comparable Transactions Analysis. Using publicly available
information, CS First Boston analyzed the prices and multiples paid in
24 thrift acquisitions with transaction values above $100 million
announced since January 1, 1995. The transactions analyzed (the
"Comparable Transactions") were:
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Peoples Heritage Fin./Family Bancorp; NationsBank Corp./TAC Bancshares;
Union Planters Corp./Leader Financial Corp.; Norwest
Corporation/Primerit Bank FSB; Standard Federal Bank/Bell Bancorp; Mid
America Federal Savings Bancorp/N.S. Bancorp; First Union Corp./Society
First FSB; Dime Savings Bank of Williamsburgh/Conestoga Bancorp;
SouthTrust Corp/Bankers First Corp.; Bank of Boston/Boston Bancorp;
Republic New York/Brooklyn Bancorp; MacAndrews & Forbes/SFFed Corp.;
Reliance Bancorp Inc./Sunrise Bancorp Inc.; Norwest Corporation/AMFED
Financial; NationsBank Corp./CSF Holdings; Charter One
Financial/FirstFed Michigan; First Union Corp./RS Financial Corp.;
Independence Savings Bank/Bay Ridge Financial; Crestar Financial/Loyola
Capital Corp.; First Union Corp./Columbia First FSB; First Union
Corp./United Financial of South Carolina; Valley National
Bancorp/Lakeland First Financial; NBD Bancorp/DeerBank Corp.; and First
Union Corp./Coral Gables Fedcorp. This analysis indicated that (i) the
mean multiple of consideration paid to latest twelve months net income
was 17.1x for the Comparable Transactions, compared to 15.8x for the
Transaction (using for this purpose Keystone Holdings' first quarter
annualized earnings, adjusted to reflect a normalized tax rate of 40%);
(ii) the mean multiple of consideration paid to estimated forward year
net income was 16.1x for the Comparable Transactions, compared to 10.2x
for the Transaction; (iii) the mean multiple of consideration paid to
book value for the Comparable Transactions was 1.50x, compared to 1.36x
for the Merger; (iv) the mean multiple of consideration paid to
tangible book value for the Comparable Transactions was 1.57x, compared
to 1.36x for the Transaction; and (v) the mean deposit premium paid in
the Comparable Transactions was 7.94% compared to 2.49% for the
Transaction. The hypothetical range of implied values for Keystone
Holdings derived from this analysis of Comparable Transactions ranged
from approximately $1.3 billion to $1.90 billion. CS First Boston noted
that based on the closing price of Washington Mutual Common Stock on
June 17, 1996, the value of the Transaction Consideration was
approximately $1.2 billion, which was within the hypothetical range of
values derived from the foregoing analysis and which therefore
supported CS First Boston's opinion as to the fairness to Washington
Mutual of the Transaction Consideration.
Discounted Cash Flow Analysis. The stand-alone valuation of
Keystone Holdings was estimated by adding (i) the present value of
future dividend streams that Keystone Holdings could produce over a
five-year period from December 31, 1996 through the year 2001 and (ii)
the present value of Keystone Holdings' estimated 2001 terminal value.
CS First Boston prepared this analysis based on financial projections
prepared by the managements of Keystone Holdings and Washington Mutual
for the years 1996 through 1998, as adjusted to reflect estimated
pre-tax cost savings from the Transaction of $25 million and $50
million in 1997 and 1998, respectively, and the estimated after-tax
Transaction-related expenses of approximately $200 million in 1996, and
assumed for purposes of this analysis that Keystone Holdings' net
income for the period from 1999 to 2001 would grow at an average annual
rate of approximately 6%. CS First Boston also assumed the distribution
by way of dividends of all earnings in excess of those required to
maintain a 6% tangible equity to assets ratio. The terminal value of
Keystone Holdings' common equity at the end of the five-year period was
estimated by applying a range of multiples (from 8.0x to 10.0x) to
Keystone Holdings' estimated terminal year net income. The dividend
streams and terminal values were discounted to present values using a
range of discount rates (from 14% to 16%) chosen to reflect different
assumptions regarding the required rates of return of holders or
prospective buyers of Keystone Holdings' common equity. This analysis
showed an implied present value for Keystone Holdings ranging from
$1.24 billion to $1.67 billion. CS First Boston noted that based on the
closing price of Washington Mutual Common Stock on June 17, 1996, the
value of the Transaction Consideration was approximately $1.2 billion,
which was within the hypothetical range of values derived from the
foregoing analysis and which therefore supported CS First Boston's
opinion as to the fairness to Washington Mutual of the Transaction
Consideration. CS First Boston noted that discounted cash flow analysis
is a widely used valuation methodology, but that it relies on numerous
assumptions, including asset and income growth rates, dividend payout
rates, terminal values and discount rates.
Contribution Analysis. CS First Boston analyzed the respective
contributions of Washington Mutual and Keystone Holdings to the
combined entity's pro forma balance sheet as of March 31, 1996 and pro
forma net income for 1995 (historic) and 1996-1998 (projected), in each
case without giving effect to any cost savings resulting from the
Transaction. This analysis showed that Keystone Holdings would have
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contributed 47% of total assets, 46% of loans (gross), 53% of deposits,
37% of common equity and 39% of tangible common equity of the combined
entity (including the minority interest pertaining to the Warrants) on
a pro forma basis as of March 31, 1996 and that Keystone Holdings'
contribution to the combined entity's net income (including the
minority interest accrual pertaining to the Warrants) would have been
26%, 35%, 35% and 36% for 1995 (actual) and projected 1996, 1997 and
1998 net income, respectively. CS First Boston calculated that the
current shareholders of Keystone Holdings and the FRF would own, on a
fully diluted basis, 34% of the Common Stock following the Transaction.
CS First Boston noted that Keystone Holdings pro forma ownership
approximates its capital and earnings contribution, before the effect
of cost savings. CS First Boston also noted that acquired companies,
such as Keystone Holdings, typically expect to receive, through a large
pro forma equity ownership interest, a disproportionate amount of the
cost savings generated by the merger.
PRO FORMA TRANSACTION ANALYSIS. CS First Boston also analyzed the
effect that the Transaction would have on Washington Mutual's projected earnings
per share, based on the most recent estimates for Washington Mutual's 1996 and
1997 earnings published by the Institutional Brokers Estimate System ("IBES")
and an assumed growth rate of 11% from 1997 to 1998, based on the IBES mean
projected five year earnings per share growth rate for Washington Mutual. IBES
is a data service that monitors and publishes compilations of earnings estimates
produced by selected research analysts regarding companies of interest to
institutional investors. For purposes of this analysis, CS First Boston used
ASB's projected net income for 1996-1998 based on ASB's management's business
plan and estimates prepared by Washington Mutual management of the estimated
cost savings achieved as a result of the Transaction and future operating
strategies. This analysis showed that the Transaction would result in accretion
to Washington Mutual's estimated earnings per share for 1996 of 3.3%, for 1997
of 10.6% and for 1998 of 19.6%.
In connection with the CS First Boston Opinion, CS First Boston
confirmed the appropriateness of its reliance on the analyses used to render its
July 21, 1996 opinion to the Washington Mutual Board by performing certain
procedures to update such analyses and review the assumptions upon which they
were based.
The summary set forth above does not purport to be a complete
description of the analyses underlying CS First Boston's opinions. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. No company used in the comparable company analysis
described above is identical to Washington Mutual or Keystone Holdings and no
transaction used in the comparable transaction analysis described above is
identical to the Transaction. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading value or the acquisition
value of the companies to which they are being compared. Mathematical analysis
(such as determining the mean or median) is not, in itself, a meaningful method
of using comparable company or comparable transaction data.
In arriving at its opinions, CS First Boston did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, CS First Boston believes that its analyses must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinions.
In performing its analyses, CS First Boston made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Washington Mutual or
Keystone Holdings. The analyses performed by CS First Boston are not necessarily
indicative of actual values, which may be significantly more or less favorable
than suggested by such analyses. Such analyses were prepared solely as a part of
CS First Boston's analysis of the fairness of the Transaction Consideration. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold. In addition, as described above, CS First
Boston's opinion dated July 21, 1996 was one of many factors taken into
consideration by the Washington Mutual Board in making its determination to
approve the Transaction.
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CS First Boston has consented to the inclusion of its fairness opinion
and the references to such opinion and to CS First Boston in this Proxy
Statement. In giving such consent, CS First Boston did not admit that it comes
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations thereunder nor did CS First Boston
admit that it is an expert with respect to any part of this Proxy Statement
within the meaning of the term "expert" as used in the Securities Act and the
rules and regulations thereunder.
The Washington Mutual Board retained CS First Boston based upon CS
First Boston's experience and expertise and its familiarity with Washington
Mutual. CS First Boston is an internationally recognized investment banking and
advisory firm. CS First Boston, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the past, CS First Boston
and its affiliates have provided financial advisory and other services to both
Washington Mutual and Keystone Holdings (including acting as a co-lead
underwriter with respect to the August 1995 offering of $150 million of the
Company's 7 1/4% Senior Notes due August 15, 2005) and have received customary
fees for the rendering of these services. In the ordinary course of their
business, CS First Boston and its affiliates may actively trade the debt and
equity securities of Washington Mutual and the debt securities of Keystone
Holdings for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to a letter agreement dated March 8, 1996, as amended and
restated on April 16, 1996, between Washington Mutual and CS First Boston,
Washington Mutual has agreed to pay CS First Boston a fee of $2.5 million for
its services in connection with the Transaction, of which $500,000 was paid upon
the signing of the Merger Agreement and an additional $2.0 million is payable
upon the closing of the Transaction. The letter agreement with CS First Boston
also provides that Washington Mutual will reimburse CS First Boston for its
out-of-pocket expenses and indemnify CS First Boston and certain related persons
and entities against certain liabilities, including liabilities under securities
laws, incurred in connection with its services thereunder.
RISK FACTORS
In addition to the other information set forth in this Proxy Statement,
Washington Mutual Shareholders should consider the following before voting on
the proposals herein.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE. When used or
incorporated by reference in this Proxy Statement, the words "anticipate,"
"estimate," "expect," "project" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. Several key factors that have a direct bearing on Washington
Mutual's ability to attain its goals are discussed below.
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED. The Company
anticipates that substantial benefits will occur as a result of the Transaction
as described under "THE TRANSACTION -- Reasons for the Transaction;
Recommendation of the Washington Mutual Board" and "MANAGEMENT AND OPERATIONS OF
WASHINGTON MUTUAL FOLLOWING THE TRANSACTION." Whether the anticipated benefits
of the Transaction are ultimately achieved, however, will depend on a number of
factors, including the ability of the combined companies to achieve
administrative cost savings at projected levels within projected time frames,
and general economies of scale and, generally, the ability of the combined
companies to capitalize on their combined asset base and strategic position.
There can be no assurance that the expected benefits of the Transaction relative
to the combined business will be achieved.
ECONOMIC CONDITIONS AND REAL ESTATE RISK. Washington Mutual's lending
operations are concentrated primarily in Washington and Oregon, with additional
operations in Idaho, Utah and Montana, and ASB's lending operations are
concentrated in California. Both Washington Mutual and ASB have the bulk of
their assets invested in loans and securities secured by residential real estate
in those states. As a result, the financial condition and
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results of operations of the combined company will be subject to general
economic conditions and, particularly, the conditions in the single-family or
multi-family residential real estate markets prevailing in Washington, Oregon
and California. In addition, in an economic downturn, there tends to be a
run-off in deposits, which could increase overall funding costs. If economic
conditions in any one of those states worsens or if the market for residential
real estate in particular declines, the combined company may suffer decreased
net income or losses associated with higher default rates and decreased
collateral values on its existing portfolio, and may not be able to originate
the volume of high quality single-family or multi-family residential mortgage
loans or achieve the level of deposits and mutual fund assets currently
projected.
In contrast to Washington Mutual's historical situation, approximately
one-half of the combined companies' pro forma loan assets at June 30, 1996 were
secured by properties in California. The California economy and certain of its
real estate submarkets showed signs of recovery in 1994 and 1995 from the
recessionary levels of the early 1990's, and consequently ASB's delinquencies,
non-performing assets and the ratio of loss provisions to nonperforming assets
improved from earlier periods. Other California real estate submarkets continued
to decline in 1996. If the California economy or real estate values in
California were to significantly decline, future financial performance of the
combined companies could be negatively affected.
INTEREST RATE RISK. Each of Washington Mutual and ASB realizes its
income principally from the differential between the interest earned on loans,
investments and other interest-earning assets, and the interest paid on
deposits, borrowings and other interest-bearing liabilities. Net interest
spreads are affected by the difference between the repricing characteristics of
interest-earning assets and deposits and other liabilities. Loan volumes and
yields, as well as the volume of, and rates on, investments, deposits and
borrowings, are affected by market interest rates. Generally, Washington Mutual
will experience increased interest rate spreads during periods of downward
interest rate movement and decreased interest rate spreads during periods of
upward interest rate movement. This is also the case with ASB, although to a
somewhat lesser extent. Although ASB's loan portfolio consists primarily of
ARMs, the adjustments in the interest rates on the ARMs inherently lag changes
in ASB's cost of funds. To the extent that interest rates generally are
increasing, the combined company's actual interest rate spread, and thus net
income, will in most cases be negatively affected.
OPERATIONAL ISSUES; MANAGEMENT. ASB's assets and deposits are of
comparable size to Washington Mutual's, and ASB operates primarily in
California, where Washington Mutual has limited operating experience. The
combination of two companies of nearly equal size and the integration of their
management teams in different geographic areas may pose difficulties that could
adversely affect the results of operations of the combined company. In addition,
Washington Mutual anticipates certain cost savings from the consolidation of
operations, which may not materialize or may be delayed as a result of
difficulties in consolidating operations.
The ability of the combined company to operate efficiently, at least in
the short term, will be enhanced by its ability to retain existing management
personnel. If Washington Mutual is not able to retain a substantial number of
key management personnel of ASB, the consolidation of the two companies may be
more time-consuming, difficult and expensive, which may negatively affect the
predicted cost savings. See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL
FOLLOWING THE TRANSACTION."
ABILITY TO REFINANCE DEBT. Washington Mutual currently intends to
refinance certain outstanding debt and preferred equity of certain subsidiaries
of Keystone Holdings following the Transaction. To the extent that the interest
rates on such refinancing are higher than anticipated, or that some of such
indebtedness is not repaid as contemplated, actual interest and dividend costs
may be higher than anticipated by Washington Mutual. Holders of certain of such
debt have the right to demand payment in the event of a change in control, such
as the Transaction. If such holders demand payment after the Transaction,
Washington Mutual will be required to promptly repay such debt and may not be
able to arrange for alternative financing at the anticipated rates. See
"MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE TRANSACTION."
COMPETITION. Washington Mutual and ASB both face significant
competition in their respective markets. Washington Mutual has limited operating
experience in California. California has a much larger population with more
large financial institution competitors than the states in which Washington
Mutual currently operates. Many
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of these large competitors have more significant financial resources, larger
market share and greater name recognition in California than the combined
company will have. The existence of such competitors may make it difficult for
Washington Mutual to achieve its financial goals following the Transaction.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT MARKET PRICE OF
STOCK. Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of such stock. As described elsewhere in this
Proxy Statement, it is anticipated that the FDIC-Manager will sell the FRF
Initial Shares in the Initial Underwriting. Additionally, Washington Mutual has
agreed to provide the FRF and the Investors and their assigns with certain
registration rights that will facilitate future sales of shares of Common Stock
issued in connection with the Transaction. If the market price of Common Stock
were adversely affected by such sales, Washington Mutual's access to the equity
capital markets could be adversely affected, and issuances of stock by
Washington Mutual in connection with future acquisitions, or otherwise, could
dilute earnings per share. See "THE TRANSACTION -- Registration Rights."
SIGNIFICANT SHAREHOLDERS
At the Effective Time, the Initial Shares will be issued to the FRF and
KHP. The FDIC-Manager is expected to sell the FRF Initial Shares in the Initial
Underwriting, although there is no assurance that the FDICManager will sell all
or any of such shares. See "THE TRANSACTION -- Resales of Washington Mutual
Common Stock." If the FDIC-Manager does not sell any of the FRF Initial Shares
in the Initial Underwriting, at the Effective Time the FRF will own
approximately 14.0% of the Common Stock then outstanding (based on the number of
shares outstanding on the Record Date plus the Initial Shares and Litigation
Escrow Shares), assuming all of the Litigation Escrow Shares are released.
The Keystone Initial Shares and the contingent right to receive the
Litigation Escrow Shares attributable to KHP will be distributed to the
Investors immediately after the Effective Time. After the Transaction, the
Investors will own an aggregate of 31,075,333 shares of Common Stock,
representing approximately 25.9% of the Common Stock then outstanding (based on
the number of shares outstanding on the Record Date plus the Initial Shares and
Litigation Escrow Shares), assuming all of the Litigation Escrow Shares are
released.
Immediately after the Transaction, Mr. Bass will beneficially own
approximately 9.5% of the Common Stock then outstanding (computed based on the
number of shares outstanding on the Record Date plus the Initial Shares and
Litigation Escrow Shares), assuming all of the Litigation Escrow Shares are
released.
The Investors and the FDIC-Manager are restricted in their right to
sell shares of Common Stock received in the Transaction by state and federal
securities and bank regulatory laws. In addition, certain Investors are also
subject to restrictions on sales of their shares of Common Stock by the terms of
the Affiliate Letters. Other than such restrictions, Washington Mutual has no
agreements with any Investor, including Mr. Bass, that restrict an Investor's
rights to buy, sell or vote the Common Stock. As holders of a significant
percentage of the outstanding Common Stock, after the Transaction certain
Investors, particularly Mr. Bass, and the FDIC-Manager, to the extent that the
FDIC-Manager does not sell the FRF Initial Shares in the Initial Underwriting,
will be able to affect voting on matters put before the shareholders of
Washington Mutual.
REGISTRATION RIGHTS
Washington Mutual has agreed to provide certain registration rights to
the Investors and the FRF, and their permitted assigns and transferees, as
holders of the Common Stock issued in the Transaction (the "Security Holders").
The registration rights are set forth in the Registration Rights Agreement. See
"APPENDIX F."
INITIAL UNDERWRITING. Washington Mutual has agreed to file with the SEC
and use its best efforts to cause to become effective as soon as practicable
after the Effective Date on a date mutually agreeable to Washington Mutual and
the participants in the Initial Underwriting, a registration statement with
respect to the Initial Underwriting of not less than 7.5 million and not more
than 20 million of the Initial Shares. All holders of the Initial Shares are
entitled to participate in the Initial Underwriting to the full extent of their
portion of the Initial
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Shares; provided that such participation does not violate an Affiliate Letter
given by such holder to Washington Mutual. See "THE TRANSACTION -- Accounting
Treatment." Washington Mutual currently expects that all of the FRF Initial
Shares will be registered and sold in the Initial Underwriting, although there
is no assurance that the FDIC-Manager will sell any or all of such shares.
SHELF REGISTRATIONS. Washington Mutual has also agreed to file with the
SEC and use its best efforts to cause to become effective as soon as practicable
after nine months from the Effective Date a shelf registration statement ("Shelf
Registration Statement") for sale from time to time to the public of all the
Initial Shares not previously sold in the Initial Underwriting, together with
any other securities issued as a dividend or other distribution with respect to,
or in exchange for or in replacement of the Initial Shares ("Registrable
Shares"). Shares may be sold under the Shelf Registration Statement only in
brokers transactions pursuant to Rule 144(f) promulgated under the Securities
Act or in an underwritten offering pursuant to the demand and piggyback
underwriting rights described below. Washington Mutual will use its best efforts
to keep the Shelf Registration Statement continuously effective for three years
after the initial effective date of the Shelf Registration Statement.
Washington Mutual has also agreed to file with the SEC a shelf
registration statement (the "Litigation Shelf") for sale from time to time to
the public of the Litigation Escrow Shares. Washington Mutual will use its best
efforts to have such registration statement become effective as soon as
practicable after the first date any Litigation Escrow Shares are distributed
from the Litigation Escrow and keep such Litigation Shelf continuously effective
until the later of (i) the date three years after the initial effective date of
the Litigation Shelf and (ii) the date one year after the last distribution of
Litigation Escrow Shares from the Litigation Escrow. Shares may be sold under
the Litigation Shelf only in brokers' transactions pursuant to Rule 144(f)
promulgated under the Securities Act.
DEMAND AND PIGGYBACK UNDERWRITINGS. Pursuant to the Registration Rights
Agreement, the holders of the Initial Shares may require the Company, an
aggregate of four times during the three-year period following the effectiveness
of the Shelf Registration Statement, to facilitate an underwritten public
offering of the Initial Shares then owned by them. In addition, if the Company
proposes to register any shares of Common Stock for sale under the Securities
Act through the three-year anniversary of the effectiveness of the Shelf
Registration Statement for its own account (a "Company Public Sale Event")
(other than in connection with an acquisition by the Company, the redemption or
conversion of outstanding convertible securities, or an employee equity plan),
the holders of the Initial Shares will be entitled to notice of the registration
and to include their shares therein.
RESTRICTIONS ON REGISTRATION RIGHTS. The registration rights described
above are subject to certain conditions, including the right of the underwriter
of any offering to limit the number of shares included in such offering and the
restriction on sale during certain "black-out periods," including, with certain
exceptions, (i) the 60-day period immediately following the effective date of
any registration statement filed by Washington Mutual in respect of a Company
Public Sale Event, and (ii) the 90-day period immediately following notice that
the Washington Mutual Board has determined in good faith that such offer or sale
is likely to adversely affect a transaction that is being contemplated by
Washington Mutual or involve disclosure obligations that might not be in the
best interest of Washington Mutual or its shareholders. To the extent that
holders are prevented from selling shares during black-out periods, the Company
will be required to extend the period of effectiveness of the Shelf Registration
Statement and the Litigation Shelf.
Washington Mutual has agreed, with certain exceptions, that it will not
publicly offer shares of its capital stock during the 60-day period immediately
following the sale of shares by a holder in the Initial Underwriting or in an
underwritten public offering pursuant to the Shelf Registration Statement.
EXPENSES; INDEMNIFICATION. Washington Mutual will pay all fees,
disbursements and expenses in connection with the registration rights, including
all registration and filing fees, fees of Washington Mutual's auditors and legal
counsel and fees of selling shareholders' legal counsel in connection with the
registration (but not the disposition) of the shares sold, but will not be
responsible for underwriting discounts and commissions or brokerage commissions.
Washington Mutual has agreed to provide customary indemnification and
contribution rights to the underwriters and selling shareholders in connection
with such underwritings.
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REGULATORY APPROVALS
The Transaction is subject to the approval of the OTS under the Home
Owners' Loan Act. The Community Reinvestment Act of 1978 ("CRA") also requires
that the OTS, in deciding whether to approve the Transaction, assess the record
of performance of ASB and the bank subsidiaries of Washington Mutual in meeting
the credit needs of the communities they serve, including low and moderate
income neighborhoods. Each of ASB, WMB and WMBfsb currently has "outstanding"
CRA ratings from its primary regulator.
Washington Mutual has submitted an application seeking OTS approval of
the Transaction. There can be no assurance that the OTS will approve the
Transaction, and if the Transaction is approved, there can be no assurance as to
the date of such approval or as to what conditions, if any, may be imposed in
such approval. As of the date of this Proxy Statement, three community groups
have filed protests with the OTS with regard to the Transaction. The OTS will
consider these protests in connection with consideration of the Company's
application as a whole. The Company believes that the protests are without merit
and has responded to the OTS to that effect. Washington Mutual's obligation to
consummate the Transaction is conditioned upon receipt of all required
regulatory approvals and consents, without any term or condition that (i) has
not normally been imposed in transactions of this type and would have a material
adverse effect on Keystone Holdings or Washington Mutual or (ii) would require
Washington Mutual's bank subsidiaries to raise additional capital (other than to
increase either WMB's or WMBfsb's leverage capital or core capital to a level no
higher than five percent). In addition, the U.S. Department of Justice must
examine whether there are significant anti- competitive effects of the
Transaction. There can be no assurance that the U.S. Department of Justice or
the Attorney General of the state of California will not challenge the Merger
or, if challenged, what the result of such a challenge would be.
Mr. Bass has filed a notice of change of control with the OTS. The
parties' obligations to consummate the Transaction are conditioned on the
receipt of the non-objection of the OTS to such notice. There can be no
assurance that such non-objection will be forthcoming, and if received, there
can be no assurance as to the date of such non-objection or what conditions may
be imposed.
The obligation of Washington Mutual to consummate the Transaction is
also subject to the satisfaction of the following conditions: (i) Washington
Mutual's receipt (x) from the OTS of confirmation that upon consummation of the
Transaction, Washington Mutual will not be deemed to control Family Savings Bank
(a minority-owned financial institution of which Keystone Holdings owns 14.7% of
the outstanding common stock and all the outstanding preferred stock) and (y)
from the FDIC of either confirmation that Washington Mutual will not be deemed
to control Family Savings Bank or a waiver for Washington Mutual's subsidiaries
of certain "cross guaranty" liability with respect to Family Savings Bank; and
(ii) the resolution of any material outstanding differences between KHP and the
Keystone Entities, on the one hand, and the FDIC-Manager, on the other hand,
without material liability attaching to the Keystone Entities. There can be no
assurance that these conditions will be satisfied.
Washington Mutual is not aware of any other governmental approvals that
are required for consummation of the Transaction except as described above.
Should any other approval or action be required, it is presently contemplated
that such approval would be sought. There can be no assurance whether or when
any such approval, if required, could be obtained.
FRF MATTERS
FRF AGREEMENTS. In connection with the 1988 Acquisition, the Keystone
Entities and the FRF entered into the FRF Agreements. See "APPENDIX A,
INFORMATION CONCERNING KEYSTONE HOLDINGS -Keystone Holdings -- The 1988
Acquisition." Pursuant to the Warrant Exchange Agreement, at the Effective Time,
certain of the FRF Agreements (or portions thereof) relating to the Warrants
will be terminated. Additionally, pursuant to the Merger Agreement, KHP and the
Keystone Entities have agreed to use their best efforts to: (i) obtain consents
necessary so that the FRF Agreements can be assumed by a subsidiary of
Washington Mutual; (ii) resolve, without material liability to Washington Mutual
or the Keystone Entities, any material outstanding
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differences between KHP and the Keystone Entities, on the one hand, and the
FDIC-Manager, on the other hand, relating to the FRF Agreements; and (iii)
facilitate a renegotiation of the FRF Agreements to simplify the remaining
effective provisions thereof. The Company anticipates that at the Effective
Time, assuming the renegotiation of the FRF Agreements, the only material
continuing obligations under the FRF Agreements will be (i) the obligation of
the FDIC-Manager to indemnify Washington Mutual in certain circumstances and
(ii) the obligation of Washington Mutual to share certain tax savings with the
FDIC-Manager. See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE
TRANSACTION -- Operations After the Transaction."
In addition, the FDIC Office of Inspector General has commenced a
compliance audit (the "Audit") with regard to certain of the FRF Agreements. The
completion of the Audit without liability to New West and ASB exceeding $500,000
is a condition to the consummation of the Transaction. See "-- Conditions to the
Transaction." To the extent that the Audit is completed prior to the Effective
Date, the FDIC-Manager and KHP and the Keystone Entities have agreed to use
their good faith efforts to resolve any dispute that may arise with respect to
the items or periods covered by the Audit and to enter into a release in which
the parties will agree that, subject to certain exceptions, all entries on the
schedules of activities will be deemed approved at all levels of audit review
and for all purposes.
NEW WEST DIVESTITURE. In the 1988 Acquisition, New West was structured
to be the "bad bank" that acquired substantially all of the underperforming
loans and certain other assets from the Failed Association while ASB acquired
substantially all of the performing loans. Pursuant to FRF Agreements, New West
indemnified ASB and one of its affiliates from liability arising out of certain
management responsibilities for New West. As conditions of the consummation of
the Transaction, (i) the stock of New West, together with any obligations and
liabilities in connection with the ownership, business or operation of New West,
will be transferred by Keystone Holdings to, or assumed by, an entity not being
acquired by Washington Mutual and (ii) the indemnities provided by New West to
ASB and one of its affiliates will be provided by the FRF. The divestiture of
New West must be effected without any substantial cost to any Keystone Entity.
CONDITIONS TO THE TRANSACTION
Conditions to the Transaction include the following conditions to the
Merger and conditions to the Warrant Exchange. As of the date of this Proxy
Statement, substantially all of the conditions remain to be satisfied.
The obligations of Keystone Holdings, Washington Mutual and the
FDIC-Manager to consummate the Transaction are subject to, among other things,
the satisfaction of the following conditions: (i) the approval of the
Transaction and the amendment to the Articles by the requisite vote of
Washington Mutual Shareholders; (ii) the receipt of all applicable regulatory
and governmental approvals and consents and the expiration of all statutory and
regulatory waiting periods; (iii) the absence of any order, decree or injunction
of a court or agency of competent jurisdiction that enjoins or prohibits the
consummation of the Merger; (iv) the receipt of an opinion of counsel to
Washington Mutual, dated as of the Effective Date, to the effect that the Merger
will qualify as a "reorganization" as defined by the Code; (v) the compliance
with applicable pre-merger notification provisions of Section 7A of the Clayton
Act and the absence of pending or threatened proceedings under any applicable
antitrust law of the state of California; (vi) the divestiture of the shares of
stock in New West to an entity other than a Keystone Entity; (vii) the
concurrent consummation of the Warrant Exchange and the Merger and receipt by
the Keystone Entities of certain consents relating to and modifications of the
surviving FRF Agreements; (viii) the receipt of a letter from Deloitte & Touche
LLP stating that the Transaction qualifies for pooling of interests accounting
treatment; (ix) the execution and delivery of an Escrow Agreement by the parties
thereto; and (x) the continued accuracy of the representations and warranties of
and the performance of the covenants and agreements by each party to each of the
Merger Agreement and the Warrant Exchange Agreement except where the failure of
such representations and warranties to be accurate or the failure to perform
such covenants or agreements would not have a material adverse effect on such
party.
The obligation of Washington Mutual to consummate the Transaction is
subject to the satisfaction or waiver of certain additional conditions,
including, without limitation, the following: (i) the receipt of all regulatory
and governmental consents, waivers, clearances, approvals and authorizations
required in connection with the
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Transaction without the imposition of an unusual condition that (a) would have a
material adverse effect on the Keystone Entities or Washington Mutual or (b)
would require Washington Mutual's banking subsidiaries to raise additional
capital other than to raise their pro forma leverage capital or core capital
ratio to a level no higher than five percent; (ii) the receipt of confirmation
from the OTS and the receipt of confirmation or waiver from the FDIC that upon
consummation of the Transaction, Washington Mutual will not be deemed to control
Family Savings Bank; (iii) the resolution of any material outstanding
differences between KHP and Keystone Entities and the FDICManager; (iv) the
receipt of opinions reasonably satisfactory to Washington Mutual, dated as of
the Effective Date, from counsel to KHP to the effect that each of KHP and the
Keystone Entities is duly incorporated, is in good standing and has all
requisite power and authority to effect the Transaction and additional opinions
customary in a transaction of this nature; (v) the receipt of the CS First
Boston Opinion; (vi) the absence of any material adverse change in the overall
financial condition, businesses or results of operations of the Keystone
Entities; (vii) the receipt of resignations of the directors of each of the
Keystone Entities; (viii) the receipt of a certificate of officers of Keystone
Holdings and other documents evidencing fulfillment of the conditions precedent
to the closing of the Transaction; (ix) the receipt by KHP and the Keystone
Entities of consents to transfer certain real property leases; (x) the receipt
by KHP of necessary consents and modifications so that the FRF Agreements may be
assumed by a subsidiary of Washington Mutual; (xi) the waiver by affiliates of
KHP of their right to receive notice for the redemption of certain debt and
preferred stock owned by such affiliates; (xii) the filing of the 1992 and 1993
amended federal income tax returns of Keystone Holdings, which amended tax
returns have been filed (see "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL
FOLLOWING THE TRANSACTION -- Operations After the Transaction -- Certain Federal
Income Tax Matters."); (xiii) the completion of the Audit without liability to
New West and ASB exceeding $500,000; and (xiv) the effectiveness of a tax
settlement agreement dated as of July 21, 1996 (the "Tax Settlement Agreement")
between the FDIC-Manager and the Keystone Entities (See "MANAGEMENT AND
OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE TRANSACTION -- Operations After
the Transaction" and "APPENDIX A, INFORMATION CONCERNING KEYSTONE HOLDINGS --
Keystone Holdings -- The 1988 Acquisition -- Tax-Related Agreements").
The obligation of KHP and Keystone Entities to consummate the
Transaction is subject to the satisfaction or waiver of certain additional
conditions, including, without limitation, the following: (i) the receipt of an
opinion reasonably satisfactory to KHP, dated as of the Effective Date, from
counsel to Washington Mutual to the effect that Washington Mutual is duly
incorporated, is in good standing and has all requisite power and authority to
effect the Transaction and additional opinions customary in a transaction of
this nature; (iii) the absence of any material adverse change in the overall
financial condition, businesses or operations of Washington Mutual; (iv) the
receipt of a certificate of officers of Washington Mutual and such other
documents evidencing fulfillment of the conditions precedent to the closing of
the Transaction; and (v) the receipt by Washington Mutual's transfer agent at
least two days prior to closing of instructions with respect to the issuance of
the Keystone Initial Shares.
The obligation of the FDIC-Manager to consummate the Transaction is
subject to the satisfaction or waiver of certain additional conditions,
including, without limitation, the following: (i) the receipt of an opinion
reasonably satisfactory to the FDIC-Manager, dated as of the Effective Date,
from counsel to Washington Mutual to the effect that Washington Mutual is duly
incorporated, is in good standing and has all requisite power and authority to
effect the Transaction and additional opinions customary in a transaction of
this nature; (ii) the receipt of certificates of officers of Washington Mutual,
KHP, the Keystone Entities and certain Investors and such other documents
evidencing fulfillment of all conditions precedent; (iii) the receipt by
Washington Mutual's transfer agent at least two days prior to Closing of
instructions with respect to the issuance of the FRF Initial Shares; (iv) the
execution and delivery of the Registration Rights Agreement and the Escrow
Agreement; (v) the absence of any material adverse change with respect to
Washington Mutual, except for changes resulting from market and economic
conditions which generally affect the savings industry as a whole and (vi) the
completion of all actions necessary for the authorization and issuance of the
FRF Initial Shares and the Litigation Escrow Shares.
COVENANTS OF KEYSTONE HOLDINGS
Under the Merger Agreement, prior to the Effective Time, KHP and the
Keystone Entities are generally obligated to conduct their business in a manner
consistent with prudent banking practice in accordance with the ASB business
plan. In addition, KHP and the Keystone Entities have agreed to use their best
efforts to preserve the
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business organization of ASB and the Keystone Entities, keep available the
present services of the employees of ASB and the Keystone Entities and preserve
the goodwill of the customers and other business relationships of ASB and the
Keystone Entities. The Merger Agreement also provides that, prior to the
Effective Time, with certain exceptions, no Keystone Entity will or will agree
to: (i) amend its articles of incorporation, charter or bylaws; (ii) change the
number of or reclassify any shares of its authorized or issued capital stock;
(iii) issue, grant or amend any options, warrants or other rights to purchase
capital stock; (iv) declare, set aside or pay any dividends or other
distributions on its capital stock (except for certain cash dividends declared
and paid by direct and indirect wholly-owned subsidiaries of Keystone Holdings);
(v) redeem or otherwise acquire any shares of its capital stock; (vi) liquidate,
sell, transfer, assign, encumber or otherwise dispose of any shares of its
capital stock; or (vii) merge or consolidate with any entity or acquire any
equity interest in any entity or create any subsidiary; (viii) make capital
expenditures in excess of $500,000 per project or related series of projects or
$3 million in the aggregate; (ix) open, close or relocate any branches or make
application to do so; (x) change in any material manner its material banking
policies; (xi) make loans or issue loan commitments other than in the ordinary
course of business consistent with past practice at rates not less than
prevailing market rates; (xii) issue letters of credit or otherwise guarantee
the obligations of any other person except in the ordinary course of business
consistent with past practice; (xiii) enter into, amend or terminate certain
contracts calling for the payment of $250,000 or more and that cannot be
terminated on not more than 30 days notice; (xiv) engage or participate in any
material transaction or incur or sustain any material obligation except in the
ordinary course of business; (xv) except in accordance with ASB's environmental
policy foreclose upon or otherwise acquire any real property (other than 1-to-4
family residential properties in the ordinary course of business); or (xvi)
liquidate sell, transfer, assign, encumber or otherwise dispose of assets other
than in the ordinary course of business.
In addition, neither KHP, any Keystone Entity nor any of their
partners, directors, officers, representatives, agents or other persons
controlled by any of them, will directly or indirectly solicit, hold discussions
with, or provide any information to, any person, entity or group, other than
Washington Mutual, concerning any merger, sale of substantial assets not in the
ordinary course of business, sale of shares of capital stock or similar
transactions involving any Keystone Entity, or any division or subsidiary
thereof. KHP and the Keystone Entities will promptly communicate to Washington
Mutual the terms of any proposal that any of them may receive in respect of any
such transaction.
COVENANTS OF WASHINGTON MUTUAL
Pursuant to the Merger Agreement, Washington Mutual has agreed that
until the Effective Time it will generally conduct the business of Washington
Mutual and each of its subsidiaries in a manner consistent with prudent banking
or (in the case of WM Life Insurance Company) insurance practice and with the
Company's 1996 Strategic Plan. In addition, neither Washington Mutual, WMB nor
WMBfsb, nor any of their respective directors, officers, representatives, agents
or other persons controlled by any of them, will prior to the Effective Time
directly or indirectly solicit, hold discussions with or provide any information
to, any person or group concerning any transaction which, if consummated, would
result in a third party acquiring a majority of the outstanding Common Stock,
and will promptly communicate to KHP the terms of any such proposal that it
receives, except that the Washington Mutual Board may respond to an unsolicited
offer if it determines in its good faith judgment that such response is
reasonably required in order to discharge its fiduciary duties.
Washington Mutual also agreed that until the Effective Time, without
the prior written consent of KHP, neither Washington Mutual nor any of its
subsidiaries will enter into, or agree to enter into, any transaction whereby
Washington Mutual or any of its subsidiaries would acquire or assume, (i)
another entity with more than $5 billion in assets, (ii) assets of another
entity in excess of $5 billion or (iii) deposits and other liabilities of
another entity in excess of $5 billion.
ACCOUNTING TREATMENT
The Transaction is intended to be treated as a pooling-of-interests for
accounting purposes. Accordingly, under generally accepted accounting
principles, the assets and liabilities of Keystone Holdings will be recorded on
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the books of Washington Mutual at their values on the books of Keystone Holdings
at the time of consummation of the Transaction. If completed as proposed, no
goodwill will be created in the Transaction.
Washington Mutual and KHP have received a "poolability" letter from
KPMG Peat Marwick LLP and, will, at closing, receive from Deloitte & Touche LLP
a pooling letter with respect to the Transaction. The "poolability" letter
received from KPMG Peat Marwick LLP ("Poolability Letter") states such firm's
belief that, at the time of signing the Merger Agreement, no conditions related
to Keystone Holdings existed that would preclude Washington Mutual's accounting
for the Transaction as a pooling of interests. The Poolability Letter sets forth
certain assumptions made, matters considered and limits on review. The pooling
letter from Deloitte & Touche LLP ("Pooling Letter"), the receipt of which is a
condition to closing the Transaction, will state, subject to similar assumptions
and limitations, that the Transaction may be accounted for as a pooling of
interests.
Pursuant to the Merger Agreement, Keystone Holdings is required to
deliver from each party who may be deemed to be an "affiliate" of Keystone
Holdings (collectively, the "Affiliates") for the purposes of SEC Accounting
Series Release No. 130 as amended by Release No. 135 ("ASR 135"), to Washington
Mutual an Affiliate Letter, pursuant to which, among other things, each
Affiliate agrees, with certain limited exceptions, not to sell or otherwise
dispose of any interest in KHP or Common Stock during the period commencing 30
days preceding the Effective Date until such time as consolidated financial
results covering at least 30 days of post-Transaction combined operations of
Washington Mutual and Keystone Holdings have been published. While not required
to be subject to written agreements, Washington Mutual affiliates are subject to
the same restrictions as to sales of Common Stock. In order to assure that the
Merger will be treated as a pooling of interests, Washington Mutual will have
the right to place a restrictive legend on all shares of Common Stock to be
received by an Affiliate so as to preclude the transfer of such shares in
violation of the Affiliate Letters. The Affiliate Letters and restrictive
legends are intended to preserve treatment of the Merger as a
pooling-of-interests for accounting purposes.
For the Transaction to qualify for pooling of interests accounting
treatment, holders of no more than 4.8 million shares of Common Stock may have
perfected their dissenters' rights at the Effective Date. See
"-- Dissenters' Rights."
DISSENTERS' RIGHTS
Holders of Common Stock have the right to dissent from the Transaction
and, in certain circumstances, to receive payment for their shares in accordance
with the terms of Chapter 23B.13 of the Washington Business Corporation Act
("WBCA"). Generally a shareholder must dissent with respect to all shares the
shareholder owns or over which such shareholder exercises voting power.
THE FOLLOWING DISCUSSION CONTAINS ALL MATERIAL PROVISIONS OF WASHINGTON
LAW WITH WHICH DISSENTING SHAREHOLDERS MUST COMPLY IN ORDER TO PRESERVE THEIR
DISSENTERS' RIGHTS. IT IS NOT, HOWEVER, A COMPLETE STATEMENT OF THE LAW
PERTAINING TO DISSENTERS' RIGHTS UNDER THE WBCA AND IS QUALIFIED IN ITS ENTIRETY
BY THE FULL TEXT OF CHAPTER 23B.13 OF THE WBCA, WHICH IS REPRINTED IN ITS
ENTIRETY AS APPENDIX H TO THIS PROXY STATEMENT.
Appendix H should be reviewed carefully by any holder of the Common
Stock who wishes to exercise dissenters' rights or who wishes to preserve the
right to do so, since failure to comply with the procedures of the statute will
result in the loss of dissenters' rights.
If the shares of Common Stock of a Dissenting Holder are held in street
name, either the beneficial owner or the broker in whose name the shares are
registered may dissent from the Transaction by following the following
procedures. The record shareholder may dissent with respect to all shares held
by one beneficial owner and must provide written notice to the Company of the
name and address of each such dissenting beneficial owner. A beneficial owner
may assert dissenters' rights as to shares held on the shareholder's behalf only
if the beneficial owner provides to Washington Mutual the written consent of the
registered holder to such dissent with or prior to the assertion of dissenters'
right.
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A holder of Common Stock who wishes to dissent from the Transaction (a
"Dissenting Holder") must satisfy the following conditions, among others:
(a) Written Objection. Such shareholder must file a written objection
to the Transaction with the Company at it offices at 1201 Third Avenue, Suite
1500, Seattle, Washington 98101 (Attention: William L. Lynch) prior to the vote
if taken at the Special Meeting; and
(b) No Vote in Favor. Such shareholder must not vote in favor of the
Transaction.
If the Transaction is approved by the holders of Common Stock,
Washington Mutual will send written notice along with a copy of Chapter 23B.13
of the WBCA not later than 10 days after the Effective Time to each Dissenting
Holder (i) stating where such shareholder must send his or her written payment
demand, (ii) stating where and when certificates representing Common Stock must
be deposited, (iii) containing a form for demanding payment, which requires the
Dissenting Holder to certify that he or she acquired beneficial ownership before
the first public announcement of the Transaction on July 22, 1996, and (iv)
setting a date by which such written payment demand must be received. A holder
of Common Stock who does not demand payment, certify that such shareholder
acquired the shares before July 22, 1996, nor deposit his or her shares within
the time provided by such notice will not be entitled to dissenters' rights.
Washington Mutual will pay to each Dissenting Holder who complies with
the procedures described above, within 30 days of the later of the Effective
Time or the date the payment demand is received, the amount that Washington
Mutual estimates to be the fair value of such Dissenting Holder's shares
immediately prior to the Effective Date, plus accrued interest, excluding any
appreciation or depreciation in anticipation of the Transaction. Washington
Mutual will provide, along with such payment, Washington Mutual's balance sheet,
income statement and statement of changes in shareholders' equity for its last
fiscal year and any recent interim financial statements, an explanation of how
Washington Mutual estimated the fair value of the shares and how the accrued
interest was calculated and certain other information. Any Dissenting Holder who
is dissatisfied with such payment or such offer may, within 30 days of such
payment or offer for payment, notify Washington Mutual in writing of such
shareholder's estimate of fair value of his or her shares and the amount of
interest due, and demand payment thereof.
Washington law provides no specific method for determining "fair value"
of a Dissenting Holder's shares. In determining its estimate of such fair value
immediately before the Effective Date, exclusive of any appreciation or
depreciation in anticipation of the Transaction, Washington Mutual expects it
will take into consideration the closing price of the Common Stock on July 19,
1996 (the last trading day preceding the announcement of the Transaction), the
closing price of the Common Stock for the 10 trading days following announcement
of the Transaction and the closing price of the Common Stock for the 10 trading
days prior to the Effective Date, as well as other relevant factors. The closing
price of the Common Stock on July 19, 1996 was $30.125. The average closing
price of the Common Stock for the ten trading days following the announcement of
the Transaction was $35.41.
If any Dissenting Holder's demand for payment is not settled within 60
days after receipt by Washington Mutual of such shareholder's payment demand
described in the last sentence, the WBCA requires that Washington Mutual
commence a proceeding in King County Superior Court to determine the fair value
of the shares, naming all Dissenting Holders whose demands remain unsettled as
parties to the proceeding. The court may appoint one or more persons as
appraisers to receive evidence and recommend the fair value of the shares.
Court costs and fees of appraisers appointed by the court would be
assessed against Washington Mutual, except that the court may assess such costs
against some or all of the Dissenting Holders to the extent that the court finds
the Dissenting Holders acted arbitrarily, vexatiously or not in good faith in
demanding payment or to the extent the court finds equitable. Under certain
circumstances, the court may award attorneys' fees and expenses to Washington
Mutual or to any or all of the dissenters.
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Any shareholder who fails to follow these procedures will lose his or
her rights to dissent from the Transaction. A negative vote, alone, will not
constitute the written objection required prior to the Special Meeting. Any
shareholder making a written demand for payment is thereafter entitled only to
payment as provided in the WBCA, and is no longer entitled to vote or otherwise
exercise any shareholder rights as to the shareholders shares of Common Stock.
Consent of the Company is required for the withdrawal of demand for payment.
RESALES OF WASHINGTON MUTUAL COMMON STOCK
At the Effective Time, the shares of Common Stock to be issued to KHP
and the FRF in connection with the Transaction will not have been registered
under the Securities Act. All such shares will be issued pursuant to an
exemption from the registration provisions of the Securities Act and are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act. Common Stock received in the Transaction will be
transferable only pursuant to an effective registration or a valid exemption
from registration under the Securities Act. Pursuant to the Registration Rights
Agreement, Washington Mutual has agreed to file and cause to become effective
with the SEC a registration statement with respect to the Initial Underwriting
of up to 20 million shares and to provide certain other registration rights to
the holders of the Initial Shares and the Litigation Escrow Shares.
See "THE TRANSACTION -- Registration Rights."
FEDERAL INCOME TAX CONSEQUENCES
Shareholders of Washington Mutual who do not dissent will not
experience any federal income tax consequences as a result of the approval of
the proposals described herein or as a result of the consummation of the
Transaction.
The following paragraph contains a summary of the material tax
consequences to Washington Mutual shareholders who effectively exercise their
dissenters' rights with respect to the proposals presented hereby and does not
purport to be complete. Accordingly, shareholders of Washington Mutual who are
considering whether to exercise their dissenters' rights should consult their
own tax advisor.
Each Washington Mutual Shareholder who receives cash in connection with
the perfection of dissenters' rights will be treated as receiving a distribution
in redemption of such share interest. In general, such distribution in
redemption will be treated as a payment in exchange for such share interest,
subject to the provisions and limitations of Code Section 302 (which in certain
circumstances could result in the receipt of cash being treated as a dividend).
If treated as a payment in exchange for such share interest, gain or loss will
be measured by the difference between the tax basis allocable to the Dissenting
Holder's shares tendered and the amount of cash received therefor. Such gain or
loss will be a capital gain or loss if the Common Stock was held as a capital
asset as of the Effective Date. The gain or loss will be treated as a long-term
capital gain or loss if the Common Stock that resulted in the receipt of such
cash was held by the Dissenting Holder for more than one year, and otherwise
will be short-term capital gain or loss.
The following discussion summarizes certain material federal income tax
consequences of the Transaction to Keystone Holdings and its shareholders and
does not purport to be a complete discussion of all material tax consequences
of the Transaction.
The Merger is expected to constitute a "reorganization" under Section
368 of the Code. Consummation of the Merger is conditioned upon, among other
things, receipt at the Effective Date by KHP and Washington Mutual of an opinion
from Foster Pepper & Shefelman, counsel to Washington Mutual, dated as of the
Effective Date, substantially to the effect that the Merger will qualify as a
"reorganization" for federal income tax purposes. Such opinion will be
conditioned upon the continued accuracy of certain factual representations made
by Washington Mutual, KHP and Mr. Bass. The opinion will not, however, be
binding upon the Internal Revenue Service (the "IRS") or the courts. No ruling
from the IRS will be applied for with respect to the federal income tax
consequences of the Merger. There can be no assurance that the IRS will agree
with the conclusions set forth in this Proxy Statement.
Assuming the Merger qualifies as a "reorganization" under the Code,
gain or loss will generally not be recognized by the partners of KHP due to the
exchange of Keystone Holdings' stock for the Common Stock.
OTHER TERMS OF THE MERGER AGREEMENT AND WARRANT EXCHANGE AGREEMENT
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WAIVER AND AMENDMENT. At any time prior to the consummation of the
Merger, the parties to the Merger Agreement may (i) amend the Merger Agreement
(including the Plans of Merger incorporated therein), (ii) extend the time for
the performance of any of the obligations or other acts of any other party
thereto, (iii) waive any inaccuracies in the representations and warranties of
any other party contained therein or in any document delivered pursuant thereto,
or (iv) waive compliance with any of the agreements or conditions contained
therein; provided, however, that after any approval of the Merger by Washington
Mutual Shareholders, there may not be, without further approval of such
shareholders, any amendment or waiver of the Merger Agreement that changes the
amount of consideration to be delivered to KHP.
TERMINATION. The Merger Agreement or the Warrant Exchange may be
terminated at any time prior to the Effective Time, whether before or after
approval of the Transaction by the holders of Common Stock:
(a) by mutual written consent of all the parties to such
agreement; or
(b) by any party to such agreement (i) if the Effective Time
has not occurred on or prior to June 30, 1997 unless the failure of such
occurrence is due to the failure of the party seeking such termination to
perform or observe its agreements and conditions set forth in the agreement;
(ii) 31 days after the date on which any application for regulatory approval
prerequisite to the consummation of the Merger or Warrant Exchange has been
denied or withdrawn at the request of the applicable regulatory authority unless
at the expiration of such 31-day period Washington Mutual is engaged in
litigation or an appeal procedure relating to an attempt to obtain such
approval; or (iii) 10 days after written certification is delivered to KHP or
the FRF that the shareholders of Washington Mutual failed to approve the
Transaction and the amendment to the Articles;
In addition, the Merger Agreement may be terminated at any time prior
to the Effective Time:
(x) by Washington Mutual if (i) at the time of such
termination there has been a material adverse change with respect to the
Keystone Entities from that set forth in financial statements for the
three-month period ended March 31, 1996 (except for changes resulting from
market and economic conditions that generally affect the savings bank industry
as a whole); or (ii) there has been any material breach of any covenant of KHP
or the Keystone Entities under the Merger Agreement that has not been remedied
within 45 days after receipt of written notice by ASB.
(y) by KHP and the Keystone Entities if (i) at the time of
such termination there has been a material adverse change with respect to
Washington Mutual from that set forth in Washington Mutual's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996 (except for changes resulting
from market and economic conditions that generally affect the savings bank
industry as a whole); (ii) there has been any material breach of any covenant of
Washington Mutual under the Merger Agreement that has not been remedied within
45 days after receipt of written notice by Washington Mutual; or (iii) a third
person or group acquires securities representing a majority of the voting shares
of Washington Mutual or the Company enters into an agreement to effect a
transaction that would result in such ownership.
In addition, the Warrant Exchange Agreement may be terminated at any
time prior to the Effective Time:
(A) by the FDIC-Manager if at the time of such termination
there has been a material adverse change with respect to Washington Mutual from
that set forth in Washington Mutual's quarterly report on Form 10-Q for the
quarter ended March 31, 1996 (except for changes resulting from market and
economic conditions that generally affect the savings industry as a whole);
(B) by any party to the Warrant Exchange Agreement in the
event that the Merger Agreement is terminated in accordance with its terms; and
(C) by Washington Mutual, the FDIC-Manager, Keystone Entities
or KHP if any final, nonappealable judgment, decree or order is in effect that
would make unlawful or prevent the consummation of the Warrant Exchange.
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In the event that the termination of the Warrant Exchange Agreement is
not based on a breach of such agreement by the FDIC-Manager, Washington Mutual
will have no obligation to acquire or exchange the Warrants and the FDIC-Manager
will have no obligation to sell, transfer or exchange the Warrants.
Additionally, if the Warrant Exchange Agreement is terminated, all obligations
of the parties under the Warrant Exchange Agreement and the Registration Rights
Agreement will cease.
EXPENSES. All legal and other costs and expenses incurred by KHP in
connection with the Merger Agreement and the Merger will be the responsibility
of the Keystone Entities, other than legal fees incurred in connection with the
determination of the appropriate consideration to be received by the
FDIC-Manager for the Warrants, which fees will be the responsibility of KHP. All
other legal and other costs and expenses will be borne by the party incurring
such costs and expenses unless otherwise specified in the Merger Agreement.
THE LITIGATION ESCROW
The following discussion contains a summary of all material terms and
conditions of the Merger Agreement, Warrant Exchange Agreement and Escrow
Agreement relating to the Litigation Escrow and is qualified in its entirety by
the full text of the Merger Agreement, Warrant Exchange Agreement and Escrow
Agreement which are included in this Proxy Statement as Appendices C, D and E
and are incorporated by reference herein.
GENERAL
As described elsewhere herein, the Litigation Escrow Shares will be
held by the Escrow Agent in the Litigation Escrow pursuant to the terms of the
Escrow Agreement. Initially, KHP and the FRF will be the holders of contingent
rights to have up to 64.9 % and 35.1%, respectively, of the Litigation Escrow
Shares. Immediately after the Effective Time, KHP intends to distribute its
contingent right in the Litigation Escrow Shares to the Investors.
The Litigation Escrow Shares will be registered in the name of the
Escrow Agent who will hold such shares together with any dividends,
distributions or any additional or substitute securities with respect to such
shares, as well as any interest or earnings on such dividends, distributions or
additional or substitute securities (collectively, the "Escrow Fund"). The
Escrow Agent will hold the Escrow Fund until the earlier of the date that is the
sixth anniversary of the Effective Date or until the entire Escrow Fund has been
released from the Litigation Escrow (the "Escrow Expiration Date"). In general,
the Escrow Expiration Date will be automatically extended to 10 years from the
Effective Date if, prior to the sixth anniversary of the Effective Date, there
has been any judgment or final settlement in the Case granted or entered in
favor of Washington Mutual or any of its subsidiaries. The Escrow Expiration
Date may be extended further if Case Proceeds are paid in installments. In the
event that Washington Mutual receives any Case Proceeds on or before the Escrow
Expiration Date, the Escrow Agent will make distributions of all or a portion of
the Escrow Fund to the holders of contingent rights to the Escrow Fund. The
number of Litigation Escrow Shares to be distributed will be computed as (a) the
amount of Case Proceeds received less (b) the aggregate of (i) taxes owed on the
Case Proceeds to be calculated based on a formula in the Merger Agreement, (ii)
fees, costs and expenses paid or accrued by Washington Mutual in connection with
the Case or pursuant to the Escrow Agreement, (iii) 200 percent of the allocated
time costs of Washington Mutual employees for time reasonably devoted to the
Case, and (iv) all amounts paid by any Keystone Entity prosecuting the Case in
excess of $10,000,000, (c) divided by the Average Price. The "Average Price"
means the arithmetic average of the closing prices of the Common Stock on The
Nasdaq Stock Market for the 10 trading days immediately preceding the third
trading day before the Effective Date. The Escrow Agent may make more than one
distribution out of the Escrow Fund if Case Proceeds are received in two or more
installments. In general, if no Case Proceeds have been received, beginning on
the last day of the full calendar month immediately following the sixth
anniversary of the Effective Date and on the last day of every succeeding month,
the Escrow Agent will return to Washington Mutual for cancellation a number of
shares equal to 1.25% of the number of Litigation Escrow Shares, together with
any dividends and distributions received on such shares and any interest or
earnings on such dividends. At the Escrow Expiration Date, any remaining
Litigation Escrow Shares, together with any amounts in the Escrow Fund, will be
returned to Washington Mutual.
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The ultimate outcome of the Case is uncertain, and there can be no
assurance that there will be any recovery in the Case or that, if there is a
recovery, it will result in Case Proceeds that exceed the value of the
Litigation Escrow Shares plus costs and expenses. Generally, Washington Mutual
will not benefit financially from the Case unless Case Proceeds exceed such an
amount and, in negotiating the Transaction, Washington Mutual ascribed no value
to the possibility that the Case Proceeds would exceed such amount. As a result,
it is uncertain what, if any, impact recovery in the Case will have on the
financial position of Washington Mutual.
THE CASE
On December 28, 1992, ASB, KHP, Keystone Holdings and other related
parties (the "Plaintiffs") filed the Case in the U.S. Court of Federal Claims.
In the Case, Plaintiffs allege that they entered into a contract with the FSLIC
and the FHLBB, agencies of the United States government, whereby the Plaintiffs
acquired the capital stock of ASB and New West and undertook other liabilities
and responsibilities for the benefit of the FSLIC and the FHLBB, in return for
which the FSLIC and the FHLBB agreed, among other things, that ASB would be
authorized to operate with a lower level of capital than the applicable
regulations would otherwise have required. Plaintiffs further allege that the
United States government's abrogation of this agreement constituted a breach of
contract, damaging the Plaintiffs. The contract promises which Plaintiffs allege
are similar to those asserted in Winstar Corp. v. United States, Statesman
Savings Holding Corp. v. United States and Glendale Federal Bank, FSB v. United
States (the "Winstar Cases"). On July 1, 1996, the United States Supreme Court
affirmed two lower courts' decisions holding that the United States government
was liable for breach of contract in the Winstar Cases. The Winstar Cases have
been remanded to the Court of Federal Claims for further proceedings including
a determination of damages. There can be no assurance that the United States
government will not assert additional defenses or counterclaims on remand. The
Court of Federal Claims has also initiated procedures for resolving the merits
of other related cases, including the Case. The Plaintiffs have asserted claims
for damages in an unspecified amount. The government has not yet answered the
complaint in the Case. As a consequence of the Transaction, Washington Mutual
will succeed by operation of law to all of the rights of the Keystone Entities
in the Case and KHP has contractually agreed to remit to Washington Mutual
proceeds received from the Case. Based on the Winstar Cases, as of the date of
this Proxy Statement, no record has been established which would indicate what,
if any, damages the Plaintiffs are entitled to recover in the Case, and
Plaintiffs are unable to assess the likelihood of their success in the Case.
CONTROL OF THE CASE
In connection with the Case, Washington Mutual and the Keystone
Entities will form a special litigation committee comprised of two persons
designated by KHP and one person designated by Washington Mutual (the
"Litigation Committee"), which will have the exclusive right to manage the Case
and to make decisions relating to any proposal to dismiss, settle, terminate,
cease prosecuting the Case or decline to pursue any appeal; provided that any
settlement of the Case must involve the payment of Case Proceeds to Washington
Mutual; and, provided further, that without Washington Mutual's prior specific
written approval, no settlement agreement may impose any obligation (other than
standard settlement releases and related obligations) on Washington Mutual or
its subsidiaries or restrict the operation of their business.
Washington Mutual will have the right to remove any person from the
Litigation Committee in the event such removal is requested by any federal or
state regulator having jurisdiction over Washington Mutual or any of its
subsidiaries. If any person is so removed, his or her replacement will be
designated by the party originally designating such person or, if the removed
person was originally designated by KHP and KHP no longer exists, then by Mr.
Bass.
The Litigation Committee must select counsel satisfactory to Washington
Mutual to prosecute the Case. Washington Mutual has consented to the selection
of Arnold & Porter as counsel. Arnold & Porter will prosecute the Case pursuant
to a fixed fee agreement (the "Fixed Fee Agreement"), that provides for a
one-time non-refundable payment of $11.5 million by Keystone Holdings to Arnold
& Porter on the Effective Date and that otherwise none of Washington Mutual,
WMB, WMBfsb nor any Keystone Entity will have any liability for any future costs
or expenses associated with the prosecution of the Case. The Litigation
Committee will have the right to replace counsel at any time with such
replacement counsel reasonably satisfactory to Washington Mutual; provided that
such replacement counsel will assume all of Arnold & Porter's obligations, but
not its rights, under the Fixed Fee Agreement.
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RIGHTS IN THE LITIGATION ESCROW SHARES
Each holder of contingent rights to receive Litigation Escrow Shares
will have the absolute right to have its pro rata portion of such shares at the
time of the applicable record date (and any additional or substitute securities
with respect thereto) voted on all matters with respect to which the vote of the
holders of such securities is required or solicited, in accordance with such
holder's written instructions to the Escrow Agent. The Escrow Agent does not
have discretionary authority to vote any of the Litigation Escrow Shares for
which it does not receive written voting instructions from the holder of
contingent rights to such shares.
The Litigation Escrow Shares will be validly issued shares of Common
Stock and will not be registered under the Securities Act, nor will the
contingent right to receive the Litigation Escrow Shares be registered as a
separate security. The holders of the contingent rights to the Escrow Fund may
transfer any or all such rights upon delivery to Washington Mutual of (i) an
opinion of counsel that such transfer is exempt from the registration
requirements of the Securities Act and similar requirements under all applicable
state securities laws and (ii) a written instrument executed by the proposed
transferee agreeing to be bound by all applicable provisions of the Escrow
Agreement. See "THE TRANSACTION -- Registration Rights."
MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE
TRANSACTION
GENERAL
The Transaction provides for the merger of Keystone Holdings with and
into Washington Mutual, with Washington Mutual as the surviving corporation. The
separate existence of Keystone Holdings will cease upon completion of the
Transaction and, ASB will become a wholly-owned subsidiary of Washington Mutual.
The Articles of Incorporation and Bylaws of Washington Mutual will be the
Articles of Incorporation and Bylaws of the surviving entity after the
completion of the Transaction.
BOARD OF DIRECTORS
The names of the continuing directors of Washington Mutual at the
Effective Time and information regarding such persons are set forth in
Washington Mutual's Proxy Statement for its 1996 Annual Meeting, which is
incorporated herein by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "AVAILABLE INFORMATION."
After completion of the Transaction, two representatives mutually
agreeable to Mr. Bass and Washington Mutual will be appointed to fill
then-vacant seats in two different classes of the Washington Mutual Board.
Pursuant to the Merger Agreement, after the Effective Date the Washington Mutual
Board will, in connection with each annual shareholders meeting at which either
of such representatives' term as a director ends, nominate the one
mutually-agreeable representative if Mr. Bass and certain of his affiliates
beneficially own, as of the record date for such meeting, a number of shares of
Common Stock greater than the sum of (i) 8.5 million, plus (ii) 21.3 percent of
the Litigation Escrow Shares that have been released as of such date (the "2
Director Total"); however, if as of each such record date, the number of shares
of Common Stock beneficially owned by Mr. Bass and certain of his affiliates is
fewer than the 2 Director Total, but greater than the sum of (a) 5.0 million,
plus (b) 21.3 percent of the Litigation Escrow Shares that have been released as
of such date (the "1 Director Total"), the Washington Mutual Board will not
re-nominate such director and the term of such director will expire and the
remaining representative will continue on the Washington Mutual Board. The
remaining director will be renominated if Mr. Bass and certain of his affiliates
beneficially own, as of the record date for the meeting at which such director's
term as a director ends, a number of shares greater than the 1 Director Total.
The Washington Mutual Board has no obligation to re-nominate any representative
if Mr. Bass and such affiliates do not maintain beneficial ownership of the 1
Director Total or at least 5% of Washington Mutual's outstanding Common Stock on
the record date for such meeting.
46
<PAGE> 51
As of the date of this Proxy Statement, Washington Mutual and Mr. Bass
have not selected the representatives to serve as Washington Mutual directors.
OPERATIONS AFTER THE TRANSACTION.
GENERAL. Washington Mutual intends to continue operating ASB under the
"American Savings Bank" name in California. ASB will become a separate first
tier subsidiary of Washington Mutual. While final operating plans are not
complete, Washington Mutual currently intends to introduce its consumer banking
products and approaches throughout ASB's branch system and to expand ASB's loan
origination capabilities.
CONSOLIDATION OF OPERATIONS; PROJECTED COST SAVINGS. Washington Mutual
intends to consolidate certain corporate functions and computer and back office
operations within six months after the Effective Date. Washington Mutual expects
to achieve annual operating cost savings through such consolidations of
approximately $25 million and $50 million (pre-tax) in 1997 and 1998,
respectively. There can be no assurance that such cost savings will be realized
or that they will be realized in the time periods expected.
TRANSACTION EXPENSE AND ADDITION TO LOAN LOSS RESERVE. Transaction
expenses of approximately $118.5 million (pre-tax) are expected to be recorded
by Washington Mutual at the Effective Time. This charge includes the creation of
reserves of $46 million for severance and management payments, $15 million for
prepayment premiums on certain Keystone Entity debt which Washington Mutual
intends to refinance as soon as possible after the Effective Date and $24.5
million for investment banking and other professional fees. These Washington
Mutual Transaction-related charges are subject to change as further information
becomes available.
Washington Mutual intends to provide an additional $125 million in loan
loss provisions as a charge to earnings at the Effective Date. This additional
loan loss provision is being provided principally because a number of Washington
Mutual credit administration and asset management philosophies and procedures
differ from those of ASB. These differences consist principally of the
following: (1) Washington Mutual is more proactive than ASB in dealing with
emerging credit problems and tends to prefer judicial foreclosure actions to
induce borrowers to correct defaults, whereas ASB tends to prefer workouts in
lieu of a more aggressive foreclosure stance; and (2) ASB has considered the
risk characteristics of its portfolio of multi-family loans of less than $1
million to be similar to its single family residential portfolio. Washington
Mutual on the other hand considers the risk characteristics of that portfolio to
be more closely aligned with its commercial income property portfolio, which
tends to have a higher loan loss provision than the single-family residential
portfolio. Washington Mutual intends to conform ASB's asset management
practices, administration, philosophies and procedures to its own, or in some
instances to revise ASB's current asset management strategies to conform to
strategies being developed by Washington Mutual. The plan of realization of
troubled loans differs between the companies and therefore results in different
levels of loss reserves. The additional loan loss provision is to a lesser
degree being provided because Washington Mutual believes that while there has
been an increase in the price of houses in certain California markets, a decline
in collateral values for some portions of the California real estate market has
occurred in 1996.
NEW FEDERAL LAW. On September 30, 1996, President Clinton signed
legislation intended to recapitalize the Savings Association Insurance Fund
("SAIF") and to reduce the gap between SAIF premiums and the Bank Insurance Fund
("BIF") premiums, among other things. The legislation provides for a special
one-time assessment on SAIF-insured deposits that were held as of March 31,
1995, including certain deposits acquired after that date. The assessment will
bring the SAIF's reserve ratio to the legally required level of $1.25 for every
$100 in insured deposits. Beginning in January 1997, deposits insured through
the SAIF at most institutions probably will be subject to regular FDIC
assessments amounting to 6.4 cents per $100 per year, while deposits insured
through the BIF at most institutions probably will be subject to regular FDIC
assessments amounting to 1.3 cents per $100 per year.
Washington Mutual's special assessment will result in an estimated
pre-tax charge of about $35.7 million, which will be taken in the quarter ended
September 30, 1996. ASB's special assessment will result in an estimated pre-tax
charge of $88.1 million. Based on current levels of deposits, Washington Mutual
estimates that the reduction in the regular assessment on its SAIF deposits
beginning in 1997 should result in annual savings of approximately $10 million,
and ASB estimates that the reduction in the regular assessment on its SAIF
deposits should result in annual savings of approximately $21.2 million.
The Federal legislation that was enacted on September 30, 1996, also
amended the provision that prescribes the investments that WMB and WMBfsb must
hold in order to be a "qualified thrift lender" ("QTL"). Washington Mutual would
become subject to certain statutory restrictions on activities and investments,
would be required to register with the Board of Governors of the Federal Reserve
System (the "FRB") and would be subject to the FRB's
47
<PAGE> 52
bank holding company regulations, including capital requirements, if WMB or
WMBfsb were to fail to be a QTL. For example, bank holding companies are not
generally permitted to underwrite life insurance. Federal law prior to September
30, 1996, prescribed that at least 65% of a specified asset base of a QTL
generally must consist of certain assets related to domestic residential real
estate, including residential mortgage loans and mortgage securities. As
amended, Federal law allows an institution to qualify as a QTL either (a) by
having at least 65% of a specified asset base invested in loans to small
businesses, credit card loans, educational loans or certain assets related to
domestic residential real estate, including residential mortgage loans and
mortgage securities; or (b) by having at least 60% of total assets invested in
cash, United States government and government agency debt or equity securities,
certain state or local debt securities, education loans, certificates of
deposit, fixed assets, or loans secured by deposits, by real property used for
residential, educational, church, welfare or health purposes, or by real
property in certain urban renewal areas. Failure to remain a QTL also would
impose conditions on WMB's ability to obtain advances from the FHLB, and would
restrict WMBfsb's ability, among other things, to branch, to pay dividends and
to obtain such advances. WMB and WMBfsb are currently in compliance with QTL
standards.
MANAGEMENT AFTER THE TRANSACTION. Following the Transaction, Washington
Mutual will retain a majority of ASB's current management team in the management
of ASB. As previously announced, Mario Antoci, the Chairman and Chief Executive
Officer of ASB, will retire upon the closing of the Transaction. Mr. Antoci will
consult with Washington Mutual on CRA and community development issues after
consummation of the Transaction. Robert T. Barnum, President, Chief Operating
Officer and a director of ASB, will continue after the Transaction as President
of ASB and a significant number of ASB's current executive officers will remain
in the management of ASB. It is currently anticipated that the consolidations
planned by Washington Mutual will not have a material effect on overall ASB
employment. In addition, the current management team of Washington Mutual will
remain in place following the Transaction, with the addition of Mr. Barnum as
Executive Vice President.
REDEMPTION OF KEYSTONE ENTITIES PREFERRED STOCK AND REPAYMENT OF DEBT.
New Capital has three series of debt securities outstanding. These debt
securities consist of (i) $169 million in current outstanding principal amount
of Series B 9.60% Notes due in 1999, (ii) $175 million in current outstanding
principal amount of Series C Floating Rate Notes due in 2002 and (iii) $20.5
million in current outstanding principal amount of Subordinated Notes due in
1998. The Series B Notes and Subordinated Notes bear interest at 1.375 and 2.875
percent, respectively, over the three-month London Interbank Offer Rate (LIBOR)
reset on a quarterly basis. New Capital also has outstanding $80 million of
Cumulative Redeemable Preferred Stock. Washington Mutual intends to redeem the
New Capital preferred stock and repay the New Capital debt as soon as possible
after the Effective Time. By redeeming such equity and repaying such debt,
Washington Mutual's management believes it can significantly reduce the cost of
such borrowings. There can be no assurance that the cost of such borrowings will
be reduced significantly, or at all, in connection with such refinancing. See
"THE TRANSACTION -- Risk Factors."
Many of the benefits described above are forward-looking statements and
actual results may vary materially from such projections.
CERTAIN FEDERAL INCOME TAX MATTERS.
Net Operating Loss Carryforward Deductions. Due to Section 382
of the Code, most of the value of the net operating loss carryforward deductions
described in the Consolidated Financial Statements of Keystone Holdings will be
eliminated due to the Transaction. Accordingly, the future tax savings
attributable to such net operating loss carryforward deductions will be greatly
reduced. Further, the actual savings due to such reduced net operating loss
carryforward deductions will be even further reduced due to a provision in the
FRF Agreements generally requiring that approximately 75% of the federal tax
savings resulting from such net operating loss carry forwards be paid to the
FRF. See "APPENDIX A - INFORMATION CONCERNING KEYSTONE HOLDINGS" and "APPENDIX B
- - CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS."
Tax Bad Debt Reserve Recapture. The recently enacted "Small
Business Job Protection Act of 1996" (the "Job Protection Act") requires that
qualified thrift institutions, such as Washington Mutual and ASB, generally
recapture for federal income tax purposes that portion of the balance of their
tax bad debt reserves that exceeds the December 31, 1987 balance, with certain
adjustments. Such recaptured amounts are to be generally
48
<PAGE> 53
taken into ordinary income ratably over a six year period beginning in 1996, or
as late as 1998 if certain conditions are met. Accordingly Washington Mutual
will have to pay, with respect to current Washington Mutual entities, an
additional approximate $4.2 million (based upon current federal income tax
rates) in federal income taxes each year of the six-year period due to the Job
Protection Act. The Merger Agreement requires that Keystone Holdings file
amended federal income tax returns with the IRS for 1992 and 1993 in order to
reduce the tax bad debt reserve recapture amount that ASB would otherwise incur
due to the Job Protection Act.
The Job Protection Act also repeals the reserve method of
accounting for tax bad debt deductions and, thus, requires thrifts to calculate
the tax bad debt deduction based on actual current loan losses.
Tax Settlement Agreement. The Tax Settlement Agreement, which
is a condition to closing the Transaction, resolved certain disputes that arose
between the Keystone Entities and the FDIC-Manager regarding interpretations of
provisions in the FRF Agreements pertaining to the general requirement that
approximately 75% of the federal income tax savings attributable to New West be
paid to the FRF. The Tax Settlement Agreement also requires Keystone Holdings to
pay $10.5 million to the FRF if the Transaction closes, in addition to any other
undisputed amounts owed. See "Note 3 - Transaction-Related Expenses in the Notes
to the Pro Forma Combined Consolidated Statements of Income."
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Subject to the terms and conditions of the Merger Agreement, on the
Effective Date, Keystone Holdings will merge with and into Washington Mutual,
with Washington Mutual as the surviving corporation. The separate existence of
Keystone Holdings will cease upon the effectiveness of the Merger and the direct
and indirect subsidiaries of Keystone Holdings, including ASB, will become
subsidiaries of Washington Mutual. Additionally, the FDIC has agreed to effect
the Warrant Exchange. Upon the Effective Date, Washington Mutual will directly
or indirectly wholly-own all of the subsidiaries of Keystone Holdings, including
ASB. In connection with the Transaction, Washington Mutual will issue 47,883,333
shares of Common Stock as follows: 25,883,333 shares to KHP; 14,000,000 shares
to the FRF; and 8,000,000 shares to the Litigation Escrow for the benefit of the
Investors and the FRF. See "THE TRANSACTION."
The following pro forma combined unaudited consolidated statement of
financial position as of June 30, 1996 and the pro forma combined unaudited
consolidated statements of income for the three years ended December 31, 1995
and the six months ended June 30, 1996 are based upon the supplemental and
historical consolidated financial statements of Washington Mutual as previously
filed with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated by reference in this Proxy Statement, as
restated for the Western Merger, and of Keystone Holdings as set forth in
"APPENDIX B, CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS" included in
this Proxy Statement, and should be read in conjunction with those consolidated
financial statements and related notes. These combined unaudited pro forma
condensed financial statements are not necessarily indicative of the operating
results that would have been achieved had the Transaction been consummated as of
the beginning of the periods presented and should not be construed as
representative of future operating results. These combined unaudited pro forma
condensed financial statements give effect to the Transaction by combining the
results of operations of Washington Mutual and Keystone Holdings using the
"pooling of interests" method of accounting.
49
<PAGE> 54
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------------------------------------------
Pro Forma Pro Forma
Adjustments(1) Including
Washington Keystone ------------------------------ Keystone
Mutual Holdings Debt Credit Ref. Holdings
---------- ------------ ------ -------- -------- -----------
(dollars in thousands, except per share amount)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..................... $ 303,851 $ 144,062 $ $ (46,000) 1(a)(iii)
(15,000) 1(e)(iii)
(10,500) 1(e)(iii)
(47,000) 1(e)(iii) $ 329,413
Trading account securities.................... 3,715 -- 3,715
Available-for-sale securities................. 7,221,172 3,844,439 11,065,611
Held-to-maturity securities................... 180,658 2,876,527 3,057,185
Loans......................................... 13,800,209 12,854,633 (125,000) 1(e)(iv) 26,529,842
Real estate owned............................. 27,072 84,036 111,108
Bank premises and equipment................... 222,830 231,455 454,285
Goodwill and other intangible assets.......... 147,251 -- 147,251
Other assets.................................. 416,714 445,554 862,268
------------------------------------------------------------------------------
Total assets................................ $22,323,472 $20,480,706 $ -- $(243,500) $42,560,678
==============================================================================
LIABILITIES
Deposits:
Checking, savings and money market
accounts.................................. $ 5,610,889 $ 3,855,659 $ $ 97,089 1(a) $ 9,563,637
Time certificates........................... 5,415,830 8,873,307 14,289,137
------------------------------------------------------------------------------
Total deposits............................ 11,026,719 12,728,966 97,089 23,852,774
Annuities..................................... 866,349 -- 866,349
Federal funds purchased....................... 770,000 -- 770,000
Securities sold under agreements to
repurchase.................................. 4,645,682 3,987,359 8,633,041
Advances from Federal Home Loan Banks......... 2,962,205 2,013,439 4,975,644
Other borrowings.............................. 224,314 493,734 718,048
Other liabilities............................. 181,130 399,831 (97,089) 1(a)
(86,200) 1(e)(ii)
50,000 1(e)(v) 447,672
------------------------------------------------------------------------------
TOTAL LIABILITIES........................... 20,676,399 19,623,329 (183,289) 147,089 40,263,528
Minority interest............................... -- 306,979 (167,000) 1(b)
(59,979) 1(c) 80,000
STOCKHOLDERS' EQUITY
Preferred stock............................... -- -- --
Common stock.................................. -- 1 (1) 1(d) --
Capital surplus............................... 728,914 30,419 167,000 1(b)
1 1(d) 926,334
Valuation reserve for available-for-sale
securities.................................. (21,267) (1,411) (22,678)
Retained earnings............................. 939,426 521,389 59,979 1(c)
(207,300) 1(e)(i) 1,313,494
------------------------------------------------------------------------------
Total stockholders' equity.................. 1,647,073 550,398 (207,300) 226,980 2,217,150
------------------------------------------------------------------------------
Total liabilities and stockholders' equity.. $22,323,472 $20,480,706 $(617,569) $ 374,069 $42,560,678
==============================================================================
Book value per common share (2)................. $19.73 -- -- $17.88
Number of fully diluted common shares
outstanding (2)................................. 77,505,610 -- -- 117,388,943
</TABLE>
50
<PAGE> 55
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(1) Statement of Financial Position. The pro forma adjustments reflected in the
unaudited pro forma combined statement of financial position of Washington
Mutual including Keystone Holdings as of June 30, 1996 give effect to the
following adjustments:
a. Deposits have been increased by $97.1 million to reflect a
reclassification of certain escrow accounts classified as
other liabilities in Keystone Holdings' statement of financial
position.
(dollars in thousands)
--------------------------------------------
Dr Other liabilities.....$97,089
Cr Deposits .......... $97,089
b. The minority interest and stockholders' equity of Keystone
Holdings have been adjusted by $167.0 million to reflect the
issuance of 14,000,000 shares of the Common Stock in the
Warrant Exchange. Due to the Warrant Exchange, the warrant
holder is no longer shown as minority interest in that
Washington Mutual will directly or indirectly wholly-own all
of the subsidiaries of Keystone Holdings. See "THE
TRANSACTION."
(dollars in thousands)
----------------------------------------------
Dr Minority interest.......$167,000
Cr Capital surplus ..... $167,000
c. The minority interest and stockholders' equity of Keystone
Holdings have been adjusted by $60.0 million to give effect
to the earnings attributable to the warrant holder. Due to
the Warrant Exchange, the warrant holder is no longer shown
as minority interest in that Washington Mutual will directly
or indirectly wholly-own all of the subsidiaries of Keystone
Holdings. See "THE TRANSACTION."
(dollars in thousands)
----------------------------------------------
Dr Minority interest........$59,979
Cr Retained earnings..... $59,979
d. The minority interest and stockholders' equity of Keystone
Holdings have been adjusted to give effect to the exchange of
1,048 shares of Keystone Holdings common stock, par value
$1.00 per share for 25,883,333 shares of Common Stock.
(dollars in thousands)
----------------------------------------------
Dr Common stock.............$1
Cr Capital surplus.... $1
e. Transaction-related Expenses. Nonrecurring Transaction-related
expenses anticipated to be recorded are included in the
unaudited pro forma combined statements of financial position
of Washington Mutual including Keystone Holdings as of June
30, 1996. Nonrecurring Transaction-related expenses expected
to be recorded by Washington Mutual are summarized in the
following table (dollars in thousands):
<TABLE>
<S> <C>
Additional loan loss reserves(a)................. $125,000
Severance and management payments................ 46,000
Holding company debt call premiums............... 15,000
FRF tax settlement............................... 10,500
Other charges.................................... 47,000
----------------------------------------------------------
Total charges.................................. 243,500
Tax benefit...................................... (86,200)
Negative adjustment to ASB's deferred tax asset.. 50,000
----------------------------------------------------------
Net charges.................................... $207,300
==========================================================
</TABLE>
- ------------
(a) See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AFTER THE
TRANSACTION -- Operations After the Transaction -- Transaction Expenses
and Addition to Loan Loss Reserve" for a discussion of the differences
in philosophy between Washington Mutual and ASB regarding provisions
for loan loss and reasons for the increase in the loan loss provision.
(dollars in thousands)
---------------------------------------------------------------------
(i) Dr Retained earnings -- net charges ......... .$207,300
(ii) Dr Other liabilities -- tax benefit ........... 86,200
(iii) Cr Cash -- Severance & management premiums..... 46,000
(iii) Cr Cash -- Holding company debt call premiums.. 15,000
(iii) Cr Cash -- FRF tax settlement.................. 10,500
(iii) Cr Cash -- Other charges....................... 47,000
(iv) Cr Loans -- Additional loan loss reserves...... 125,000
(v) Cr Other liabilities -- Negative adjustment to
ASB's deferred tax asset....................... 50,000
(2) Per Share Data. Washington Mutual's book value per common share of $19.73
and pro forma combined book value per common share of $17.88 as of June 30, 1996
were calculated using the following information:
<TABLE>
<CAPTION>
Pro forma including
Washington Mutual Keystone Holdings
----------------- -----------------
<S> <C> <C>
Stockholders' equity..................................... $1,647,073 $2,217,150
Noncumulative Perpetual Series C Preferred Stock......... (68,813) (68,813)
Noncumulative Perpetual Series E Preferred Stock......... (49,250) (49,250)
---------- --------
Total stockholders' equity attributable to common shares.. $1,529,010 $2,099,087
========== ==========
Number of fully diluted common shares outstanding........ 77,505,610 117,388,943
</TABLE>
Washington Mutual will issue 8,000,000 shares of Common Stock to the
Litigation Escrow. The shares will be released, 64.9% to the Investors and 35.1%
to the FRF, to the extent that Washington Mutual receives net cash proceeds from
certain litigation that Keystone Holdings and its affiliates are pursuing
against the United States, which litigation is being assumed by Washington
Mutual in the Transaction. The ultimate outcome of the Case is uncertain and
there can be no assurance that there will be any recovery. Washington Mutual
will use the treasury stock method to determine the effect of the 8,000,000
shares upon the Company's financial statements. As of the Effective Date, there
is no potential dilutive effect of the 8,000,000 shares of Common Stock.
Stockholders' equity, book value per share and primary and fully diluted
earnings per share have therefore not been adjusted for the issuance of the
Litigation Escrow Shares.
51
<PAGE> 56
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Year Ended December 31, 1995
----------------------------------------------------------------------
Pro Forma ProForma
Adjustments(2) Including
Washington Keystone ---------------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings (3)
---------- ---------- ----- ------ ---- ---------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans............................................... $1,094,538 $ 967,263 $ $ $2,061,801
New West note....................................... -- 58,841 58,841
Available-for-sale securities....................... 294,286 114,777 409,063
Held-to-maturity securities......................... 185,388 196,245 381,633
Cash equivalents.................................... 4,748 -- 4,748
-----------------------------------------------------------------------
Total interest income............................. 1,578,960 1,337,126 2,916,086
INTEREST EXPENSE
Deposits............................................ 498,503 636,315 1,134,818
Borrowings.......................................... 462,221 326,397 788,618
-----------------------------------------------------------------------
Total interest expense............................ 960,724 962,712 1,923,436
-----------------------------------------------------------------------
Net interest income............................... 618,236 374,414 992,650
Provision for loan losses............................. 11,150 63,837 74,987
-----------------------------------------------------------------------
Net interest income after provision for loan
losses.............................................. 607,086 310,577 917,663
Other income ......................................... 117,874 72,433 18,032 2(a) 208,339
Other expense ........................................ 417,655 264,827 18,032 2(a) 700,514
-----------------------------------------------------------------------
Income before income taxes........................ 307,305 118,183 (18,032) 18,032 425,488
Income taxes.......................................... 107,504 12,289 119,793
-----------------------------------------------------------------------
Net income from continuing operations................. 199,801 105,894 (18,032) 18,032 305,695
Extraordinary items, net of federal income tax effect. -- -- --
Cumulative effect of change in tax accounting method.. -- -- --
Minority interest in earnings relating to
Warrants ........................................... (14,592) -- 14,592 2(b) --
Dividends paid to minority interest .................. (6,500) (9,293) -- 2(b) (15,793)
-----------------------------------------------------------------------
Minority interest in earnings of consolidated
subsidiaries........................................ -- (21,092) (9,293) 14,592 2(b) (15,793)
-----------------------------------------------------------------------
NET INCOME............................................ $ 199,801 $ 84,802 $(27,325) $32,624 $ 289,902
=======================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK............... $ 181,217 $ 84,802 $(27,325) $32,624 $ 271,318
=======================================================================
Net income from continuing operations per common
share (1):
Primary............................................. $2.59 -- $2.47
Fully diluted....................................... 2.51 -- 2.42
Net income per common share (1):
Primary............................................. $2.59 -- $2.47
Fully diluted....................................... 2.51 -- 2.42
Average number of common shares outstanding (2):
Primary............................................. 70,061,144 -- 109,944,477
Fully diluted....................................... 75,480,391 -- 115,363,724
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended June 30, 1996
----------------------------------------------------------------------
Pro Forma ProForma
Adjustments(2) Including
Washington Keystone ---------------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
---------- -------- ----- ------ ---- ----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans............................................... $ 563,495 $448,397 $1,011,892
New West note....................................... -- -- --
Available-for-sale securities....................... 262,662 153,352 416,014
Held-to-maturity securities......................... 6,606 104,971 111,577
Cash equivalents.................................... 1,408 -- 1,408
-----------------------------------------------------------------------
Total interest income............................. 834,171 706,720 1,540,891
INTEREST EXPENSE
Deposits............................................ 239,374 298,357 537,731
Borrowings.......................................... 245,658 170,739 416,397
-----------------------------------------------------------------------
Total interest expense............................ 485,032 469,096 954,128
-----------------------------------------------------------------------
Net interest income............................... 349,139 237,624 586,763
Provision for loan losses............................. 5,825 35,180 41,005
-----------------------------------------------------------------------
Net interest income after provision for loan
losses.............................................. 343,314 202,444 5,758
Other income ......................................... 73,514 34,624 7,496 2(a) 5,634
Other expense ........................................ 224,779 134,870 7,496 2(a) 7,145
-----------------------------------------------------------------------
Income before income taxes........................ 192,049 102,198 (7,496) 7,496 4,247
Income taxes.......................................... 71,161 27,685 8,846
-----------------------------------------------------------------------
Net income from continuing operations................. 120,888 74,513 (7,496) 7,496 5,401
Extraordinary items, net of federal income tax effect. -- -- --
Cumulative effect of change in tax accounting method.. -- -- --
Minority interest in earnings relating to
Warrants ........................................... (13,918) -- 13,918 2(b) --
Dividends paid to minority interest .................. (6,978) -- -- 2(b) (6,978)
-----------------------------------------------------------------------
Minority interest in earnings of consolidated
subsidiaries........................................ -- (20,896) -- 13,918 2(b) (6,978)
-----------------------------------------------------------------------
NET INCOME............................................ $ 120,888 $ 53,617 $ (7,496) $21,414 8,423
=======================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK............... $ 111,678 $ 53,617 $ (7,496) $21,414 9,213
=======================================================================
Net income from continuing operations per common
share (1):
Primary............................................. $1.55 -- $1.60
Fully diluted....................................... 1.50 -- 1.56
Net income per common share (1):
Primary............................................. $1.55 -- $1.60
Fully diluted....................................... 1.50 -- 1.56
Average number of common shares outstanding (2):
Primary............................................. 71,982,173 -- 111,865,506
Fully diluted....................................... 77,401,033 -- 117,284,366
</TABLE>
52
<PAGE> 57
<TABLE>
<CAPTION>
For Years Ended December 31,
1993
----------------------------------------------------------------------------
Pro Forma ProForma
Adjustments(2) Including
Washington Keystone ------------------------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
------------- --------- -------- ------ ---- -----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans...................................... $822,874 $756,606 $ $ $1,579,480
New West note.............................. -- 241,014 241,014
Available-for-sale securities.............. 1,371 53,006 54,377
Held-to-maturity securities................ 253,945 66,643 320,588
Cash equivalents........................... 3,119 -- 3,119
------------------------------------------------------------------------------
Total interest income.................... 1,081,309 1,117,269 2,198,578
INTEREST EXPENSE
Deposits................................... 354,743 513,435 868,178
Borrowings................................. 166,007 177,711 343,718
------------------------------------------------------------------------------
Total interest expense................... 520,750 691,146 1,211,896
------------------------------------------------------------------------------
Net interest income...................... 560,559 426,123 986,682
Provision for loan losses.................... 35,225 123,503 158,728
------------------------------------------------------------------------------
Net interest income after provision for
loan losses............................ 525,334 302,620 827,954
Other income................................. 152,575 81,050 12,951 2(a) 246,576
Other expense................................ 394,874 279,694 12,951 2(a) 687,519
------------------------------------------------------------------------------
Income before income taxes............... 283,035 103,976 (12,951) 12,951 387,011
Income taxes................................. 98,864 11,245 110,109
------------------------------------------------------------------------------
Net income from continuing operations........ 184,171 92,731 (12,951) 12,951 276,902
Extraordinary items, net of federal income
tax effect................................. (8,953) -- (8,953)
Cumulative effect of change in tax
accounting method.......................... 13,365 -- 13,365
Minority interest in earnings relating
to Warrants ............................... (9,600) 9,600 2(b) --
Dividends paid to minority interest.......... -- (874) (13,117) 2(b) (13,991)
------------------------------------------------------------------------------
Minority interest in earnings of
consolidated subsidiaries.................. (10,474) (13,117) 9,600 2(b) (13,991)
------------------------------------------------------------------------------
NET INCOME................................... $ 188,583 $ 82,257 $(26,068) $22,551 $ 267,323
==============================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK...... $ 175,025 $ 82,257 $(26,068) $22,551 $ 253,765
==============================================================================
Net income from continuing operations per
common share (1):
Primary.................................... $2.63 -- $2.38
Fully diluted.............................. 2.51 -- 2.32
Net income per common share (1):
Primary.................................... $2.70 -- $2.42
Fully diluted.............................. 2.57 -- 2.36
Average number of common shares
outstanding (2):
Primary.................................... 64,808,073 -- 104,691,406
Fully diluted.............................. 70,870,441 -- 110,753,774
</TABLE>
<TABLE>
<CAPTION>
For Years Ended December 31,
1994
----------------------------------------------------------------------------
Pro Forma ProForma
Adjustments(2) Including
Washington Keystone ------------------------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
------------- --------- -------- ------ ---- -----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans...................................... $ 949,777 $709,041 $ $ $1,658,818
New West note.............................. -- 141,039 141,039
Available-for-sale securities.............. 151,561 84,148 235,709
Held-to-maturity securities................ 156,043 102,635 258,678
Cash equivalents........................... 1,169 -- 1,169
------------------------------------------------------------------------------
Total interest income.................... 1,258,550 1,036,863 2,295,413
INTEREST EXPENSE
Deposits................................... 370,872 481,794 852,666
Borrowings................................. 280,999 201,693 482,692
------------------------------------------------------------------------------
Total interest expense................... 651,871 683,487 1,335,358
------------------------------------------------------------------------------
Net interest income...................... 606,679 353,376 960,055
Provision for loan losses.................... 20,400 101,609 122,009
------------------------------------------------------------------------------
Net interest income after provision for
loan losses............................ 586,279 251,767 838,046
Other income................................. 118,502 88,902 13,390 2(a) 220,794
Other expense................................ 415,300 266,827 13,390 2(a) 695,517
------------------------------------------------------------------------------
Income before income taxes............... 289,481 73,842 (13,390) 13,390 363,323
Income taxes................................. 108,159 897 109,056
------------------------------------------------------------------------------
Net income from continuing operations........ 181,322 72,945 (13,390) 13,390 254,267
Extraordinary items, net of federal income
tax effect................................. -- -- --
Cumulative effect of change in tax
accounting method.......................... -- -- --
Minority interest in earnings relating
to Warrants................................ (21,746) 21,746 2(b) --
Dividends paid to minority interest.......... -- (875) (13,117) 2(b) (13,992)
------------------------------------------------------------------------------
Minority interest in earnings of
consolidated subsidiaries.................. (22,621) (13,117) 21,746 2(b) (13,992)
------------------------------------------------------------------------------
NET INCOME................................... $ 181,322 $ 50,324 $(26,507) $35,136 $ 240,275
==============================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK...... $ 162,738 $ 50,324 $(26,507) $35,136 $ 221,691
==============================================================================
Net income from continuing operations per
common share (1):
Primary.................................... $2.45 -- $2.09
Fully diluted.............................. 2.38 -- 2.06
Net income per common share (1):
Primary.................................... $2.45 -- $2.09
Fully diluted.............................. 2.38 -- 2.06
Average number of common shares
outstanding (2):
Primary.................................... 66,361,794 -- 106,245,127
Fully diluted.............................. 71,781,041 -- 111,664,374
</TABLE>
53
<PAGE> 58
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(1) Per Share Data. Fully diluted net income from continuing operations per
common share and fully diluted net income per common share as of the six months
ended June 30, 1996 and the three years ended December 31, 1995 were calculated
using the following information:
<TABLE>
<CAPTION>
Six Months Year ended December 31,
Ended -----------------------------------------------
June 30, 1996 1995 1994 1993
----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
WASHINGTON MUTUAL
Net income.................................................... $120,888 $199,801 $181,322 $188,583
Preferred stock dividends:
Noncumulative Perpetual, Series C........................... (3,138) (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E........................... (1,872) (3,800) (3,800) (538)
--------------------------------------------------------------------
Net income available to fully diluted common stock............ 115,878 189,617 171,138 182,417
Less:
Extraordinary items, net of federal income tax effect..... -- -- -- (8,953)
Cumulative effect of change in tax accounting method...... -- -- -- 13,365
--------------------------------------------------------------------
Net income from continuing operations available to fully diluted
common stock................................................ $115,878 $189,617 $171,138 $178,005
======== ======== ======== ========
Average common shares outstanding:
Primary..................................................... 71,982,173 70,061,144 66,361,794 64,808,073
Noncumulative Convertible Perpetual Preferred Stock,
Series A.................................................. -- -- -- 643,121
Noncumulative Convertible Perpetual Preferred Stock,
Series D.................................................. 5,418,860 5,419,247 5,419,247 5,419,247
Fully diluted............................................... 77,401,033 75,480,391 71,781,041 70,870,441
PRO FORMA INCLUDING KEYSTONE HOLDINGS
Net income.................................................... $188,423 $289,902 $240,275 $267,323
Preferred stock dividends:
Noncumulative Perpetual, Series C........................... (3,138) (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E........................... (1,872) (3,800) (3,800) (538)
--------------------------------------------------------------------
Net income available to fully diluted common stock............ 183,413 279,718 230,091 261,157
Less:
Extraordinary items, net of federal income tax effect..... -- -- -- (8,953)
Cumulative effect of change in tax accounting method...... -- -- -- 13,365
--------------------------------------------------------------------
Net income from continuing operations available to fully diluted
common stock................................................ $183,413 $279,718 $230,091 $256,745
======== ======== ======== ========
Average common shares outstanding:
Primary..................................................... 111,865,506 109,944,477 106,245,127 104,691,406
Noncumulative Convertible Perpetual Preferred Stock,
Series A.................................................. -- -- -- 643,121
Noncumulative Convertible Perpetual Preferred Stock,
Series D.................................................. 5,418,860 5,419,247 5,419,247 5,419,247
--------------------------------------------------------------------
Fully diluted............................................... 117,284,366 115,363,724 111,664,374 110,753,774
=========== =========== =========== ===========
</TABLE>
(2) Statements of Income. The pro forma adjustments reflected in the unaudited
Pro Forma Including Keystone Holdings statements of income for the three years
ended December 31, 1995 and six months ended June 30, 1996 give effect to the
following adjustments:
a. Real estate owned expenses included in the other income
category in the Consolidated Statements of Keystone Holdings'
have been reclassed to other expense.
54
<PAGE> 59
b. New Capital's $80.0 million cumulative redeemable preferred
stock was issued to three investment partnerships, two of whom
share substantially common ownership with KHP, the holder of
the Keystone Holdings common stock. The two investment
partnerships received $75.0 million of the $80.0 million of
the preferred stock issued. Due to the substantially common
ownership, the $75.0 million of preferred stock was previously
presented in Keystone Holdings' Consolidated Financial
Statements as "Additional Paid-in Capital." The remaining
$5.0 million of preferred stock, owned by an unrelated
investment partnership, has been presented as a minority
interest. Effective August 1, 1995, the three investment
partnerships sold all of the preferred stock to an unrelated
party. Due to that sale, all of the preferred stock is
presented as minority interest in Keystone Holdings'
Consolidated Financial Statements as of December 31, 1995.
On the Effective Date, the two investment partnerships holding
$75.0 million of the preferred stock during 1993, 1994 and
the first seven months of 1995 would cease to have
substantially common ownership with KHP. As a result of the
Transaction, the persons creating the common ownership will no
longer have controlling interest in the pooled company.
Therefore, dividends paid on the full $80.0 million would be
considered to be dividends paid to minority interest.
Holders of the preferred stock are entitled to receive
cumulative dividends from the date of issue equal to 17.25%
per annum. The dividends are payable quarterly and unpaid
dividends will be compounded quarterly on each dividend
payment date. Accrued and unpaid dividends on the preferred
stock amounted to $1.8 million at both December 31, 1995 and
1994.
In addition, on the Effective Date, the amount of earnings
attributable to the warrant holder during 1993, 1994, 1995 and
the six months ended June 30, 1996 no longer needs to be shown
as minority interest in that on such date Washington Mutual
will directly or indirectly wholly-own all of the
subsidiaries of Keystone Holdings. See "THE TRANSACTION."
(3) Transaction-related Expenses. Nonrecurring Transaction-related expenses
anticipated to be recorded are not included in the unaudited pro forma combined
statements of income of Washington Mutual including Keystone Holdings for the
six months ended June 30, 1996. See "MANAGEMENT AND OPERATIONS OF WASHINGTON
MUTUAL FOLLOWING THE TRANSACTION -- Operations After the Transaction
- -Transaction Expense and Addition to Loan Loss Reserve." Nonrecurring
Transaction-related expenses expected to be recorded by Washington Mutual are
summarized in the following table (dollars in thousands):
<TABLE>
<S> <C>
Additional loan loss reserves(a)...................................... $ 125,000
Severance and management payments..................................... 46,000
Holding company debt call premiums.................................... 15,000
FRF tax settlement.................................................... 10,500
Other charges......................................................... 47,000
-------
Total charges....................................................... 243,500
Tax benefit........................................................... (86,200)
Negative adjustment to ASB's deferred tax asset....................... 50,000
-------
Net charges......................................................... $ 207,300
==========
</TABLE>
a. See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AFTER THE
TRANSACTION -- Operations After the Transaction --
Transaction Expenses and Addition to Loan Loss Reserve" for a
discussion of the differences in philosophy between Washington
Mutual and ASB regarding provisions for loan loss and reasons
for the increase in the loan loss provision.
55
<PAGE> 60
INFORMATION CONCERNING WASHINGTON MUTUAL
WASHINGTON MUTUAL
Washington Mutual is a Washington corporation that provides a broad
range of financial services to individuals and small businesses in Washington,
Oregon, Utah, Montana and Idaho through its subsidiary operations. The principal
assets of Washington Mutual are its principal subsidiaries, including its bank
subsidiaries, WMB and WMBfsb, and its insurance subsidiary, WM Life. Financial
services of the Company include the traditional savings bank activities of
accepting deposits from the general public and making residential loans,
consumer loans and limited types of commercial real estate loans (primarily
multi-family) and, more recently, certain commercial banking activities as
discussed below. Washington Mutual, through other subsidiaries, also issues and
markets annuity contracts and is the investment advisor to and distributor of
mutual funds.
During the first half of 1993, Washington Mutual merged with Pioneer
Savings Bank and acquired Pacific First Bank. As a result of these business
combinations, Washington Mutual became substantially larger, with significant
operations in Oregon as well as Washington. In 1994 and 1995, Washington Mutual
continued to expand its operations through business combinations with other
financial institutions in Washington and Utah.
On August 31, 1995, Washington Mutual diversified its business mix
through a merger of Enterprise Bank ("Enterprise") with and into WMB. Enterprise
was a Seattle-area commercial bank that focused on small- to midsize commercial
business clients. On January 31, 1996, Western Bank of Coos Bay, Oregon
("Western") merged with and into WMB. With 42 offices in 35 communities and
assets of $787.1 million at December 31, 1995, Western was Oregon's largest
community-based commercial bank. These two mergers provide Washington Mutual
with access to the higher growth business segment of commercial banking.
Because the Western Merger was not completed until January 31, 1996,
Western's results of operations and analysis of financial position are not
included in the financial information contained in Washington Mutual's Annual
Report on Form 10-K for the year ended December 31, 1995. This information has
been restated to include Western in Washington Mutual's Current Report on Form
8-K dated October 18, 1996, as amended.
At June 30, 1996, Washington Mutual, though its subsidiaries, operated
a total of 297 financial centers and 23 loan centers. At June 30, 1996,
Washington Mutual had total consolidated assets of $22.3 billion, total deposits
of $11.0 billion and stockholders' equity of $1.6 billion.
The principal executive offices of Washington Mutual are located in the
Washington Mutual Tower, 1201 Third Avenue, Suite 1500, Seattle, Washington,
98101, and its telephone number is (206) 461-2000.
Certain information relating to the business, management and other
related matters as to Washington Mutual is set forth in: (1) Washington Mutual's
Annual Report on Form 10-K for the year ended December 31, 1995; and (2)
Washington Mutual's Quarterly Reports on Form 10-Q for the periods ended March
31, 1996 and June 30, 1996. Each of these documents is incorporated herein by
reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION."
THE REORGANIZATION
Washington Mutual was formed in August 1994 by its predecessor, WMSB, a
former Washington state-chartered savings bank, for the purpose of serving as a
holding company in the reorganization of WMSB into a holding company structure.
The Reorganization was completed in November 1994 through the merger of WMSB
into WMB, Washington Mutual's Washington state-chartered savings bank
subsidiary, with WMB as the surviving entity. As a result of the Reorganization,
Washington Mutual became the parent company of the companies of which WMSB was,
prior to the Reorganization, the parent company. Because Washington Mutual owns
WMB and WMBfsb, Washington Mutual is a savings and loan holding company under
federal law and, as such, is subject to regulation by the OTS.
56
<PAGE> 61
As a result of the Reorganization, all shareholders of WMSB became
shareholders of Washington Mutual. Each outstanding share of WMSB common stock
was converted into one share of the Common Stock and each outstanding share of
WMSB 9.12% Noncumulative Perpetual Preferred Stock, Series C; $6.00
Noncumulative Convertible Perpetual Preferred Stock, Series D; and 7.60%
Noncumulative Perpetual Preferred Stock, Series E, was converted on a
share-for-share basis into the Series C Preferred, Series D Preferred and Series
E Preferred, respectively, with substantially the same relative rights,
privileges and preferences. Except as noted otherwise, references in this Proxy
Statement to "Washington Mutual" or the "Company" refer to both (i) Washington
Mutual, Inc. and its consolidated subsidiaries after the consummation of the
Reorganization; and (ii) WMSB and its consolidated subsidiaries prior to the
consummation of the Reorganization.
WASHINGTON MUTUAL'S PRINCIPAL OPERATING SUBSIDIARIES
WMB. WMB's principal business is providing a broad range of financial
services, primarily to consumers. These services include the traditional savings
bank activities of accepting deposits from the general public and making
residential mortgage loans, consumer loans and limited types of commercial real
estate loans, primarily multi-family. Beginning in the latter half of 1995, WMB,
through its merger with Enterprise and Western, diversified its traditional
activities into commercial lending.
On December 1, 1995, Washington Mutual, a Federal Savings Bank ("FSB"),
a federally chartered savings bank subsidiary of WMB with operations in
Washington and Oregon and total assets of $8,566.8 million at September 30,
1995, merged with and into WMB, with WMB as the surviving entity. At June 30,
1996, WMB had total assets of $20.6 billion and operated 268 financial centers,
of which 156 are in Washington and 116 are in Oregon, and 21 loan centers, of
which 14 are in Washington and 7 are in Oregon.
WMB operates under Title 32 (Mutual Savings Banks) of the Revised Code
of Washington. Its deposits are insured by the FDIC through the BIF and the
SAIF.
WMBfsb. WMBfsb is a federal savings bank formed in 1994 to participate
in a supervisory acquisition of certain branches of a federal savings bank from
the Resolution Trust Corporation. WMBfsb's principal business includes the
traditional savings association activity of accepting deposits from the general
public and making residential loans, consumer loans and limited types of
commercial real estate loans, primarily multi-family. At June 30, 1996, WMBfsb
had assets of $811.5 million and operated 25 financial centers, of which 16 are
in Utah, six are in Idaho, two are in Montana and one is in Oregon, and operated
one loan center in Idaho and one in Utah. WMBfsb's deposits are insured by the
FDIC through the SAIF.
WM LIFE. WM Life is an Arizona-domiciled life insurance company. WM
Life is authorized under state law to issue annuities in seven states. In
addition, WM Life owns Empire Life Insurance Co. ("Empire"), which is currently
licensed under state law to issue annuities in 28 states. WM Life currently
issues fixed and variable flexible premium deferred annuities, single premium
fixed deferred annuities and single premium immediate annuities. Empire
currently issues fixed flexible premium deferred annuities and single premium
immediate annuities. Both companies conduct business through licensed
independent agents. The majority of such agents are employees of affiliates of
the Company and operate in the Company's financial centers. Currently, annuities
are primarily issued in Washington and Oregon.
MURPHEY FAVRE, INC. Murphey Favre, Inc. ("Murphey Favre") is a
registered broker-dealer that offers a broad range of securities brokerage
services, including distribution of mutual funds. Murphey Favre has seven
free-standing offices, and Murphey Favre representatives are available for
consultation regularly or by appointment in many of the Company's financial
centers.
COMPOSITE RESEARCH & MANAGEMENT CO. Composite Research & Management Co.
("Composite Research") is a registered investment advisor. Composite Research is
the investment advisor of eight mutual funds and offers separate investment
management for large accounts. As of June 30, 1996, Composite Research had a
total of $1.3 billion in funds under management in the eight mutual funds.
57
<PAGE> 62
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth information regarding beneficial
ownership of Common Stock by each person known to the Company to have owned more
than five percent of the outstanding shares of the Common Stock on September 30,
1996. The following is based solely on statements filed with the Commission or
other reliable information. Each of the named shareholders has sole voting and
investment power with respect to the shares shown, except as noted below.
<TABLE>
<CAPTION>
Name and Address Shares of Common Stock
of Beneficial Owner Beneficially Owned Percent of Class
- ------------------- ------------------ ----------------
<S> <C> <C>
Fidelity Management & Research Co........................ 4,573,950(1) 6.34%
82 Devonshire Street
Boston, MA 02109
The Capital Group Companies, Inc......................... 3,945,730(2) 5.46%
333 South Hope Street
Los Angeles, CA 90071
</TABLE>
- ---------------
(1) Fidelity Management & Research Co. has sole investment power over
4,573,950 shares and sole voting power over 390,950 shares.
(2) The information presented is based on a Schedule 13G filed for the year
ended December 29, 1995. As of December 29, 1995, certain operating
subsidiaries of The Capital Group Companies, Inc., exercised investment
discretion over various institutional accounts which held in the
aggregate 3,945,730 shares of Washington Mutual Common Stock. Capital
Guardian Trust Company, a bank and one of such operating companies,
exercised investment discretion over 2,155,600 of such shares. Capital
Research and Management Company and Capital International, Inc., each a
registered investment adviser, and Capital International, S.A., another
operating subsidiary, had investment discretion with respect to
1,750,130, 7,690 and 32,300 of such shares, respectively. The number of
shares beneficially owned by The Capital Group Companies, Inc. includes
approximately 737,580 shares of Common Stock which are issuable to the
shareholder upon the conversion at any time of shares of Series D
Preferred held in institutional accounts over which one or more
affiliates exercises investment discretion.
58
<PAGE> 63
PRINCIPAL HOLDERS OF PREFERRED STOCK
The following table sets forth information regarding beneficial
ownership of Series D Preferred by each person known to the Company to own more
than five percent of the outstanding shares of the Series D Preferred as of
September 30, 1996. Each of the named shareholders has sole voting and
investment power with respect to the shares shown, except as noted below. The
Company knows of no person who owns more than five percent of the outstanding
shares of either the Series C Preferred or the Series E Preferred as of
September 30, 1996.
<TABLE>
<CAPTION>
Name and Address of Shares of Series D Preferred
Beneficial Owner Beneficially Owned Percent of Class
- ---------------- ------------------ ----------------
<S> <C> <C>
The Capital Group Companies, Inc......................... 153,500 11.0%
333 South Hope Street
Los Angeles, CA 90071
Safeco Asset Management.................................. 112,000 8.0
Safeco Plaza
Seattle, WA 98185
Oppenheimer Management Corp.............................. 96,800 6.9
3410 South Galena Street
Denver, CO 80231
</TABLE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table and accompanying footnotes provides a summary of
the beneficial ownership of Washington Mutual Common Stock, Series C Preferred,
Series D Preferred and Series E Preferred as of September 30, 1996, by (i)
directors, (ii) the Company's Chief Executive Officer, (iii) the other executive
officers named in the executive compensation table set forth in Washington
Mutual's proxy statement for the 1996 Annual Meeting of Shareholders, which is
incorporated by reference herein, and (iv) the directors and executive officers
as a group. As of September 30, 1996, none of the persons noted below
beneficially owned any shares of Series D Preferred. The following summary is
based on information furnished by the respective directors and officers. Each of
the named directors and officers has sole voting and investment power with
respect to the shares shown, except as noted below.
<TABLE>
<CAPTION>
COMMON STOCK(1)
Name Number of Shares(2) Percent of Class
- ---- ------------------- ----------------
<S> <C> <C>
Douglas P. Beighle ......................... 13,520(3) *
Herbert M. Bridge .......................... 20,456(4) *
Roger H. Eigsti ............................ 7,000 *
John W. Ellis .............................. 27,775(5) *
Daniel J. Evans ............................ 14,750(6) *
Anne V. Farrell ............................ 3,000 *
William P. Gerberding ...................... 4,835 *
Kerry K. Killinger ......................... 923,881(7) 1.28%
Lee D. Lannoye ............................. 71,758(8) *
Samuel B. McKinney ......................... 4,250 *
Michael K. Murphy .......................... 5,750(9) *
Deanna W. Oppenheimer ...................... 56,302(10) *
Louis H. Pepper ............................ 253,829 *
William G. Reed, Jr ........................ 26,375(11) *
James H. Stever ............................ 8,000(12) *
Craig E. Tall .............................. 227,982(13) *
S. Liane Wilson ............................ 138,859(14) *
</TABLE>
59
<PAGE> 64
<TABLE>
<S> <C> <C>
All directors and executive officers
as a group (18 persons)............ 1,823,985(15) 2.53%
</TABLE>
- ---------------
* Less than 1%
(1) Other than as set forth below, none of the above named officers and
directors owned any shares of Series C Preferred or Series E Preferred
as of September 30, 1996:
<TABLE>
<CAPTION>
Series C Preferred Number of Shares Percent of Class
------------------ --------------------------------
<S> <C> <C>
Herbert M. Bridge.................................... 200 shares less than 1%
James H. Stever...................................... 500 shares less than 1%
All directors and executive officers as a group ..... 700 shares less than 1%
</TABLE>
<TABLE>
<CAPTION>
Series E Preferred Number of Shares Percent of Class
------------------ --------------------------------
<S> <C> <C>
Herbert M. Bridge.................................... 800 shares less than 1%
Louis H. Pepper...................................... 1,525 shares less than 1%
All directors and executive officers as a group ..... 2,325 shares less than 1%
</TABLE>
(2) Includes 2,000 shares issuable pursuant to stock options exercisable
within 60 days of September 30, 1996 by each of Messrs. Beighle,
Eigsti, Ellis, Evans, Gerberding, Murphy, Pepper, Reed and Stever and
1,000 shares issuable pursuant to stock options exercisable within 60
days of September 30, 1996 by each of Mrs. Farrell and Dr. McKinney.
(3) Includes 1,350 shares held in a Keogh Plan, 795 shares held in an
Individual Retirement Account and 9,375 shares held jointly with the
estate of Gwendolen A. Beighle, for which Mr. Beighle is the personal
representative.
(4) All shares are held jointly with Mr. Bridge's spouse.
(5) Includes 24,275 shares held in a Keogh plan.
(6) Includes 5,175 shares held jointly with Mr. Evans' spouse and 7,575
shares held in a Keogh Plan, which is part of the Evans Family
Revocable Trust, of which Mr. Evans and his spouse serve as
co-trustees.
(7) Includes 388,917 shares issuable pursuant to stock options exercisable
within 60 days of September 30, 1996.
(8) Includes 22,252 shares issuable pursuant to stock options exercisable
within 60 days of September 30, 1996.
(9) Includes 1,500 shares held jointly with Mr. Murphy's spouse.
(10) Includes 16,333 shares issuable pursuant to stock options exercisable
within 60 days of September 30, 1996.
(11) All shares are held jointly with Mr. Reed's spouse.
(12) 4,500 shares are held jointly with Mr. Stever's spouse.
(13) Includes 74,667 shares issuable pursuant to stock options exercisable
within 60 days of September 30, 1996.
(14) Includes 64,166 shares issuable pursuant to stock options exercisable
within 60 days of September 30, 1996.
60
<PAGE> 65
(15) Includes, in the aggregate, 599,669 shares issuable pursuant to stock
options exercisable within 60 days of September 30, 1996.
MARKET PRICES AND DIVIDENDS
Washington Mutual Common Stock is traded on The Nasdaq Stock Market
under the symbol "WAMU." The table below sets forth, for the calendar quarters
indicated, the reported high and low sales prices of Washington Mutual Common
Stock as reported on The Nasdaq Stock Market, based on published financial
sources, and the dividends declared on such stock.
<TABLE>
Washington Mutual
Common Stock
-----------------------------------------------------
High Low Dividends
---- --- ---------
<S> <C> <C> <C>
1994 First Quarter .................. $25.00 $19.13 $0.16
Second Quarter.................. 21.50 18.25 0.17
Third Quarter................... 21.63 19.63 0.18
Fourth Quarter.................. 20.63 15.75 0.19
1995 First Quarter .................. 20.75 16.63 0.19
Second Quarter.................. 24.75 20.00 0.19
Third Quarter................... 26.75 22.50 0.19
Fourth Quarter.................. 29.50 24.75 0.20
1996 First Quarter................... 32.25 27.63 0.21
Second Quarter.................. 30.38 26.13 0.22
Third Quarter................... 39.25 28.50 0.23
Fourth Quarter
(through October 24, 1996).... 39.88 36.50 0.24
</TABLE>
As of the Record Date, there were approximately 15,948 shareholders
of record of Washington Mutual Common Stock and the last reported sales price
per share on the Record Date was $39.44. On July 19, 1996, the last full day of
trading before the first public announcement of the Transaction, the last
reported sales price per share was $30.13. See "DESCRIPTION OF WASHINGTON MUTUAL
CAPITAL STOCK."
DIVIDEND POLICY
Dividends may be paid on the Common Stock as and when declared by the
Washington Mutual Board out of funds legally available for the payment of
dividends. Each quarter, the Washington Mutual Board considers the payment of
dividends. The factors affecting this determination include Washington Mutual's
long-term interests, current and projected earnings, adequacy of capitalization,
expected asset and deposit growth as well as other financial conditions, legal,
regulatory and contractual restrictions, and tax considerations.
According to Washington law, Washington Mutual dividends may be paid
only if, after giving effect to the dividend, Washington Mutual will be able to
pay its debts as they become due in the ordinary course of business and
Washington Mutual's total assets will not be less than the sum of its total
liabilities plus the amount that would be needed, if Washington Mutual were to
be dissolved at the time of the dividend, to satisfy the preferential rights of
persons whose right to payment is superior to those receiving the dividend.
Washington Mutual's ability to pay dividends is also dependent on the ability of
WMBfsb, WMB and other subsidiary operations to pay dividends to Washington
Mutual.
The three series of outstanding Preferred Stock rank prior to the
Common Stock and to all other classes and series of equity securities of
Washington Mutual, other than any classes or series of equity securities of
Washington Mutual ranking on a parity with the Preferred Stock.
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The rights of holders of Preferred Stock to receive dividends is
noncumulative. Accordingly, if the Washington Mutual Board fails to declare a
dividend on any dividend payment date, the holders of Preferred Stock will have
no right to receive a dividend in respect of the dividend period ending on such
dividend payment date and Washington Mutual will have no obligation to pay the
dividend accrued for such period, whether or not dividends are declared payable
on any future dividend payment dates.
Full dividends on Preferred Stock must be declared and paid or set
apart for payment for the most recent dividend period ended before (i) any
dividend (other than in Common Stock) on stock junior to the Preferred Stock
("Junior Stock") may be declared or paid or set aside for payment or other
distribution made upon the Common Stock or on any other Junior Stock or (ii)
Junior Stock is redeemed (or any moneys are paid to or made available for a
sinking fund for the redemption of any share of any such stock) or any Junior
Stock or stock on a parity with Preferred Stock ("Parity Stock") is purchased or
otherwise acquired by Washington Mutual for any consideration except by
conversion into or exchange for Junior Stock.
The Washington Mutual Board may issue Preferred Stock that is entitled
to such dividend rights as the Washington Mutual Board may determine, including
priority over Common Stock in the payment of dividends.
DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK
Washington Mutual is authorized by its Articles to issue up to
100,000,000 shares of Washington Mutual Common Stock and up to 10,000,000 shares
of preferred stock, no par value per share. As described later herein, the
Washington Mutual Board is recommending that the Washington Mutual Shareholders
approve an amendment to the Articles to increase the number of authorized shares
of Common Stock from 100,000,000 shares to 350,000,000 shares. As of October 24,
1996, there were issued and outstanding 72,307,510 shares of Washington Mutual
Common Stock, 2,752,500 shares of Series C Preferred, 1,399,900 shares of Series
D Preferred and 1,970,000 shares of Series E Preferred. See "PROPOSED AMENDMENT
TO WASHINGTON MUTUAL ARTICLES OF INCORPORATION -- INCREASE IN AUTHORIZED
SHARES."
COMMON STOCK. Each holder of Washington Mutual Common Stock is entitled
to one vote for each share held on all matters voted upon by shareholders.
Shareholders are not permitted to cumulate their votes for the election of
directors.
In the unlikely event of liquidation of Washington Mutual, holders of
Washington Mutual Common Stock will be entitled to receive any remaining assets
of Washington Mutual, in cash or in kind, after payment of all liabilities and
amounts owed with respect to Washington Mutual Preferred Stock.
Holders of Washington Mutual Common Stock are not entitled to
preemptive rights with respect to any additional shares that may be issued.
The authorized but unissued and unreserved shares of Washington Mutual
Common Stock will be available for general corporate purposes, including but not
limited to possible issuance in exchange for capital notes, as stock dividends
or stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment plan, for employee benefit plans, or in a future underwritten or
other public offering. Except as described above or as otherwise required to
approve the transactions in which the additional authorized shares of Washington
Mutual Common Stock would be issued, no shareholder approval will be required
for the issuance of these shares.
At October 24, 1996, options to purchase 1,480,418 shares of Washington
Mutual Common Stock under Washington Mutual's stock option plans had been
granted, but not exercised or terminated, leaving 3,132,500 shares available for
further grants under such plans.
PREFERRED STOCK. The Preferred Stock is prior to Common Stock as to
dividends and liquidation, but does not confer general voting rights.
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The Series C Preferred Stock has a liquidation preference of $25.00 per
share plus dividends accrued and unpaid for the then-current dividend period,
and is not convertible into any other Washington Mutual securities. Dividends on
the Series C Preferred Stock, if and when declared by the Washington Mutual
Board, are at an annual rate of $2.28 per share, are noncumulative and payable
quarterly. Washington Mutual may at its option redeem the Series C Preferred
Stock. The Series C Preferred Stock is prior to the Washington Mutual Common
Stock as to dividends and liquidation, but does not confer general voting
rights.
The Series D Preferred Stock has a liquidation preference of $100.00
per share plus dividends accrued and unpaid for the then-current dividend
period, and is convertible into shares of Washington Mutual Common Stock.
Dividends on the Series D Preferred Stock, if and when declared by the
Washington Mutual Board, are at an annual rate of $6.00 per share, are
noncumulative and payable quarterly. Washington Mutual may at its option redeem
the Series D Preferred Stock. The Series D Preferred Stock is prior to the
Washington Mutual Common Stock as to dividends and liquidation, but does not
confer general voting rights.
The Series E Preferred Stock has a liquidation preference of $25.00 per
share plus dividends accrued and unpaid for the then-current dividend period,
and is not convertible into any other Washington Mutual securities. Dividends on
the Series E Preferred Stock, if and when declared by the Washington Mutual
Board, are at an annual rate of $1.90 per share, are noncumulative and payable
quarterly. Washington Mutual may at its option redeem the Series E Preferred
Stock. The Series E Preferred Stock is prior to the Common Stock as dividends
and liquidation, but does not confer general voting rights.
PROPOSED AMENDMENT TO WASHINGTON MUTUAL ARTICLES OF INCORPORATION -
INCREASE IN AUTHORIZED SHARES
It is a condition to Washington Mutual's obligation to consummate the
Transaction that the Washington Mutual Shareholders approve an amendment to the
Articles to increase the authorized shares of Common Stock. Article II of
Washington Mutual's Articles currently provides that Washington Mutual has
authority to issue 100,000,000 shares of Common Stock. In addition, a total of
10,000,000 shares of preferred stock are authorized. The Board of Directors has
approved and recommends that the shareholders adopt an amendment to Article II
of Washington Mutual's Articles to increase the number of authorized shares of
Common Stock to 350,000,000. The amendment will not increase or otherwise affect
the number of authorized shares of preferred stock that may be issued by
Washington Mutual. The proposed amendment to the Articles would amend and
restate the first sentence of Article II A to read as follows:
The total number of shares of capital stock which the Company has
authority to issue is 360,000,000 shares of which 350,000,000 shares
shall be shares of common stock with no par value per share and
10,000,000 shares shall be shares of preferred stock with no par value
per share.
If approved, the amendment to Article II would be effective upon the
filing of articles of amendment to the Articles with the Washington Secretary of
State, which would occur promptly after the Special Meeting. The implementation
of the Transaction is conditioned on, among other things, the approval of this
proposal; however, this proposal is not conditioned on the consummation of the
Transaction, and, if approved by the Washington Mutual Shareholders, it is the
present intent of the Washington Mutual Board to implement this proposal even if
the Transaction is not consummated.
CURRENT CAPITALIZATION
The primary reasons for the proposed increase in the number of
authorized shares are to make sufficient shares available for issuance in
connection with the Transaction and to provide additional available shares for
use in future transactions. As of the Record Date, Washington Mutual had a total
of 72,307,510 shares issued and outstanding and an aggregate of 4,612,918
shares reserved for issuance upon the exercise of outstanding stock options and
upon the issuance of additional stock options under Washington Mutual's 1994
Stock Option Plan. As of that date, Washington Mutual had also set aside
5,418,876 unissued shares of Common Stock for issuance upon
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conversion of the Series D Preferred. In addition, in connection with the merger
of a Utah-based bank, the Company will issue additional shares of Common Stock
with aggregate market value of approximately $15 million. Assuming an average
price of $35.00 per share, Washington Mutual will issue approximately 428,572
shares of Common Stock in connection with such merger. Consequently,
17,232,124 shares of Common Stock are authorized, unissued and not reserved
for issuance.
Assuming shareholder approval of the Transaction and the proposed
amendment to the Articles to increase the number of authorized shares of Common
Stock, Washington Mutual will issue 47,883,333 shares of the additionally
authorized Common Stock in connection with the Transaction, 8 million shares of
which will be delivered to the Escrow Agent pursuant to the Escrow Agreement.
The Washington Mutual Board believes that having additional shares of
Common Stock authorized and available for issuance at the Washington Mutual
Board's discretion is in the best interest of Washington Mutual and its
shareholders and would provide several long-term advantages to Washington Mutual
and its shareholders. Washington Mutual would have greater flexibility in
considering future actions involving the issuance of stock and in determining
the Company's proper capitalization, such as through stock dividends or splits
and other employee and shareholder distributions. Additional authorized shares
could also be used to raise cash through sales of stock to public and private
investors. The Washington Mutual Board also would have greater flexibility to
authorize the Company to pursue additional acquisitions that involve the
issuance of stock and that the Washington Mutual Board believes provide the
potential for growth and profit.
CERTAIN EFFECTS OF THE PROPOSED AMENDMENT
In certain circumstances, an increase in the authorized shares of
Common Stock could be used to enhance the Washington Mutual Board's bargaining
capability on behalf of Washington Mutual's shareholders in a takeover situation
and could render more difficult or discourage a merger, tender offer or proxy
contest. Similarly, an increase in the authorized shares of Common Stock could
have an anti-takeover effect in that such additional shares could be used to
dilute the stock ownership of persons seeking to obtain control of Washington
Mutual. Washington Mutual is not aware of any present efforts to gain control of
Washington Mutual or to organize a proxy contest. If such proposal was
presented, management would make a recommendation based upon the best interests
of Washington Mutual's shareholders.
In the event the proposal to increase the number of authorized shares
of Common Stock is approved, further shareholder approval of the issuance of the
250 million additional shares of Common Stock will not be sought prior to such
issuance unless such issuances relate to a merger, consolidation or other
transaction that otherwise requires shareholder approval. Upon issuance, such
shares will have the same rights as the outstanding shares of Common Stock.
Holders of Common Stock have no preemptive rights.
Other than the 47,883,333 shares to be issued pursuant to the
Transaction and except as otherwise described in this Proxy Statement,
Washington Mutual has no present plans to issue additional shares of Common
Stock. The proposed increase in the number of authorized shares will not change
the number of shares currently outstanding or the rights of the holders of such
stock.
CERTAIN ANTI-TAKEOVER PROVISIONS IN WASHINGTON MUTUAL'S ARTICLES AND BYLAWS
The Articles and bylaws of Washington Mutual currently contain
provisions that may assist the Washington Mutual Board in resisting, or enabling
the Washington Mutual Board to resist, a takeover attempt it does not consider
beneficial to Washington Mutual. These provisions are designed to inhibit
hostile takeovers and encourage potential acquirors to negotiate with the
Washington Mutual Board. The possible effect of these provisions may be to
delay, defer, or prevent a change in control of Washington Mutual.
AUTHORITY TO ISSUE PREFERRED STOCK. The Washington Mutual Board is
authorized to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, redemption price or
prices, liquidation preferences
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and the number of shares constituting any series or the designation of such
series, without any further vote or action by the shareholders. Washington
Mutual has no present plans to issue any additional shares of preferred stock.
NO CUMULATIVE VOTING. The Articles do not provide for cumulative
voting. As a result, to be ensured of representation on the Washington Mutual
Board, a shareholder must control the votes of a majority of the shares present
and voting at a shareholders' meeting at which a quorum is present. In addition,
the Articles provide that a transaction is not void or voidable solely by virtue
of the interested status of a director in such a transaction, if the
relationship is known or disclosed and a sufficient number of disinterested
directors, at a meeting at which a quorum is present, approve the transaction.
CLASSIFIED BOARD OF DIRECTORS. Article IV of the Articles provides that
the Washington Mutual Board is to be divided into three classes as nearly equal
in number as possible. A classified board of directors could make it more
difficult for Washington Mutual shareholders, including those holding a majority
of the outstanding Common Stock, to force an immediate change in the composition
of the majority of the Washington Mutual Board.
APPROVAL OF MERGERS, CONSOLIDATIONS, SALE OF SUBSTANTIALLY ALL ASSETS
AND DISSOLUTION. Article IX of Washington Mutual's Articles provides that if,
pursuant to the WBCA, Washington Mutual's shareholders are required to approve a
merger and if two-thirds of the Washington Mutual Board vote to recommend the
merger to the Washington Mutual shareholders, then the merger may be approved by
a vote of the Washington Mutual shareholders holding a majority of the
outstanding voting shares.
In addition, Article XI of the Articles prohibits, except under
specified circumstances, Washington Mutual (or any subsidiary of Washington
Mutual) from engaging in certain significant business transactions with a "Major
Stockholder" (defined as a person who, without the prior approval of the
Washington Mutual Board, acquires beneficial ownership of five percent or more
of the votes held by the holders of the outstanding shares of Washington
Mutual's voting stock). Prohibited transactions include, among others, any
merger with, disposition of assets to, acquisition by Washington Mutual of the
assets of, issuance of securities of Washington Mutual to, or acquisition by
Washington Mutual of securities of a Major Stockholder, or any reclassification
of the voting stock of Washington Mutual or of any subsidiary beneficially owned
by a Major Stockholder, or any partial or complete liquidation, spin off, split
off or split up of Washington Mutual or any subsidiary. The above prohibitions
do not apply, in general, if the specific transaction is approved by a
supermajority vote of either the Washington Mutual Board or the holders of
voting stock owned other than by any Major Stockholder. The Articles also
provide that during the time a Major Stockholder exists, Washington Mutual may
voluntarily dissolve only upon the unanimous consent of its stockholders or an
affirmative vote of at least two-thirds of its directors and the holders of at
least two-thirds of both the shares entitled to vote on such a dissolution and
of each class of shares entitled to vote on such a dissolution as a class, if
any. Amendments to this Article XI require the affirmative vote of 95% of
Washington Mutual shareholders holding voting stock beneficially owned by
stockholders other than any Major Stockholder.
SHAREHOLDER RIGHTS PLAN. Washington Mutual has assumed the shareholder
rights plan adopted by WMSB in 1990. Under the plan, each share of Common Stock
has attached to it a right to purchase an additional share of Common Stock. The
rights have certain antitakeover effects and are intended to discourage coercive
or unfair takeover tactics and to encourage any potential acquiror to negotiate
a price fair to all shareholders. The rights may cause substantial dilution to
an acquiring party that attempts to acquire Washington Mutual on terms not
approved by the Washington Mutual Board, but they will not interfere with any
friendly merger or other business combination. The plan was not adopted in
response to any specific effort to acquire control of Washington Mutual.
The rights are not exercisable until the tenth day after a party
acquires beneficial ownership of 20 percent or more of the outstanding Common
Stock or commences or publicly announces for the first time a tender offer to do
so. Each right entitles the holder to purchase one share of Common Stock for an
exercise price that is currently $26.67 per share. In the event, among certain
other specified events, that an acquiring party thereafter gains control of 30
percent or more of the Common Stock, any rights held by that party will be void
and, for the next 60 days, all other holders of rights can receive that number
of shares of Common Stock having a market value of two times the exercise price
of the right. The rights, which expire on October 16, 2000, may be redeemed by
Washington
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Mutual for $0.0044 per right prior to being exercisable. Until a right is
exercised, the holder of that right will have no rights as a shareholder of
Washington Mutual, including, without limitation, the right to vote or to
receive dividends.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE AMENDMENT TO THE ARTICLES TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK.
INDEPENDENT AUDITORS
The consolidated statements of financial position of Washington Mutual
and its subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995, incorporated in this
Proxy Statement by reference to Washington Mutual's Amendment No. 2 to Current
Report on Form 8-K/A dated October 25, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report with respect
thereto.
The consolidated balance sheets of Keystone Holdings and its
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1995, have been audited by
KPMG Peat Marwick LLP, independent auditors, as set forth in their report with
respect thereon. Such financial statements have been included in reliance upon
the report of KPMG Peat Marwick LLP.
It is expected that representatives of Deloitte & Touche LLP will be
present at the Special Meeting to respond to appropriate questions of Washington
Mutual Shareholders and to make a statement if they desire.
AVAILABLE INFORMATION
Washington Mutual is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the SEC. The reports, proxy statements and other
information filed by Washington Mutual with the SEC can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven
World Trade Center (13th Floor), New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, at
prescribed rates. The SEC also maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically, including the Company, with the Commission at
http://www.sec.gov. In addition, material filed by Washington Mutual can be
inspected at the offices of the National Association of Securities Dealers,
Inc., Report Section , 1735 K Street, N.W., Washington, D.C. 20006.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE UPON REQUEST TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER TO WHOM
THIS PROXY STATEMENT IS DELIVERED, WITHOUT CHARGE, UPON REQUEST TO WASHINGTON
MUTUAL, INVESTOR RELATIONS, WASHINGTON MUTUAL, INC., WASHINGTON MUTUAL TOWER,
1201 THIRD AVENUE, 12TH FLOOR, SEATTLE, WASHINGTON 98101 (TELEPHONE NUMBER (206)
461-3187). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS
SHOULD BE MADE BY DECEMBER 10, 1996.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement in connection
with the solicitation of proxies or the offering of securities made hereby and,
if given or made, such information or representation must not be relied upon as
having been authorized by Keystone Holdings, Washington Mutual or any other
person. This Proxy Statement does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities, or the solicitation of a proxy,
in any jurisdiction to or from any person to or from whom it is not lawful to
make any such offer or solicitation in such jurisdiction.
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Neither the delivery of this Proxy Statement nor any distribution of
securities made hereunder shall, under any circumstances, create an implication
that there has been no change in the affairs of Keystone Holdings or Washington
Mutual since the date hereof or that the information herein is correct as of any
time subsequent to the date hereof.
All information contained in this Proxy Statement relating to
Washington Mutual and its subsidiaries has been supplied by Washington Mutual
and all information herein relating to KHP and Keystone Holdings and its
subsidiaries has been supplied by KHP and Keystone Holdings, respectively.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC by Washington Mutual
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:
1. Washington Mutual's Annual Report on Form 10-K for the year
ended December 31, 1995;
2. Washington Mutual's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996;
3. Washington Mutual's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996;
4. Washington Mutual's Current Report on Form 8-K dated March 15,
1996;
5. Washington Mutual's Current Report on Form 8-K dated July 22,
1996; and
6. Washington Mutual's Current Report on Form 8-K dated October
18, 1996, as amended by Form 8-K/A dated October 23, 1996, as
amended by Form 8-K/A dated October 25, 1996.
All documents and reports filed by Washington Mutual pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement and before the date of the Special Meeting shall be deemed to be
incorporated by reference in this Proxy Statement and to be part hereof from the
date of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
The information relating to Washington Mutual contained in this Proxy
Statement does not purport to be complete and should be read together with the
information in the documents that accompany this Proxy Statement and the
additional documents that are incorporated by reference herein.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Shareholder proposals intended to be presented at the 1997 Annual
Meeting of Shareholders must be received by the Company no later than January
15, 1997. Proposals may be mailed to the Company, to the attention of the
Secretary, 1201 Third Avenue, Suite 1503, Seattle, Washington 98101.
OTHER MATTERS
As of the date of this Proxy Statement, the Washington Mutual Board
knows of no matters to be brought before the Special Meeting other than those
specifically listed in the Notice of Special Meeting of Washington Mutual
Shareholders. However, if any other matters should properly come before the
Special Meeting, the proxy holders will vote the proxies on such matters in
accordance with the determination of the Washington Mutual Board.
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The Washington Mutual Board urges each Washington Mutual Shareholder, whether or
not he or she intends to be present at the Special Meeting, to complete, sign
and return the enclosed proxy as promptly as possible.
BY ORDER OF THE BOARD OF DIRECTORS
OF WASHINGTON MUTUAL, INC.
Seattle, Washington William L. Lynch
November 12, 1996 Secretary
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<PAGE> 73
WASHINGTON MUTUAL, INC.
1201 Third Avenue, Seattle, WA 98101
PROXY FOR THE DECEMBER 18, 1996 SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF WASHINGTON MUTUAL, INC.
The undersigned shareholder(s) of Washington Mutual, Inc. (the
"Company"), hereby appoints William L. Lynch and Marc R. Kittner, and each of
them, as proxies, each with the power of substitution to represent and to vote,
as designated below, all the shares of Common Stock of the Company held of
record by the undersigned on October 24, 1996, at the Special Meeting of
Shareholders to be held at 10:00 a.m., December 18, 1996, and at any and all
adjournments thereof.
1. APPROVAL OF THE TRANSACTION pursuant to which Washington Mutual will
merge with Keystone Holdings, Inc. ("Keystone Holdings") and the direct
and indirect subsidiaries of Keystone Holdings, including American
Savings Bank, F.A. ("ASB") will be wholly-owned subsidiaries of
Washington Mutual. Approval of the Transaction includes approval of:
(i) the Merger Agreement and the form of the Plan of Merger included
therein ("Merger Agreement") between Keystone Holdings Partners, L.P.
the sole shareholder of Keystone Holdings ("KHP") and Washington
Mutual, among others; (ii) the Warrant Exchange Agreement between
Washington Mutual, KHP and the Federal Deposit Insurance Corporation,
as manager of the Federal Savings and Loan Insurance Corporation
Resolution Fund (the "FRF"), among others; (iii) certain other
agreements described in the Proxy Statement relating to registration
rights and escrow requirements; and (iv) the issuance by Washington
Mutual of 47,883,333 shares of Common Stock as follows: 25,883,333
shares to KHP; 14,000,000 shares to the FRF and 8,000,000 shares to an
escrow for the benefit of KHP and the FRF.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
2. APPROVAL OF AMENDMENT OF ARTICLES OF INCORPORATION to increase the number
of authorized shares of Common Stock from 100,000,000 to 350,000,000.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
3. SPECIAL MEETING R.S.V.P:
I/WE /_/ WILL /_/ WILL NOT be attending the Special Meeting.
_________ (enter number of people attending).
<PAGE> 74
Shares represented by all properly completed, dated and executed proxies
will be voted in accordance with instructions appearing on the proxy and in the
discretion of the proxy holders as to any other matter that may properly come
before the Special Meeting of Shareholders. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" ITEMS 1 AND 2. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL
BE VOTED FOR ITEMS 1 AND 2 AND IN THE DISCRETION OF THE PROXY HOLDERS AS TO ANY
OTHER MATTER THAT MAY PROPERLY COME BEFORE THE SPECIAL MEETING OF SHAREHOLDERS.
Dated:____________________________________ , 1996
_________________________________________________
Signature(s)
_________________________________________________
Please sign as name(s) appear on this proxy and
date this proxy. If a joint account, each joint
owner must sign. If signing for a corporation or
partnership or as agent, attorney or fiduciary,
indicate the capacity in which you are signing.
<PAGE> 75
WASHINGTON MUTUAL, INC.
1201 Third Avenue, Seattle, WA 98101
PROXY FOR THE DECEMBER 18, 1996 SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF WASHINGTON MUTUAL, INC.
The undersigned shareholder(s) of Washington Mutual, Inc. (the "Company"),
hereby appoints William L. Lynch and Marc R. Kittner, and each of them, as
proxies, each with the power of substitution to represent and to vote, as
designated below, all the shares of Preferred Stock of the Company held of
record by the undersigned on October 24, 1996, at the Special Meeting of
Shareholders to be held at 10:00 a.m., December 18, 1996, and at any and all
adjournments thereof.
1. APPROVAL OF AMENDMENT OF ARTICLES OF INCORPORATION to increase the number
of authorized shares of Common Stock from 100,000,000 to 350,000,000
/_/ FOR /_/ AGAINST /_/ ABSTAIN
2. SPECIAL MEETING R.S.V.P:
I/WE /_/ WILL /_/ WILL NOT be attending the Special Meeting.
_________ (enter number of people attending).
<PAGE> 76
Shares represented by all properly completed, dated and executed proxies
will be voted in accordance with instructions appearing on the proxy and in the
discretion of the proxy holders as to any other matter that may properly come
before the Special Meeting of Shareholders. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" ITEM 1. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE
VOTED FOR ITEM 1 AND IN THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER
MATTER THAT MAY PROPERLY COME BEFORE THE SPECIAL MEETING OF SHAREHOLDERS.
Dated:_____________________________________, 1996
_________________________________________________
Signature(s)
_________________________________________________
Please sign as name(s) appear on this proxy and
date this proxy. If a joint account, each joint
owner must sign. If signing for a corporation or
partnership or as agent, attorney or fiduciary,
indicate the capacity in which you are signing.
<PAGE> 77
APPENDIX A
INFORMATION CONCERNING KEYSTONE HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL .................................................................. A-2
Lending Activities.................................................... A-3
Investing Activities.................................................. A-8
Funding Activities.................................................... A-9
Asset Liability Management............................................ A-11
Taxation ............................................................. A-11
Properties............................................................ A-11
Legal Proceedings..................................................... A-11
Management............................................................ A-12
Keystone Holdings Common Stock; Dividends............................. A-14
KEYSTONE HOLDINGS.......................................................... A-15
General ............................................................. A-15
The 1988 Acquisition.................................................. A-16
The Warrants.......................................................... A-18
REGULATION AND SUPERVISION................................................. A-18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF KEYSTONE HOLDINGS.................................... A-19
Summary Financial Information for Keystone Holdings................... A-20
Financial Condition................................................... A-20
Originations.......................................................... A-21
Credit Quality........................................................ A-22
Deposits and Other Borrowings......................................... A-27
Results of Operations................................................. A-28
Capital Regulations and Requirements.................................. A-37
Asset/Liability Management............................................ A-38
Liquidity and Capital Resources....................................... A-40
</TABLE>
A-1
<PAGE> 78
GENERAL
The following discussion regarding Keystone Holdings, Inc. and its
principal subsidiary, American Savings Bank F.A., should be read in conjunction
with the Consolidated Financial Statements of Keystone Holdings, Inc. and
Subsidiaries and the notes thereto, and the Condensed Consolidated Financial
Statements of Keystone Holdings, Inc. and Subsidiaries and the notes thereto,
which are included in this Proxy Statement as Appendix B.
Keystone Holdings, Inc. is a holding company, substantially all of
whose business activities are conducted through its principal operating
subsidiary, American Savings Bank, F.A., a California-based federally chartered
savings bank ("ASB"). All of Keystone Holdings' lending activities are
conducted through ASB. Keystone Holdings, Inc., together with its consolidated
Subsidiaries, including ASB, is referred to herein as "Keystone Holdings."
Keystone Holdings had consolidated assets of $20.5 billion, deposits of $12.7
billion and stockholder's equity of $550.4 million at June 30, 1996. For the six
months ended June 30, 1996 and 1995, Keystone Holdings recorded net interest
income of $237.6 million and $165.7 million, respectively, and net earnings of
$53.6 million and $25.5 million, respectively. ASB had assets of $20.4 billion,
deposits of $12.7 billion and stockholder's equity of $1.2 billion at June 30,
1996. ASB is one of the largest originators of single-family adjustable-rate
mortgages ("ARMs") in California. Single-family ARM originations for the
six-month period ended June 30, 1996 and for the year ended December 31, 1995
were $1.3 billion and $2.8 billion, respectively. For the six months ended June
30, 1996 and 1995, ASB recorded net interest income of $251.8 million and $181.8
million, respectively, and net earnings of $93.6 million and $62.5 million,
respectively. At June 30, 1996, ASB's capital levels qualified it as "well-
capitalized," the highest of the five categories under applicable regulatory
definitions. See "KEYSTONE HOLDINGS -- General."
ASB's deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") through the Savings Association Insurance Fund (the
"SAIF"). It is a member of, and borrower from, the Federal Home Loan Bank (the
"FHLB") of San Francisco and is subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision (the "OTS").
The principal business of ASB consists of attracting funds in the form
of retail deposits through its branches through borrowings, and investing those
funds in single-family mortgage loans. ASB also originates a smaller volume of
multi-family residential loans (the majority of which are secured by properties
with 36 or fewer units) and loans secured by mobile home parks, which are
classified as commercial mortgage loans. ASB also has a limited portfolio of
other commercial mortgage loans, which were acquired from ASB's predecessor
institution. In addition, ASB owns subsidiary service corporations that engage
in securities and insurance brokerage. ASB's distribution network at June 30,
1996 consisted of 158 branches and 62 loan origination offices, all located in
California except for a loan origination office, located in Phoenix, Arizona.
ASB expects to open three additional loan origination offices, one each in Las
Vegas, Nevada and Denver and Boulder, Colorado prior to year end 1996. The
California branches and loan origination offices are concentrated in the Los
Angeles and San Francisco metropolitan areas. A majority of ASB's loan
origination offices are located in close proximity to ASB's branch offices.
ASB's principal loan products are single-family residential ARMs that
reprice monthly to a predetermined margin over the Weighted Average Cost of
Funds Index for the Eleventh District Savings Institutions ("COFI").
ASB manages interest rate risk by seeking to closely match the duration and
repricing periods of its assets and liabilities. By concentrating its loan
origination activities on COFI ARMs with monthly interest rate adjustments, ASB
generates interest-earning assets while managing interest rate risk. ASB also
offers fixed-rate and Treasury-indexed ARM loans. ASB sells substantially all of
its fixed-rate and non-COFI ARM originations immediately after funding.
A-2
<PAGE> 79
At June 30, 1996, ASB's capital exceeded all currently applicable
regulatory capital requirements and the requirements for being a
well-capitalized institution, as indicated in the table below:
<TABLE>
<CAPTION> Minimum Well-Capitalized
Ratio Actual Requirement Requirement
----- ------ ----------- ----------------
<S> <C> <C> <C>
Tangible capital to adjusted total assets........... 5.41% 1.50% n/a
Core capital to adjusted total assets............... 5.42 3.00(1) 5.00
Core capital to risk-weighted assets................ 9.26 4.00(2) 6.00
Total risk-based capital to risk-weighted assets.... 10.74 8.00 10.00
</TABLE>
----------------
(1) Under the prompt corrective action standards of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), an
institution is subject to regulatory sanctions if its core capital
ratio is less than 4.00%.
(2) Adequately capitalized standard under the prompt corrective standards
of FDICIA.
Keystone Holdings and ASB were formed to effect the December 1988
acquisition (the "1988 Acquisition") of certain assets and liabilities of the
failed savings and loan association subsidiary (the "Failed Association") of
Financial Corporation of America. The 1988 Acquisition utilized a "good bank/bad
bank" structure, with ASB, the "good bank," acquiring substantially all of the
Failed Association's performing loans and fixed assets. New West Federal Savings
and Loan Association ("New West"), the "bad bank," was formed to acquire the
Failed Association's underperforming and certain other assets, with a view
towards their liquidation. New West is a wholly-owned subsidiary of New American
Holdings, Inc. ("New Holdings"), which is a wholly-owned subsidiary of Keystone
Holdings. Although Keystone Holdings beneficially owns the stock of New West
through New Holdings, it does not have a financial interest in New West because
of certain contractual agreements with, and indemnifications by, the FDIC as
manager of the FSLIC Resolution Fund (the "FRF"). Any loss incurred by New West
during its liquidation is the financial responsibility of the FRF. In addition,
substantially all decisions made by New West's management must be approved by
the FDIC prior to execution. New West has not recorded any earnings or losses
since its inception. Therefore, New West is not included in the Consolidated
Financial Statements of Keystone Holdings. Steps are currently being taken to
effect the divestiture of New West and it is a condition to closing of the
merger of Keystone Holdings and Washington Mutual, Inc. (the "Transaction") that
the stock of New West, together with any obligations and liabilities related to
New West, be transferred to or assumed by an entity not being acquired by
Washington Mutual, Inc. ("Washington Mutual") as a result of the Transaction.
See "PROXY STATEMENT -- THE TRANSACTION -- Conditions to the Transaction."
The operations of ASB are significantly influenced by general economic
conditions, the related monetary, fiscal and regulatory policies of the federal
government and by the policies of the OTS, the FDIC, and the FHLB of San
Francisco. Deposit flows and the cost of funds are influenced by interest rates
on competing investments and general market interest rates. Similarly, loan
origination volume and the level of prepayments on receivables are affected by
market interest rates on loans, as well as additional factors that affect the
supply of and demand for housing and the availability of funds.
LENDING ACTIVITIES
Keystone Holdings, through ASB, originates receivables using three
primary distribution channels: residential loan centers, income-property loan
centers, and a state-wide network of independent residential mortgage brokers.
Both residential and income-property loan centers are staffed with commissioned
employees of ASB. In recent years, ASB has strengthened its relationships with
wholesale independent mortgage brokers by offering a competitive product line
that has allowed brokers to broaden their customer base. Loan production agents
are not involved in the appraisal or underwriting functions. The value of
property pledged as collateral for a mortgage loan is determined by an appraiser
who generally is an employee of ASB. In areas where ASB does not have appraisal
staff, appraisers approved by ASB's Board of Directors are used. All appraisers
used by ASB meet applicable regulatory requirements. Salaried underwriters or
loan officers of ASB must approve loans on residential properties (single and
multi-family) according to lending guidelines established by ASB's Board of
Directors. Loan production from the independent residential mortgage brokers is
subject to the same underwriting standards as loan production from ASB's loan
centers.
A-3
<PAGE> 80
Keystone Holdings' receivable portfolio consists principally of loans
secured by single-family real estate. The following table summarizes the
composition of Keystone Holdings' receivable portfolio on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------ --------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate receivables:
Single-family
Adjustable ...................... $10,769,464 83.13% $ 9,235,248 81.79% $ 9,539,309 74.32%
Fixed ........................... 268,832 2.08 208,841 1.85 162,861 1.27
Multi-family
Adjustable ...................... 1,422,469 10.98 1,342,563 11.89 2,529,120 19.70
Fixed ........................... 55,772 0.43 56,462 0.50 66,414 0.52
Commercial, industrial and
land (1)......................... 352,246 2.72 359,537 3.18 441,980 3.44
Equity loans (1)(2) ............... 44,332 0.34 46,122 0.41 49,643 0.39
Construction ...................... -- -- -- -- -- --
----------- ------ ----------- ------ ----------- ------
Total real estate receivables.... 12,913,115 99.68 11,248,773 99.62 12,789,327 99.64
Other receivables:
Deposit certificates .............. 21,121 0.16 21,582 0.19 24,472 0.19
Credit card ....................... 2,809 0.02 3,003 0.03 2,897 0.02
Other ............................. 17,398 0.14 18,156 0.16 19,071 0.15
----------- ------ ----------- ------ ----------- ------
Total other receivables ......... 41,328 0.32 42,741 0.38 46,440 0.36
----------- ------ ----------- ------ ----------- ------
Total gross receivables ....... $12,954,443 100.00% $11,291,514 100.00% $12,835,767 100.00%
=========== ====== =========== ====== =========== ======
<CAPTION>
December 31,
---------------------------------------------------------------------------
1993 1992 1991
----------------------- ------------------------ ------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate receivables:
Single-family
Adjustable ...................... $ 6,796,988 67.65% $ 7,012,321 70.77% $ 5,905,566 67.83%
Fixed ........................... 304,837 3.03 341,713 3.45 624,132 7.17
Multi-family
Adjustable ...................... 2,171,648 21.61 1,707,545 17.23 1,252,144 14.38
Fixed ........................... 82,834 0.82 95,841 0.97 84,868 0.97
Commercial, industrial and land (1) 426,908 4.25 456,230 4.60 519,869 5.97
Equity loans (1)(2) ............... 58,302 0.58 71,743 0.72 89,736 1.03
Construction ...................... 2,991 0.04 2,991 0.03 2,991 0.03
----------- ------ ----------- ------ ----------- ------
Total real estate receivables.... 9,844,508 97.98 9,688,384 97.77 8,479,306 97.38
Other receivables:
Deposit certificates .............. 31,024 0.31 39,693 0.40 53,699 0.62
Credit card ....................... 151,871 1.51 158,476 1.60 149,428 1.72
Other ............................. 20,129 0.20 22,561 0.23 24,076 0.28
----------- ------ ----------- ------ ----------- ------
Total other receivables ......... 203,024 2.02 220,730 2.23 227,203 2.62
----------- ------ ----------- ------ ----------- ------
Total gross receivables ....... $10,047,532 100.00% $ 9,909,114 100.00% $ 8,706,509 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
- ----------------
(1) Predominantly adjustable-rate receivables.
(2) All equity loans are secured by residential real estate.
Keystone Holdings' mortgage portfolio is almost exclusively within
California. The following table summarizes the real estate receivable portfolio
by certain geographic areas on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------ --------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County ............ $ 3,930,640 30.44% $ 3,494,217 31.06% $ 4,028,411 31.50%
San Francisco Bay Area ........ 4,156,423 32.19 3,537,474 31.45 3,680,469 28.78
Orange County ................. 1,438,278 11.14 1,285,570 11.43 1,256,836 9.83
Other California Counties ..... 3,292,603 25.50 2,867,455 25.49 3,492,578 27.31
Other States .................. 95,171 0.73 64,057 0.57 331,033 2.58
----------- ------ ----------- ------ ----------- ------
Total Real Estate Receivables $12,913,115 100.00% $11,248,773 100.00% $12,789,327 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
A-4
<PAGE> 81
Single-Family Mortgages. A substantial portion of ASB's lending
activity consists of the origination and acquisition of loans secured by
single-family residences. Approximately 70% of the single-family mortgage loans
originated by ASB during the six months ended June 30, 1996 were secured by
owner-occupied properties and had loan-to-value ratios of less than 80% based on
appraisals at the time of origination. The remaining 30% consisted of owner and
non-owner occupied single-family originations, with the majority being
owner-occupied loans with loan-to-value ratios between 80 percent and 90
percent.
ASB offers an array of mortgage products with varying maturities and
repricing characteristics. Primary products include COFI ARMs that adjust
monthly with maturities up to a maximum of 40 years, mortgages that have a fixed
initial rate for up to five years and then reprice monthly until maturity, and
fixed-rate 15, 20 and 30 year mortgages. ASB's 30 and 40 year mortgages have
historically remained outstanding for substantially shorter periods than the
loan term due to borrower prepayments and refinancings. See APPENDIX B -- Note
5, "Receivables," in the Notes to the Consolidated Financial Statements of
Keystone Holdings for additional information regarding the contractual loan
repayment schedule of the receivable portfolio.
The June 30, 1996 gross receivable balance consisted of over 97% ARMs
and less than 3% fixed-rate receivables. The majority of the ARMs adjust monthly
to a predetermined margin over COFI.
The monthly payments on substantially all of ASB's ARMs adjust annually
with the adjustment limited to 7.5% per year (except at the end of each
five-year interval during the life of the loan, when the payment may be adjusted
by more than 7.5% to assure that the loan will amortize over the remaining term)
thereby protecting borrowers from unlimited payment increases. These protections
for borrowers can result in monthly payments that are greater or less than the
amount necessary to amortize the mortgage by its maturity at the interest rate
in effect for any particular month. In the event that a monthly payment is not
sufficient to pay the interest accruing on a mortgage, the shortage is added to
the principal balance. This is referred to as negative amortization. An increase
in interest rates tends to increase the outstanding loan principal arising from
negative amortization. The portion of outstanding loan principal resulting from
negative amortization was $22.0 million, $13.3 million and $2.9 million at June
30, 1996 and December 31, 1995 and 1994, respectively.
ASB requires title insurance on all liens on real property securing
loans and also requires that fire and casualty insurance be maintained on
properties in an amount at least equal to the total of ASB's loans plus all
prior liens on the property or the replacement cost of the property, whichever
is less.
Under federal regulations, a real estate loan may not exceed the
appraised value of the property at the time of origination. In addition, savings
associations are required by regulation to adopt written policies that establish
appropriate limits and standards for real estate loans and to consider certain
regulatory guidelines in establishing these policies. These guidelines specify
that savings associations should not originate any commercial, multi-family or
nonowner-occupied 1-to-4 family mortgage loan with an initial loan-to-value
ratio in excess of 85%. The guidelines further provide that savings associations
should not originate any owner-occupied 1-to-4 family mortgage loan with a
loan-to-value ratio that equals or exceeds 90% at origination, unless such loan
is protected by an appropriate credit enhancement in the form of either mortgage
insurance or readily marketable collateral. These real estate lending guidelines
recognize that it may be appropriate for a savings association to originate
mortgage loans with loan-to-value ratios exceeding these specified levels,
provided that the aggregate amount of all loans in excess of these limits does
not exceed a specified level of such association's total capital and such loans
are identified in the association's records and reported at least quarterly to
its board of directors. ASB's real estate lending policies and real estate
loans comply with these requirements.
Multi-Family and Commercial Mortgages. The risks associated with
multi-family and commercial lending are typically greater than those associated
with residential single-family mortgage lending. The former typically involve
larger loan balances concentrated with single borrowers or groups of related
borrowers. In addition, payments on loans secured by such properties are usually
dependent on the cash flows generated from the related real estate project and
therefore may be subject, to a greater extent, to adverse conditions in the real
estate market or in the economy. During the first six months of 1996 and 1995,
multi-family originations represented approximately 5.2% and 6.4%, respectively,
of total loan originations (by principal balance).
The commercial loans originated by ASB during the first six months of
1996 and 1995 were restricted to loans secured by mobile home parks and
refinances of existing loans. Commercial originations
A-5
<PAGE> 82
represented approximately 0.3 percent and 0.2 percent of total loan originations
(by principal balance) during the six months ending June 30, 1996 and 1995,
respectively.
The following table summarizes the balance of multi-family, commercial
and industrial receivables by collateral type on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------ --------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Multi-family .......... $1,478,241 80.76% $1,399,025 79.56% $2,595,534 85.45%
Office buildings (1) .. 131,517 7.18 137,441 7.82 206,135 6.79
Retail stores ......... 73,145 3.99 75,446 4.29 95,293 3.14
Manufacturing/wholesale
warehouses .......... 36,359 1.99 39,396 2.24 44,018 1.45
Mobile home parks ..... 104,861 5.73 101,712 5.78 86,799 2.86
Other (2) ............. 6,364 0.35 5,542 0.31 9,735 0.31
---------- ------ ---------- ------ ---------- ------
Total ............. $1,830,487 100.00% $1,758,562 100.00% $3,037,514 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
- ----------------
(1) $0.6 million, $2.8 million and $46.8 million of these receivables were
covered by government credit support at June 30, 1996 and at December 31,
1995 and 1994, respectively.
(2) Includes land receivables of $190,000, $90,000 and $51,000 at June 30,
1996, December 31, 1995 and December 31, 1994, respectively.
Under applicable regulations, a savings association may invest in
commercial real estate loans up to 400.0% of its total risk-based capital. ASB
was in compliance with this limitation at June 30, 1996. The amount of
multi-family lending and single-family lending is not limited by federal
regulation.
Consumer Receivables. ASB has originated various types of consumer
loans generally consisting of unsecured lines of credit and loans that are
secured by personal property. These loans historically have been provided as a
service to existing customers and have not represented a significant portion
of ASB's business. In the first quarter of 1994, ASB sold the majority of its
credit card portfolio for a gain of approximately $25.0 million.
Receivables Held-for-Sale. ASB had designated $42.1 million of
receivables as held-for-sale at June 30, 1996. The held-for-sale portfolio at
June 30, 1996 primarily consisted of single-family fixed-rate receivables. The
buyers of receivables sold by ASB are primarily the Federal National Mortgage
Association (the "FNMA") and, to a lesser extent, the Federal Home Loan Mortgage
Corporation (the "FHLMC").
At the time of sale, Keystone Holdings retains the servicing for
substantially all of the loans it sells and, in turn, receives servicing fees.
Servicing activities include collecting and remitting loan payments, inspecting
the properties and ensuring that insurance and tax payments are made on behalf
of the borrowers. At June 30, 1996 and at December 31, 1995, Keystone Holdings
serviced $15.7 billion and $16.2 billion of receivables for investors,
respectively. Although most receivables are sold servicing retained, Keystone
Holdings has sold certain receivables servicing released.
ASB hedges certain of its mortgage commitments in an effort to manage
its exposure to movements in interest rates. Depending on the level of the
commitments hedged and actual movements in interest rates, ASB may incur gains
or losses upon disposition of these assets in the secondary market. The results
of these activities are included in "Other Income and Expense" in the
Consolidated Statements of Earnings. See "APPENDIX B."
Receivables Held-to-Maturity. Receivables not designated by management
as held-for-sale are classified as held-to-maturity with the intent of holding
these receivables to maturity. At June 30, 1996, ASB's held-to-maturity
receivables consisted primarily of single-family ARMs and, to a lesser extent,
multi-family, commercial and consumer loans.
A-6
<PAGE> 83
Mortgage-Backed Securities. Total net mortgage-backed securities
decreased to $6.3 billion at June 30, 1996 from $7.0 billion at December 31,
1995. Substantially all mortgage-backed securities held by Keystone Holdings are
collateralized by mortgages originated and securitized by ASB for purposes of
diversifying credit risk, increasing liquidity and creating collateral for
borrowings.
Delinquent Receivables and Non-Performing Assets. When a borrower fails
to make a scheduled payment, the related receivable is classified as delinquent.
If the delinquency is not cured (through receipt of payments due or, in certain
instances, through formal modifications or restructurings), ASB sends a notice
of intent to foreclose on approximately the 35th day of delinquency, records a
notice of default and commences foreclosure proceedings on the 65th day of
delinquency.
The procedural steps necessary for foreclosure vary from state to
state, but generally if the loan is not reinstated within a certain period
specified by statute, the property securing the loan can be acquired by the
lender. In most cases, a lender is not permitted under California law to obtain
a deficiency judgment against the borrower if the property is insufficient to
cover the balance owed on the loan. While deficiency judgments are available in
several of the other states in which ASB has loans, it generally relies on the
underlying real property to satisfy foreclosed loans.
Interest is not recognized on receivables that are 90 days or more
contractually delinquent or where collection is less than probable ("nonaccrual
receivables"). Interest income is subsequently recognized on these receivables
only to the extent that payments are received.
Classification of Assets. Savings associations are required to review
and classify receivables and other assets according to risk on a regular basis.
An association generally classifies an asset, or a portion thereof, as
"substandard" if it has a well-defined weakness and is characterized by the
distinct possibility that the association will sustain some loss if the
deficiencies are not corrected. Assets classified as "doubtful" have the
weaknesses inherent in those classified substandard, with the added
characteristic that collection or liquidation in full on the basis of currently
existing facts is highly questionable and improbable. Those assets that are
classified as "loss" have been considered to be uncollectible. Any portion of an
asset that is classified as loss must have either a specific valuation allowance
equal to 100.0% of the balance classified as loss or be charged off. In
addition, an asset that does not currently warrant classification as substandard
but that demonstrates weaknesses or deficiencies deserving close attention is
required to be designated as "special mention." ASB monitors the level of assets
within each category and utilizes this information as one of the factors in
determining the appropriate level of credit allowances.
Allowance for Credit Losses. ASB establishes general loss allowances on
the outstanding portfolio and, where appropriate, specific loss allowances on
individual receivables. Specific loss allowances are provided when an impairment
of value which is deemed other than temporary is identified on an individual
receivable. Factors management considers when assessing the adequacy of the
allowance for credit losses include, but are not limited to, the nature and
value of the underlying collateral, the loan delinquency status, historical and
projected loss experience on foreclosed properties and the level and trend of
classified assets. As management utilizes information currently available to
make such an assessment, the allowance for credit losses is subjective and may
be adjusted in the future depending on changes in economic conditions or other
factors. Additionally, various regulatory agencies, as an integral part of their
regular examination process, review the allowance for estimated losses. These
agencies may require additions to the allowance based on their judgments of
information available to them at the time of their examination. See APPENDIX B
- -- Note 6, "Allowance for Credit Losses," in the Notes to the Consolidated
Financial Statements of Keystone Holdings for additional information on the
allowance for credit losses.
INVESTING ACTIVITIES
OTS Applicable regulations require that ASB maintain a balance of
assets that are invested in certain eligible liquid investments. ASB maintains a
portfolio of investment securities in order to meet liquidity requirements and
to fulfill short-term cash needs. ASB's investment portfolio is managed to
emphasize liquidity, to preserve capital and to minimize credit risk.
A-7
<PAGE> 84
The following tables summarize Keystone Holdings' investment securities
classified as available-for-sale on the dates indicated (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------
Gross
Unrealized
Amortized ------------------- Fair
Cost Gain Loss Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ............ $123,418 $ -- $ (1,613) $121,805
Corporate debt obligations -- $ -- -- --
-------- ------- -------- --------
Total ................ $123,418 $ -- $ (1,613) $121,805
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------------------------------- -------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized ------------------- Fair Amortized ------------------- Fair
Cost Gain Loss Value Cost Gain Loss Value
-------- ------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations ............ $164,972 $ 407 $ -- $165,379 $ 90,021 $ -- $ (2,447) $ 87,574
Corporate debt obligations -- -- -- -- 50,000 -- (1,625) 48,375
-------- ------ ------ -------- -------- ------ -------- --------
Total .................. $164,972 $ 407 $ -- $165,379 $140,021 $ -- $ (4,072) $135,949
======== ====== ====== ======== ======== ====== ======== ========
<CAPTION>
December 31,
1993
-------------------------------------------
Gross
Unrealized
Amortized ------------------- Fair
Cost Gain Loss Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations ............ $ -- $ -- $ -- $ --
Corporate debt obligations -- -- -- --
------ ------ ------ ------
Total .................. $ -- $ -- $ -- $ --
====== ====== ====== ======
</TABLE>
The following tables summarize Keystone Holdings' investment securities
classified as held-to-maturity on the dates indicated (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------
Gross
Unrealized
Amortized ------------------- Fair
Cost Gain Loss Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ............ $ 6,008 $ 2 $ -- $ 6,010
Corporate debt obligations 100,087 -- (8) 100,079
-------- ------ ------ --------
Total ................ $106,095 $ 2 $ (8) $106,089
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------------------------------- -------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized ------------------- Fair Amortized ------------------- Fair
Cost Gain Loss Value Cost Gain Loss Value
-------- ------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agency
obligations ............ $ 19,693 $ -- $ -- $ 19,693 $ 23,847 $ -- $ -- $ 23,847
Corporate debt obligations 97,035 -- (7) 97,028 63,167 1 (13) 63,155
-------- ----- ------ -------- -------- ------ ------ --------
Total .................. $116,728 $ -- $ (7) $116,721 $ 87,014 $ 1 $ (13) $ 87,002
======== ===== ====== ======== ======== ====== ====== ========
<CAPTION>
December 31,
1993
-------------------------------------------
Gross
Unrealized
Amortized ------------------- Fair
Cost Gain Loss Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ............ $ 18,790 $ -- $ -- $ 18,790
Corporate debt obligations 73,638 1 (12) 73,627
-------- ----- ------ --------
Total .................. $ 92,428 $ 1 $ (12) $ 92,417
======== ===== ====== ========
</TABLE>
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<PAGE> 85
Keystone Holdings limits its investment in commercial paper and in debentures to
investments rated at least A1/P1 and AAA, respectively. Consequently, management
considers the credit risk associated with these types of investments to be
minimal. Keystone Holdings minimizes the market risk associated with these types
of investments by limiting the maturities of commercial paper and fixed-rate
debentures to 90 days and five years, respectively.
At June 30, 1996, Keystone Holdings had commercial paper totalling $71.2 million
issued by Ford Motor Company, representing 12.9% of Keystone Holdings'
stockholder's equity at that date. The market value of the Ford Motor Company
commercial paper approximated its carrying value on June 30, 1996.
See APPENDIX B -- Note 3, "Investment Securities," in the Notes to the
Consolidated Financial Statements of Keystone Holdings for additional
information.
FUNDING ACTIVITIES
Deposit accounts traditionally have been an important source of funds
for ASB's lending activities. In addition to deposits, ASB obtains funds from
loan repayments, sales of receivables and mortgage-backed securities, wholesale
borrowings, FHLB advances, reverse repurchase agreements and other borrowings.
Scheduled loan payments are a relatively stable source of funds, while loan
prepayments and deposit levels are significantly influenced by prevailing
interest rates and money market conditions.
Deposits. ASB's deposits are generated primarily from its sales force
located in the 158 ASB retail branch offices throughout California. Deposits
declined slightly at June 30, 1996 from December 31, 1995. In order to attract
both short and long-term deposits from the general public, ASB offers a variety
of products including passbook accounts, NOW accounts, various money market and
savings accounts and certificates of deposit. >
The following table summarizes the deposit account balances outstanding
on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------------------------------------------
1996 1995 1994 1993
------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Demand and savings deposits:
Money market demand ............... $ 1,324,613 $ 1,425,243 $ 1,585,308 $ 1,945,614
Passbook .......................... 2,027,509 1,878,761 1,063,064 758,431
Money market savings .............. 375,724 415,886 564,298 693,242
Super passbook .................... 143,251 173,826 400,525 607,550
Other ............................. 108 237 383 10,297
------------ ------------ ------------ ------------
Total demand and savings deposits 3,871,205 3,893,953 3,613,578 4,015,134
------------ ------------ ------------ ------------
Time certificates:
Fixed Rate ........................ 8,873,365 9,126,012 9,217,044 9,353,918
Other ............................. 40 247 365 2,867
------------ ------------ ------------ ------------
Total time certificates ......... 8,873,405 9,126,259 9,217,409 9,356,785
------------ ------------ ------------ ------------
Unearned premium .................... -- -- 313 2,198
Deferred hedging costs .............. (15,644) (15,183) (15,811) (6,477)
------------ ------------ ------------ ------------
Total ......................... $ 12,728,966 $ 13,005,029 $ 12,815,489 $ 13,367,640
============ ============ ============ ============
</TABLE>
Time deposit accounts with balances of $100,000 or greater aggregated
$1.7 billion and $1.8 billion at June 30, 1996 and December 31, 1995,
respectively. At June 30, 1996, time deposit accounts with balances of $100,000
or greater mature as follows: $557.8 million within three months, $458.0 million
in three to six months, $551.0 million in six to twelve months, and $180.3
million thereafter. At December 31, 1995, time deposit accounts with balances of
$100,000 or greater matured as follows: $1.4 billion within three months, $177.2
million in three to six months, $102.0 million in six to twelve months, and
$98.9 million thereafter.
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<PAGE> 86
The following table summarizes average deposit balances by category for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
------------------------------------------------
1996 1995
--------------------- ----------------------
Average Average
Balance(1) Rate Balance(1) Rate
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Money market demand accounts $ 894,591 0.81% $ 909,584 1.01%
Savings accounts ........... 2,940,489 3.36% 3,027,627 3.54%
Time deposit accounts ...... 8,925,101 5.47% 9,374,031 5.41%
----------- ---- ----------- ----
Total deposits .... $12,760,181 4.65% $13,311,242 4.68%
=========== ==== =========== ====
</TABLE>
- -----------------
(1) Average balances calculated on a monthly basis.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Average Average Average
Balance(1) Rate Balance(1) Rate Balance(1) Rate
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Money market demand accounts $ 909,383 0.91% $ 963,857 1.03% $ 983,330 1.29%
Savings accounts ........... 3,087,775 3.84% 2,864,716 2.26% 3,308,896 2.41%
Time deposit accounts ...... 9,327,026 5.46% 9,242,465 4.41% 9,488,159 4.44%
----------- ---- ----------- ---- ----------- ----
Total deposits .... $13,324,184 4.78% $13,071,038 3.69% $13,780,385 3.73%
=========== ==== =========== ==== =========== ====
</TABLE>
- -----------------
(1) Average balances calculated on a monthly basis.
For additional information on deposits see APPENDIX B -- Note 12,
"Deposits," in the Notes to the Consolidated Financial Statements of Keystone
Holdings.
FHLB Advances and Other Borrowings. In addition to deposits, ASB
utilizes borrowings from the FHLB as a source of funds, pledging as security its
shares of FHLB of San Francisco stock and certain receivables and
mortgage-backed securities. At June 30, 1996, FHLB of San Francisco advances are
secured by ASB's investment in FHLB stock of $180.3 million and receivables and
mortgage-backed securities with aggregate principal balances of $1.8 billion and
$91.4 million, respectively. The maximum amount of credit that the FHLB of San
Francisco will advance for purposes other than meeting withdrawals varies from
time to time in accordance with changes in policy of the FHLB of San Francisco.
In order to meet cash flow requirements and fund receivables, ASB also
enters into reverse repurchase and dollar roll agreements, consisting of sales
of securities with a concurrent commitment to repurchase the same or similar
securities at a predetermined price at a future date. ASB generally borrows 97%
of the fair value of the collateral from broker-dealers and 100% of the fair
value of the collateral from the FHLB of San Francisco. In these transactions,
ASB sells securities to broker-dealers and the FHLB of San Francisco with a
concurrent commitment to repurchase securities from the broker-dealer and the
FHLB of San Francisco at a specified price on a specified future date, typically
one to 90 days after the date of the initial purchase. However, ASB has entered
into transactions as long as five years based on the economic benefit derived
from these transactions. Reverse repurchase agreements are subject to certain
risks, including the risk that the broker-dealer will fail to perform its
obligations. ASB attempts to reduce such risks by, among other things, entering
into such agreements only with well-capitalized broker-dealers who are primary
dealers in government securities, reviewing on a regular basis the financial
status of such broker-dealers, limiting the maximum amount of agreements
permitted to be outstanding at any time with any single broker-dealer and
requiring the return of securities if the market value of the purchased
securities rises above levels specified in such agreements. Although ASB
believes that these procedures reduce the risks of reverse repurchase
agreements, there is no assurance that it would be able to obtain the purchased
securities in the event that a broker-dealer fails to perform its obligations
under a reverse repurchase agreement.
A-10
<PAGE> 87
The following table summarizes information concerning Keystone
Holdings' borrowings outstanding on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
---------- ----------------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
FHLB advances ...................... $2,013,439 $1,004,337 $ 391,366 $1,537,663
Reverse repurchase agreements ...... 3,987,359 4,016,441 3,982,659 1,034,595
Federal funds purchased ............ -- -- 50,000 --
Payable to affiliates .............. 25,000 -- -- 10,000
Other borrowed money ............... 493,734 371,079 309,653 308,721
---------- ---------- ---------- ----------
Total .......................... $6,519,532 $5,391,857 $4,733,678 $2,890,979
========== ========== ========== ==========
Total borrowings as a percentage of:
Deposits ......................... 51.22% 41.46% 36.94% 21.63%
Total assets ..................... 31.83% 27.36% 25.72% 16.79%
</TABLE>
See APPENDIX B -- Note 13, "Federal Home Loan Bank Advances," Note 14, "Reverse
Repurchase Agreements," and Note 15, "Other Borrowed Money" in the Notes to the
Consolidated Financial Statements of Keystone Holdings for additional
information, including the contractual maturity of outstanding borrowings.
ASSET LIABILITY MANAGEMENT
Keystone Holdings controls the sensitivity of its net interest income
to fluctuations in interest rates by closely matching the maturities and
interest rates of its interest-earning assets and interest-bearing liabilities.
See "APPENDIX A -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF KEYSTONE HOLDINGS -- Asset/Liability Management."
TAXATION
For federal income tax purposes, Keystone Holdings reports its income
and expenses using the accrual method of accounting and uses the calendar year
as its tax year. Except for interest expense rules pertaining to certain tax
exempt income applicable to banks and the recently repealed bad debt reserve
deduction, the Keystone Entities are subject to federal income tax, under
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code") in generally the same manner as other corporations. As a result of the
1988 Acquisition, however, Keystone Holdings and certain subsidiaries in
exchange for the ability to utilize certain net operating loss carryforwards
generated by the Failed Association, agreed to share certain federal income tax
benefits with the FRF. See "APPENDIX A -- KEYSTONE HOLDINGS -- The 1988
Acquisition -- Tax Related Agreements." Recently enacted legislation requires
thrifts to calculate tax bad debt deductions based on actual current loan
losses. Such legislation also requires ASB to recapture as ordinary income its
post-1987 tax bad debt reserves over a six-year period. Such post-1987 reserves
have been provided for in calculating the deferred tax asset set forth in the
Consolidated Financial Statements of Keystone Holdings attached as Appendix B.
However, the useable value of the net operating loss carryforward deductions
involved in the deferred tax asset calculations will be severely reduced due to
the Transaction.
PROPERTIES
ASB owns its principal office building in Stockton, California, 96 of
its 158 branch offices and 13 of its 51 other facilities. ASB leases 62 branches
and 38 other facilities for periods through 2061. ASB also leased its executive
offices in Irvine, California during 1994. Effective January 1995, ASB acquired
the Irvine Plaza Buildings in Irvine, California, which house ASB's executive
offices as well as various other departments.
LEGAL PROCEEDINGS
Keystone Holdings and its subsidiaries are defendants in various legal
actions that arise out of the normal course of business. In the opinion of
management, the probable liability resulting from these suits, individually or
in the aggregate, is unlikely to have a material effect on Keystone Holdings.
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<PAGE> 88
As part of the administration and oversight of the agreements between
Keystone Holdings and the FRF, among others, related to the 1988 Acquisition
(the "FRF Agreements"), the FDIC has a variety of review and audit rights,
including the right to review and audit computations of payments in lieu of
taxes. Keystone Holdings and its affiliated parties have entered into a
settlement agreements (the "Settlement Agreements") with the FDIC for all
periods through June 30, 1994, pursuant to which Keystone Holdings and certain
of its affiliates and the FDIC have mutually settled and released all claims in
consideration of certain nominal payments. Keystone Holdings has received no
notice of any issues involving more than nominal amounts arising after June 30,
1994. The Office of Inspector General has commenced an audit of certain
transactions and payments under the FRF Agreements occurring during the period
beginning July 1, 1994 and ending June 30, 1996. See "PROXY STATEMENT -- THE
TRANSACTION -- FRF Matters."
MANAGEMENT
The following table sets forth the names, ages and titles of the
directors and executive officers of Keystone Holdings as of October 1, 1996:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
David Bonderman 53 Director and President
Bernard J. Carl 48 Director
James G. Coulter 36 Director
Ray L. Pinson 39 Senior Vice President, Secretary and Treasurer
</TABLE>
The following table sets forth the names, ages and titles of the
directors and executive officers of ASB as of October 1, 1996:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Mario J. Antoci 62 Chairman of the Board and Chief Executive Officer
Robert T. Barnum 50 Director, President and Chief Operating Officer
David Bonderman 53 Director
Bernard J. Carl 48 Director
James G. Coulter 36 Director
J. Taylor Crandall 42 Director
Robert B. Henske 35 Director, Executive Vice President and Chief Financial Officer
John D. Broderick 54 Executive Vice President and Director of Retail Banking
Craig S. Davis 45 Executive Vice President and Director of Mortgage Origination
John R. Donohue 53 Executive Vice President and Director of Lending Portfolio Management
Jimmy D. Holland 48 Executive Vice President, General Counsel and Secretary
Mary P. Locatelli 46 Executive Vice President and Director of Audit and Compliance Officer
</TABLE>
Mario J. Antoci. Mario J. Antoci has more than 30 years of financial
services experience. He has served ASB as Chairman and Chief Executive Officer
since 1988. Prior to his employment with ASB, Mr. Antoci was President and Chief
Operating Officer of Home Savings of America, the nation's largest savings and
loan association, and its parent company, H.F. Ahmanson and Co., for four years.
He was a member of Home Savings' Board of Directors from 1982 to 1988. Mr.
Antoci will resign as Chairman and Chief Executive Officer of ASB effective as
of the closing of the Transaction. See "PROXY STATEMENT -- MANAGEMENT AND
OPERATIONS FOLLOWING THE TRANSACTION -- Operations Following the Transaction."
Robert T. Barnum. Robert T. Barnum has served ASB as President and
Chief Operating Officer since 1992. He joined ASB in 1989 as a Director,
Executive Vice President and Chief Financial Officer. Previously,
A-12
<PAGE> 89
Mr. Barnum was Chief Financial Officer for First Nationwide Corp. of San
Francisco, California and Executive Vice President and Chief Financial Officer
for the Krupp Companies, a Boston-based builder-syndicator and savings and loan
holding company. Currently, he serves as a director for National Re Holdings
Corp., a reinsurance holding company in Stanford, Connecticut and Harborside
Healthcare Corp. of Boston, Massachusetts. See "PROXY STATEMENT -- MANAGEMENT
AND OPERATIONS FOLLOWING THE TRANSACTION -- Operations Following the
Transaction."
David Bonderman. David Bonderman has been a Director of each of
Keystone Holdings and ASB since 1989. Mr. Bonderman is a Principal of Texas
Pacific Group, an investment entity. From 1983 until 1992, Mr. Bonderman was
Chief Operating Officer of Keystone, Inc. (formerly Robert M. Bass Group, Inc.),
a company owned by Robert M. Bass and principally engaged in investment
activities. KH Group Management, Inc., a corporation of which Mr. Bonderman is
the sole director and president, is the managing general partner of Keystone
Partners. He is a director of National Re Holdings Corp., a reinsurance holding
company, Bell & Howell Company, Inc., an information handling, storage and
retrieval company, Carr Realty Co., a real estate investment trust, and is
Chairman of the Board of Continental Airlines, Inc.
John D. Broderick. John D. Broderick joined ASB as Executive Vice
President and Director of Retail Banking in January 1996. In this capacity, he
oversees the strategic direction and operation of ASB's branch network and
retail operations. Previously, Mr. Broderick was Chairman and Chief Executive
Officer of San Francisco, California-based ITT Residential Capital Corporation.
He also has served as an Executive Vice President of First New Hampshire Bank
and Crocker National Bank.
Bernard J. Carl. Bernard J. Carl has been a director of each of
Keystone Holdings and ASB since 1988. Mr. Carl is the Managing General Partner
of Castine Partners, an investment partnership associated with Keystone, Inc. In
this capacity, Mr. Carl had lead responsibility for the 1988 acquisition of ASB,
negotiation of the Settlement Agreements, and the 1993 acquisition of the Brazos
Partners, L.P. portfolio. Before joining Castine, Mr. Carl was in charge of
product development for the mortgage, real estate and financial institutions
group at Salomon Brothers Inc; a partner in the law firm of Williams & Connolly;
an appointee to the President's Commission on Housing; chief policy official of
the U.S. Department of Housing and Urban Development (HUD); and law clerk to
U.S. Supreme Court Justice Thurgood Marshall.
James G. Coulter. James G. Coulter has been a Director of each of
Keystone Holdings and ASB since 1992. Mr. Coulter is a Managing Partner of Texas
Pacific Group. From 1986 until 1992, Mr. Coulter was a Vice President of
Keystone, Inc. From 1986 to 1988, Mr. Coulter was also associated with SPO
Partners. Prior to joining Keystone, Inc., Mr. Coulter was an analyst for Lehman
Brothers Kuhn Loeb, Inc. Mr. Coulter is a director of America West Airlines,
Inc., Virgin Cinemas Ltd., Allied Waste Industries, Inc., Beringer Wine Estates
and Paradyne, Inc.
J. Taylor Crandall. J. Taylor Crandall has been a Director of ASB since
December 1988. He has been Chief Financial Officer and Vice President of
Keystone, Inc. and President of Acadia MGP, Inc., a general partner of Acadia
Partners, L.P., an investment partnership. In addition, since August 1989, Mr.
Crandall has been a Vice President of National Re Holdings Corp., and he served
as Treasurer of that company until June 1990 and has been one of its directors
since November 1989. From July 1976 to October 1986, Mr. Crandall was employed
by The First National Bank of Boston, where he was Vice President-Corporate
Lending at the time of his departure. Mr. Crandall is also a director of Bell &
Howell Company, Inc. and Specialty Foods Acquisition Corporation.
Craig S. Davis. Craig S. Davis has served ASB as Executive Vice
President and Director of Mortgage Origination since 1993. In this capacity, he
directs the strategic operation of ASB's residential and wholesale lending
operations. Mr. Davis joined ASB in 1989 to establish ASB Financial Services,
Inc., a subsidiary offering investments and insurance products, and served as
President of that subsidiary until his appointment to head Mortgage Origination.
Prior to joining ASB, Mr. Davis helped co-found and direct Home Savings of
America's broker-dealer operations, Griffin Financial Services.
John R. Donohue. John R. Donohue has served ASB as Executive Vice
President and Director of Lending Portfolio Management since 1993. In this
capacity, he oversees ASB's credit and lending operations. Mr. Donohue came to
ASB after 16 years at Oakland-based World Savings, where he most recently served
as Group Senior Vice President, Loan Underwriting and Human Resources.
Robert B. Henske. Robert B. Henske joined ASB as Executive Vice
President and Chief Financial Officer in January 1996. In this capacity, he
oversees all aspects of ASB's financial operations. Previously, Mr. Henske
A-13
<PAGE> 90
was Vice President of Boston, Massachusetts-based Bain & Company. He also has
served as Vice President of First Manhattan Consulting Group.
Jimmy D. Holland. Jimmy D. Holland has served ASB as Executive Vice
President and General Counsel since 1991 and as Corporate Secretary since July
1992. From 1990 to 1991, Mr. Holland was General Counsel of American Real Estate
Group, Inc. and New West. Mr. Holland also specialized in finance and corporate
matters in private practice during six years as a director of Kelly, Hart &
Hallman, P.C., a Fort Worth, Texas law firm. During this period, he participated
in the representation of Keystone Holdings in the 1988 Acquisition.
Mary Locatelli. Mary Locatelli has served ASB as Executive Vice
President and Director of Audit and ASB's Compliance Officer since 1992. Ms.
Locatelli joined ASB in 1990 as First Vice President, Audit and Compliance
Officer. Previously, she was a Partner at Ernst & Young.
Ray L. Pinson. Ray L. Pinson has been Senior Vice President, Secretary
and Treasurer of Keystone Holdings since 1993. Since July 1990, Mr. Pinson has
been an analyst with Bass Enterprises Production Co. under contract to act as a
full-time consultant to ASB's holding companies, including Keystone Holdings.
From September 1988 until July 1990, Mr. Pinson was employed as a consultant to
Ferguson and Company, a consulting firm active in the savings association
industry. Mr. Pinson is a certified public accountant.
KEYSTONE HOLDINGS COMMON STOCK; DIVIDENDS
The authorized capital stock of Keystone Holdings consists of 100,000
shares of Keystone Holdings Common Stock. As of the date of this Proxy
Statement, there were 1,048.4483 shares of Keystone Holdings Common Stock issued
and outstanding. All of the issued and outstanding shares of Keystone Holdings
Common Stock are held by Keystone Holdings Partners L.P. There is no established
trading market for Keystone Holdings Common Stock and the shares of Keystone
Holdings Common Stock do not trade.
At June 30, 1996, ASB was a "well capitalized" institution as defined
by the OTS and was a "Tier 1" institution for purposes of OTS dividend
regulations. Under OTS regulations, ASB may make capital distributions during a
calendar year up to the greater of: (i) 100% of net income to date during the
calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" at the beginning of the calendar year, or (ii) 75% of net income
over the most recent four-quarter period. ASB's available dividend capacity
under these regulations was $134.7 million at June 30, 1996 and $126.3 million
at December 31, 1995.
It is the intent of the management of Keystone Holdings to operate ASB
as a "well-capitalized" institution. Therefore, ASB's dividend policy
incorporates OTS dividend requirements, planned balance sheet growth, and
certain earnings contingencies, such as an anticipated one-time SAIF assessment.
Keystone Holdings' dividends have been dependent on dividend payments
made by its subsidiary, New American Holdings, Inc. ("New Holdings"), whose
dividends have been dependent on dividend payments made by New Capital. The
amount of dividends paid are in accordance with the provisions of certain debt
covenants, called restricted payments, applicable to New Capital and the timing
of the dividend payments is determined by the timing of certain cash flows
arising from certain tax sharing payments that are made in accordance with an
intercompany tax sharing agreement. Keystone Holdings paid dividends of $76.3
million, $29.0 million, $32.5 million, and $5.6 million in 1992, 1993, 1994, and
1995, respectively. The 1995 dividend was lower than prior years due to the
increase in capital at ASB in anticipation of a one-time SAIF assessment and the
timing of the 1995 tax sharing payments. Keystone Holdings has declared
dividends totalling $60.0 million in 1996 and does not intend to declare further
dividends in 1996.
A-14
<PAGE> 91
KEYSTONE HOLDINGS
GENERAL
Keystone Holdings commenced operations in December 1988 as an indirect
holding company for ASB. N.A. Capital Holdings, Inc. ("NACH Inc.") owns all of
the outstanding common stock of ASB. NACH Inc. is owned by New Capital whose
common stock is owned by New Holdings, a subsidiary of Keystone Holdings. The
Keystone Group is comprised of Keystone Holdings and its direct and indirect
subsidiaries. The holding company structure of the Keystone Group and related
companies is shown on the following diagram.
---------------------
Keystone Holdings
---------------------
- ------------------ ---------------------
New West ---- New Holdings
- ------------------ ---------------------
---------------------
New Capital
---------------------
--------------------- --------------
NACH, Inc. Warrants FRF
----------
--------------------- --------------
---------------------
ASB
---------------------
Substantially all of Keystone Holdings consolidated assets consist of
the consolidated assets of ASB, and at June 30, 1996, 97.8% of Keystone
Holdings' consolidated liabilities consisted of ASB's consolidated liabilities.
Substantially all of Keystone Holdings' remaining consolidated liabilities
consisted of indebtedness issued by New Capital. Thus, substantially all of the
earnings of Keystone Holdings consist of its equity in the earnings of ASB, less
the interest costs on an aggregate of $364.5 million principal amount of debt of
New Capital. Keystone Holdings' equity in the earnings of ASB is further reduced
by the minority interest represented by the warrants held by the FRF (see
"APPENDIX A -- GENERAL -- The Warrants"), as well as by $80.0 million in
outstanding preferred stock issued by New Capital. Keystone Holdings reported
earnings before taxes of $102.2 million and $34.8 million for the six months
ended June 30, 1996 and 1995, respectively. Net earnings were $53.6 million and
$25.5 million for the same periods. American reported consolidated net earnings
of $93.6 million and $62.5 million for the six months ended June 30, 1996 and
1995, respectively.
A-15
<PAGE> 92
The following schedule reconciles the differences between ASB's
consolidated net earnings and Keystone Holdings' consolidated net earnings for
the first six months of 1996 and 1995 and for the years ended December 31, 1995,
1994 and 1993 (in millions of dollars):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
------------------ ---------------------------------
1996 1995 1995 1994 1993
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
ASB's consolidated net earnings............... $ 93.6 $ 62.5 $ 148.5 $ 109.2 $ 114.6
Minority interest attributable to the Warrants (13.9) (14.3) (14.6) (21.8) (9.6)
Intermediate holdings companies' separate
income and expenses:
Gain on sale of asset management rights . -- -- -- -- 23.0
Interest expense ........................ (15.0) (16.2) (32.6) (26.7) (26.1)
Amortization of the Warrant value ....... (3.1) (3.2) (6.2) (6.8) (8.0)
Loss on early extinguishment of debt .... -- (2.1) (2.1) -- --
General and administrative expenses ..... (0.2) (0.3) (0.7) (0.9) (8.6)
------ ------ ------- ------- -------
61.4 26.4 92.3 53.0 85.3
Minority interest attributable to intermediate
holding company preferred .................. (7.0) (0.5) (6.5) (0.8) (0.8)
Separate net loss of Keystone Holdings ....... (0.8) (0.4) (1.0) (1.9) (2.2)
------ ------ ------- ------- -------
Keystone Holdings consolidated net earnings .. $ 53.6 $ 25.5 $ 84.8 $ 50.3 $ 82.3
====== ====== ======= ======= =======
</TABLE>
THE 1988 ACQUISITION
General
ASB was formed to effect the 1988 Acquisition of certain assets and
liabilities of the Failed Association. The 1988 Acquisition had a "good bank/bad
bank" structure, with ASB, the "good bank," acquiring substantially all of the
Failed Association's performing loans, fixed assets and deposit liabilities.
ASB's sister association, New West, the "bad bank," was formed to acquire the
Failed Association's other assets (including non-performing loans) and
liabilities, with a view towards their liquidation. As a result of the 1988
Acquisition, ASB received a note (the "New West Note") from New West with an
initial outstanding principal amount of $7.8 billion (representing the
difference between the amount of deposits and other liabilities assumed and the
value of the assets acquired by ASB at the time of the 1988 Acquisition). The
then outstanding balance on the New West Note was prepaid in full on October 24,
1995. In the 1988 Acquisition, the Failed Association's assets and liabilities
acquired or assumed by ASB were marked to market.
At the time of the 1988 Acquisition, the FSLIC, with the approval of
the Federal Home Loan Bank Board (the "FHLBB"), entered the FRF Agreements with
Keystone Holdings and its affiliates. Among other things, these arrangements
provided Keystone Holdings and its affiliates with protection against certain
credit risks associated with the assets acquired from the Failed Association and
provided for the availability and allocation of tax benefits arising from the
assets and operations of New West and loss carryovers inherited from the Failed
Association. As a result of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), certain assets and liabilities of the FSLIC,
including those arising from the 1988 Acquisition, have been assigned to and
assumed by the FRF, a special fund managed by the FDIC.
In April 1993, Keystone Holdings and certain of its affiliates entered
into the Settlement Agreement with the FDIC to settle certain existing disputes
between the parties relating to their respective rights and obligations under
the various agreements entered into in connection with the Acquisition. In June
1993, Keystone Holdings and its affiliates entered into a transaction (the
"Restructuring") with the FDIC and the Resolution Trust Corporation (the "RTC"),
which served to modify a number of the credit support and other arrangements
that had been put in place at the time of the 1988 Acquisition. The terms of the
1988 Acquisition arrangements described below are those in effect after the 1993
settlement agreement and the Restructuring unless otherwise indicated.
Prior to consummation of the Transaction, it is anticipated that these
arrangements will be renegotiated, with a view to the simplification and
elimination of their most complex aspects. It is not anticipated that any
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<PAGE> 93
material assistance from the United States government will continue after
consummation of the Transaction. However, the obligation to share certain tax
benefits with the FRF will continue. See "PROXY STATEMENT -- THE TRANSACTION --
FRF Matters."
In connection with the 1988 Acquisition, Keystone Holdings and its
subsidiaries entered into a variety of agreements relating to credit loss
protection and other matters. Many of the provisions of these agreements have
been modified or eliminated as a result of events following the 1988
Acquisition, including the Restructuring. The following are the principal
remaining agreements.
Credit Loss Protection and Other FRF Assistance
ASB receives direct FRF assistance on certain of ASB's assets. The
assets receiving this assistance consist of (i) certain identified loans and REO
properties that have become more than 61 days delinquent since the 1988
Acquisition, (ii) any loans which ASB is required to repurchase or to provide a
substitute loan for as a result of one or more participation interests therein
sold by the Failed Association and (iii) any loan or REO acquired by ASB in the
1988 Acquisition that is or becomes affected by certain environmental
conditions. The direct assistance provided by the FRF with respect to these
assets consists of the payment by the FDIC to ASB of (i) monthly yield
maintenance that provides an annual rate of 175 basis points over COFI, (ii)
capital loss protection upon sale or other disposition (generally, the
difference between the net proceeds from disposition and the then current
carrying value of the assets), and (iii) reimbursement of all out-of-pocket
costs and expenses relating to the holding, operation and resolution of the
assets (collectively, the "Direct FRF Assistance").
The FRF has agreed to indemnify, among others, Keystone Holdings, ASB,
New Capital and New West against all liabilities, subject to certain exceptions,
relating to the Failed Association existing prior to the effective date of the
1988 Acquisition and legal challenges relating to the 1988 Acquisition. Pursuant
to these provisions, the FDIC assumed defense of a statutory notice of
deficiency resulting from an audit by the Internal Revenue Service of Financial
Corporation of America's consolidated tax returns for the years 1982, 1983 and
1984. See APPENDIX B -- Note 23, "Commitments and Contingencies," in the Notes
to the Consolidated Financial Statements of Keystone Holdings. In addition, with
respect to loans or REO that qualify for Direct FRF Assistance. Keystone
Holdings and its subsidiaries will also receive indemnification from the FDIC
with respect to liabilities incurred in connection with third-party claims
relating to the ownership or management by ASB thereof (other than claims
resulting from ASB's gross negligence or willful misconduct). These
indemnifications are expected to terminate at the end of 1998, except that
certain environmental indemnities will continue for longer periods.
Tax-Related Agreements
In connection with the 1988 Acquisition, the Internal Revenue Service
entered into a closing agreement (the "Closing Agreement") with respect to the
federal income tax consequences of the 1988 Acquisition and certain aspects of
the taxation of the affiliated group of which Keystone Holdings is the common
parent (the "Keystone Group"). The Closing Agreement contains provisions
that were intended to ensure that losses expected to be generated by New West
would be available to offset income of ASB for federal income tax purposes. To
accomplish this, the Closing Agreement provides, among other things, that: (a)
the 1988 Acquisition was a tax-free reorganization, (b) the tax attributes of
the Failed Association, including NOLs and tax loan loss reserves, carried over
to ASB, (c) as long as ASB qualifies as a domestic building and loan association
and New West is its nominee, any assistance received or accrued from the FRF
would be excluded from gross income, and (d) as long as certain conditions (the
"nominee conditions") existed, New West would be a nominee for ASB with the
result that all of New West's income, deductions, gains and losses would be
treated as ASB's income, deductions, gains and losses. In connection with the
Restructuring, the Keystone Group received a closing agreement from the Internal
Revenue Service to the effect that the Closing Agreement remains in effect.
The California Franchise Tax Board issued an opinion letter with
provisions substantially similar to the Closing Agreement; thus, New West's
losses similarly should be available to offset ASB's income for California
franchise tax purposes. No additional rulings or opinion letters were sought
from the California Franchise Tax Board in connection with the Restructuring;
however, management believes that the Keystone Group may continue to rely on its
earlier opinion letters. In 1993, California enacted legislation reducing the
NOL carryover period to 10 years from 15 years for losses incurred prior to 1994
related to assets acquired in a tax-free reorganization such as that used in the
1988 Acquisition.
A-17
<PAGE> 94
Even if New West's losses offset ASB's income for federal income and
California franchise tax purposes, the Keystone Group may still have alternative
minimum tax liability. Federal legislation enacted in 1993 retroactively
disallowed certain losses and bad debt deductions relating to assets acquired in
a federally assisted transaction. This legislation reduced Keystone Holdings'
federal net operating loss carryover by approximately $455 million. The federal
loss carryovers available to Keystone Holdings as of December 31, 1995, based on
tax returns as filed total approximately $3.9 billion; such net operating loss
carryovers are principally attributable to New West. The deductibility of these
loss carryovers will be significantly limited under Section 382 of the Code for
periods after the closing of the Transaction.
On October 24, 1995, when the New West Note was prepaid in full, New
West and ASB ceased to meet the nominee conditions. Accordingly, the tax
benefits generated by any future losses of New West may not offset ASB's taxable
income, although the benefit of utilizing existing significant tax loss
carryovers will continue.
The FRF Agreements are designed, in part, to provide that over time,
75% of most of the federal tax savings and 19.5% of most of the California tax
savings (in each case computed in accordance with specific provisions contained
in the FRF Agreements) attributable to the Keystone Group's utilization of
any current losses or tax loss carryovers of New West are paid by Keystone
Holdings to New West for the benefit of the FRF. The provision for such payments
is reflected in Keystone Holdings' financial statements as "Payments in Lieu of
Taxes." These payments have historically been funded primarily through an
intercompany tax sharing agreement between Keystone Holdings and its
subsidiaries. In connection with the negotiation of the Merger Agreement,
Keystone Holdings, certain of its subsidiaries and the FDIC entered into a tax
settlement agreement dated July 21, 1996, which clarifies the treatment under
these agreements of certain items relating to bad debts. See "PROXY STATEMENT --
MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE TRANSACTION --
Operations After The Transaction."
THE WARRANTS
In connection with the 1988 Acquisition, the FSLIC received warrants
(the "Warrants") entitling the holder thereof to purchase, for a nominal price,
shares of Class B Common Stock of NACH Inc. that represent (after certain
dividend preferences) an interest of approximately 30% in NACH Inc. The
FRF became the holder of the Warrants as a result of the enactment of FIRREA.
The Warrants will be exchanged for shares of Common Stock in connection with the
consummation of the Transaction. See "PROXY STATEMENT -- THE TRANSACTION."
REGULATION AND SUPERVISION
Keystone Holdings and ASB are subject to extensive supervision and
regulation by various federal regulators, including the OTS and the FDIC.
Keystone Holdings and ASB are regulated in the same manner as Washington Mutual
and its wholly-owned federally chartered savings bank, Washington Mutual Bank
fsb, respectively. For a discussion of such regulation and supervision, see
Washington Mutual's Annual Report on Form 10-K for the year ended December 31,
1995, which is incorporated herein by reference. See "PROXY STATEMENT --
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "PROXY STATEMENT --
AVAILABLE INFORMATION."
A-18
<PAGE> 95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KEYSTONE HOLDINGS
The following discussion of the financial condition and results of
operations of Keystone Holdings should be read in conjunction with the
Consolidated Financial Statements of Keystone Holdings, Inc. and
Subsidiaries and the Condensed Consolidated Financial Statements of Keystone
Holdings, Inc. and Subsidiaries, including the notes thereto, appearing
elsewhere in this Proxy Statement.
Keystone Holdings is an indirect holding company for ASB. At June 30,
1996, substantially all of Keystone Holdings' consolidated assets consist of the
consolidated assets of ASB; 97.8 percent of Keystone Holdings' consolidated
liabilities consisted of ASB's consolidated liabilities. Substantially all of
Keystone Holdings' remaining consolidated liabilities consisted of indebtedness
issued by New Capital. Thus, substantially all of the earnings of Keystone
Holdings consist of its equity in the earnings of ASB, less the interest costs
on the principal amount of New Capital debt. Keystone Holdings' equity in the
earnings of ASB is further reduced by the minority interest represented by the
Warrants held by the FRF, as well as by $80.0 million of outstanding preferred
stock issued by New Capital. Keystone Holdings reported earnings before taxes of
$102.2 million and $34.8 million for the six months ended June 30, 1996 and
1995, respectively. Net earnings were $53.6 million and $25.5 million for the
same periods. ASB reported consolidated net earnings of $93.6 million and $62.5
million for the six months ended June 30, 1996 and 1995, respectively. See
"APPENDIX A -- GENERAL."
On September 30, 1996, President Clinton signed legislation intended to
recapitalize the Savings Association Insurance Fund ("SAIF") and to reduce the
gap between SAIF premiums and the Bank Insurance Fund ("BIF") premiums, among
other things. The legislation provides for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured
deposits. Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amount to 1.3
cents per $100 per year.
Keystone Holdings' special assessment will result in an estimated
pretax charge of about $88.5 million. Even though the one-time charge, to be
taken in the quarter ended September 30, 1996, will have a severe negative
impact on the results of operations for that quarter, management believes the
legislation to be in the best interests of Keystone Holdings. Based on current
levels of deposits, Keystone Holdings estimates that the reduction in the
regular assessment on its SAIF deposits beginning in 1997 should result in
annual pretax savings of approximately $21.2 million. Neither the one-time
charge, nor the annual savings thereafter should have a material impact on
Keystone Holdings' financial position, capital level or liquidity.
SUMMARY FINANCIAL INFORMATION FOR KEYSTONE HOLDINGS
<TABLE>
<CAPTION>
For the Six-Month
Period Ended June 30, For the Year Ended December 31,
----------------------- -------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ----------- ----------- ----------- ----------- -----------
Operating Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income .............. $ 706,720 $ 636,301 $ 1,337,126 $ 1,036,863 $ 1,117,269 $ 1,357,076 $ 1,629,827
Total interest expense ............. 469,096 470,602 962,712 683,487 691,146 845,613 1,125,609
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income ................ 237,624 165,699 374,414 353,376 426,123 511,463 504,218
Provision for credit losses ........ 35,180 34,533 63,837 101,609 123,503 143,650 63,400
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income after provision
for credit losses................. 202,444 131,166 310,577 251,767 302,620 367,813 440,818
Other income ....................... 42,120 48,224 90,465 102,292 94,001 76,617 75,724
General and administrative expenses (134,870) (136,130) (264,827) (266,827) (279,694) (298,599) (312,218)
Net expense of foreclosed properties (7,496) (8,467) (18,032) (13,390) (12,951) (10,065) (1,235)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Earnings before taxes .............. 102,198 34,793 118,183 73,842 103,976 135,766 203,089
Federal and state income taxes and
payments in lieu of taxes......... 27,685 (5,439) 12,289 897 11,245 31,983 85,221
---------- ---------- ----------- ----------- ----------- ----------- -----------
Earnings from operations ........... 74,513 40,232 105,894 72,945 92,731 103,783 117,868
Cumulative effect of change in
accounting principle ............. -- -- -- -- -- 60,045 --
Minority interest in earnings of
consolidated subsidiaries ........ 20,896 14,708 21,092 22,621 10,474 883 874
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net earnings ....................... $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257 $ 162,945 $ 116,994
========== ========== =========== =========== =========== =========== ===========
Common dividends declared .......... $ 60,000 $ 5,500 $ 5,587 $ 22,500 $ 18,000 $ 97,300 $ 49,000
</TABLE>
FINANCIAL CONDITION
At June 30, 1996, December 31, 1995 and December 31, 1994, Keystone
Holdings' total consolidated assets were $20.5 billion, $19.7 billion and $18.4
billion, respectively. Consolidated stockholder's equity was $550.4 million at
June 30, 1996, representing a $118.2 million or 17.7 percent decrease from the
balance at December 31, 1995. The decrease from December 31, 1995 to June 30,
1996 was largely attributable to the change in unrealized holding gains (losses)
on available- for-sale securities of $111.8 million, which have been recorded at
fair value in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). Total dividends declared on common stock during the six months ended June
30, 1996 were $60.0 million. Stockholder's equity at December 31, 1995 increased
$134.4 million or 25.2 percent from the balance at December 31, 1994. The
increase from
A-19
<PAGE> 96
December 31, 1994 to December 31, 1995 was primarily due to a change in
unrealized holding gains (losses) on available-for- sale securities of $139.5
million, which were recorded at fair value in accordance with SFAS 115. See
"APPENDIX A -- GENERAL."
The components of the $118.2 million decrease in stockholder's equity
for the six months ended June 30, 1996 are shown in the following table:
<TABLE>
<CAPTION>
Amount
------------------------
(dollars in millions)
<S> <C>
Net earnings ................................... $ 53.6
Common stock dividends ......................... (60.0)
Unrealized loss on available-for-sale securities (111.8)
-------
Decrease in stockholder's equity ............. $(118.2)
=======
</TABLE>
Total net receivables and mortgage-backed securities increased to $19.2
billion at June 30, 1996 from $18.1 billion at December 31, 1995 and $15.7
billion at December 31, 1994. The balance of foreclosed properties, net declined
to $84.0 million at June 30, 1996 from $100.0 million at December 31, 1995 and
$118.6 million at December 31, 1994.
Total deposits were $12.7 billion, $13.0 billion and $12.8 billion at
June 30, 1996, December 31, 1995 and December 31, 1994, respectively. In
addition to deposits, Keystone Holdings utilizes several other funding sources,
including reverse repurchase agreements, brokered deposits and FHLB advances.
At June 30, 1996, December 31, 1995 and December 31, 1994, the
outstanding balance of receivables sold or securitized with recourse ("recourse
obligations") was $4.6 billion, $4.8 billion and $1.2 billion, respectively.
Keystone Holdings has provided for probable and estimated losses on these
receivables through charges to earnings.
A-20
<PAGE> 97
ORIGINATIONS
The following table presents real estate receivables originated and
acquired for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period Ended June 30,
------------------------------------------------------
1996 1995
------------------------- --------------------------
Percentage of Percentage of
Amount Total Amount Total
---------- ------------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Single-Family:
Monthly ARMs ................. $1,303,018 45.66% $1,644,639 77.90%
Other ARMs ................... 26,043 0.91 146,241 6.93
Fixed ........................ 634,233 22.23 151,758 7.19
Fixed five year-one month ARMs 729,386 25.56 23,659 1.12
---------- ------ ---------- ------
2,692,680 94.36 1,966,297 93.14
Multi-family:
Monthly ARMs ................. 137,082 4.80 128,784 6.10
Fixed ........................ 6,498 0.23 5,603 0.27
Fixed five year-one month ARMs 5,323 0.19 710 0.03
---------- ------ ---------- ------
148,903 5.22 135,097 6.40
Equity loans .................... 4,445 0.16 4,565 0.22
Commercial ...................... 7,558 0.26 5,049 0.24
---------- ------ ---------- ------
Total receivables originated
and acquired ............. $2,853,586 100.00% $2,111,008 100.00%
========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1995 1994 1993
------------------------- -------------------------- --------------------------
Percentage of Percentage of Percentage of
Amount Total Amount Total Amount Total
---------- ------------- ---------- ------------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family:
Monthly ARMs ..................... $2,606,592 54.66% $3,801,693 79.03% $2,223,679 57.37%
Other ARMs ....................... 185,940 3.90 176,902 3.68 56,457 1.46
Fixed ............................ 782,032 16.40 231,332 4.81 925,852 23.89
Fixed five year-one month ARMs ... 906,545 19.00 9,739 0.20 39,360 1.02
---------- ------ ---------- ------ ---------- ------
4,481,109 93.96 4,219,666 87.72 3,245,348 83.74
Multi-Family:
Monthly ARMs ..................... 245,698 5.15 516,800 10.74 565,587 14.59
Fixed ............................ 6,103 0.13 7,561 0.16 975 0.03
Fixed five year-one month ARMs ... 6,306 0.13 9,787 0.20 46,113 1.19
---------- ------ ---------- ------ ---------- ------
258,107 5.41 534,148 11.10 612,675 15.81
Equity loans ........................ 9,515 0.20 7,291 0.15 2,158 0.05
Commercial .......................... 20,388 0.43 49,314 1.03 15,549 0.40
---------- ------ ---------- ------ ---------- ------
Total receivables originated and
acquired ..................... $4,769,119 100.00% $4,810,419 100.00% $3,875,730 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Interest rates offered on fixed-rate receivables declined during the
six months ended June 30, 1996 compared to the same period in 1995. As a result,
the origination volume of fixed-rate products increased while the volume of
adjustable-rate products decreased during the first six months of 1996 when
compared to the same period in 1995. In addition, the origination volume of
fixed-rate products increased while the volume of adjustable-rate products
stabilized during 1995 when compared to 1994 due to the significant increase in
short-term interest rates in the later part of 1994 and early 1995. Originations
of single-family loans where the loan rate is fixed for five years and then
converts to a monthly adjustable-rate loan increased during 1995 and the first
half of 1996 when compared to 1994 and 1993 as pricing for this product became
more competitive. However, in 1996 the pricing for this product has been
changed to make it less attractive to customers.
The percentage of multi-family receivables originated to total
receivables originated and acquired declined to 5.2 percent from 6.4 percent for
the six months ended June 30, 1996 and 1995, respectively, and declined to
A-21
<PAGE> 98
5.4 percent for the year ended December 31, 1995 from 11.1 percent and 15.8
percent for the years ended December 31, 1994 and 1993, respectively. Keystone
Holdings' primary focus continues to be single-family lending, representing 94.4
percent of total 1996 originations.
The following table summarizes Keystone Holdings' refinancing volume as
a percentage of its total originated receivables (divided between refinancings
of loans originated by ASB and refinancings of loans originated by other
lending institutions) for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Refinance volume/originated receivables:
ASB .................................. 8.72% 3.42% 5.81% 7.97% 20.34%
Other lending institutions ........... 38.57 31.57 37.53 38.55 46.30
----- ----- ----- ----- -----
Total .............................. 47.29% 34.99% 43.34% 46.52% 66.64%
===== ===== ===== ===== =====
</TABLE>
Low interest rates during 1993 generated an unusually large increase in
refinancing volume. As a result of higher interest rates during the latter part
of 1994 and in 1995, the volume of refinancing declined. Management does not
expect that the extremely high levels of refinancings experienced during 1993
will occur in the future.
Keystone Holdings' receivables are originated through three primary
distribution channels: residential loan centers, income-property loan centers,
and a state-wide network of independent residential mortgage brokers. Both
residential and income-property loan centers are staffed with commissioned
employees of ASB. The following table displays the percentage distribution
between the channels as a percentage of total originations for the periods
indicated:
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Residential loan centers ... 50.8% 51.7% 52.8% 56.8% 78.3%
Income-property loan centers 5.6 6.7 5.9 12.3 16.3
Mortgage brokers ........... 43.6 41.6 41.3 30.9 5.4
----- ----- ----- ----- -----
Total .................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The mortgage broker channel is an important element of Keystone
Holdings' California residential lending strategy. Keystone Holdings has
strengthened its relationships with wholesale brokers by offering a competitive
product line that allows brokers to broaden their customer base. As a result,
originations through the wholesale channel increased significantly beginning in
1994. Loan production from the wholesale channel is subjected to the same
underwriting standards as loan production from loan centers.
CREDIT QUALITY
Provision for Losses and Allowance for Credit Losses. The provision for
losses is based upon Keystone Holdings management's estimate of the amount
necessary to maintain the allowance for credit losses at an adequate level.
Keystone Holdings determines the level of its allowance for credit losses by
assessing numerous factors, including the nature and value of the underlying
collateral, the loan's delinquency status, historical and projected loss
experience and the level and trends of non-performing assets (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Keystone Holdings -- Credit Quality -- Non-performing Assets"), receivable
modifications and classified assets.
A-22
<PAGE> 99
A-23
<PAGE> 100
The following table summarizes an allocation of the allowance for
credit losses by product type and the percentage of receivables and recourse
obligations in each category to total receivables and recourse obligations on
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------- ---------------------------------------------------------------------
1996 1995 1994 1993
------------------- ------------------- ------------------- ---------------------
Allowance % Allowance % Allowance % Allowance %
--------- ------ --------- ------ --------- ------ --------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family ........ $ 43,883 62.93% $ 46,079 58.82% $ 54,768 69.65% $ 73,087 60.13%
Multi-family and
commercial ......... 26,231 17.50 27,358 18.85 39,829 21.65 30,570 23.49
Recourse obligations . 18,862 19.26 17,441 21.97 16,701 8.24 12,075 14.44
Consumer ............. 1,045 0.31 1,078 0.36 1,192 0.46 10,015 1.94
-------- ------ -------- ------ -------- ------ -------- ------
Total .............. $90,021 100.00% $ 91,956 100.00% $112,490 100.00% $125,747 100.00%
======== ====== ======== ====== ======== ====== ======== ======
<CAPTION>
December 31,
--------------------------------------------
1992 1991
------------------ -------------------
Allowance % Allowance %
-------- ------ --------- ------
<S> <C> <C> <C> <C>
Single-family ........ $ 81,528 66.93% $ 49,989 66.93%
Multi-family and
commercial ......... 22,796 20.16 13,977 20.16
Recourse obligations . 7,110 11.30 4,360 11.30
Consumer ............. 10,103 1.61 6,195 1.61
-------- ------ -------- ------
Total .............. $121,537 100.00% $ 74,521 100.00%
======== ====== ======== ======
</TABLE>
The following table summarizes an allocation of the provision for
credit losses by product type for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period Ended June 30, Year Ended December 31,
------------------------------------------- -------------------------------------------------------------------
1996 1995 1995 1994 1993
-------------------- -------------------- --------------------- --------------------- ---------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family .. $ 19,759 56.17% $ 25,670 74.34% $ 34,413 53.91% $ 48,074 47.31% $ 81,635 66.10%
Multi-family and
commercial ... 10,594 30.11 9,905 28.68 16,889 26.46 28,939 28.48 20,909 16.93
Consumer ....... 943 2.68 798 2.31 1,418 2.22 2,361 2.32 13,883 11.24
Earthquake (1) . -- -- -- -- -- -- 12,500 12.31 -- --
Recourse
obligations .. 3,884 11.04 (1,840) (5.33) 11,117 17.41 9,735 9.58 7,076 5.73
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total ...... $ 35,180 100.00% $ 34,533 100.00% $ 63,837 100.00% $101,609 100.00% $123,503 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
<CAPTION>
Year Ended December 31,
-------------------------------------------
1992 1991(2)
-------------------- --------------------
Percentage Percentage
Amount of Total Amount of Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Single-family .. $119,669 83.30%
Multi-family and
commercial ... 6,423 4.47
Consumer ....... 15,176 10.56
Earthquake (1) . -- --
Recourse
obligations .. 2,382 1.67
-------- ------
Total ...... $143,650 100.00% $ 63,400 100.00%
======== ====== ======== ======
</TABLE>
- ----------------
(1) The provision for losses for the year ended December 31, 1994 included
$12.5 million related to losses resulting from the Northridge,
California earthquake in January 1994.
(2) Detail not available for periods prior to 1992.
A-24
<PAGE> 101
The following summarizes the activity in the allowance for credit
losses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Beginning Balance ......... $ 91,956 $ 112,490
Provision for Credit Losses 35,180 34,533
Charge-Offs:
Single-Family ........... (26,420) (28,587)
Multi-Family ............ (10,364) (10,594)
Commercial .............. (2,276) (2,580)
Other ................... (926) (829)
--------- ---------
(39,986) (42,590)
Earthquake ................ (166) (2,157)
--------- ---------
Total Charge-Offs ...... (40,152) (44,747)
Recoveries:
Single-Family ........... 1,951 1,258
Multi-Family ............ 888 998
Commercial .............. 198 --
--------- ---------
Total Recoveries ....... 3,037 2,256
--------- ---------
Ending Balance .......... $ 90,021 $ 104,532
========= =========
Net Charge-offs/Average
Receivables and Recourse
Obligations ............. 0.22% 0.30%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning Balance ......... $ 112,490 $ 125,747 $ 121,537 $ 74,521 $ 38,577
Provision for Credit Losses 63,837 101,609 123,503 143,650 63,400
Charge-Offs:
Single-Family ........... (55,933) (88,033) (92,187) (76,674) (13,695)
Multi-Family ............ (22,784) (17,374) (10,127) (3,144) (1,333)
Commercial .............. (5,362) (1,963) (3,008) (1,222) (983)
Other ................... (1,510) (5,084) (13,971) (15,594) (11,445)
--------- --------- --------- --------- ---------
(85,589) (112,454) (119,293) (96,634) (27,456)
Earthquake ................ (3,743) (5,145) -- -- --
--------- --------- --------- --------- ---------
Total Charge-Offs ...... (89,332) (117,599) (119,293) (96,634) (27,456)
Recoveries:
Single-Family ........... 2,222 2,505 -- -- --
Multi-Family ............ 1,563 220 -- -- --
Commercial .............. 1,176 8 -- -- --
--------- --------- --------- --------- ---------
Total Recoveries ....... 4,961 2,733 -- -- --
--------- --------- --------- --------- ---------
Ending Balance .......... $ 91,956 $ 112,490 $ 125,747 $ 121,537 $ 74,521
========= ========= ========= ========= =========
Net Charge-Offs/Average
Receivables and Recourse
Obligations ............. 0.52% 0.92% 1.02% 0.93% 0.29%
</TABLE>
The total provision for losses increased to $35.2 million during the
first six months of 1996 from $34.5 million for the same period in 1995. The
increase is primarily due to a $0.7 million increase in the provision for
multi-family and commercial loans and a $5.7 million increase in the provision
for recourse obligations, which were partially offset by a $5.9 million decrease
in the provision for single-family loans, during the six months ended June 30,
1996 as compared to the same period in 1995. The negative $1.8 million provision
for recourse obligations during the six months ended June 30, 1995 resulted from
a change in the methodology used to accrue for losses that management believes
resulted in a better estimate of probable losses under the recourse obligations.
A-25
<PAGE> 102
Single-family charge-offs declined to $26.4 million from $28.6 million
for the six months ended June 30, 1996 and 1995, respectively. Multi-family and
commercial charge-offs decreased slightly to $12.6 million from $13.2 million
for the six months ended June 30, 1996 and 1995, respectively. The decline in
charge-offs reflects an overall decline in delinquencies. Total receivable and
recourse obligation delinquencies declined to 1.36 percent of the total gross
receivable and recourse obligation portfolios at June 30, 1996 from 1.68 percent
at June 30, 1995.
The provision for losses declined to $63.8 million from $101.6 million
and $123.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The decrease in the provision reflects a continuing decline in
receivable and recourse obligation delinquencies. Declines in single-family
delinquencies resulted in reduced single-family charge-offs and declines in the
overall allowance for credit losses related to the single-family portfolio.
Single-family charge-offs declined to $55.9 million from $88.0 million and $92.2
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Multi-family and commercial charge-offs increased to $28.1 million from $19.3
million and $13.1 million for the years ending December 31, 1995, 1994 and 1993,
respectively. Although charge-offs increased in the multi-family and commercial
portfolio, total multi-family and commercial delinquencies as a percentage of
the total multi-family and commercial portfolio declined to 0.24 percent at
December 31, 1995 from 0.74 percent at December 31, 1994. In addition, the 1994
provision for losses included $12.5 million related to losses resulting from the
Northridge, California earthquake in January 1994.
During 1991, California's general economic indicators, including
employment, consumer confidence and real estate prices, began to deteriorate.
These trends continued through 1992 and 1993. In response to these trends,
Keystone Holdings increased its allowance for credit losses through the
provision for credit losses, and tightened underwriting standards. Keystone
Holdings provided $123.5 million for credit losses during the year ended
December 31, 1993, compared with $143.7 million provided in 1992 and $63.4
million provided during 1991. The decrease from 1992 to 1993 reflects an
improvement in delinquencies. Management believes that the stricter
underwriting standards initiated in the latter part of 1991 and 1992
contributed to the overall decline in delinquencies during 1993, despite the
recessionary conditions that existed in California. The delinquency experience
of Keystone Holdings' 1993 and 1992 originations has been significantly less
than those originated prior to 1992. Management believes that the high rate of
delinquencies in prior years' originations can be attributed to a limited
documentation program offered by Keystone Holdings during 1989 and 1990 as well
as the general decline in housing prices that resulted in the deterioration of
many borrowers' equity.
Impaired Loans. In May 1993, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114
addresses the accounting by creditors for impairment of a loan by specifying how
allowances for credit losses related to impaired loans, as defined, should be
determined. In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 118, "Accounting for Creditors for Impairment of a Loan--Income
Recognition Disclosures" ("SFAS 118") as an amendment to SFAS 114. SFAS 118
eliminates the income recognition provisions included in SFAS 114 thereby
permitting the use of existing methods for recognizing interest income on
impaired loans. Keystone Holdings adopted the provisions of SFAS 114 and SFAS
118 effective January 1, 1995.
SFAS 114 does not apply to large groups of smaller balance homogenous
loans that are collectively evaluated for impairment. Management collectively
reviews all single-family loans, all consumer loans, and multi-family and
commercial loans with outstanding principal balances under $1.0 million for
impairment.
Management considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Keystone Holdings will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Keystone Holdings' impaired loans disclosed under the
requirements of SFAS 114 include nonaccrual loans (excluding those collectively
reviewed for impairment), debt restructurings, and multi-family and commercial
loans less than 90 days delinquent in which management believes that the
borrower may be experiencing financial difficulty based on indicators such as
low debt coverage ratios or high loan-to-value ratios. Keystone Holdings bases
the measurement of loan impairment on the fair value of the loan's underlying
collateral in accordance with SFAS 114. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
included in the allowance for credit losses through a charge to the provision
for credit losses. At the time of in-substance foreclosure or troubled debt
restructuring, the shortfall, if any, between the recorded investment of a loan
and the measure of impairment is charged-off.
The recorded investment in loans considered to be impaired under SFAS
114 was $86.8 million and $69.4 million at June 30, 1996 and December 31, 1995,
respectively. Included in the amount at June 30, 1996 is $37.9 million of
impaired loans for which the related allowance for credit losses is $7.4 million
and $48.9 million of impaired loans that do not have an allowance for credit
losses. Included in the impaired loans amount at December 31, 1995 is $24.7
million of impaired loans for which the related allowance for credit losses is
$5.7 million and $44.7 million of impaired loans that do not have an allowance
for credit losses. The average recorded
A-26
<PAGE> 103
investment in impaired loans at June 30, 1996 and December 31, 1995 was $77.7
million and $69.0 million for the six months ended June 30, 1996 and for the
year ended December 31, 1995, respectively. Interest income of $2.1 million,
$1.1 million and $4.7 million was recognized on impaired loans during the period
of impairment for the six months ended June 30, 1996, 1995 and for the year
ended December 31, 1995, respectively.
The aggregate investment in troubled debt restructurings ("TDRs")
modified prior to January 1, 1995 that were not impaired based on the terms
specified by the TDR agreements with borrowers was $5.7 million at June 30, 1996
and $10.6 million, $22.6 million, $36.4 million, $7.9 million and $0.7 million
at December 31, 1995, 1994, 1993, 1992 and 1991, respectively. The foregone
interest on these restructured receivables did not have a significant impact on
Keystone Holdings' earnings for the six months ended June 30, 1996 or 1995 or
the years ended December 31, 1995, 1994, 1993, 1992 or 1991. Interest income on
TDRs was $0.2 million and $0.4 million for the six months ended June 30, 1996
and 1995, respectively, and $0.8 million and $1.8 million for the years ended
December 31, 1995 and 1994, respectively. At June 30, 1996 and December 31,
1995, Keystone Holdings had no commitments to lend additional funds to borrowers
whose loans were classified as TDRs.
Interest income is accrued and credited to income as it is earned.
Accrued interest on nonaccrual receivables (i.e., receivables that are 90 days
or more contractually delinquent) is not recognized as income. Interest income
is subsequently recognized on nonaccrual receivables only to the extent that
payments are received. Payments received on nonaccrual receivables are recorded
as a reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan principal. Nonaccrual
loans at June 30, 1996 and at December 31, 1995, 1994, 1993, 1992 and 1991 had
interest due but not recognized of approximately $6.9 million, $7.1 million,
$8.8 million, $12.7 million, $16.6 million and $14.7 million, respectively.
Non-Performing Assets. Non-performing assets consisted of the following
at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
-------- ----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual receivables (1) .. $135,968 $144,095 $219,266 $259,002 $283,452 $245,453
Foreclosed properties (2) ... 84,036 100,037 118,645 150,868 144,535 49,500
-------- -------- -------- -------- -------- --------
Total non-performing assets $220,004 $244,132 $337,911 $409,870 $427,987 $294,953
======== ======== ======== ======== ======== ========
Percentage of total assets .. 1.07% 1.24% 1.84% 2.38% 2.48% 1.73%
</TABLE>
- ---------------
(1) Nonaccrual receivables include recourse obligations
(2) Net of allowance for losses on foreclosed properties.
Nonaccrual receivables declined to $136.0 million at June 30, 1996 from
$144.1 at December 31, 1995 and $219.3 million at December 31, 1994. Net
foreclosed properties decreased to $84.0 million at June 30, 1996 from $100.0
million at December 31, 1995 and $118.6 million at December 31, 1994. Total
non-performing assets declined to $220.0 million at June 30, 1996 from $244.1
million and $337.9 million at December 31, 1995 and 1994, respectively.
A-27
<PAGE> 104
The following table presents certain portfolio information by selected
regions in California and all other states as of June 30, 1996:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------------------------------------
Non-Performing Assets
-----------------------------------------------------------------------
Gross Receivables Nonaccrual
and Recourse Receivables and Foreclosed
Obligations Recourse Obligations Properties, Net Total
-------------------- -------------------- ------------------ -------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Los Angeles County ........ $ 5,355,751 30.52% $ 66,829 49.15% $ 35,088 41.75% $ 101,917 46.32%
San Francisco Bay area .... 5,415,568 30.86 20,923 15.39 14,496 17.25 35,419 16.10
Orange County ............. 1,877,261 10.70 15,626 11.49 7,201 8.57 22,827 10.38
Other California counties . 4,775,948 27.21 31,873 23.44 27,176 32.34 59,049 26.84
Other states .............. 104,291 0.59 717 0.53 75 0.09 792 0.36
Non-mortgage receivables .. 20,206 0.12 -- -- -- -- -- --
----------- ------ --------- ------ -------- ------ --------- ------
Total ................... $17,549,025 100.00% $ 135,968 100.00% $ 84,036 100.00% $ 220,004 100.00%
=========== ====== ========= ====== ======== ====== ========= ======
</TABLE>
Foreclosed Properties. The following table summarizes activity in the
foreclosed property portfolio for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
------------------------ ---------------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance .... $ 100,037 $ 118,645 $ 118,645 $ 150,868 $ 144,535
Acquisition cost ..... 87,479 103,676 185,250 230,605 228,654
Allowances ........... (3,237) (5,066) (10,523) (15,391) (19,589)
Sales ................ (100,243) (97,091) (193,335) (247,437) (202,732)
--------- --------- --------- --------- ---------
Ending balance ....... $ 84,036 $ 120,164 $ 100,037 $ 118,645 $ 150,868
========= ========= ========= ========= =========
</TABLE>
Foreclosed properties are recorded at fair value, less estimated costs
to sell, as determined by independent appraisals. The following table summarizes
the number of properties in the foreclosed property portfolio for the periods
indicated:
<TABLE>
<CAPTION>
Six-Months Year Ended
Ended June 30, December 31,
------------------ ------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Beginning amount 581 628 628 772 556
Foreclosures . 523 527 972 1,124 1,084
Sales ........ (511) (480) (1,019) (1,268) (868)
------ ------ ------ ------ ------
Ending amount .. 593 675 581 628 772
====== ====== ====== ====== ======
</TABLE>
Typically, foreclosed properties are sold by Keystone Holdings within
six to eight months subsequent to foreclosure. The timely disposal of foreclosed
properties continues to be a priority of management.
DEPOSITS AND OTHER BORROWINGS
Total deposits were $12.7 billion, $13.0 billion and $12.8 billion at
June 30, 1996, December 31, 1995 and December 31, 1994, respectively. Management
anticipates maintaining its current deposit market share among the institutions
that are members of the FHLB of San Francisco.
On February 8, 1996, ASB completed the private placement of $100.0
million of Subordinated Notes (the "Notes"). The Notes bear an interest rate of
6.625 percent per annum. Interest on the Notes is payable semi-annually in
arrears on each February 15 and August 15, beginning on August 15, 1996.
The Notes mature on February 15, 2006. However, the Notes are
redeemable in whole, or in part, at the option of ASB at any time prior to that
date. The redemption price is equal to the greater of (i) 100 percent of the
A-28
<PAGE> 105
principal amount and (ii) the sum of the present values of the remaining
scheduled payments of principal and interest discounted to the date of
redemption on a semiannual basis at a yield comparable to that on a treasury
security with a term equal to the then remaining term of the Notes, plus 15
basis points, plus in each case accrued interest to the date of redemption.
The payment of the principal and interest on the Notes is subordinated
to the prior payment in full of all Senior Indebtedness. Senior Indebtedness, in
general, includes the principal and interest on (a) all claims against ASB
having the same priority as savings account holders of ASB or any higher
priority, (b) all indebtedness of ASB, other than the Notes, which is given in
connection with the acquisition of any businesses, properties or assets of any
kind and (c) obligations of ASB as lessee under capitalized leases. At June 30,
1996, Senior Indebtedness totaled approximately $18.8 billion, including $12.7
billion in deposits.
The proceeds of the Notes were used to pay general corporate expenses,
to repay certain borrowings and to fund loan originations. The Notes qualify to
be included in regulatory capital.
The Notes do not restrict ASB from paying dividends or from incurring,
assuming or becoming liable for any type of debt or other obligation. In
addition, the Notes do not require ASB to maintain any financial ratios or
certain levels of regulatory capital or liquidity.
Keystone Holdings utilizes several other funding sources including
reverse repurchase agreements, brokered deposits and FHLB advances. FHLB
advances increased to $2.0 billion at June 30, 1996 from $1.0 billion and $391.4
million at December 31, 1995 and 1994, respectively. New American Capital, Inc.
("New Capital"), a wholly-owned subsidiary of Keystone Holdings, has issued debt
securities with outstanding principal balances totalling $364.5 million at June
30, 1996. New Capital's $175.0 million Series C Floating Rate Notes due April
12, 2000 ("Series C Notes") bear interest at three-month London Interbank
Offering Rate ("LIBOR") plus 1.375%, while its $20.5 million floating rate
subordinated notes due in 1998 ("Subordinated Notes") bear interest at the
three-month LIBOR plus 2.875%. The Series C Notes and Subordinated Notes reprice
and require interest payments quarterly. New Capital's $169.0 million Series B
Notes due 1999 ("Series B Notes") bear interest at a fixed rate of 9.60 percent
until maturity. Interest payments on the Series B Notes are made semi-annually.
In June 1996, ASB was approved to participate in the FHLB's Guaranteed
Spread Program (the "GSP Program"). Under the GSP Program, ASB was approved for
a credit amount of up to $0.9 billion after paying a fee to the FHLB of San
Francisco and pledging certain qualifying mortgages as collateral. Interest on
advances is determined using LIBOR minus a fixed spread. Included in FHLB
advances at June 30, 1996 are $0.9 billion related to the GSP Program.
RESULTS OF OPERATIONS
Net Earnings. Keystone Holdings reported earnings before taxes of
$102.2 million and $34.8 million for the six months ended June 30, 1996 and
1995, respectively. Net earnings were $53.6 million and $25.5 million for the
same periods.
Keystone Holdings reported earnings before taxes of $118.2 million,
$73.8 million and $104.0 million for the years ended December 31, 1995, 1994 and
1993, respectively. Net earnings were $84.8 million, $50.3 million and $82.3
million for the same periods.
Net Interest Income. Net interest income increased to $237.6 million
for the six months ended June 30, 1996 from $165.7 million for the same period
in 1995. The increase in net interest income resulted from an increase of 66
basis points in the interest rate spread to 2.40 percent from 1.74 percent for
the six month periods ended June 30, 1996 and 1995, respectively. In addition,
net interest income for the six months ended June 30, 1996 was positively
affected by COFI lag when compared to the same period in 1995. A majority of
ASB's interest-earning assets reprice at a spread above COFI. There is an
inherent timing difference between the repricing of assets and liabilities that
could impact the interest rate spread if there are significant fluctuations in
the interest rate environment. This timing difference, or lag, is a result of
delays in the publication of COFI and the repricing terms of related assets. The
impact of this timing difference will be favorable during a period of declining
interest
A-29
<PAGE> 106
rates and unfavorable in a rising interest rate environment. Although the impact
of this lag tends to balance out over the life of a loan, it can produce
short-term volatility in an institution's net interest income during periods of
interest rate movement. The COFI lag resulted in a favorable impact to net
interest income of approximately $11.6 million for the six months ended June 30,
1996 compared with an unfavorable impact to net interest income of $38.5 million
for the six months ended June 30, 1995.
Net interest income increased to $374.4 million for the year ended
December 31, 1995 from $353.4 million for the year ended December 31, 1994. The
interest rate spread was 1.95 percent and 2.04 percent for the years ended
December 31, 1995 and 1994, respectively. COFI lag resulted in an unfavorable
impact to net interest income of approximately $38.8 million and $23.8 million
in 1995 and 1994, respectively.
Keystone Holdings' net interest income decreased to $353.4 million for
the year ended December 31, 1994 compared to $426.1 million for the year ended
December 31, 1993. The decrease in net interest income resulted from a decrease
of 43 basis points in the interest rate spread to 2.04 percent from 2.47 percent
for the years ended December 31, 1994 and 1993, respectively. In addition, net
interest income in 1994 when compared to 1993 was negatively impacted by COFI
lag. The COFI lag resulted in an unfavorable impact to net interest income of
$23.8 million in 1994 contrasted with a favorable impact to net interest income
of $32.7 million in 1993.
A-30
<PAGE> 107
The following tables summarize average yields earned and rates paid for
the periods indicated and the resulting volume and rate variances:
<TABLE>
<CAPTION>
Average Yields Earned and Rates Paid
--------------------------------------------------------------------------------------
Six-Month Period Ended June 30,
--------------------------------------------------------------------------------------
1996 1995
------------------------------------------ ------------------------------------------
Average Average
Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate
------------- ------------- ------------- ------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2)........................ $11,890,990 $445,479 7.49% $13,109,784 $460,003 7.02%
Mortgage-backed securities............ 6,500,155 242,465 7.46 3,332,138 112,497 6.75
Consumer loans........................ 41,718 2,918 13.99 44,923 3,091 13.76
New West Note......................... -- -- -- 1,348,383 43,699 6.48
Investment securities................. 355,209 11,319 6.37 446,118 13,813 6.19
FHLB stock............................ 175,227 4,539 5.18 145,979 3,198 4.38
----------- -------- ----- ----------- -------- -----
Total interest-earning assets....... $18,963,299 $706,720 7.45% $18,427,325 $636,301 6.91%
=========== ======== ===== =========== ======== =====
Interest-bearing liabilities:
Deposits.............................. $12,800,352 $298,357 4.66% $13,287,497 $308,414 4.64%
FHLB advances......................... 739,654 21,252 5.75 410,700 13,120 6.39
Other borrowings...................... 5,053,253 149,487 5.92 4,492,032 149,068 6.64
----------- -------- ----- ----------- -------- -----
Total interest-bearing liabilities.. $18,593,259 $469,096 5.05% $18,190,229 $470,602 5.17%
=========== ======== ===== =========== ======== =====
Excess of average interest-earning
assets over average interest-bearing
liabilities........................... $ 370,040 $ 237,096
Net interest income..................... $237,624 $165,699
Interest rate spread.................... 2.40% 1.74%
Net interest margin..................... 2.51% 1.80%
Change in net interest income...........
<CAPTION>
Rate Volume Analysis
-------------------------------------------
Six-Month Period Ended
June 30, 1996 Versus 1995
-------------------------------------------
Favorable (Unfavorable) Change
Due to Changes in:
-------------------------------------------
Volume Rate Total
------------- ------------- --------------
<S> <C> <C> <C>
Interest-earning assets:
Receivables(2)........................ $(74,358) $59,834 $(14,524)
Mortgage-backed securities............ 104,147 25,821 129,968
Consumer loans........................ (274) 101 (173)
New West Note......................... -- (43,699) (43,699)
Investment securities................. (3,279) 785 (2,494)
FHLB stock............................ 63 1,278 1,341
----------- --------- ---------
Total interest-earning assets....... $26,299 $ 44,120 $ 70,419
=========== ========= =========
Interest-bearing liabilities:
Deposits.............................. $12,642 $(2,585) $10,057
FHLB advances......................... (11,007) 2,875 (8,132)
Other borrowings...................... (34,666) 34,247 (419)
----------- --------- ---------
Total interest-bearing liabilities.. $ (33,031) $ 34,537 $ 1,506
=========== ========= =========
Excess of average interest-earning
assets over average interest-bearing
liabilities...........................
Net interest income.....................
Interest rate spread....................
Net interest margin.....................
Change in net interest income........... $(6,732) $78,657 $71,925
</TABLE>
- -------------------
(1) Average balances are calculated on a daily basis.
(2) Nonaccruing loans are included in the daily average receivables
outstanding.
A-31
<PAGE> 108
<TABLE>
<CAPTION>
Average Yields Earned and Rates Paid
---------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------
1995 1994
----------------------------------------- -------------------------------------------
Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate
------------ ------------ ----------- ------------ ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2)....................... $14,084,471 $961,002 6.82% $10,671,463 $697,086 6.53%
Mortgage-backed securities........... 2,842,714 272,320 9.58 2,988,864 167,073 5.59
Consumer loans....................... 44,773 6,261 13.98 79,603 11,955 15.02
New West Note........................ 890,800 58,841 6.61 2,513,753 141,039 5.61
Investment securities................ 487,341 31,006 6.36 298,726 13,603 4.55
FHLB stock........................... 152,209 7,696 5.06 118,558 6,107 5.15
----------- --------- ----- ----------- ---------- ------
Total interest-earning assets...... $18,502,308 $1,337,126 7.23% $16,670,967 $1,036,863 6.22%
=========== ======== ===== =========== ========== ======
Interest-bearing liabilities:
Deposits............................. $13,249,964 $636,315 4.80% $13,053,566 $481,794 3.69%
FHLB advances........................ 492,611 30,858 6.26 1,044,018 69,096 6.62
Other borrowings..................... 4,483,800 295,539 6.59 2,260,826 132,597 5.86
----------- --------- ----- ----------- ---------- ------
Total interest-bearing liabilities. $18,226,375 $962,712 5.28% $16,358,410 $683,487 4.18%
=========== ======== ===== =========== ========== ======
Excess of average interest-earning
assets over average interest-bearing
liabilities.......................... $275,933 $312,557
Net interest income.................... $374,414 $353,376
Interest rate spread................... 1.95% 2.04%
Net interest margin.................... 2.02% 2.12%
Change in net interest income..........
<CAPTION>
Rate Volume Analysis
------------------------------------------
Year Ended December 31
1995 Versus 1994
------------------------------------------
Favorable (Unfavorable) Change
Due to Changes in:
------------------------------------------
Volume Rate Total
------------- ------------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Receivables(2)....................... $ 231,661 $ 32,255 $ 263,916
Mortgage-backed securities........... (8,543) 113,790 105,247
Consumer loans....................... (4,920) (774) (5,694)
New West Note........................ (103,725) 21,527 (82,198)
Investment securities................ 10,683 6,720 17,403
FHLB stock........................... 1,703 (114) 1,589
---------- --------- ---------
Total interest-earning assets...... $ 126,859 $ 173,404 $ 300,263
========== ========= =========
Interest-bearing liabilities:
Deposits............................. $ (7,353) $(147,168) $(154,521)
FHLB advances........................ 34,721 3,517 38,238
Other borrowings..................... (144,716) (18,226) (162,942)
---------- --------- ---------
Total interest-bearing liabilities. $ (117,348) $(161,877) $(279,225)
========== ========= =========
Excess of average interest-earning
assets over average interest-bearing
liabilities..........................
Net interest income....................
Interest rate spread...................
Net interest margin....................
Change in net interest income.......... $ 9,511 $11,527 $ 21,038
</TABLE>
- ----------------
(1) Average balances are calculated on a daily basis.
(2) Nonaccruing loans are included in the daily average receivables
outstanding.
A-32
<PAGE> 109
<TABLE>
<CAPTION>
Average Yields Earned and Rates Paid
----------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------
1994 1993
-------------------------------------------- ---------------------------------
Average Yield/ Average
Balance(1) Interest Rate Balance(1) Interest
----------- ----------- -------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2)....................... $10,671,463 $ 697,086 6.53% $10,101,371 $ 725,687
Mortgage-backed securities........... 2,988,864 167,073 5.59 1,860,407 106,764
Consumer loans....................... 79,603 11,955 15.02 208,614 30,919
New West Note........................ 2,513,753 141,039 5.61 4,061,221 241,014
Investment securities................ 298,726 13,603 4.55 273,148 9,315
FHLB stock........................... 118,558 6,107 5.15 103,136 3,570
----------- ----------- -------- ----------- -----------
Total interest-earning assets...... $16,670,967 $ 1,036,863 6.22% $16,607,897 $ 1,117,269
=========== =========== ======== =========== ===========
Interest-bearing liabilities:
Deposits............................. $13,053,566 $ 481,794 3.69% $13,718,142 $ 513,435
FHLB advances........................ 1,044,018 69,096 6.62 1,578,904 128,741
Other borrowings..................... 2,260,826 132,597 5.86 935,282 48,970
----------- ----------- -------- ----------- -----------
Total interest-bearing
liabilities...................... $16,358,410 $ 683,487 4.18% $16,232,328 $ 691,146
=========== =========== ======== =========== ===========
Excess of average interest-earning
assets over average interest-bearing
liabilities.......................... $312,557 $ 375,569
Net interest income.................... $ 353,376 $ 426,123
Interest rate spread................... 2.04%
Net interest margin.................... 2.12%
Change in net interest income..........
<CAPTION>
Rate Volume Analysis
-----------------------------------------
Year Ended December 31
1994 Versus 1993
-----------------------------------------
Favorable (Unfavorable) Change
Due to Changes in:
-----------------------------------------
Yield/
Rate Volume Rate Total
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2)....................... 7.18% $ 39,531 $ (68,132) $ (28,601)
Mortgage-backed securities........... 5.74 63,148 (2,839) 60,309
Consumer loans....................... 14.82 (19,370) 406 (18,964)
New West Note........................ 5.93 (87,451) (12,524) (99,975)
Investment securities................ 3.41 936 3,352 4,288
FHLB stock........................... 3.46 595 1,942 2,537
-------- ----------- ----------- -----------
Total interest-earning assets...... 6.73% $ (2,611) $ (77,795) $ (80,406)
======== =========== =========== ===========
Interest-bearing liabilities:
Deposits............................. 3.74% $ 24,605 $ 7,036 $ 31,641
FHLB advances........................ 8.15 38,335 21,310 59,645
Other borrowings..................... 5.24 (77,091) (6,536) (83,627)
-------- ----------- ----------- -----------
Total interest-bearing
liabilities...................... 4.26% $ (14,151) $ 21,810 $ 7,659
======== =========== =========== ===========
Excess of average interest-earning
assets over average interest-bearing
liabilities..........................
Net interest income....................
Interest rate spread................... 2.47%
Net interest margin.................... 2.57%
Change in net interest income.......... $ (16,762) $ (55,985) $ (72,747)
</TABLE>
- ----------------
(1) Average balances are calculated on a daily basis.
(2) Nonaccruing loans are included in the daily average receivables
outstanding.
A-33
<PAGE> 110
Other Income and Expense. Other income and expense consisted of the following
items for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period Ended
June 30, Year Ended December 31,
------------------------ ----------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Gain (loss) on sale of receivables, net $ 2,965 $ 777 $ 34 $ (2,295) $ 9,776
Gain on disposition of credit card
receivables, net -- -- -- 24,981 --
Gain on sale of mortgage servicing
rights -- -- -- 20,396 --
Savings, commission and receivable fee
income 29,549 21,763 50,227 44,913 49,622
Gain (loss) on asset sales, net (324) 890 2,534 207 23,994
Net expense of foreclosed properties (7,496) (8,467) (18,032) (13,390) (12,951)
Net servicing income 9,391 8,275 18,696 14,038 7,229
Loss on sale of covered assets -- (667) (37,399) -- _
Effect of FDIC assistance on covered
assets -- 16,741 55,630 -- --
Other, net 539 445 743 52 3,380
-------- -------- -------- -------- --------
Total $ 34,624 $ 39,757 $ 72,433 $ 88,902 $ 81,050
======== ======== ======== ======== ========
</TABLE>
Other income and expense for the six months ended June 30, 1996 was
$34.6 million compared to $39.8 million for the same period in 1995. Included in
the previous period's amount is a $16.7 million gain of FDIC assistance. This
assistance related to the sale of certain single-family loans serviced by other
institutions that had an outstanding principal balance of $200.5 million at the
time of sale. These loans (covered assets) were acquired by ASB in the 1988
Acquisition and, as a part of the terms of the 1988 Acquisition, the FRF was
contractually obligated to ASB to make up any deficiencies in the timely payment
of principal and interest on these covered assets. As a result of a
restructuring of certain FRF Agreements, direct payments by the FRF to ASB with
respect to such deficiencies were to be terminated by a mark-to-market process
to be conducted when the New West Note became fully repaid (or, if sooner, when
a covered asset subject to the assistance was sold) pursuant to an agreed upon
mark-to-market methodology. Thus, included in the $16.7 million assistance was
compensation from the FRF relating to the value implicit in the remaining
duration (at the time of the mark) of the original FRF guarantee. The decrease
in FDIC assistance was partially offset by an increase in savings fee,
commission, receivable fee and net servicing income assistance during the six
month period ended June 30, 1996 compared to the same period in 1995.
Other income and expense decreased to $72.4 million from $88.9 million
for the years ended December 31, 1995 and 1994, respectively, due to a $25.0
million decrease in gains on the sale of the credit card portfolio, a $20.4
million decline in gains on the sale of mortgage servicing rights, and a $37.4
million increase in loss on sale of covered assets, which were partially offset
by a $55.6 million increase in FDIC assistance.
Other income and expense increased to $88.9 million from $81.1 million
for the years ended December 31, 1994 and 1993, respectively. The decrease was
due to a $25.0 million gain on the 1994 sale of the credit card portfolio and a
$20.4 million gain on the sale of mortgage servicing rights related to the sale
of $1.9 billion of Keystone Holdings' servicing portfolio, which were partially
offset by $23.8 million and $12.1 million declines in gains on asset sales and
sales of receivables, respectively.
A-34
<PAGE> 111
As shown in the previous table, net gain (loss) on other asset sales
consisted of the following for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities.............. $(402) $580 $1,127 $33 $1,433
Asset management rights................. -- -- -- -- 23,000
Other................................... 78 310 1,407 174 (439)
------ ---- ------ ---- -------
Total................................. $(324) $890 $2,534 $207 $23,994
====== ==== ====== ==== =======
</TABLE>
In 1993, Keystone Holdings recognized a $23.0 million gain on the sale
of certain rights related to the management of New West assets.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), an
amendment to Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities" ("SFAS 65"). In September 1995, Keystone
Holdings adopted early application of SFAS 122. SFAS 122 requires an institution
that purchases or originates mortgage loans and subsequently sells or securities
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Institutions are
required to assess impairment of the capitalized mortgage servicing portfolio
based on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired stratum.
Capitalized mortgage servicing rights should be stratified based upon one or
more of the predominant risk characteristics of the underlying loans such as
loan type, size, note rate, date of origination, term and/or geographic
location.
Keystone Holdings elected to retroactively implement SFAS 122 as of
January 1, 1995. Keystone Holdings capitalized $4.4 million and $7.8 million in
originated loan servicing rights during the first six months of 1996 and the
year ended December 31, 1995, respectively, that resulted from the origination
and sale of receivables with servicing retained. At June 30, 1996 and December
31, 1995, Keystone Holdings established an impairment valuation allowance of
$0.4 million and $0.9 million, respectively based upon an evaluation performed
on the entire servicing rights portfolio.
In order to determine the fair value of the servicing rights,
management uses market prices under comparable servicing sale contracts, when
available, or alternatively, uses a valuation model that calculates the present
value of future cash flows. Assumptions used in the valuation model include
market discount rates and anticipated prepayment speeds. The prepayment speeds
are determined from market sources for fixed-rate mortgages with similar coupons
and prepayment reports for comparable ARM loans. In addition, management uses
market comparables for estimates of the cost of servicing per loan, float value,
an inflation rate, ancillary income per loan and default rates.
Keystone Holdings amortizes the servicing rights in proportion to and
over the period of estimated future net servicing income.
For the purpose of measuring impairment, management stratified the
capitalized mortgage servicing rights using the following risk characteristics:
fixed-rate loans by coupon (less than 8%, 8%-10%, 10%-12% and greater than 12%);
and adjustable-rate loans by index (COFI, Treasury, LIBOR, etc.). Impairment is
measured utilizing fair value.
A-35
<PAGE> 112
Purchased loan servicing, originated loan servicing and excess
servicing fees, net of amortization and the valuation allowance were as follows
for the periods indicated:
<TABLE>
<CAPTION>
Purchased Loan Originated Loan Excess Total Mortgage
Servicing, Net Servicing, Net Servicing, Net Servicing Rights
-------------- --------------- -------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1995......... $66,884 $6,509 $17,508 $90,901
Additions.......................... 5,170 4,356 685 10,211
Amortization....................... (8,053) (615) (2,026) (10,694)
Valuation allowance................ -- (392) -- (392)
------- ------ ------- -------
Balance at June 30, 1996............. $64,001 $9,858 $16,167 $90,026
======= ====== ======= =======
</TABLE>
Net servicing income consisted of the following for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Servicing Income..................... $20,085 $16,193 $37,521 $29,270 $30,032
Amortization of mortgage servicing
rights............................. (10,694) (7,918) (18,825) (15,232) (22,803)
-------- ------- ------- ------- -------
Net servicing income................. $ 9,391 $ 8,275 $18,696 $14,038 $ 7,229
======== ======= ======= ======= =======
</TABLE>
Net servicing income increased to $18.7 million from $14.0 million and
$7.2 million for the years ended December 31, 1995 and 1994 and 1993,
respectively. The increase from 1994 to 1995 is due to the average outstanding
balance of the loans serviced by ASB for other institutions increasing to $16.2
billion for the year ended December 31, 1995 from $11.4 billion for the year
ended December 31, 1994. The increase in net servicing income from $7.2 million
in 1993 to $14.0 million in 1994 was largely due to a decrease in amortization
of mortgage servicing rights attributable to a gradual decline in prepayments of
mortgage receivables in 1994 compared to 1993.
Miscellaneous other income and expense consisted of the following items
for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------------ ----------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Credit card fees..................... $255 $135 $ 532 $1,095 $4,574
Loss on sales of branches............ (217) (98) (832) (1,410) (955)
Provision on other assets............ -- -- -- -- (1,000)
Other................................ 501 408 1,043 367 761
---- ---- ------ ------ ------
Total.............................. $539 $445 $ 743 $ 52 $3,380
==== ==== ====== ====== ======
</TABLE>
Credit card fees decreased in 1995 and 1994 as compared to 1993 due to
the sale of a majority of the credit card portfolio in the first quarter of
1994.
General and Administrative Expenses. General and administrative
expenses were $134.9 million for the six-month period ended June 30, 1996
compared to $136.1 million for the same period in 1995. General and
administrative expenses as a percentage of total average assets on an annualized
basis were 1.36% and 1.42% for the six months ending June 30, 1996 and 1995,
respectively. Total general and administrative expenses declined to $264.8
million for the year ended December 31, 1995 compared to $266.8 million for the
year ended December 31, 1994 and $279.7 million for the year ended December 31,
1993. General and administrative expenses as a percentage of total average
assets were 1.37%, 1.54% and 1.62% for the years ended December 31,
A-36
<PAGE> 113
1995, 1994 and 1993, respectively. These trends reflect management's continuing
focus on decreasing general and administrative expenses through the automation
of processes and the streamlining of operations where appropriate.
Provision for Federal and State Income Taxes. The provision for federal
and state taxes on income was $3.5 million and $1.0 million for the six-month
periods ended June 30, 1996 and 1995, respectively. The provision consisted of
alternative minimum tax for these periods.
The provision for federal and state taxes on income was $4.4 million
for the year ended December 31, 1995 compared to a provision of $1.7 million for
the year ended December 31, 1994 and a benefit of $2.8 million for the year
ended December 31, 1993. These provisions reflect effective tax rates of 3.7%,
2.3% and (2.7%) for the years ended December 31, 1995, 1994 and 1993,
respectively. The effective tax rates for 1995 and 1994 reflect the utilization
of current tax losses of ASB's nominee and the increase in the tax loan loss
base year reserve amounts coupled with changes in the deferred tax asset
valuation allowance. The 1993 effective tax rate reflects the utilization of
current tax losses of ASB's nominee, the benefit on the deferred tax asset of
the tax rate change in the 1993 Revenue Reconciliation Act, a reduction in the
deferred tax asset for provisions in the same legislation that significantly
reduced, retroactively to March 4, 1991, losses attributable to ASB's nominee,
New West, and changes to the deferred tax asset valuation allowance.
Provision (Benefit) for Payments in Lieu of Taxes. Keystone Holdings
recorded a provision for payments in lieu of taxes of $24.2 million for the six
months ended June 30, 1996 compared to a benefit for payments in lieu of taxes
of $6.5 million for the six months ended June 30, 1995. The provision for
payments in lieu of taxes for the six months ended June 30, 1996 as compared to
the benefit for the six months ended June 30, 1995 is the result of an increase
in earnings before taxes and a decrease in allowable tax bad debt deductions in
excess of book credit loss provisions. Keystone Holdings' earnings before taxes
for the six months ended June 30, 1996 were $102.2 million compared to $34.8
million for the same period in 1995. See APPENDIX B - Note 18, "Payments in Lieu
of Taxes," in the Notes to the Consolidated Financial Statements.
The provision for payments in lieu of taxes was $7.9 million for the
year ended December 31, 1995 compared with a benefit for payments in lieu of
taxes of $0.8 million and a provision of $14.1 million for the years ended
December 31, 1994 and 1993, respectively. The increase in the provision for
payments in lieu of taxes in 1995 over 1994 and the decrease in 1994 over 1993
were largely attributable to increased or decreased earnings before taxes.
Earnings before taxes for the years ended December 31, 1995, 1994 and 1993 were
$118.2 million, 73.8 million and $104.0 million, respectively.
Accounting for Income Taxes. In February 1992, the FASB issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the anticipated future tax
consequences attributable to carryovers and differences between the amount
recorded in the financial statements for existing assets and liabilities and
their respective tax bases. Effective January 1, 1992, Keystone Holdings adopted
SFAS 109.
At January 1, 1992, Keystone Holdings recognized a deferred tax asset
relating to NOL carryforwards of $4.3 billion and net deductible temporary
differences of $370.0 million. The deferred tax asset was reduced by a valuation
allowance to arrive at the net amount that is more likely than not to be
realized from such carryforwards and temporary differences.
In adopting SFAS 109, Keystone Holdings recorded the cumulative effect
of a change in accounting principle of $60.0 million which was presented
separately in its Consolidated Statement of Earnings for the year ended December
31, 1992. Prior years' financial statements were not restated. Under the
provisions of SFAS 109, Keystone Holdings recorded a deferred tax benefit of
$2.8 million and $22.0 million for 1993 and 1992, respectively. The Consolidated
Balance Sheets include deferred tax assets of $112.6 million at June 30, 1996
and December 31, 1995 and 1994.
Keystone Holdings had earnings before taxes of $102.2 million and $34.8
million for the six months ended June 30, 1996 and 1995, respectively, and
$118.2 million, $73.8 million, and $104.0 million for the years ended
A-37
<PAGE> 114
December 31, 1995, 1994 and 1993, respectively. However, for the latter three
periods, Keystone Holdings had taxable losses due to the operations of New West,
a non-consolidated subsidiary of New Holdings that was a nominee of ASB for tax
purposes. For the six months ended June 30, 1996, NOL carryovers from the 1988
Acquisition were used to eliminate Keystone Holdings' taxable income. As of
December 31, 1995, Keystone Holdings had NOL carryovers available to offset
future taxable income of $3.9 billion. Virtually all of these carryovers are
attributable to the operations of New West with the balance representing
carryovers available to Keystone Holdings from the Acquisition. Since all of the
loss carryovers belong to Keystone Holdings for tax purposes, they are
considered in the computation of the deferred tax asset. The net deferred tax
asset has been reduced to the extent Keystone Holdings will share these loss
carryover benefits with the FRF.
In order to fully realize the net deferred tax asset at December 31,
1995, Keystone Holdings will need to begin to generate future taxable income of
approximately $672.1 million prior to the expiration of its NOLs, which expire
in 2004. Based on its history of prior operating earnings and expectations for
the future, management believes it is more likely than not that Keystone
Holdings will realize the recorded benefit of $112.6 million through use of net
operating loss carryovers existing at December 31, 1995.
CAPITAL REGULATIONS AND REQUIREMENTS
Statutes and OTS regulations applicable to savings associations,
including ASB, require the maintenance of tangible capital, as defined, in an
amount not less than 1.5% of adjusted total assets; core capital, as defined, in
an amount not less than 3.0% of adjusted total assets; and risk-based capital,
as defined, in an amount not less than 8.0% of adjusted risk-weighted assets.
A-38
<PAGE> 115
The following table presents ASB's actual regulatory capital compared
to the minimum required regulatory capital at June 30, 1996:
<TABLE>
<CAPTION>
Capital Assets % of Assets
---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
TANGIBLE CAPITAL REQUIREMENT:
GAAP capital/assets........................................... $1,180,436 $20,367,147
Add: Unrealized loss on available-for-sale securities..... 1,411 1,411
Reclass ACH settlement from deposits to other assets. -- 22,141
Reclass deferred debt issue costs to other assets.... -- 1,249
Less: Deferred income taxes(1)............................. (78,596) (78,596)
Core deposit intangible.............................. (2,025) (2,025)
Investment in nonincludable subsidiary............... (2,401) (970)
---------- -----------
Actual tangible capital/assets................................ 1,098,825 $20,310,357 5.41%
===========
Required tangible capital..................................... (304,655) 1.50
---------- -----
Excess tangible capital....................................... $ 794,170 3.91%
========== =====
CORE CAPITAL REQUIREMENT:
Tangible capital/assets....................................... $1,098,825 $20,310,357
Add: Core deposit intangible.............................. 2,025 2,025
---------- -----------
Actual core capital/assets.................................... 1,100,850 $20,312,382 5.42%
===========
Required core capital(2)...................................... (609,371) 3.00
---------- -----
Excess core capital........................................... $ 491,479 2.42%
========== =====
RISK-BASED CAPITAL REQUIREMENT:
Core capital.................................................. $1,100,850
On-balance sheet risk-weighted assets....................... -- $11,826,300
Off-balance sheet risk-weighted assets...................... -- 61,272
---------- -----------
Core capital/risk-weighted assets............................. 1,100,850 $11,887,572
Add: Allowable general credit loss reserve................ 76,334 --
Qualifying subordinated notes, net................... 99,825 --
Reclass deferred debt issue costs to other assets.... -- 1,249
---------- -----------
Actual risk-based capital/assets.............................. 1,277,009 $11,888,821 10.74%
===========
Required risk-based capital................................... (951,106) 8.00
---------- -----
Excess risk-based capital..................................... $ 325,903 2.74%
========== =====
</TABLE>
- --------------------
(1) $34.0 million of total deferred income tax qualifies for inclusion in
regulatory capital at June 30, 1996. This balance represents the
estimated amount of the deferred tax asset that can be realized in the
twelve-month period following the reporting period based upon ASB's
projected earnings for the same period.
(2) Under the prompt corrective action standards of the Federal Deposit
Insurance Corporation Improvement Act, an institution is subject to
regulatory sanctions if its core capital is less than 4.00%.
ASSET/LIABILITY MANAGEMENT
Keystone Holdings controls the sensitivity of its net interest income
to fluctuations in interest rates by closely matching the maturities and
interest rates of its interest-earning assets and interest-bearing liabilities.
The movement of interest rates on assets or liabilities, whether at
maturity or through interest rate adjustment provisions, is referred to as
"repricing." In order to match the interest rates of its assets and liabilities,
Keystone Holdings originates ARMs which reprice monthly at a spread over COFI.
COFI reflects the weighted average cost of funds for savings associations in the
FHLB's Eleventh District. Additionally, a majority of the mortgage-backed
securities portfolio represent adjustable rate assets indexed to COFI. Keystone
Holdings' primary asset/liability management objective is to maximize the
long-term spread between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Keystone Holdings has focused on
managing its cost of funds to provide rate and repricing characteristics similar
to COFI.
A-39
<PAGE> 116
The lifetime interest rate caps which Keystone Holdings offers to its
COFI ARM borrowers introduce an element of interest rate risk to Keystone
Holdings. In periods of high interest rates, it is possible for Keystone
Holdings' cost of funds to exceed the rate on the lifetime interest rate caps
offered to customers. When determined appropriate by management, Keystone
Holdings hedges this risk by purchasing COFI- and LIBOR-based interest rate caps
and collars.
Other various financial instruments utilized by Keystone Holdings'
management to reduce or eliminate interest rate risk include options, swaps and
forward sales. See APPENDIX B - Note 21, "Interest Rate Risk Management," in the
Notes to the Consolidated Financial Statements for additional information.
Maturity and Interest Rate Sensitivity Analysis. A conventional measure
of interest rate sensitivity for thrift institutions is to divide the difference
between assets maturing or repricing within one year and total liabilities
maturing or repricing within one year by total assets - "one-year gap." At June
30, 1996, Keystone Holdings' one-year gap was a positive 2.20 percent compared
with a positive 4.82 percent at the end of 1995. Keystone Holdings' slightly
positive one-year gap is a reflection of its ability to originate and maintain
adjustable-rate receivables. By holding in its portfolio primarily
adjustable-rate receivables and MBS, Keystone Holdings is able to help control
its sensivity to movements in interest rates. The following maturity and
interest rate sensitivity analysis summarizes the asset and liability balances
of Keystone Holdings at June 30, 1996, on the basis of rate adjustments due to
occur within selected time intervals. The repricing periods and amounts in the
table assume the contractual amortization and estimated prepayments of
receivables and MBS.
<TABLE>
<CAPTION>
At June 30, 1996
-------------------------------------------------------------------------------------------
Repricing Periods(1)
-------------------------------------------------------------------------------------------
Weighted
Average 0-3 4-12 1-5 5-10 Over 10
Balance(2) Yield Months Months Years Years Years
-------- -------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments $ 408 5.93% $ 286 $ -- $ 122 $ -- $ --
Receivables 12,954 7.49 11,188 294 1,277 97 98
MBS 6,355 7.35 6,306 4 15 11 19
-------- ---- -------- -------- -------- -------- --------
Total interest-earning
-------- -------- -------- -------- -------- --------
assets 19,717 7.41 17,780 298 1,414 108 117
--------
Interest-bearing liabilities:
Deposits 12,729 4.69 6,467 5,296 966 -- --
Borrowings 6,495 5.87 5,741 118 523 100 13
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 19,224 5.06 12,208 5,414 1,489 100 13
-------- -------- -------- -------- -------- --------
Maturity gap $ 493 $ 5,572 ($ 5,116) ($ 75) $ 8 $ 104
======== ======== ======== ======== ======== ========
Cumulative maturity gap $ 5,572 $ 456 $ 381 $ 389 $ 493
======== ======== ======== ======== ========
Gap as a percentage of
total assets 2.38% 27.18% 2.20% 1.84% 1.88% 2.38%
</TABLE>
- ----------------
(1) The impact of hedging is reflected in the individual asset or liability
lines.
(2) Balances in this table are presented gross of discounts, premiums and
allowances for credit losses.
(3) Investments and borrowings are assumed to reprice at the earlier of
their interest rate reset date or their contractual maturity.
(4) Deposits are assumed to reprice at the earlier of their interest rate
reset date or their contractual maturity, except for deposits with no
stated maturity, which are assumed to reprice in month O.
Consistent with Keystone Holdings' strategy to maintain the majority of
its portfolio in monthly adjustable rate receivables and MBS, the repricing
table indicates that at June 30, 1996 Keystone Holdings' assets are scheduled to
reprice sooner than its liabilities. Given this strategy, Keystone Holdings'
earnings would be expected to decline with falling interest rates and to
increase with rising interest rates. However, Keystone Holdings' earnings are
also affected by the lag inherent in COFI, the index on which the majority of
Keystone Holdings' adjustable rate receivables and MBS interest rates are based.
This lag results from the two month delay in reporting COFI because of the time
required to gather the data needed to compute the index. Consequently, the
current COFI used to price adjustable rate receivables and MBS actually reflects
the cost of funds at a two month prior level. As a result, the COFI lag causes
adjustable rate receivables and MBS to initially reprice more slowly than
liabilities when the interest rate environment changes, enhancing earnings when
rates fall and lessening income when rates rise. In addition to the COFI
reporting lag, other characteristics
A-40
<PAGE> 117
of adjustable rate receivables and MBS impact earnings. These characteristics
include introductory (or "teaser") rates, the interest rate adjustment
frequencies, interest rate caps or limits on interest rate changes, and interest
rate floors.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Keystone Holdings has declared dividends on its common
stock of $60.0 million and $5.5 million for the six months ended June 30, 1996
and 1995, respectively, and $5.6 million and $32.5 million for the years ended
December 31, 1995 and 1994, respectively. In 1993, Keystone Holdings retired a
note for $21.0 million which had been given to its shareholder in payment of a
dividend in 1992. In addition Keystone Holdings paid an $8.0 million cash
dividend in 1993. At the end of 1993 a $10.0 million dividend had been declared
but unpaid.
New Capital is subject to the restrictions and limitations provided for
in the note purchase agreements related to the Series B Notes and the
Subordinated Notes and the Indenture covering the Series C Notes. See APPENDIX B
- -- Note 20, "Stockholder's Equity," in the Notes to the Consolidated Financial
Statements of Keystone Holdings for additional information on the restrictions
under debt covenants. Based on the most restrictive of New Capital's debt
covenants, at June 30, 1996, New Capital would have been permitted to make up to
$28.6 million in dividend or other restricted payments.
Federal regulations require that ASB maintain for each calendar month
an average daily balance of liquid assets at least equal to 5.0% of the prior
month's average daily balance of net withdrawable deposits plus borrowings due
within one year. At June 30, 1996, ASB's liquid assets consisted of currency,
cash in banks, short-term investments in federal funds and bankers acceptances.
Also included were mortgage-backed securities with maturities of five years or
less. ASB's liquidity ratio was 6.76%, 5.29% and 5.04% at June 30, 1996,
December 31, 1995 and December 31, 1994, respectively.
At December 31, 1995, approximately 88 percent of time certificates are
scheduled to mature within one year. In the event that a higher than anticipated
number of these certificates do not renew, liquidity will be maintained
utilizing other funding sources such as FHLB advances, reverse repurchase
agreements and brokered deposits.
Keystone Holdings' cash and cash equivalents decreased to $144.1
million at June 30, 1996 from $385.6 million at December 31, 1995. The decrease
is primarily due to receivable originations of $2.3 billion and purchases of
held-to-maturity securities of $1.7 billion during the six months ended June 30,
1996. The decrease in cash and cash equivalents was partially offset by a net
increase in FHLB advances of $1.0 billion, and principal payments of
held-to-maturity securities and receivables of $1.8 billion and $507.7 million,
respectively, during the six months ended June 30, 1996.
Cash and cash equivalents increased to $385.6 million at December 31,
1995 from $215.3 million at December 31, 1994. The increase primarily results
from payments received on the New West Note of $1.7 billion during the year
ended December 31, 1995. In addition, proceeds from the sale of receivables
increased $1.1 billion, principal payments on receivables increased $744.4
million and net FHLB advances increased $613.0 million during the year ended
December 31, 1995. The increase in cash and cash equivalents was partially
offset by receivable originations of $3.9 billion during the year ended December
31, 1995.
Capital Resources. ASB's major sources of funds are generated from the
collection of loan principal and interest payments, deposits, FHLB advances,
repurchase agreements and other borrowings. In addition, ASB receives funds
through the sale of receivables, mortgage-backed securities and other assets.
ASB uses these funds primarily to originate receivables and pay dividends.
A-41
<PAGE> 118
APPENDIX B
CONSOLIDATED FINANCIAL STATEMENTS OF
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995, 1994 AND 1993
<S> <C>
Independent Auditors' Report........................................................................... B-2
Consolidated Balance Sheets as of December 31, 1995 and 1994........................................... B-3
Consolidated Statements of Earnings for the years ended December 31, 1995, 1994 and 1993............... B-4
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1995, 1994 and 1993... B-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............. B-6
Notes to Consolidated Financial Statements............................................................. B-8
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1996
Condensed Consolidated Balance Sheets................................................................. B-48
Condensed Consolidated Statements of Earnings......................................................... B-49
Condensed Consolidated Statements of Stockholder's Equity............................................. B-50
Condensed Consolidated Statements of Cash Flows....................................................... B-51
Notes to Condensed Consolidated Financial Statements.................................................. B-53
</TABLE>
B-1
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Keystone Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Keystone
Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, stockholder's equity and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keystone Holdings,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 26, 1996, except as to Note 27
to the consolidated financial statements,
which is as of February 8, 1996
B-2
<PAGE> 120
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
(Dollars in Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
1995 1994
------------ -----------
ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 385,561 $ 215,253
Investment Securities (fair value of $116,721 and $87,002) 116,728 87,014
Receivable from Affiliates 1,357 1,282
Receivables, net 11,101,010 12,638,520
Mortgage-Backed Securities, net (fair value of $2,959,608 and $1,698,338) 2,890,765 1,706,122
Assets Available-for-Sale:
Investment Securities 165,379 135,949
Mortgage-Backed Securities, net 4,061,282 1,321,425
Assets Held-for-Sale:
Receivables (fair value of $75,614 and $5,070) 74,021 5,070
New West Note - 1,515,040
Federal Home Loan Bank Stock 159,949 122,987
Interest Receivable 111,284 77,223
Premises and Equipment, net 233,687 194,112
Foreclosed Properties, net 100,037 118,645
Mortgage Servicing Rights, net 90,901 61,039
Deferred Tax Asset, net 112,596 112,596
Other Assets 99,099 90,126
------------ -----------
TOTAL ASSETS $19,703,656 $18,402,403
============ ===========
LIABILITIES:
Deposits $13,005,029 $12,815,489
Federal Home Loan Bank Advances 1,004,337 391,366
Reverse Repurchase Agreements 4,016,441 3,982,659
Other Borrowed Money 371,079 359,653
Interest Payable 63,114 42,562
Remittances Due Banks 54,525 77,183
Remittances Due on Loans Serviced for Others 136,312 80,131
Accounts Payable and Accrued Expenses 91,199 82,782
------------ -----------
TOTAL LIABILITIES 18,742,036 17,831,825
------------ -----------
MINORITY INTEREST 293,061 203,454
LESS OFFSET-NEW WEST NOTE - (167,000)
------------ -----------
NET MINORITY INTEREST 293,061 36,454
STOCKHOLDER'S EQUITY:
Common Stock (par value $1.00 per share); Shares Authorized 100,000;
Shares Issued and Outstanding 1,048 1 1
Additional Paid-in Capital 30,419 105,419
Unrealized Gain (Loss) on Available-for-Sale Securities 110,367 (29,161)
Retained Earnings - Substantially Restricted 527,772 457,865
------------ -----------
TOTAL STOCKHOLDER'S EQUITY 668,559 534,124
------------ -----------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY $19,703,656 $18,402,403
============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
B-3
<PAGE> 121
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
INTEREST INCOME:
<S> <C> <C> <C>
Receivables $ 967,263 $ 709,041 $ 756,606
Mortgage-Backed Securities 272,320 167,073 106,764
New West Note 58,841 141,039 241,014
Investment Securities 38,702 19,710 12,885
----------- ----------- -----------
Total Interest Income 1,337,126 1,036,863 1,117,269
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 636,315 481,794 513,435
FHLB Advances 30,858 69,096 128,741
Reverse Repurchase Agreements 261,217 103,828 20,239
Other Borrowings 34,322 28,769 28,731
----------- ----------- -----------
Total Interest Expense 962,712 683,487 691,146
----------- ----------- -----------
NET INTEREST INCOME 374,414 353,376 426,123
Provision for Credit Losses 63,837 101,609 123,503
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 310,577 251,767 302,620
OTHER INCOME AND EXPENSE:
Gain From Disposition of Credit Card Receivables, net -- 24,981 --
Gain (Loss) on Sale of Receivables, net 34 (2,295) 9,776
Gain on Sale of Servicing Rights -- 20,396 --
Savings Fee Income 21,526 16,781 17,555
Commissions Income 16,890 15,150 18,238
Receivable Fee Income 11,811 12,982 13,829
Gain on Asset Sales, net 2,534 207 23,994
Net Expense of Foreclosed Properties (18,032) (13,390) (12,951)
Net Servicing Income 18,696 14,038 7,229
Loss on Sale of Covered Assets (37,399) -- --
Effect of FDIC Assistance on Covered Assets 55,630 -- --
Other Income and Expense 743 52 3,380
----------- ----------- -----------
Total Other Income and Expense 72,433 88,902 81,050
----------- ----------- -----------
EARNINGS BEFORE GENERAL AND ADMINISTRATIVE
EXPENSES AND TAXES 383,010 340,669 383,670
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and Fringe Benefits 146,292 151,797 160,837
Occupancy 38,391 34,801 46,313
Regulatory Premiums and Assessments 33,367 32,483 32,019
Data Processing 27,119 25,777 26,754
Advertising and Promotion 12,424 11,628 11,677
Deferred Origination Expenses (34,718) (38,931) (35,067)
Reimbursements from Affiliates (573) (1,144) (17,407)
Other Operating Expenses 42,525 50,416 54,568
----------- ----------- -----------
Total General and Administrative Expenses 264,827 266,827 279,694
----------- ----------- -----------
EARNINGS BEFORE TAXES 118,183 73,842 103,976
Provision (Benefit) for Federal and State Income Taxes 4,402 1,721 (2,830)
Provision (Benefit) for Payments in Lieu of Taxes 7,887 (824) 14,075
----------- ----------- -----------
EARNINGS FROM OPERATIONS 105,894 72,945 92,731
Minority Interest in Earnings of Consolidated Subsidiaries (21,092) (22,621) (10,474)
----------- ----------- -----------
NET EARNINGS $ 84,802 $ 50,324 $ 82,257
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
B-4
<PAGE> 122
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Retained
Additional Available- Earnings - Total
Common Paid-in for-Sale Substantially Stockholder's
Stock Capital Securities Restricted Equity
------ ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $ 1 $ 105,419 $ $392,018 $497,438
Net Earnings - -- -- 82,257 82,257
Dividends on Common Stock - -- -- (18,000) (18,000)
Other Capital Distributions - -- -- (13,117) (13,117)
Unrealized Gain on Available-
for-Sale Securities - -- 29,657 -- 29,657
--- --------- -------- -------- --------
BALANCE AT DECEMBER 31, 1993 1 105,419 29,657 443,158 578,235
Net Earnings - -- -- 50,324 50,324
Dividends on Common Stock - -- -- (22,500) (22,500)
Other Capital Distributions - -- -- (13,117) (13,117)
Unrealized Loss on Available-
for-Sale Securities - -- (58,818) -- (58,818)
--- --------- -------- -------- --------
BALANCE AT DECEMBER 31, 1994 $ 1 $ 105,419 (29,161) 457,865 534,124
Net Earnings - -- -- 84,802 84,802
Dividends on Common Stock - -- -- (5,587) (5,587)
Other Capital Distributions - -- -- (9,308) (9,308)
Other Capital Reductions - (75,000) -- -- (75,000)
Unrealized Gain on Available-
for-Sale Securities - -- 139,528 -- 139,528
--- --------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 $ 1 $ 30,419 $110,367 $527,772 $668,559
=== ========= ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
B-5
<PAGE> 123
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
NET EARNINGS $ 84,802 $ 50,324 $ 82,257
Adjustments to Reconcile Net Earnings to Net Cash Provided
By Operating Activities:
Provisions for Credit Losses 63,837 101,609 123,503
Depreciation and Amortization 27,049 21,961 53,197
Net Gain from Disposition of Credit Card Receivables -- (24,981) --
Net Gain on Sale of Servicing Rights -- (20,396) --
Net Loss (Gain) on Asset Sales (2,568) 2,088 (33,770)
Loss on Sale of Covered Assets 37,399 -- --
Effect of FDIC Assistance on Covered Assets (55,630) -- --
Federal Home Loan Bank Stock Dividend (7,188) (5,355) (2,772)
Interest Payable, Net Change 20,552 10,398 20,074
Remittances Due, Net Change 33,523 (78,759) 33,550
Originated Receivables, Held-for-Sale (782,583) (223,220) (920,151)
Proceeds from Sale of Real Estate Receivables, Held-for-Sale 1,093,754 724,324 818,966
Purchase of Investment Securities, Held-for-Trading (128,510) (66,211) --
Proceeds from Sales of Investment Securities, Held-for-Trading 128,609 66,324 --
Decrease (Increase) in Interest Receivable (34,061) (14,551) 3,543
Increase (Decrease) in Federal and State Taxes 1,307 (295) (2,830)
Increase (Decrease) in Payable to FSLIC Resolution Fund 8,210 (15,133) (41,396)
Other, Net (2,601) (12,652) 57,250
---------- ---------- ----------
Total Adjustments 401,099 465,151 109,164
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 485,901 515,475 191,421
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Available-for-Sale Securities (619,918) (355,975) (334,306)
Principal Payments and Maturities of Available-for-Sale Securities 446,303 188,405 142,116
Proceeds from Sales of Available-for-Sale Securities 453,874 164,587 262,132
Purchases of Held-to-Maturity Securities (609,221) (1,147,607) (271,216)
Principal Payments and Maturities of Held-to-Maturity Securities 704,581 889,979 514,708
Originated Real Estate Receivables (3,939,384) (4,491,645) (2,955,578)
Principal Payments on Real Estate Receivables 744,400 840,432 1,014,252
Consumer Receivables Originated or Collected, Net Change 3,698 16,023 3,735
Federal Home Loan Bank Stock Purchases (29,774) (11,102) (14,068)
New West Note, Payments Received 1,682,040 1,569,018 1,569,018
Proceeds from Sale of Premises and Equipment 4,871 2,211 8,130
Purchase of Premises and Equipment (65,169) (19,988) (17,610)
Foreclosed Properties, Net Sales Proceeds 125,889 168,141 151,513
Cash Proceeds from Disposition of Credit Card Receivables -- 166,315 --
Purchased Mortgage Servicing Rights (38,270) (37,605) --
Other, Net (7,224) 38,818 (3,948)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,143,304) (2,019,993) 68,878
---------- ---------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
B-6
<PAGE> 124
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Deposit Activity, Net 189,540 (552,151) (618,033)
Proceeds from Federal Home Loan Bank Advances 1,093,732 2,505,794 3,170,361
Payments for Federal Home Loan Bank Advances (480,761) (3,652,271) (3,219,518)
Proceeds from Long-Term Reverse Repurchase Agreements 597,557 1,103,000 --
Payments for Long-Term Reverse Repurchase Agreements (475,127) -- --
Short-Term Reverse Repurchase Agreements, Net Change (88,648) 1,845,064 534,842
Federal Funds Purchased, Net Change (50,000) 50,000 --
Proceeds from Issuance of Series C Notes 175,000 -- --
Proceeds from Issuance of Subordinated Notes -- -- 19,988
Repayment of Series A Notes (111,000) -- --
Retirement of Subordinated Debentures -- -- (20,000)
Decrease in Payable to Affiliate -- -- (21,000)
Common Stock Dividends Paid (5,587) (32,500) (8,000)
Other Capital Distributions (9,308) (13,117) (13,117)
Other, Net (7,687) 4,704 (36,833)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 827,711 1,258,523 (211,310)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 170,308 (245,995) 48,989
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 215,253 461,248 412,259
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 385,561 $ 215,253 $ 461,248
========== ========== ==========
</TABLE>
DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest Paid on Deposits $ 628,618 $ 481,834 $ 513,196
Interest Paid on Borrowings 310,510 188,619 155,009
Non-Cash Investing Activities:
Loans Exchanged for Mortgage-Backed Securities 4,214,911 8,697 1,557,485
Foreclosed Properties Acquired in Settlement of Loans 231,838 318,726 316,369
Loans Originated to Facilitate the Sale of Foreclosed Properties 65,693 92,415 47,832
Non-Cash Financing Activities:
Deposits Exchanged in Branch Swaps -- -- 152,382
Additional Paid-in Capital Transferred to Minority Interest
Upon Sale of Preferred Stock to Unrelated Party 75,000 -- --
Dividends Declared and Payable in Different Years:
Common Stock Dividends -- (10,000) 10,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
B-7
<PAGE> 125
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Keystone Holdings, Inc. (the "Company") commenced operations in December 1988 as
an indirect holding company for American Savings Bank, F.A. ("American") and for
American Real Estate Group, Inc. ("AREG"). American is a Federally chartered
savings bank. AREG formerly managed certain real estate related assets of New
West Federal Savings and Loan Association ("New West") and is now inactive as a
result of a restructuring transaction in 1993. N.A. Capital Holdings, Inc.
("N.A. Holdings") owns all of the outstanding common stock of American and AREG.
N.A. Holdings is owned by New American Capital, Inc. ("New American") whose
common stock is owned by New American Holdings, Inc., a subsidiary of the
Company. The Company and its direct and indirect subsidiaries are collectively
referred to as the "Keystone Group."
The Company, through New American Holdings, Inc. owns the common stock of New
West. Although the Company holds the ownership interest in New West, the Company
does not have a financial interest in New West because of certain contractual
provisions and indemnifications, described here and in Note 8. Any loss incurred
by New West during its liquidation is the financial responsibility of the FSLIC
Resolution Fund. The Company does not record any equity in the earnings or
losses of New West and substantially all decisions made by New West's management
must be approved by the FDIC prior to execution. Therefore, the accounts of New
West are not included in the Company's consolidated financial statements. New
West was considered a nominee corporation of American for state and federal tax
purposes until October 24, 1995. (See Notes 17 and 18).
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). In preparing the Consolidated
Financial Statements, management is required to make estimates and assumptions
that affect the reported balances of certain assets and liabilities as of the
balance sheet date and revenues and expenses for the period then ended. In those
cases where amounts reported in the Consolidated Financial Statements are
significantly influenced by such estimates and assumptions, actual results could
differ from those reported. Certain amounts in the prior years Consolidated
Financial Statements have been reclassified to conform with the current year
presentation.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash, federal funds sold and repurchase
agreements with original maturities of 90 days or less.
Investment and Mortgage-Backed Securities
Investments in debt and equity securities that management has both the intent
and ability to hold until maturity are carried at cost, adjusted for
amortization of premium and accretion of discount, ("amortized cost") using the
interest method over the term of the security.
Securities that are bought and held principally for the purpose of selling in
the near term are classified as trading securities. In addition, mortgage loans
that are held-for-sale and were subsequently securitized in conjunction with
mortgage banking activities are classified as trading securities. Trading
securities are carried at fair value, with unrealized holding gains and losses
included in earnings. The Company had no securities classified as trading
securities at December 31, 1995 and 1994.
B-8
<PAGE> 126
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities not classified as either held-to-maturity or as trading securities
are classified as available-for-sale and carried at fair value, with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of stockholder's equity until realized. Securities are classified into
one of the three categories at acquisition. Any transfer between categories of
investments are accounted for at fair value. The Company recognized unrealized
holding gains of $139.5 million for the year ended December 31, 1995 and
unrealized holding losses of $58.8 million for the year ended December 31, 1994
on its available-for-sale portfolio.
Any declines in the recorded value of investment and mortgage-backed securities
that are determined to be other than temporary are charged to current earnings.
Dividend and interest income, including amortization of premium and accretion of
discount, for all three categories of securities are included in earnings when
earned using the interest method. The cost of investments and mortgage-backed
securities sold is determined by the specific identification method.
Receivables
Receivables, other than those that are identified as held-for-sale, are recorded
in the balance sheets at amortized cost. Receivables held-for-sale are those
originated or purchased with the intent to be sold in the foreseeable future.
These receivables, net of their related hedge gains and losses, are recorded at
the lower of amortized cost or fair value.
Interest income is accrued and credited to earnings as it is earned. Accrued
interest on receivables that are 90 days or more contractually delinquent is not
recognized as income ("nonaccrual receivables"). Interest income is subsequently
recognized on nonaccrual receivables only to the extent that payments are
received. Payments received on nonaccrual receivables are recorded as a
reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan principal. The Company
ceases amortization of deferred net fees or costs and accretion of discounts on
nonaccrual receivables. Nonaccrual receivables are returned to accrual status at
the time the delinquent receivable balance is paid current. Restructured
receivables have been permanently modified by the Company and include partial
forgiveness of principal, interest and an extension of the receivable's
maturity. The Company accounts for these receivables in accordance with
Statement of Financial Accounting Standards No. 15 ("SFAS 15"), "Accounting by
Debtors and Creditors for Troubled Debt Restructurings" and Statement of
Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by Creditors
for Impairment of a Loan", as amended by Statement of Financial Accounting
Standards No. 118 ("SFAS 118"), "Accounting for Creditors for Impairment of a
Loan - Income Recognition Disclosures."
Certain direct loan origination fees and costs are deferred and amortized as an
adjustment to yield over the estimated life of the related loans using the
interest method. Fees and direct costs associated with commitments expected to
be exercised are treated in the same manner. Indirect loan origination costs are
expensed as incurred.
The Company holds certain receivables that have been securitized into
mortgage-backed securities with full recourse. The allowance for credit losses
on mortgage-backed securities represents management's estimate of the credit
losses the Company will incur.
Allowance for Credit Losses
The allowance for credit losses is maintained at an amount management believes
adequate to absorb probable losses on the existing portfolio. Management
continuously assesses the adequacy of the allowance and periodically makes
adjustments through charges to earnings in order to maintain the allowance at an
appropriate level. Factors considered when making such an assessment include,
but are not limited to, the nature and value of the underlying collateral, the
loan delinquency status, historical and projected loss experience on sales of
foreclosed properties and the levels and trends of non-performing assets, loan
modifications and classified assets.
As management utilizes information currently available to make such an
assessment, the allowance for credit losses is subjective and may be adjusted in
the future depending on changes in economic conditions or other factors.
Additionally, various regulatory agencies, as an integral part of their regular
examination process, review the
B-9
<PAGE> 127
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's allowance for credit losses on a periodic basis. These agencies may
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Premises and Equipment
Premises and equipment are recorded at cost and depreciated over their estimated
useful lives using the straight-line method. Estimated lives are generally 31.5
years for buildings, three to five years for furniture and equipment, three to
five years for computer hardware and three years for computer software.
Leasehold improvements are depreciated using the straight-line method over the
remaining lease terms or the lives of the improvements, whichever is less. Costs
related to maintenance and repairs are expensed as incurred, whereas costs that
increase either the estimated useful life or value of the property are
capitalized.
Foreclosed Properties
Real estate acquired in settlement of loans or through deed-in-lieu of
foreclosure is recorded at fair value less estimated selling costs, as supported
by independent appraisals. Once acquired, the recorded value of the property is
periodically reviewed and may subsequently be adjusted downward with a charge to
earnings, as appropriate.
Purchased and Originated Servicing
In May 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights," an amendment to Statement of Financial
Accounting Standards No. 65 ("SFAS 65"), "Accounting for Certain Mortgage
Banking Activities." In September 1995, the Company adopted early application of
SFAS 122 and elected to implement SFAS 122 as of January 1, 1995 which resulted
in the recognition of $5.9 million in originated mortgage servicing rights. As
SFAS 122 prohibits retroactive application in prior years, the Company's
financial statement reporting for 1994 and prior is in accordance with the
original SFAS 65.
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. Originated servicing rights are recorded when mortgage loans are
originated and subsequently sold or securitized with the servicing rights
retained. The total cost of the mortgage loans is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. The cost relating to purchased and originated
servicing is capitalized and amortized in proportion to, and over the period of,
estimated future net servicing income.
The Company assesses impairment of the capitalized mortgage servicing portfolio
based on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired stratum.
For the purpose of measuring impairment, the Company stratified the capitalized
mortgage servicing rights using the following risk characteristics: fixed-rate
loans by coupon (less than 8%, 8%-10%, 10%- 12% and greater than 12%); and
adjustable-rate loans by index (Weighted Average Cost of Funds Index for the
Eleventh District Savings Institutions ("COFI"), Treasury, London Interbank
Offering Rate ("LIBOR"), etc.). Impairment is measured utilizing fair value.
In order to determine the fair value of the servicing rights, the Company uses
market prices under comparable servicing sales contracts, when available, or
alternatively, it uses a valuation model that calculates the present value of
future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed-rate mortgages with similar coupons and
prepayment reports for comparable adjustable-rate mortgages ("ARMs") . In
addition, the Company uses market comparables for estimates of the cost of
servicing per loan, an inflation rate, ancillary income per loan and default
rates. Amounts capitalized are recorded at cost, net of accumulated amortization
and valuation allowance.
Capitalized Excess Servicing
B-10
<PAGE> 128
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To the extent that servicing fees on a mortgage loan exceed a "normal" servicing
fee, the gain or loss on sale is adjusted to provide for the recognition of the
excess servicing fee over the estimated lives of the loans. The amount of the
adjustment approximates the amount that investors were willing to pay for the
excess servicing fees at the time of the loan sale. The adjustment results in an
asset that is realized through receipt of the excess service fee over the lives
of the loans.
The Company uses a valuation model to calculate the present value of future
excess servicing. Prepayment speeds are determined from market projections for
fixed-rate mortgages with similar coupons and vintage. Discount rates are
maintained at the market rate that existed at the time the excess servicing was
originally calculated.
Intangible Amortization
The assumption of deposits through acquisition has resulted in the recognition
of an intangible asset ("core deposit intangible"). The core deposit intangible
is included in "Other Assets" in the Consolidated Balance Sheets and is
amortized over the estimated life of the core deposits. The balance of the
Company's core deposit intangible was $3.3 million and $7.1 million at December
31, 1995 and 1994, respectively.
Debt Issuance Costs
Expenses incurred in connection with the issuance of certain outstanding debt of
the Company are deferred and amortized, using the interest method. The
amortization of deferred issuance costs is included as an adjustment of the debt
service cost over the term of the related debt. The unamortized balance of these
debt issuance costs is included in "Other Assets" in the Consolidated Financial
Statements.
Organization Costs
Expenses incurred in connection with the organization of the Company were
deferred and amortized over five years using the straight-line method. These
organization costs were fully amortized as of December 31, 1993.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
recorded amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
The Company and its subsidiaries file a consolidated federal income tax return.
For California franchise tax purposes, American joins in the filing of a
combined return with its subsidiaries and with AREG.
The Tax Sharing Agreement entered into by the Company and its subsidiaries (the
"Tax Sharing Agreement") requires the subsidiaries to compute their tax sharing
payments as if they were filing a separate return. Such agreement further
requires N.A. Holdings to compute its tax sharing payment as if it were filing a
separate consolidated return with its subsidiaries (including American), with
certain significant adjustments. The principal adjustments are (a) the income,
expenses, gains and losses of New West, a nominee of American for income and
franchise tax purposes through October 23, 1995, are excluded, (b) loan fees are
recognized on a straight-line basis over seven years, adjusted for sales of such
loans, rather than as received, and (c) for the years ending on or before
December 31, 1994, the market-to-market adjustment attributable to the real
estate loan portfolio acquired from the failed American Savings and Loan
Association is accreted into income ratably over seven years, adjusted for sales
of the acquired loans.
Securities and Loans Sold Under Agreements to Repurchase
B-11
<PAGE> 129
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company enters into sales of securities and loans under agreements to
repurchase the same or similar securities or loans ("reverse repurchase
agreements" and "dollar roll agreements"). Reverse repurchase and dollar roll
agreements are accounted for as financing arrangements, with the obligation to
repurchase securities or loans sold reflected as a liability in the Consolidated
Balance Sheets. The dollar amount of securities and loans underlying the
agreements remains in the respective asset accounts.
Interest Rate Risk Management Instruments
Interest rate risk management instruments include interest rate exchange
agreements ("swaps"), interest rate protection agreements ("caps"), forward
sales of financial instruments, and financial futures and options contracts.
Premiums, discounts and fees associated with caps and swaps are accreted into
income or amortized to expense using the interest method. A gain or loss upon
the termination of a hedge is amortized over the remaining life of the hedged
asset or liability. Any gains and losses from forward sales and financial
futures which meet deferral accounting criteria are either deferred and
amortized using the interest method over the lives of the related positions or
recognized in current earnings if the related assets are sold. Net unamortized
gains or losses are included in the recorded value of the related asset or
liability being hedged.
NOTE 2: CASH AND CASH EQUIVALENTS
The following table summarizes the outstanding balance of cash and cash
equivalents at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash $385,561 $145,369
Federal Funds Sold - 69,884
-------- --------
Total $385,561 $215,253
======== ========
</TABLE>
The cash balances noted above include restricted cash of $9.2 million and $4.8
million at December 31, 1995 and 1994, respectively. The restrictions primarily
relate to remittances received on certain receivables serviced for others.
The Company did not have any repurchase agreements outstanding at any month end
in 1995. The maximum balance of repurchase agreements outstanding at any month
end during 1994 was $125.0 million. The average balances outstanding during 1995
and 1994 were $0.5 million and $13.9 million, respectively. The weighted average
interest rates for 1995 and 1994 were 5.95 percent and 3.37 percent. All of the
securities underlying the repurchase agreements remain under the Company's
custody and control.
B-12
<PAGE> 130
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: INVESTMENT SECURITIES
The following tables summarize the amortized cost, fair value and gross
unrealized holding gains and losses on investment securities, all of which
management has the ability and intent to hold until maturity, at December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1995
------------------------------------------------
Gross Unrealized Weighted
Amortized ---------------- Fair Average
Cost Gains Losses Value Yield
--------- ----- -------- -------- -----
Investment securities:
U.S. government and agency obligations:
<S> <C> <C> <C> <C> <C>
Due within one year.................................. $ 19,693 $ -- $ -- $ 19,693 5.24%
Corporate debt obligations:
Due within one year.................................. 96,935 -- (2) 96,933 5.72
Due after one but within five years.................. 50 -- (2) 48 5.50
After five but within 10 years....................... 50 -- (3) 47 5.50
-------- ---- ------ -------- ----
97,035 -- (7) 97,028 5.72
-------- ---- ------ -------- ----
Total.............................................. $116,728 $ -- $ (7) $116,721 5.64%
======== ==== ====== ======== ====
1994
------------------------------------------------
Gross Unrealized Weighted
Amortized ---------------- Fair Average
Cost Gains Losses Value Yield
--------- ----- -------- -------- -----
Investment securities:
U.S. government and agency obligations:
Due within one year.................................. $ 23,847 $ -- $ -- $ 23,847 4.94%
Corporate debt obligations:
Due within one year.................................. 63,067 1 (7) 63,061 5.67
Due after one but within five years.................. -- -- -- -- --
After five but within 10 years....................... 100 -- (6) 94 5.50
-------- ---- ------ -------- -----
63,167 1 (13) 63,155 5.67
-------- ---- ------ -------- -----
Total.............................................. $ 87,014 $ 1 $ (13) $ 87,002 5.47%
======== ==== ====== ======== =====
</TABLE>
The following tables summarize the amortized cost, fair value and gross
unrealized holding gains and losses on investment securities, all of which
management has determined to be available-for-sale, at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995
------------------------------------------------
Gross Unrealized Weighted
Amortized ---------------- Fair Average
Cost Gains Losses Value Yield
--------- ----- -------- -------- -----
Investment securities:
U.S. government and agency obligations:
<S> <C> <C> <C> <C> <C>
Due after one but within five years.............. $ 164,972 $407 $ -- $165,379 6.56%
-------- ---- ------ -------- ----
Total.......................................... $ 164,972 $407 $ -- $165,379 6.56%
======== ==== ====== ======== ====
</TABLE>
B-13
<PAGE> 131
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1994
------------------------------------------------
Gross Unrealized Weighted
Amortized ---------------- Fair Average
Cost Gains Losses Value Yield
--------- ----- -------- -------- -----
Investment securities:
U.S. government and agency obligations:
<S> <C> <C> <C> <C> <C>
Due after one but within five years.............. $ 90,021 $ -- $(2,447) $ 87,574 5.66%
Corporate debt obligations:
Due after one but within five years.............. 50,000 -- (1,625) 48,375 5.70
-------- ---- ------- -------- ----
Total.......................................... $140,021 $ -- $(4,072) $135,949 5.68%
======= ==== ======= ======== ====
</TABLE>
No investment securities were classified as trading securities at December 31,
1995 and 1994. At December 31, 1995 and 1994, investment securities of $21.9
million and $15.8 million, respectively, were pledged as collateral to secure
certain borrowings.
The following table presents certain information on sales of the Company's
investment securities portfolio for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Proceeds From Sales $294,123 $88,328 $39,992
Gross Realized Gains 1,431 183 41
Gross Realized Losses 14 64 -
</TABLE>
The proceeds from sales of securities in 1995 and 1994, identified above, were
the result of sales of debentures. The proceeds from sales of securities in 1993
were the result of the sale of a U.S. Treasury security and a corporate
security. All of these securities were classified as available-for-sale or
held-for-trading.
B-14
<PAGE> 132
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: MORTGAGE-BACKED SECURITIES
The following table presents held-to-maturity and available-for-sale
mortgage-backed securities at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------------------------- -----------------------------------------------
Gross Unrealized Gross Unrealized
Amortized ----------------- Fair Amortized ------------------- Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- -------- ------- ------------ ---------- ------- --------- -----------
HELD-TO-MATURITY:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC $ - $ - $ - $ - $ 591,960 $ - $ (6,932) $ 585,028
FNMA(1) 2,908,206 51,402 - 2,959,608 689,142 602 (5,572) 684,172
Private Label - - - - 333,691 - (10,007) 323,684
Resolution Trust
Corporation - - - - 108,030 - (2,576) 105,454
---------- -------- ------- ---------- ---------- ------- -------- ----------
2,908,206 $ 51,402 $ - 2,959,608 1,722,823 $ 602 $(25,087) 1,698,338
======== ======= ======= ========
Allowance for Credit
Losses (17,441) - (16,701) -
---------- ---------- ---------- ----------
TOTAL $2,890,765 $2,959,608 $1,706,122 $1,698,338
========== ========== ========== ==========
AVAILABLE-FOR-SALE:
FHLMC $ 598,307 $ 16,900 $ (364) $ 614,843 $ 150,020 $ 31 $ (4,376) $ 145,675
FNMA(2) 2,872,005 97,699 (926) 2,968,778 1,191,602 19,020 (39,542) 1,171,080
Resolution Trust
Corporation 125,301 18 (1,387) 123,932 4,892 - (222) 4,670
Private Labels 355,709 1,240 (3,220) 353,729 - - - -
---------- -------- ------- ---------- ---------- ------- -------- ----------
TOTAL $3,951,322 $115,857 $(5,897) $4,061,282 $1,346,514 $19,051 $(44,140) $1,321,425
========== ======== ======= ========== ========== ======= ======== ==========
</TABLE>
- --------------------
(1) Included $2.9 billion of recourse obligations in 1995. There were no
recourse obligations in 1994.
(2) Included $1.8 billion and $1.0 billion of recourse obligations in 1995 and
1994, respectively. The $1.4 billion FNMA REMIC executed in December 1995 is
included in the $1.8 billion. Approximately $1.2 billion of the REMIC is
collateralized by multi-family loans, and represent Keystone Holdings' only
multi-family recourse amounts.
At December 31, 1995 and 1994, respectively, mortgage-backed securities of $4.2
billion and $1.9 billion were pledged as collateral to secure certain reverse
repurchase agreements.
At December 31, 1995 and 1994, the Company did not have any mortgage-backed
securities classified as trading securities.
The following table presents certain information on sales of the Company's
available-for-sale portfolio for the years ended December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Proceeds From Sales $159,751 $76,259 $222,140
Gross Realized Gains 1,184 252 1,359
Gross Realized Losses 18 - 2
</TABLE>
In November 1995, the FASB issued its Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities", that permitted enterprises to reassess the appropriateness of the
classifications of all securities held upon initial adoption of the Special
Report, provided that such reassessment and any resulting reclassification was
completed no later than December 31, 1995. As a result, the Company reclassified
$1.4 billion of mortgage-backed securities from its held-to-maturity portfolio
to the available-for-sale portfolio during November 1995. The unrealized gain on
these securities at the time of the reclassification was $24.8 million. There
were no subsequent sales of these reclassified securities in 1995.
B-15
<PAGE> 133
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: RECEIVABLES
The following table summarizes receivables at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
REAL ESTATE RECEIVABLES:
Single-Family
<S> <C> <C>
Adjustable $ 9,235,248 $ 9,539,309
Fixed 208,841 162,861
Multi-Family
Adjustable 1,342,563 2,529,120
Fixed 56,462 66,414
Commercial, Industrial and Land 359,537 441,980
Equity(1) 46,122 49,643
------------ ------------
TOTAL REAL ESTATE RECEIVABLES 11,248,773 12,789,327
OTHER RECEIVABLES:
Deposit Certificates 21,582 24,472
Credit Card 3,003 2,897
Other 18,156 19,071
------------ ------------
TOTAL OTHER RECEIVABLES 42,741 46,440
------------ ------------
TOTAL GROSS RECEIVABLES 11,291,514 12,835,767
Unearned Discount, net (41,492) (69,532)
Unamortized Deferred Fees, net (476) (26,856)
Allowance for Credit Losses (74,515) (95,789)
------------ ------------
RECEIVABLES OWNED, NET $ 11,175,031 $ 12,643,590
============ ============
Weighted Average Yield on Receivables for the Year Ended 7.60% 6.64%
============ ============
</TABLE>
- ---------------
(1) All equity loans are secured by residential real estate.
Total net receivables serviced was $27.4 billion, $24.0 billion and $18.7
billion at December 31, 1995, 1994 and 1993, respectively.
Collateralized borrowings issued by the Company, including Federal Home Loan
Bank ("FHLB") advances, are secured by receivables of $2.4 billion,
mortgage-backed securities of $3.0 billion and FHLB stock of $159.9 million at
December 31, 1995.
Included in the above table are receivables held-for-sale of $74.0 million and
$5.1 million at December 31, 1995 and 1994, respectively.
The Company primarily lends to customers located throughout California. The
following table summarizes the
B-16
<PAGE> 134
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's real estate receivable portfolio by certain geographic areas at
December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
San
Los Francisco Other Other
Angeles Orange Bay Area California States Total
---------- ---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Single-Family $2,759,775 $1,145,718 $3,178,947 $2,323,659 $35,990 $ 9,444,089
Multi-Family 559,749 110,935 299,488 402,995 25,858 1,399,025
Commercial, Industrial and
Land 136,076 28,448 55,578 137,231 2,204 359,537
Equity 38,617 469 3,461 3,570 5 46,122
---------- ---------- ---------- ---------- ------- -----------
TOTAL $3,494,217 $1,285,570 $3,537,474 $2,867,455 $64,057 $11,248,773
========== ========== ========== ========== ======= ===========
PERCENT 31.06% 11.43% 31.45% 25.49% 0.57% 100.00%
========== ========== ========== ========== ======= ===========
</TABLE>
No other geographic areas within California or other states constituted more
than ten percent of total receivables at December 31, 1995.
The following table presents the contractual maturity of gross real estate
receivables at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1999- 2001- 2006 &
1996 1997 1998 2000 2005 After Total
------- ------- ------- ------- -------- ----------- -----------
SINGLE-FAMILY
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable $ 167 $ -- $ 68 $ -- $ 1,463 $ 9,233,550 $ 9,235,248
Fixed 1,638 1,101 271 951 19,068 185,812 208,841
MULTI-FAMILY
Adjustable 4,067 1,267 3,073 13,735 74,963 1,245,458 1,342,563
Fixed 1,480 15,334 10,106 2,641 9,690 17,211 56,462
COMMERCIAL, INDUSTRIAL, LAND
Adjustable 2,716 32,713 12,742 10,350 110,760 104,154 273,435
Fixed 12,236 19,322 10,424 1,245 38,613 4,262 86,102
EQUITY
Adjustable -- -- -- -- 14 43,985 43,999
Fixed 3 27 1,788 55 71 179 2,123
------- ------- ------- ------- -------- ----------- -----------
TOTAL $22,307 $69,764 $38,472 $28,977 $254,642 $10,834,611 $11,248,773
======= ======= ======= ======= ======== =========== ===========
</TABLE>
Based upon historical experience, a substantial amount of receivables will be
paid prior to contractual maturity. As a result, this table is not to be
regarded as a forecast of future cash collections.
The following table summarizes the aggregate outstanding balance of nonaccrual
receivables and loans sold or securitized with recourse ("recourse obligations")
at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
NONACCRUAL RECEIVABLES AND RECOURSE OBLIGATIONS(1)(2)
<S> <C> <C>
Single-Family $118,480 $143,360
Multi-Family and Commercial 23,979 74,423
Equity 1,636 1,483
-------- --------
TOTAL $144,095 $219,266
======== ========
Percentage of Total Receivables and Recourse Obligations 0.90% 1.56%
</TABLE>
- ---------------
(1) At December 31, 1995 and 1994, nonaccrual receivables include nonaccrual
restructured receivables of $6.5 million and $3.9 million, respectively.
(2) At December 31, 1994, nonaccrual receivables serviced by others were
entitled to certain FDIC assistance and, therefore, were excluded from
the amounts shown above.
B-17
<PAGE> 135
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company did not have any receivables or recourse obligations more than 90
days past due and still accruing interest at December 31, 1995 and 1994, except
for consumer credit card loans which are placed on nonaccrual status when such
loans become 120 days past due.
In May 1993, the FASB issued SFAS 114. SFAS 114 addresses the accounting by
creditors for impairment of certain loans by specifying how allowances for
credit losses related to impaired loans should be determined. A loan is defined
as being impaired when, based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan agreement
(including both principal and interest payments) will not be received. SFAS 114
applies to all loans that are restructured in a troubled debt restructuring
involving a modification of terms.
In October 1994, the FASB issued SFAS 118 as an amendment to SFAS 114. SFAS 118
eliminates the income recognition provisions included in SFAS 114 thereby
permitting creditors to use existing methods of recognizing interest income on
impaired loans. The Company adopted the provisions of SFAS 114 as amended by
SFAS 118, effective January 1, 1995.
SFAS 114 does not apply to large groups of smaller balance homogenous loans that
are collectively evaluated for impairment. The Company collectively reviews all
single family loans, all consumer loans and multi-family and commercial loans
with outstanding principal balances under $1.0 million for impairment. The
Company considers a loan to be impaired when, based upon current information and
events, it believes it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
Company's impaired loans disclosed under the requirements of SFAS 114 include
nonaccrual loans (excluding those collectively reviewed for impairment), debt
restructurings, and multifamily and commercial loans less than 90 days
delinquent in which management believes that the borrower may be experiencing
financial difficulty based on indicators such as low debt coverage ratios or
high loan-to-value ratios ("other impaired loans"). The Company bases the
measurement of loan impairment on the fair value of the loan's underlying
collateral. If the recorded investment of a loan exceeds the measure of
impairment, the Company recognizes the impairment by creating a valuation
allowance (or adjusting an existing valuation allowance on the loan) with a
corresponding charge to the provision for credit losses. At the time of
in-substance foreclosure or troubled debt restructuring, including foreclosure,
the shortfall, if any, between the recorded investment of a loan and the measure
of impairment is charged off.
Impaired loans and the related specific loan loss allowance at December 31, 1995
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Recorded Allowance Net
Investment for Losses Investment
---------- ---------- ----------
Nonaccrual Loans:
<S> <C> <C> <C>
With specific allowances $ 1,128 $ 158 $ 970
Without specific allowances 3,417 -- 3,417
------- ------- -------
4,545 158 4,387
------- ------- -------
Restructured Loans:
With specific allowances 13,471 2,756 10,715
Without specific allowances 34,879 -- 34,879
------- ------- -------
48,350 2,756 45,594
------- ------- -------
Other Impaired Loans:
With specific allowances 10,065 2,804 7,261
Without specific allowances 6,419 -- 6,419
------- ------- -------
16,484 2,804 13,680
------- ------- -------
TOTAL IMPAIRED LOANS $69,379 $ 5,718 $63,661
======= ======= =======
</TABLE>
B-18
<PAGE> 136
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The average net recorded investment in impaired loans for the year ended
December 31, 1995 was $69.0 million. Interest income of $4.7 million was
recognized on impaired loans during the period of impairment.
Interest income is accrued and credited to earnings as it is earned. Accrued
interest on nonaccrual receivables (i.e., receivables that are 90 days or more
contractually delinquent) is not recognized as income. Interest income is
subsequently recognized on nonaccrual receivables only to the extent that
payments are received. Payments received on nonaccrual receivables are recorded
as a reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan principal. At December 31,
1995 nonaccrual loans had interest due but not recognized of approximately $7.1
million.
The aggregate investment in troubled debt restructurings ("TDRs") modified prior
to January 1, 1995 that are not impaired based on the terms specified by the TDR
agreements with borrowers was $10.6 million at December 31, 1995. The foregone
interest on these restructured receivables did not have a significant impact on
the Company's earnings for the year ended December 31, 1995. Interest income on
TDRs for the year ended December 31, 1995 was $0.8 million. At December 31,
1995, the Company had no commitments to lend additional funds to borrowers whose
loans were classified as TDRs.
The following table reconciles total nonaccrual loans to total impaired loans at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Total Nonaccrual Loans $144,095
Homogenous Nonaccrual Loans (139,550)
Accruing Restructured Loans 48,350
Other Impaired Loans 16,484
--------
Total Impaired Loans $69,379
========
</TABLE>
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
The following summarizes the activity in the allowance for credit losses related
to loan receivables and mortgage-backed securities ("MBS") for the year ended
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
January 1, ........................ $ 112,490 $ 125,747 $ 121,537
Provision for Credit Losses ....... 63,837 101,609 123,503
Charge-Offs:
Single-Family ................... (55,933) (88,033) (92,187)
Multi-Family .................... (22,784) (17,374) (10,127)
Commercial ...................... (5,362) (1,963) (3,008)
Consumer ........................ (1,510) (5,084) (13,971)
--------- --------- ---------
(85,589) (112,454) (119,293)
Earthquake ...................... (3,743) (5,145) --
--------- --------- ---------
Total Charge-offs ............. (89,332) (117,599) (119,293)
Recoveries:
Single-Family ................... 2,222 2,505 --
Multi-Family .................... 1,563 220 --
Commercial ...................... 1,176 8 --
--------- --------- ---------
Total Recoveries .............. 4,961 2,733 --
--------- --------- ---------
December 31, ...................... $ 91,956 $ 112,490 $ 125,747
========= ========= =========
Net Charge-Offs/Average Receivables
and Recourse Obligations ........ 0.52% 0.92% 1.02%
</TABLE>
B-19
<PAGE> 137
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: INTEREST RECEIVABLE
Interest receivable is comprised of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Receivables $ 60,779 $58,972
Mortgage-Backed Securities 48,380 16,971
Investment Securities 2,125 1,280
-------- -------
TOTAL $111,284 $77,223
======== =======
</TABLE>
NOTE 8: NEW WEST NOTE
On December 28, 1988 (the "Effective Date"), substantially all assets and
liabilities of the failed savings and loan subsidiary (the "Failed Association")
of Financial Corporation of America ("FCA"), were transferred to American (the
"Acquisition") and New West. As part of the transaction, American received a
promissory note from New West for the balance of the net assets transferred to
New West ("New West Note").
As of the Effective Date, the Company and other related entities also entered
into an assistance agreement (the "Assistance Agreement") with the Federal
Savings and Loan Insurance Corporation (the "FSLIC"). Under the terms of the
Assistance Agreement, the FSLIC Resolution Fund (the "FRF") is required to
indemnify American for specified losses that may be incurred on, or in
connection with, certain of the acquired assets.
The FDIC has always caused New West to prepay the New West Note to the maximum
extent permitted by its terms. If the maximum prepayments under its terms were
to have continued, the balance of the New West Note would have been reduced to
approximately $113.0 million in November 1995 and fully repaid in February 1996.
However, in October 1995, the Company agreed with the FDIC to allow prepayment
of the remaining balance of the New West Note. American received the remaining
principal balance of $505.3 million, plus interest on October 24, 1995. American
utilized the proceeds received to pay down certain short-term borrowings and to
originate new receivables.
The following is a summary of the New West Note activity for the years indicated
(dollars in thousands):
<TABLE>
<CAPTION>
New West Warrant Net of
Note Offset Warrant
----------- --------- -----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 ........ $ 4,767,144 $ 167,000 $ 4,600,144
Receivables Transferred to New West 52,932 -- 52,932
Optional Prepayments .............. (1,569,018) -- (1,569,018)
----------- --------- -----------
BALANCE AT DECEMBER 31, 1993 ........ 3,251,058 167,000 3,084,058
Optional Prepayments .............. (1,569,018) -- (1,569,018)
----------- --------- -----------
BALANCE AT DECEMBER 31, 1994 ........ 1,682,040 167,000 1,515,040
Optional Prepayments .............. (1,682,040) (167,000) (1,515,040)
----------- --------- -----------
BALANCE AT DECEMBER 31, 1995 ........ $ -- $ -- $ --
=========== ========= ===========
</TABLE>
The balance of the New West Note reported in the Company's financial statements
prior to December 31, 1995 has been reduced by the $167.0 million value ascribed
to the Warrants. Consensus No. 88-19 of the Emerging Issues Task Force of the
Financial Accounting Standards Board requires that capital arising from
instruments issued to the FSLIC be offset against amounts receivable from the
FSLIC which in this case included the New West Note, as its repayment was
supported by FRF assistance to New West.
B-20
<PAGE> 138
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Buildings and Leasehold Improvements $ 268,712 $ 218,666
Furniture and Equipment 99,617 94,460
Land 41,463 35,339
Construction in Progress 8,080 9,047
Accumulated Depreciation and Amortization (184,185) (163,400)
--------- ---------
TOTAL $ 233,687 $ 194,112
========= =========
</TABLE>
In January 1995, a wholly-owned service corporation of American purchased from a
related limited partnership the Irvine Plaza building structures and adjoining
land currently utilized for American's executive offices and various
departments. The total cash purchase price paid for the property was $45.2
million.
NOTE 10: FORECLOSED PROPERTIES
The following summarizes the outstanding balance of foreclosed properties at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Single-Family $ 69,448 $ 91,824
Multi-Family 29,404 28,423
Commercial and Industrial 4,922 28
--------- ---------
103,774 120,275
Allowance for Market Losses
Subsequent to Foreclosure (3,737) (1,630)
--------- ---------
TOTAL $ 100,037 $ 118,645
========= =========
</TABLE>
A summary of the activity in the allowance for market losses subsequent to
foreclosure for the years shown follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, $ 1,630 $ 7,855 $ 4,786
Provision for Market Losses 10,523 15,391 19,589
Write-downs (8,416) (21,616) (16,520)
-------- -------- --------
BALANCE AT DECEMBER 31, $ 3,737 $ 1,630 $ 7,855
======== ======== ========
</TABLE>
NOTE 11: MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued SFAS 122, an amendment to SFAS 65. In September
1995, the Company adopted early application of SFAS 122. SFAS 122 requires a
company that purchases or originates mortgage loans and subsequently sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Companies are required to assess impairment of the capitalized mortgage
servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights
should be stratified based upon one or
B-21
<PAGE> 139
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
more of the predominant risk characteristics of the underlying loans such as
loan type, size, note rate, date of origination, term and/or geographic
location.
The Company elected to implement SFAS 122 effective January 1, 1995. As a
result, throughout 1995 the Company capitalized $7.8 million in originated loan
servicing rights that resulted from the origination and sale of receivables with
servicing retained. At December 31, 1995, the Company established an impairment
valuation allowance of $0.9 million based upon an evaluation performed on the
entire servicing rights portfolio. The Company's financial statement reporting
for 1994 and prior was in accordance with the original SFAS 65.
The following table summarizes the activity in purchased loan servicing,
originated loan servicing and excess servicing fees, net of amortization and the
valuation allowance for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Purchased Loan Originated Loan Excess Total Mortgage
Servicing, Net Servicing, Net Servicing, Net Servicing Rights
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 9,205 $ - $ 59,345 $ 68,550
Present Value Gain on 1993 Sales - - 5,448 5,448
Amortization (3,046) - (19,757) (22,803)
------- ------- -------- --------
BALANCE AT DECEMBER 31, 1993 6,159 - 45,036 51,195
Sale of Servicing - - (13,087) (13,087)
Purchased Servicing 37,605 - - 37,605
Present Value Gain on 1994 Loan Sales - - 558 558
Amortization (2,448) - (12,784) (15,232)
------- ------- -------- --------
BALANCE AT DECEMBER 31, 1994 41,316 - 19,723 61,039
Purchased/Originated Servicing 38,270 7,757 - 46,027
Present Value Gain on 1995 Loan Sales - - 3,542 3,542
Amortization (12,702) (366) (5,757) (18,825)
Impairment Valuation Allowance - (882) - (882)
------- ------- -------- --------
BALANCE AT DECEMBER 31, 1995 $66,884 $6,509 $ 17,508 $ 90,901
======= ======= ======== ========
</TABLE>
NOTE 12: DEPOSITS
Deposits and related weighted average interest rates consisted of the following
at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------ -------- ----------- --------
DEMAND AND SAVINGS DEPOSITS
<S> <C> <C> <C> <C>
Money Market Demand $ 1,425,243 1.50% $ 1,585,308 1.84%
Passbook 1,878,761 3.90 1,063,064 2.77
Money Market Savings 415,886 2.51 564,298 2.58
Super Passbook 173,826 3.02 400,525 2.77
Other 237 -- 383 --
----------- -----------
TOTAL DEMAND AND SAVINGS DEPOSITS 3,893,953 2.83 3,613,578 2.33
----------- -----------
TIME CERTIFICATES
Fixed 9,126,012 5.64 9,217,044 4.83
Other 247 2.79 365 2.94
----------- ---------
TOTAL TIME CERTIFICATES 9,126,259 5.64 9,217,409 4.83
----------- -----------
Unearned Premium -- 313
Deferred Hedging Costs (15,183) (15,811)
----------- -----------
TOTAL $13,005,029 4.81% $12,815,489 4.13%
=========== ===========
</TABLE>
B-22
<PAGE> 140
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the maturity characteristics of time certificates
within each interest rate range at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Maturing in
------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter Total
---------- -------- -------- ------- ------- ---------- ----------
Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C>
0%-3.9% $ 55,130 $ 1,079 $ - $ - $ 1,068 $ - $ 57,277
4.0%-4.9% 1,202,412 62,729 427 93 5 - 1,265,666
5.0%-5.9% 4,952,907 356,129 97,417 18,239 27,983 4,081 5,456,756
6.0%-6.9% 1,235,642 345,122 58,663 43,053 52,327 214 1,735,021
7.0% or more 549,565 39,959 6,960 3,173 11,415 467 611,539
---------- -------- -------- ------- ------- ------ ----------
TOTAL $7,995,656 $805,018 $163,467 $64,558 $92,798 $4,762 $9,126,259
========== ======== ======== ======= ======= ====== ==========
</TABLE>
Fixed time certificates with balances of $100,000 or greater are $1.76 billion
at December 31, 1995.
At December 31, 1995 and 1994, respectively, receivables with total unpaid
principal balances of $344,000 and $383,000 were pledged as collateral for
certain public agency deposits.
The following summarizes interest expense on deposits by type of account for the
years ended December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Savings Deposits $598,403 $447,506 $468,000
Demand Deposits 24,112 29,502 40,486
Wholesale Deposits 6,000 1,365 2,447
Other 7,800 3,421 2,502
-------- -------- --------
TOTAL $636,315 $481,794 $513,435
======== ======== ========
</TABLE>
NOTE 13: FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1995, FHLB advances are secured by the Company's investment in
FHLB capital stock of $159.9 million and receivables and mortgage-backed
securities with aggregate principal balances of $893.1 million and $96.1
million, respectively. At December 31, 1994, FHLB stock of $123.0 million and
receivables with aggregate principal balances of $391.4 million secured FHLB
advances.
As a member of the FHLB of San Francisco, American must maintain FHLB capital
stock equal to the greater of: (a) 1.0 percent of its net residential mortgages,
(b) 5.0 percent of outstanding FHLB advances and letters of credit from the FHLB
or (c) 0.3 percent of unconsolidated assets. At December 31, 1995 and 1994,
American was in compliance with this requirement.
The following summarizes the FHLB advances outstanding and their related
weighted average interest rates at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Fixed $ 824,337 6.27 % $211,366 6.31 %
Adjustable 180,000 5.81 180,000 6.17
---------- --------
TOTAL $1,004,337 6.19 % $391,366 6.25 %
========== ========
</TABLE>
B-23
<PAGE> 141
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FHLB advances outstanding at December 31, 1995 will mature as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Maturing in
------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter Total
-------- ------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed $648,876 $10,000 $58,642 $50,000 $50,000 $ 6,819 $ 824,337
Adjustable -- -- 30,000 -- -- 150,000 180,000
-------- ------- ------- ------- ------- -------- ----------
TOTAL $648,876 $10,000 $88,642 $50,000 $50,000 $156,819 $1,004,337
======== ======= ======= ======= ======= ======== ==========
</TABLE>
The following table presents certain information on FHLB advances for the years
ending December 31, (dollar in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Month-End Outstanding Balance $1,004,337 $1,562,919 $1,638,561
Average Balance Outstanding 492,284 1,044,018 1,578,904
Weighted Average Rate 6.64% 6.62% 8.15%
</TABLE>
NOTE 14: REVERSE REPURCHASE AGREEMENTS
The Company enters into reverse repurchase agreements with major brokerage firms
that are primary dealers in government securities. Mortgage-backed securities
underlying certain of the agreements are delivered to the dealers that arrange
the transactions. The dealers may loan these securities to other parties in the
normal course of their operations. The following table presents information
regarding reverse repurchase agreements at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
Repurchase Recorded(1) Fair Maturity
Underlying Collateral Liability Value Value Date
- --------------------- ------------------------ ------------------------ ------------------------ ------------------
1995 1994 1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC Securities $ 113,171 $ 531,034 $ 113,774 $ 573,558 $ 119,162 $ 553,600 2/1/96 3/20/95
FNMA Securities 2,695,270 1,490,688 2,711,622 1,563,680 2,730,927 1,513,599 1/26/96 3/20/95
Pledged Receivables(2) 1,208,000 1,960,937 1,226,853 2,106,704 1,230,630 2,084,559 5/22/97 6/15/99
---------- ---------- ---------- ---------- ---------- ----------
TOTAL $4,016,441 $3,982,659 $4,052,249 $4,243,942 $4,080,719 $4,151,758
========== ========== ========== ========== ========== ==========
</TABLE>
- ------------------
(1) Recorded value includes accrued interest at December 31.
(2) In July 1994, American pledged certain single-family adjustable rate loans
as collateral for reverse repurchase agreements with the Federal Home Loan
Bank.
B-24
<PAGE> 142
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reverse repurchase agreements outstanding with individual brokers in excess of
ten percent of the Company's stockholder's equity at December 31, 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Collateral
Weighted ------------------------
Average Recorded Recorded Market
Purchasing Party Maturity Value(1) Value(1) Value
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DLJ 29 days $ 172,220 $ 176,433 $ 179,059
CS First Boston 33 days 366,168 376,221 325,228
Federal Home Loan Bank 508 days 1,226,853 1,206,500 1,230,630
FNMA 12 days 334,118 342,511 343,666
Goldman Sachs 32 days 672,917 674,362 677,774
Nomura Securities 25 days 330,640 341,574 344,715
Prudential Securities 17 days 266,880 270,036 273,920
Paine Webber 37 days 122,191 126,497 126,355
Salomon Brothers 32 days 325,496 333,555 335,158
UBS Securities 16 days 120,993 125,681 125,052
Smith Barney 32 days 113,774 118,275 119,162
</TABLE>
- ---------------
(1) Recorded value includes accrued interest at December 31, 1995.
The following table presents certain information on reverse repurchase
agreements for the years shown (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Month-End Outstanding Balance $4,258,600 $3,982,659 $1,101,457
Average Balance Outstanding 4,109,917 2,025,036 628,885
Weighted Average Rate 6.09% 4.68% 3.17%
</TABLE>
NOTE 15: OTHER BORROWED MONEY
Other borrowed money consisted of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Series A Floating Rate Notes due 1997 $ -- $111,000
Series B 9.60% Notes due 1999 169,000 169,000
Series C Floating Rate Notes due 2000 175,000 --
Federal Funds Purchased -- 50,000
Subordinated Notes Due 1998 20,500 20,500
Dollar Roll Agreements 5,915 8,478
Capitalized Leases 560 562
Mortgage Notes Payable Secured by Premises 104 113
-------- --------
TOTAL $371,079 $359,653
======== ========
Weighted average interest rate at end of period 8.41% 7.83%
======== ========
</TABLE>
B-25
<PAGE> 143
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other borrowed money matures as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ --------
<S> <C>
1996 $ 5,927
1997 13
1998 105,013
1999 84,514
2000 175,015
Thereafter 597
--------
TOTAL $371,079
========
</TABLE>
The following table presents certain information on other borrowed money for the
years ending December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Maximum Month-End Outstanding Balance $380,277 $367,795 $309,050
Average Balance Outstanding 368,477 319,500 301,461
Weighted Average Rate 8.54% 8.06% 8.47%
</TABLE>
On January 14, 1992, New American completed its private placement of Series A
Floating Rate Notes due 1997 ("Series A Notes") of $111.0 million and Series B
9.60 percent Notes due 1999 ("Series B Notes") of $169.0 million. Interest on
the Series A Notes accrued at three-month LIBOR plus 2.25 percent and repriced
quarterly. The Series B Notes accrue interest at 9.60 percent over their entire
term. A note purchase agreement (the "Note Purchase Agreement") was executed by
New American in connection with the private placement of the Series A and Series
B Notes.
On October 12, 1993, in accordance with a subordinated note purchase agreement
(the "Subordinated Note Agreement"), New American issued $20.5 million of
subordinated notes at a discounted price of 97.5 percent of the principal
amount. The subordinated notes accrue interest at a rate equal to three-month
LIBOR plus 2.875 percent. The rate on the subordinated notes wa 8.81 percent at
December 31, 1995. Interest is paid quarterly and the subordinated notes mature
on October 12, 1998.
The Note Purchase Agreement and the Subordinated Note Agreement contain certain
limitations regarding the payment of cash dividends on common or preferred
stock, the reacquisition or issuance of common or preferred stock, additional
borrowings and payments thereon and certain other transactions. New American is
in compliance with all such limitations.
On March 23, 1995, New American completed the private placement of $175.0
million of its Series C Floating Rate Notes due April 12, 2000 (the "Series C
Notes"). The net proceeds from the issuance of the Series C Notes were used to
redeem the $111.0 million Series A Notes and to fund a $60.0 million capital
contribution from N.A. Holdings to American. Interest on the Series C Notes
accrues at a rate equal to three-month LIBOR plus 1.375%, reset on a quarterly
basis. Interest payments are made quarterly on January 12, April 12, July 12 and
October 12 of each year.
The indenture related to the Series C Notes contains certain covenants that,
among other things, require the maintenance of regulatory capital at American
and limit the following: (i) funded indebtedness, (ii) subsidiary funded
indebtedness, (iii) upstream payments, (iv) subsidiary dividends, (v) liens,
(vi) mergers and consolidations, (vii) issuance of subsidiary capital stock,
(viii) transactions with affiliates and (ix) lines of business. New American is
in compliance with all such covenants and restrictions.
B-26
<PAGE> 144
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A redemption notice was provided to holders of the Series A Notes as required by
the Note Purchase Agreement and the redemption was completed on April 12, 1995.
As of March 30, 1995, New American irrevocably placed sufficient funds in trust
with its paying agent to satisfy the required principal and interest necessary
to redeem the Series A Notes on their redemption date. As a result, New American
recorded the payment of those funds as an in-substance defeasance of the Series
A Notes. The early retirement of the Series A Notes required the Company to
write off certain related unamortized debt issuance costs and to mark certain
interest rate cap agreements to market as of March 30, 1995, resulting in a
pre-tax loss on early retirement of debt approximating $2.1 million. The loss
has been included in general and administrative expenses in the accompanying
Consolidated Statements of Earnings.
NOTE 16: EMPLOYEE BENEFIT AND COMPENSATION PLANS
Pension Plan
Effective January 1, 1989, American established a defined benefit pension plan
(the "Plan") covering substantially all of its employees. The benefits are based
on each employee's years of service after January 1, 1989, up to a maximum of 30
years and each employee's compensation during the last five years of
participation. All service since the date of hire with either American or the
Failed Association is counted for vesting purposes. American's funding policy is
to ensure that the Plan meets the minimum funding requirement set forth in the
Employee Retirement Income Security Act of 1974 ("ERISA"). Plan assets include
cash equivalents and mutual funds.
Effective December 31, 1993, the Plan was amended to freeze benefit accruals for
all participants. This event resulted in a curtailment under Statement of
Financial Accounting Standards No. 88 ("SFAS 88"), "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." American realized a nominal gain as a result of the
curtailment.
The Plan was terminated effective June 30, 1995. At the termination date, all
participants' accrued benefits became fully vested. The net assets of the Plan
were allocated as prescribed by the ERISA and the Pension Benefit Guaranty
Corporation (the "PBGC") and their related regulations. All participants
received full benefits. The termination resulted in a settlement under SFAS 88.
American recognized a gain of $1.7 million as a result of the settlement. The
majority of the projected benefit obligation was settled in 1995. At December
31, 1995, the Plan had $1.8 million in remaining assets. Ultimate distribution
of these assets is pending IRS approval.
The following table sets forth the Plan's funded status and amounts recorded in
the Company's Consolidated Balance Sheet at December 31, 1994 (dollars in
thousands):
<TABLE>
<CAPTION>
1994
-------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION
<S> <C>
Vested Accumulated Benefits $ 5,307
Non-Vested Accumulated Benefits 1,316
-------
TOTAL ACCUMULATED BENEFITS $ 6,623
=======
Projected Benefit Obligation for Service Rendered to Date $ 6,623
Plan Assets at Fair Value 8,035
-------
Projected Benefit Obligation (Less than) in Excess of Plan Assets (1,412)
Unrecognized Net Gain 3,317
-------
PENSION LIABILITY $ 1,905
=======
</TABLE>
B-27
<PAGE> 145
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions used in determining the actuarial present value of the projected
benefit obligation at December 31, 1994 follows:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Rate of Return on Plan Assets 8.50%
Discount Rate 8.50%
Rate of Increase in Future Compensation 5.00%
</TABLE>
Net pension (income) cost includes the following components for the years shown
below (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service Cost (benefits earned during the period) $ - $ - $3,162
Interest Cost on Projected Benefit Obligation 594 688 803
Actual Return on Plan Assets (896) 152 (840)
Net Amortization and Deferral 78 (896) 233
------ ------ ------
NET PERIODIC PENSION (INCOME) COST $(224) $ (56) $3,358
====== ====== ======
</TABLE>
Savings Plan
American has established a savings plan for its employees that allows
participants to make contributions by salary deduction equal to 14.0 percent or
less of their salaries, pursuant to Section 401(k) of the Internal Revenue Code.
All regular employees of American, other than collective bargaining and
temporary employees are immediately eligible to participate in the Plan.
American matches an employee's contributions up to a maximum 4.0 percent of the
employee's salary. Employee contributions vest immediately; American's partial
matching contributions vest over five years. American's contributions to the
savings plan in 1995, 1994 and 1993 were $4.2 million, $4.4 million and $3.1
million, respectively.
Supplemental Executive Retirement Plan
American implemented a Supplemental Executive Retirement Plan ("SERP") in 1990.
The SERP is a non-qualified, noncontributory, defined benefit plan where
benefits are paid to certain officers using a target percentage which is based
upon the number of years of service with American. This percentage is applied to
the participant's average annual earnings for the highest three out of the final
ten years of employment. These benefits are reduced to the extent a participant
receives benefits from the defined benefit pension plan. The expense for the
SERP was $1.6 million, $1.9 million and $1.2 million in 1995, 1994 and 1993,
respectively.
Phantom Share Plan
In 1990, American implemented the Phantom Share Plan (the "PSP") for the benefit
of certain of its officers. The PSP provides a long-term financial performance
incentive to its participants. Participants in the PSP are granted phantom
shares (units of value), the value of which is determined similar to that of
actual equity securities. The PSP calls for the immediate exercisability and
cashing out in the event of a change of control of Keystone Holdings or any of
its subsidiaries. In the case of an initial public offering, the phantom shares
are converted into stock options. American did not record any costs for the PSP
in 1995 and 1994.
Executive Short-Term Incentive Plan
American has established a Short-Term Incentive Plan ("STI") for the benefit of
certain of its executives. The STI provides a short-term incentive to its
participants based upon the achievement of both overall company and individual
performance goals. The expense for the STI was $3.2 million, $2.2 million and
$3.0 million in 1995, 1994 and 1993, respectively.
B-28
<PAGE> 146
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: FEDERAL AND STATE INCOME TAXES
The Tax Sharing Agreement between the Company and its subsidiaries is generally
patterned after provisions in the Internal Revenue Code and requires the
Company's subsidiaries to make quarterly payments of their estimated tax
liabilities and tax sharing dividends based on analyzing income, as adjusted.
The excess of the amounts paid to the Company under the Tax Sharing Agreement
over the sum of (a) the current portion of the provision for income taxes and
(b) the provision for payments in lieu of taxes (see Note 18, "Payments in Lieu
of Taxes") is recorded as a tax sharing dividend.
The Company's taxable income (loss) and earnings before taxes for the years
ended December 31, follows (dollars in millions):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- --------
<S> <C> <C> <C>
Taxable Income (Loss) $128.5 $(31.0) $(944.6)
Earnings Before Taxes 118.2 73.8 104.0
</TABLE>
Pursuant to the terms of the closing agreement entered into with the Internal
Revenue Service in connection with the Acquisition, New West was treated as a
nominee of American until the balance of the New West Note fell below $250.0
million (the "Unwind Date," which occurred on October 24, 1995). Accordingly,
beginning on the Unwind Date, New West was treated as a separate entity for
federal income and California franchise tax purposes and is no longer a nominee
of American. Tax benefits that may be generated by any future losses of New West
will not reduce the taxes of American; however, there is no effect on the
benefits of utilizing the existing significant tax loss carryovers.
Current and deferred income taxes are allocated among the members of the
Keystone Group as if each company were filing a separate tax return. In
American's case, this computation considers the losses generated by American's
nominee, New West, prior to the Unwind Date.
As of December 31, 1995, the Company's net deferred tax asset was $112.6
million. In order to fully realize the net deferred tax asset, the Company will
need to generate future taxable income of approximately $672.1 million prior to
the expiration of its tax net operating losses, which begin to expire in 2004.
Based on the Company's history of prior operating earnings and expectations for
the future, management believes it is more likely than not that the Company will
realize the recorded benefit of $112.6 million through use of net operating loss
carryovers existing at December 31, 1995.
In determining the possible future realization of deferred tax assets
attributable to net operating loss carryovers, GAAP requires that future taxable
income from the following sources be taken into account: (a) the reversal of
taxable temporary differences, (b) future operations exclusive of reversing
temporary differences and (c) tax-planning strategies that, if necessary, would
be implemented to accelerate taxable income into years in which net operating
losses might otherwise expire. The Company's management has taken these sources
of future taxable income into account in determining the amount of the net
deferred tax asset.
B-29
<PAGE> 147
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes (benefit) attributable to income from continuing operations for the
years shown are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CURRENT
Federal $ 3,471 $ 766 $ --
State 931 955 --
--------- --------- ---------
CURRENT INCOME TAXES 4,402 1,721 --
DEFERRED
Federal 784 (42,840) (55,492)
State 6,330 (5,401) 39,286
--------- --------- ---------
7,114 (48,241) (16,206)
Change in Net Deferred Tax Asset Before Valuation
Allowance due to Change in Tax Laws and Rate -- -- 121,034
Change in Valuation Allowance (7,114) 48,241 (107,658)
--------- --------- ---------
DEFERRED INCOME TAXES (BENEFIT) -- -- (2,830)
--------- --------- ---------
TOTAL INCOME TAXES (BENEFIT) $ 4,402 $ 1,721 $ (2,830)
========= ========= =========
</TABLE>
The Company's effective tax rate differs from the statutory federal tax rate as
set forth below for the years shown (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- -------------------- -----------------------
Balance Rate Balance Rate Balance Rate
--------- ------ --------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
STATUTORY FEDERAL INCOME TAX
PROVISION AND RATE $ 41,364 35.0% $ 25,845 35.0% $ 36,392 35.0%
INCREASE (DECREASE) DUE TO:
Utilization of Current Tax
Losses of Nominee, New West (17,482) (14.8) (55,100) (74.6) (90,136) (86.7)
Change in Net Deferred Tax Asset
Before Valuation Allowance due
to Change in Tax Laws and Rate -- -- -- -- 121,034 116.4
State Franchise Tax net of Federal Tax Benefit 3,899 3.3 (2,890) (3.9) 39,286 37.8
Increase in Base Year Reserve Amount (16,318) (13.8) (11,605) (15.7) -- --
Change in Valuation Allowance (7,114) (6.0) 48,241 65.3 (107,658) (103.5)
Other, net 53 -- (2,770) (3.8) (1,748) (1.7)
--------- ------ --------- ------ --------- -------
EFFECTIVE INCOME TAX PROVISION AND RATE $ 4,402 3.7% $ 1,721 2.3% $ (2,830) (2.7)%
========= ====== ========= ====== ========= =======
</TABLE>
B-30
<PAGE> 148
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of deferred income taxes at December 31, are presented below (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
COMPONENTS OF THE DEFERRED TAX ASSET
Purchase Accounting $ 29,025 $ 40,319
Net Operating Loss Carryforwards 1,632,230 1,690,939
Provision for Losses on Loans and Real Estate 44,764 67,829
Other 40,057 33,941
----------- -----------
Total 1,746,076 1,833,028
VALUATION ALLOWANCE (1,150,206) (1,157,320)
----------- -----------
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE 595,870 675,708
----------- -----------
COMPONENTS OF DEFERRED TAX LIABILITY
Tax Bad Debt Reserve (449,137) (526,706)
Purchase Accounting (3,648) (4,500)
Other (30,489) (31,906)
----------- -----------
DEFERRED TAX LIABILITY (483,274) (563,112)
----------- -----------
DEFERRED TAX ASSET, NET $ 112,596 $ 112,596
=========== ===========
</TABLE>
The valuation allowances of $1.2 billion at December 31, 1995 and 1994, include
$130.6 million and $270.2 million, respectively, related to payments in lieu of
taxes that will arise from the realization of the net deferred tax asset. These
valuation allowances represent the excess of the gross deferred tax asset over
the sum of the taxes and the payments in lieu of taxes related to projected
future taxable income, reversing taxable temporary differences and tax planning
strategies. The decline in the valuation allowance of $7.1 million during the
year ended December 31, 1995 was primarily attributable to a greater than
anticipated utilization of the beginning balance of the deferred tax asset. The
increase in the valuation allowance of $48.2 million during the year ended
December 31, 1994 reflects management's estimate of the benefit Keystone would
ultimately receive from the utilization of losses from the operations of
American's nominee, New West. While the Revenue Reconciliation Act of 1993
increased the federal tax rate, it also significantly reduced, retroactively to
March 4, 1991, losses and deductions attributable to American's nominee, New
West. This resulted in a reduction in the deferred tax asset with a
corresponding change in the related valuation allowance for the year ended
December 31, 1993.
The enactment in 1993 of certain federal tax legislation had the effect of
retroactively disallowing certain losses and bad debt deductions arising from
assets of New West. As a result, the Company reduced its gross deferred tax
asset and the related valuation allowance by $155.0 million.
Also during 1993, California enacted legislation reducing the net operating loss
carryforward period from 15 years to ten years for losses incurred prior to 1994
relating to assets acquired in a tax-free reorganization under Internal Revenue
Code Section 368(a)(1)(G). This change had a negligible impact on the valuation
allowance.
At December 31, 1995, the Company has the following federal income tax net
operating loss carryforwards which expire under current law during the years
indicated (dollars in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2004 $1,641,595
2005 784,196
2006 701,008
2007 105,825
2008 625,887
2009 37,460
-----------
TOTAL $3,895,971
===========
</TABLE>
B-31
<PAGE> 149
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has alternative minimum tax credit carryovers of approximately
$4.2 million as of December 31, 1995 which are available to reduce future
regular federal income taxes.
Savings institutions are permitted a special bad debt deduction computed under
the percentage of taxable income method or the experience method, whichever is
more beneficial. The percentage of taxable income method is approximately 8.0
percent of taxable income, subject to certain limitations. Under the experience
method, a savings institution's bad debt deduction is computed based on actual
loan loss experience. Due to the significant tax net operating losses generated
by American's tax nominee, New West, prior to the Unwind Date, coupled with the
actual loan loss experience of New West deemed attributable to American for tax
purposes under the agreements executed in connection with the Acquisition, bad
debt deductions of American are computed using the experience method.
A deferred tax liability is not required to be recognized for the amount of the
tax bad debt reserve arising in years beginning before 1988 (the "base year
reserve amount") unless it becomes apparent that it will reverse in the
foreseeable future. At December 31, 1995 the base year reserve amount was
approximately $225.6 million. The Consolidated Financial Statements do not
include a tax liability of $24.4 million related to the base year reserve amount
as these reserves are not expected to reverse until indefinite future periods or
may never reverse. Circumstances that would require an accrual of all or a
portion of this unrecorded tax liability include the failure to meet the tax
definition of a savings institution or a reduction in qualifying loan levels.
The 1988, 1989 and 1990 tax returns of the Company have been examined by the
Internal Revenue Service.
NOTE 18: PAYMENTS IN LIEU OF TAXES
The Assistance Agreement generally provides that 75.0 percent of most of the
federal tax savings and approximately 19.5 percent of most of the California tax
savings (as computed in accordance with the Assistance Agreement) attributable
to American's utilization of any current tax losses or tax loss carryovers of
New West are to be paid by the Company for the benefit of the FRF. The
Assistance Agreement sets forth certain special adjustments to federal taxable
income to arrive at "FSLIC taxable income." The principal adjustments
effectively permit American (a) to recognize loan fees ratably over seven years
adjusted for loan dispositions, (b) to treat the income and expenses of N.A.
Holdings and New American as income and expenses of American, and (c) for years
ending on or before December 31, 1994, to recognize approximately 36.0 percent
of the amortization of the market-to-market adjustment attributable to the
acquired loan portfolio.
At December 31, the provision (benefit) for payments in lieu of taxes consisted
of the following (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
PROVISION (BENEFIT) FOR PAYMENTS IN LIEU OF TAXES
State $3,450 $(137) $ 327
Federal 4,437 (687) 13,748
------ ------ -------
TOTAL $7,887 $(824) $14,075
====== ====== =======
</TABLE>
NOTE 19: MINORITY INTEREST
New American's $80.0 million cumulative redeemable preferred stock ("Preferred
Stock") was issued to three investment partnerships, two of whom share
substantially common ownership with Keystone Holdings Partners, L.P. (the holder
of the Company's common stock). The two investment partnerships received $75.0
million of the $80.0 million of Preferred Stock issued. Due to substantially
common ownership, the $75.0 million of Preferred Stock was previously presented
in the Company's Consolidated Financial Statements as "Additional Paid-In
Capital". The
B-32
<PAGE> 150
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remaining $5.0 million of Preferred Stock, owned by an unrelated investment
partnership, has been presented as a minority interest.
Effective August 1, 1995, the three investment partnerships sold all of the
Preferred Stock to an unrelated party. Due to that sale, all of the Preferred
Stock is presented as a minority interest in the Company's Consolidated
Financial Statements as of December 31, 1995.
"Other Capital Distributions" in the Consolidated Statement of Stockholder's
Equity represents dividends on the Preferred Stock paid (prior to August 1,
1995) to the two investment partnerships that share substantially common
ownership with Keystone Holdings Partners, L.P. "Other Capital Reductions" in
the Consolidated Statement of Stockholder's Equity represents the $75.0 million
reduction in the Company's consolidated stockholder's equity due to the sale of
the Preferred Stock by the investment partnerships.
On the Effective Date, the FSLIC received the Warrants entitling the holder
thereof to purchase, for a nominal price, 3,000 shares of N.A. Holdings Class B
Common Stock, subject to certain adjustments, at any time after the earlier of
December 28, 1998 or a decision by N.A. Holdings to file a registration
statement under the Securities Act of 1933 in respect of a secondary public
offering of its securities. The Warrants expire by their terms on December 28,
1999, but may be extended to December 28, 2003 in certain circumstances. Holders
of the Warrants will also have certain rights upon liquidation of N.A. Holdings,
or any of its subsidiaries. The Warrants were valued as of the Effective Date by
an Independent Financial Advisor, based on certain assumptions, and have been
recorded at their ascribed value of $167.0 million on the books of N.A.
Holdings.
Prior to the repayment of the New West Note in October 1995, the $167.0 million
value ascribed to the Warrants was offset against the balance of the New West
Note pursuant to guidance provided by Consensus No. 88-19 of the Emerging Issues
Task Force of the Financial Accounting Standards Board. Subsequent to the
repayment of the New West Note, the $167.0 million Warrant value is included in
the balance of Minority Interest on the Consolidated Balance Sheets of the
Company.
The holder of the Warrants issued by N.A. Holdings is entitled to receive 30
percent of common dividends from N.A. Holdings after satisfaction of the
exclusive right of the common stock to receive the first $500.0 million in
common dividends. Tax sharing dividends are not subject to the $500.0 million
preference. In addition, the common stock is entitled to receive a 1.4 percent
preferential return.
In June 1993, the cumulative net earnings of N.A. Holdings net of tax sharing
dividends and the 1.4 percent preferential return amount exceeded $500.0
million. The Company records only 70.0 percent of such amounts earned in excess
of the $500.0 million preference as equity in earnings of subsidiaries. The
amount of earnings attributable to the Warrant holder are shown in the
Consolidated Financial Statements as minority interest in earnings of
consolidated subsidiaries.
NOTE 20: STOCKHOLDER'S EQUITY
Dividend Restrictions and Capital Levels
American's primary regulator is the Office of Thrift Supervision ("OTS"). OTS
regulations impose limitations upon all "capital distributions" by savings
associations, including cash dividends, payments to repurchase or otherwise
acquire an institution's shares, payments to shareholders of another institution
in a cash-out merger and other distributions charged against capital of savings
associations. All dividends paid by American have complied with these
limitations.
Savings institutions are categorized into one of three tiers by the OTS based
upon each institution's compliance with capital requirements and level of OTS
supervisory concern. Tier 1 savings institutions have capital, both before and
after a proposed distribution, greater than or equal to the fully phased-in
capital requirement applicable on December 31, 1995, and have not been notified
of being in need of more than normal supervision. These
B-33
<PAGE> 151
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
institutions may make capital distributions, after thirty days prior notice to
the OTS Director, during a calendar year up to the higher of 100.0 percent of
net earnings to date during such year plus an amount equal to 50.0 percent of
capital in excess of the fully phased-in capital requirement as of the beginning
of the year or 75.0 percent of its net earnings for the most recent four
quarters. American is a Tier 1 institution. Tier 2 savings institutions have
capital, both before and after a proposed distribution, greater than or equal to
the minimum capital required or would otherwise be a Tier 1 institution except
for notification of supervisory concerns. These institutions may make capital
distributions, after notice to the OTS Director, during a calendar year between
75.0 percent and 25.0 percent of net earnings to date depending upon how close
the institution is to meeting its fully phased-in capital requirement. Tier 1
and Tier 2 institutions can make additional distributions after OTS approval.
Tier 3 institutions do not meet their capital requirements and cannot make
capital distributions without prior OTS approval.
OTS regulations also prohibit savings institutions from making any capital
distribution or paying any management fees to any person controlling the
institution if after the distribution or payment the institution's capital would
be less than any of the following requirements: (a) a risk-based capital ratio
of 8.0 percent, (b) a core capital to risk- adjusted assets ratio of 4.0
percent, (c) a core capital to adjusted total assets ratio of 4.0 percent, and
(d) any specific capital level for any capital measure in any written agency
capital directive to which the institution is subject. American's capital has
exceeded these standards throughout the periods covered by the Consolidated
Financial Statements.
In addition, pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), American is required to meet certain minimum
regulatory tangible, core and risk-based capital requirements. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") further
expanded the capital requirements promulgated by FIRREA. At December 31, 1995
and 1994, American met all current and fully- phased in capital requirements.
New American is subject to the restrictions and limitations provided for in the
Note Purchase Agreement, the Subordinated Note Agreement and the Series C Note
Indenture. See Note 15, "Other Borrowed Money." Under the terms of the Note
Purchase Agreement and the Subordinated Note Agreement, New American cannot pay
dividends on its preferred stock or common stock unless its consolidated net
worth exceeds $375.0 million. As long as New American's consolidated net worth
exceeds $375.0 million, it can make restricted payments if the cumulative
restricted payments do not exceed the sum of (i) $30.0 million, (ii) the
proceeds from certain capital contributions and (iii) 50.0 percent of the
cumulative adjusted net earnings (as defined in the agreements) of New American.
The percentage limitation applied to cumulative adjusted net earnings is
increased to 65.0 percent as long as New American's consolidated net worth after
the proposed restricted payments exceeds $475.0 million. As of December 31,
1995, New American's consolidated net worth was $653.4 million and the 65.0
percent limitation was in effect. Under the terms of the Series C Note
Indenture, New American may pay dividends and make other capital distributions
("Upstream Payments") to the extent that it has the capacity to incur an
additional dollar of funded indebtedness (as defined in the Series C Indenture)
after the proposed Upstream Payment. Based on the most restrictive of New
American's debt covenants, as of December 31, 1995, New American would have been
permitted to make up to $55.8 million in dividend or other restricted payments.
NOTE 21: INTEREST RATE RISK MANAGEMENT
General
The Company enters into interest rate risk management transactions that involve,
to varying degrees, elements of credit and interest-rate risk. Exposure to
credit risk generally arises from the nonperformance of counterparties or their
inability to meet contractual terms. The Company's policy is to enter into
interest-rate risk management agreements only with large commercial banks, the
FHLB and primary dealers. The collateral supporting the financial instruments
are typically liquid assets such as mortgage-backed securities and loans. The
Company further manages its credit risk through the underwriting of investments
and the establishment of credit approvals, credit limits and the ongoing
monitoring of the counterparties. Interest rate and market risks arising from
these
B-34
<PAGE> 152
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions are managed through the use of established transaction size
limitations, a specific approval process for each transaction and ongoing
monitoring of risk positions. The Company does not enter into speculative
positions.
Interest Rate Exchange Agreements
The Company utilizes swaps to limit interest-rate risk or modify terms of
certain interest-sensitive assets and liabilities. At December 31, 1995 and
1994, the Company held $1.5 billion and $1.9 billion, respectively, in swap
positions. The following is a summary of the open swap positions, which are
generally based on one, three and six-month LIBOR (dollars in millions):
<TABLE>
<CAPTION>
Term to Maturity
Notional Fair Weighted Average Rate In Years
Amount Value Commences Receive Pay Original Remaining
----------- ------------ --------------- ------------ ------------- ------------- ------------
December 31, 1995
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Floating Payment $100 $13.3 1990 8.95% 6.01% 10.0 4.3
Floating Payment 225 3.6 1991 8.05 6.04 5.0 0.6
Fixed Payment 135 (4.6) 1992 5.90 6.87 5.0 1.3
Fixed Payment 782 (33.9) 1993 5.99 7.34 4.6 2.1
Fixed Payment 255 (0.7) 1994 6.05 5.84 2.4 0.5
Fixed Payment 20 (0.2) 1995 5.93 6.54 1.9 1.5
</TABLE>
<TABLE>
<CAPTION>
Term to Maturity
Weighted Average Rate In Years
Notional Fair --------------------------- ---------------------------
Amount Value Commences Receive Pay Original Remaining
----------- ------------ --------------- ------------ ------------- ------------- ------------
December 31, 1994
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Floating Payment $100 $ 4.0 1990 9.03% 5.79% 10.1 5.4
Floating Payment 225 0.4 1991 8.05 5.68 5.0 1.6
Floating Payment 250 (2.9) 1993 4.00 6.15 1.5 0.3
Fixed Payment 168 4.0 1992 6.00 6.84 4.9 2.2
Fixed Payment 946 8.9 1993 5.77 7.52 4.5 3.0
Fixed Payment 195 5.6 1994 5.71 5.90 2.6 1.6
</TABLE>
Interest Rate Protection Agreements
Interest rate protection agreements entitle the purchaser, in exchange for the
payment of a premium, to receive variable interest payments if the index exceeds
an agreed upon interest rate ("cap rate"). The Company's cap positions are
indexed based upon one or three-month LIBOR or one-month COFI. Shown below are
the interest rate protection agreements held by the Company at the dates
indicated (dollars in millions):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1994
--------- --------
<S> <C> <C>
Notional Amount $ 7,224 $ 1,885
Unamortized Premium $ 18 $ 17
Estimated Market Value $ (0.6) $ 21
Weighted Average Maturity 1.9 yrs 4.6 yrs
Weighted Average Original Term 2.2 yrs 5.9 yrs
Weighted Average Cap Rate 7.69% 8.46%
One-Month LIBOR at December 31, 5.69% 5.94%
Three-Month LIBOR at December 31, 5.63% 6.44%
One-Month COFI at December 31, 5.12% 4.19%
</TABLE>
For the years ended December 31, 1995 and 1994, the index did not exceed the cap
rates and the Company did not receive any payments under these agreements.
B-35
<PAGE> 153
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To further manage interest rate risk, the Company entered into interest rate
collar agreements (caps and floors) during 1995 which are effective January
1996. The collars have a notional amount of $5.0 billion, a three-month LIBOR
index and a weighted average maturity of one year.
Forward Sales
The Company uses forward sales of financial instruments to lock in prices on
similar types and coupons of financial instruments and thereby limit market risk
until these financial instruments are sold. See Note 23, "Commitments and
Contingencies - Loan Commitments."
The following table summarizes the open positions at the dates indicated
(dollars in millions):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
MORTGAGE POOL SECURITIES
Notional Amount $ 97 $ 7
Deferred Loss $ (1) $ -
Weighted Average Maturity 25 days 33 days
Weighted Average Coupon 6.61% 8.40%
</TABLE>
Financial Futures and Options
Financial futures and options contracts may be used to limit risk from declining
interest rates or to protect against rising interest rates; however, during 1995
and 1994 the Company did not purchase any futures or option contracts.
NOTE 22: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial instruments
is made in accordance with the requirements of the Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
B-36
<PAGE> 154
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments at December 31,
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------------- ---------------------------
Recorded Fair Recorded Fair
Amount Value Amount Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash, Cash Equivalents and Other Investments $ 827,617 $ 827,610 $ 561,215 $ 561,203
New West Note - - 1,515,040 1,667,405
Mortgage-Backed Securities 6,952,047 7,020,890 3,027,547 3,019,763
Receivables from Affiliates 1,357 1,357 1,282 1,282
Receivables, Net of Allowance for Credit Losses 11,175,031 11,517,125 12,643,590 12,255,376
Excess Servicing Fees Receivable 17,508 22,963 19,723 20,727
FINANCIAL LIABILITIES:
Deposits 13,005,029 13,136,945 12,815,489 12,764,187
Federal Home Loan Bank Advances 1,004,337 1,018,398 391,366 389,399
Reverse Repurchase Agreements 4,016,441 4,017,245 3,982,659 3,982,649
Other Borrowings 371,079 382,498 359,653 357,416
OFF-BALANCE SHEET NET UNREALIZED GAINS (LOSSES):
Interest Rate Protection and Exchange Agreements - (22,965) - 40,341
Outstanding Loan Commitments Written - 50 - (14)
Commitments to Sell or Purchase Mortgage Loans - (931) - (7)
</TABLE>
Cash, Cash Equivalents and Other Investments
The fair values of cash and cash equivalents, federal funds sold, and investment
in FHLB stock approximate the recorded values reported in the balance sheets.
The fair values of investment securities and repurchase agreements are based on
quoted market prices.
New West Note
In January 1995, the Federal Deposit Insurance Corporation ("FDIC") offered to
pay down the remaining principal balance of the New West Note at par. Therefore,
the fair value of the New West Note at December 31, 1994 represented the at par
offer by the FDIC as it was the best indication of the current fair value. The
Company agreed with the FDIC in October 1995 to allow prepayment of the
remaining balance of the New West Note. On October 24, 1995, American received
the remaining principal balance of the New West Note of $505.3 million, plus
interest. See Note 8, "New West Note".
Mortgage-backed Securities
The fair value of mortgage-backed securities is based on quoted market prices,
yield spreads or dealer quotations from secondary market sources, adjusted for
excess mortgage servicing rights for mortgage-backed securities issued before
January 1, 1995 and originated mortgage servicing rights for mortgage-backed
securities issued on or after January 1, 1995 on wholesale loans that were
obtained from secondary market sources.
Loans Receivable
For purposes of calculating the fair value of loans receivable, loans were
segregated by type, such as residential mortgages, income property loans,
consumer and other receivables. Each loan category was further segregated
between those with fixed interest rates and those with adjustable interest
rates. ARMs are grouped based upon index, repricing terms and other relevant
terms.
B-37
<PAGE> 155
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all mortgage loans, fair value is estimated using discounted cash flow
analyses. Discount rates are based on secondary market quotations for similar
loan types adjusted for differences in credit and servicing characteristics. For
adjustable-rate mortgages in particular, a multiple scenario analysis is used to
measure the impact interest rate caps have on fair value.
Excess Servicing Fees Receivable
The fair value of excess servicing fees receivable is estimated using projected
cash flows, adjusted for the effects of anticipated prepayments, using a market
discount rate.
Deposits
The fair values of passbook accounts, demand deposits, and certain money market
deposits are assumed to be the recorded amounts at the reporting date. The fair
value of term accounts is based on projected contractual cash flows discounted
at rates currently offered for deposits of similar maturities. Core deposit
intangibles are not included.
Federal Home Loan Bank Advances and Other Borrowings
The fair values of fixed and adjustable rate FHLB advances are estimated by
discounting contractual cash flows using discount rates that reflect current
FHLB borrowing rates for similar advances.
Other borrowings include securities and loans sold under agreements to
repurchase, Series A, B and C Notes, subordinated notes and mortgages payable
secured by premises. The fair value of other borrowings is calculated based on a
discounted cash flow analysis. The cash flows are discounted using approximated
maturity matched rates for comparable instruments.
Off-Balance Sheet Financial Instruments
Off-balance sheet items include interest rate caps, collars, corridors and swaps
used for hedging purposes. Swap values are determined using dealer quotations,
when available, or a discounted cash flow calculation whereby existing positions
are discounted using rates that reflect current spreads on swaps with similar
terms. Fair value of caps, collars and corridors are calculated using a multiple
scenario analysis when dealer quotations are not available. The fair values
represent the estimated amounts that the Company would receive or pay to
terminate the existing agreements at the reporting date. Other off-balance sheet
financial instruments include outstanding loan commitments written, recourse
obligations on receivables sold, and commitments to sell or purchase mortgage
loans. The fair values of these instruments are determined using current
estimated replacement costs.
NOTE 23: COMMITMENTS AND CONTINGENCIES
Lease Commitments
American conducts a major portion of its operations through leased facilities,
primarily branch offices. These leases are primarily operating leases and
contain options to renew at current market rates. Most leases contain escalation
clauses based upon operating costs or the consumer price index. Management
believes that in the normal course of business a majority of the leases will be
renewed or replaced by other leases. At December 31, 1995, minimum commitments
under noncancelable leases are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Contractual Maturity
-------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter Total
------- ------ ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE $ 9,524 $9,007 $ 7,815 $ 6,701 $ 5,673 $25,419 $64,139
======= ====== ======= ======= ======= ======= =======
</TABLE>
B-38
<PAGE> 156
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also, see discussion relating to purchase of Irvine Plaza buildings and land at
Note 9 "Premises and Equipment." Total rent expense was $13.1 million, $18.8
million and $18.5 million for the years ending December 31, 1995, 1994 and 1993,
respectively.
Loan Commitments
At December 31, the Company has the following commitments outstanding (dollars
in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commitments to Originate Adjustable Receivables $258,079 $529,064
Commitments to Originate Fixed Receivables 102,046 1,306
Commitments to Sell Receivables 126,501 6,683
Commitments to Purchase Mortgage-Backed Securities - 9,234
</TABLE>
In December 1992, American issued a $5.7 million irrevocable letter of credit
(expiring no later than December 17, 2002). This letter of credit serves to
ensure the timely payment of principal and interest on a loan made by the City
of Modesto, California. This loan is secured by a first trust deed on an
apartment complex in Modesto. At December 31, 1995, this letter of credit had
not been drawn upon. As part of the reimbursement agreement supporting the
letter of credit, American obtained a $5.7 million standby letter of credit from
the FHLB.
Litigation
The Company is a defendant in various legal actions that arise out of the normal
course of business. In the opinion of management, the probable liability
resulting from these suits, individually or in the aggregate, is unlikely to
have a material effect on the Company.
American has been named as a party in a variety of actions arising out of the
development of a 48-unit residential condominium project located in Long Beach,
California. The Failed Association had foreclosed on a loan secured by the
project in 1984 and completed construction. All 48 units in the project were
then sold, most with financing supplied by the Failed Association; one of these
loans was later refinanced by American. The loans issued by the Failed
Association, to the extent still outstanding, are now owned directly by the
FDIC. The claims in the actions include allegations of design and construction
defects, as a result of the alleged location of the project on a solid waste
landfill, and claims for relief under the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and Liability Act.
Although the claimed damages are substantial, American has received
indemnification from the FDIC for claims other than those relating to the loan
refinanced by American. American settled that claim in 1995 by a release of the
loan for a discounted payoff.
As part of the administration and oversight of the Assistance Agreement, the
FDIC has a variety of review and audit rights, including the right to review and
audit computations of payments in lieu of taxes. At the present time, the
Company and its affiliated parties are completing a settlement with the FDIC for
all periods through June 30, 1994. Under the terms of a proposed settlement, the
Company and its affiliated parties and the FDIC will mutually settle and release
all claims in consideration of certain nominal payments. The Company has
received no notice of any issues arising after June 30, 1994.
Acquisition Structure
In the ordinary course of business, a variety of interpretive differences have
arisen between American and its affiliated entities on the one hand and the
government agencies responsible for administering the agreements entered into in
connection with the Acquisition (principally the FDIC) (the "Acquisition
Agreements") on the other. These differences (some of which involved amounts
material to American) have been addressed both through negotiation and through
arbitration without a material impact on American. Management expects that the
administration of the Acquisition Agreements will continue to raise issues as to
which American and its affiliates, may have views different from those of the
FDIC. The prepayment of the balance of the New West Note, which occurred on
B-39
<PAGE> 157
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 24, 1995, will implicate various provisions of the Acquisition
Agreements that have not previously been the subject of interpretation by the
parties. Management does not believe that any disputes that may continue to
arise relating to the Acquisition Agreements will have a material adverse effect
on American.
NOTE 24: SIGNIFICANT EVENT
Restructuring
On June 30, 1993, American, AREG, certain of American's holding companies and
New West entered into a transaction (the "Restructuring") with the FDIC as
manager of the FRF and the Resolution Trust Corporation ("RTC"), pursuant to
which New West transferred most of its real estate-related assets (the
"Transferred Assets") to a new partnership, Brazos Partners, L.P. ("Brazos
Partners"). Also, as a result of the Restructuring, AREG's agreement to manage
the real estate assets of New West was terminated and American modified and
restated its management agreement (the "Restated Management Agreement") with New
West to cover management of all assets and liabilities retained by New West
(respectively, the "Retained Assets" and "Retained Liabilities").
Pursuant to the Restated Management Agreement, American is responsible for all
post-June 30, 1993 management functions associated with the remaining operations
of New West. The Restated Management Agreement provides identical
indemnifications and virtually the same management standards, exculpations,
covenants and level of FDIC oversight, as contained in American's prior
management agreement.
At the closing of the Restructuring, N.A. Holdings received a non-recourse,
subordinated note (the "Investor Note") in the aggregate principal amount of
$20.0 million, along with $3.0 million in cash from certain entities that are
investors in Brazos Partners (the "Investor Entities"). These were delivered to
N.A. Holdings in exchange for the transfer to the Investor Entities of certain
rights related to the existing management agreements distributed by American to
N.A. Holdings immediately prior thereto. As a result of this transaction, N.A.
Holdings recorded a gain of $23.0 million in 1993.
Payments on the Investor Note were made out of 18.1 percent of all
non-liquidating distributions to the Investor Entities and, after payment of
$72.4 million of senior indebtedness owed to the FDIC, out of 100.0 percent of
liquidating distributions. The note accrued interest at 12.0 percent per annum
and was secured by a second priority lien on the respective interests of the
Investor Entities in Brazos Partners. N.A. Holdings had agreed that all payments
of principal and interest received with respect to the Investor Note would be
contributed by N.A. Holdings to the capital of American. The Investor Note due
to N.A. Holdings was completely repaid in 1994.
With respect to loans or real estate owned ("REO") that qualify for Modified FRF
Assistance and certain categories of loans serviced by others ("LSBOs") that
would have previously qualified to be "put" to New West, American and its
holding companies will also receive indemnification from the FDIC with respect
to liabilities incurred in connection with third-party claims relating to the
ownership or management by American thereof (other than claims resulting from
American's gross negligence or willful misconduct). These indemnification rights
end upon termination of the Assistance Agreement (expected to be December 28,
1998), except that certain environmental indemnities will continue for longer
periods.
After the Restructuring, certain assistance and indemnification payments by the
FDIC to American will accrue interest at 175 basis points above the COFI from
the date American records the amount until paid at the end of each quarter.
In connection with the Restructuring, the Keystone Group received a closing
agreement from the Internal Revenue Service concluding that the closing
agreement received in 1988 remains in effect. Therefore, losses generated by New
West may continue to offset income of American for federal income tax purposes,
and the Keystone Group will continue to benefit from a reduction of its federal
income tax. No additional rulings or opinion letters were sought from the
California Franchise Tax Board; however, management believes that the Keystone
Group may
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<PAGE> 158
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continue to rely on its earlier opinion letters so that New West's losses will
continue to offset income of American for California franchise tax purposes.
Provisions of the 1988 Assistance Agreement that impose restrictions on the uses
of the tax sharing payments made to the Company by its subsidiaries were
modified to allow those payments to be contributed as capital to American under
certain circumstances (including the Company's passing a $300.0 million minimum
net worth test). Certain procedures were established, including, among others, a
procedure whereby funds would be advanced by New American to N.A. Holdings as a
loan and N.A. Holdings would then in turn contribute the proceeds of the loan to
American. By this procedure, the dividend preference contained in the Class A
Common Stock of N.A. Holdings held by New American will not be affected. On June
30, 1993, $12.0 million was contributed from the Company to New American
Holdings to New American and lent to N.A. Holdings. N.A. Holdings then
contributed the $12.0 million to American pursuant to this modification. Amounts
contributed to American out of tax sharing payments are required to be returned
to the Company as needed to fund payments in lieu of taxes for the benefit of
the FRF. As of December 31, 1994, the $12.0 million formerly contributed to
American had been returned to the Company.
NOTE 25: RELATED PARTY TRANSACTIONS
Irvine Plaza
In January 1995, a wholly-owned service corporation of American purchased from a
related limited partnership the Irvine Plaza building structures and adjoining
land currently utilized for American's executive offices and various
departments. The total cash purchase price paid for the property was $45.2
million.
Consulting Payments
The Company has consulting agreements with affiliates calling for annual
payments to be made to the affiliates in return for executive services rendered
to the Company. During 1995, 1994 and 1993 payments of $0.8 million,$0.7 million
and $1.5 million, respectively were made.
Advances to Affiliates
From time to time the Company makes interest bearing advances to affiliates. At
December 31, 1995 and 1994 the Company had advances to affiliates of $1.4
million and $1.3 million, respectively.
NOTE 26: ACCOUNTING STANDARDS ISSUED
Statement of Financial Accounting Standards No. 121
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If an impairment analysis is necessary, the following should be
performed: (a) estimate the future cash flows expected to result from the use of
the asset and its eventual disposition (b) if the sum of the expected future
cash flows (undiscounted and without interest rate charges) is less than the
carrying amount of the asset, an impairment loss is recognized (c) the
measurement of an impairment loss should be based on the fair value of the
asset. This statement does not apply to financial instruments, core deposit
intangibles, mortgage and other servicing rights or deferred tax assets.
This statement is effective for fiscal years beginning after December 15, 1995.
The provisions of SFAS 121 will be implemented January 1, 1996. The impact on
the Company is not expected to be material.
B-41
<PAGE> 159
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Position 94-6
In December 1994, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 94-6, "Disclosure of Certain Significant Risks and
Uncertainties." SOP 94-6 supplements disclosure requirements for risks and
uncertainties existing as of the date of the financial statements in the
following areas: (a) nature of operations, (b) use of estimates in the
preparation of financial statements, (c) certain significant estimates and (d)
current vulnerability due to certain concentrations.
SOP 94-6 is effective for financial statements issued for fiscal years ending
after December 15, 1995, and for financial statements for interim periods in
fiscal years subsequent to the year for which this SOP is to be the first
applied. SOP 94-6 did not have an impact on the Company's operations or
financial position.
Statement of Financial Accounting Standards No. 123
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123
establishes a fair value based method of accounting for stock based compensation
plans. SFAS 123 encourages, but does not require, adopting the fair value based
method. SFAS 123 will not have an impact on the Company's operations or
financial position.
NOTE 27: SUBSEQUENT EVENT
On February 8, 1996, American completed the private placement of $100.0 million
of Subordinated Notes (the "Notes"). The Notes bear interest at a rate of 6.625
percent per annum. Interest on the Notes is payable semi-annually in arrears on
each February 15 and August 15, beginning on August 15, 1996.
The Notes mature on February 15, 2006. However, the Notes are redeemable in
whole, or in part, at the option of American at all time prior to that date. The
redemption price is equal to the greater of (i) 100 percent of the principal
amount and (ii) the sum of the present values of the remaining scheduled
payments of principal and interest discounted to the date of redemption on a
semiannual basis at the Treasury Yield plus 15 basis points, plus in each case
accrued interest to the date of redemption.
The payment of the principal and interest on the Notes is subordinated to the
prior payment in full of all Senior Indebtedness. Senior Indebtedness, in
general, includes the principal and interest on (a) all claims against American
having the same priority as savings account holders of American or any higher
priority, (b) all indebtedness of American, other than the Notes, which is given
in connection with the acquisition of any businesses, properties or assets of
any kind and (c) obligations of American as lessee under capitalized leases. At
December 31, 1995, Senior Indebtedness of American totaled approximately $18.0
billion, including $13.0 billion in deposits.
The proceeds of the private placement were used to pay general corporate
expenses, to repay certain borrowings and to fund loan originations. The Notes
qualify to be included in regulatory capital.
The Notes do not restrict American from paying dividends or from incurring,
assuming or becoming liable for any type of debt or other obligation. In
addition, the Notes do not require American to maintain any financial ratios or
certain levels of regulatory capital or liquidity.
B-42
<PAGE> 160
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 28: PARENT COMPANY FINANCIAL INFORMATION
Following are the Condensed Financial Statements of Keystone Holdings, Inc.
(parent company only) (dollars in thousands):
CONDENSED BALANCE SHEETS:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 59 $ 34
Held to maturity investment securities (fair
value $70,731 and $3,027) 70,731 3,027
Investment in subsidiaries 590,003 526,586
Receivable from affiliates 18,304 5,000
Other assets $ 1,296 $ 1,016
----------- -----------
TOTAL ASSETS $ 680,393 $ 535,663
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses $ 11,834 $ 1,539
STOCKHOLDER'S EQUITY:
Common stock 1 1
Additional paid-in capital 30,419 105,419
Unrealized gain (loss) on available-for-sale securities 110,367 (29,161)
Retained earnings 527,772 457,865
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 668,559 534,124
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 680,393 $ 535,663
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF EARNINGS:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest income $ 640 $ 480 $ 1,782
Interest expense - - 299
-------- -------- --------
Net interest expense 640 480 1,483
Other expenses 1,606 2,398 3,072
-------- -------- --------
Loss before equity in earnings of subsidiary (966) (1,918) (1,589)
Provision for payments in lieu of taxes - - (428)
Equity in earnings of subsidiary 85,768 52,242 84,274
-------- -------- --------
NET EARNINGS $ 84,802 $ 50,324 $ 82,257
======== ======== ========
</TABLE>
B-43
<PAGE> 161
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 28: PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net earnings $ 84,802 $ 50,324 $ 82,257
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiary (85,768) (52,242) (84,274)
Increase (decrease) in FSLIC Resolution Fund
share of Keystone Group tax benefits
payable to New West 8,210 (15,133) (41,396)
(Increase) decrease in receivable from subsidiaries
for Keystone Group tax benefits
payable to New West (6,845) 5,731 (6,121)
---------
Other, net 1,806 (203) 17
--------- --------- ---------
Total adjustments (82,597) (61,847) (131,774)
--------- --------- ---------
Net cash provided by (used in) operating activities 2,205 (11,523) (49,517)
--------- --------- ---------
Cash flows from investing activities:
Contributions to subsidiary (13,392) (20,677) (72,860)
---------
Purchase of held-to-maturity securities (120,518) (150,462) (680,950)
---------
Tax sharing dividends received 77,173 21,594 49,526
---------
Common stock dividends received 7,500 39,500 34,000
---------
Proceeds from maturities of held-to-maturity securities 52,814 155,118 749,598
---------
Other, net (75) (1,111) (535)
--------- --------- ---------
Net cash provided by investing activities 3,502 43,962 78,779
--------- --------- ---------
Cash flows from financing activities:
Common stock dividends paid (5,587) (32,500) (8,000)
---------
Decrease in notes payable to affiliates -- -- (21,000)
---------
Other, net (95) 1 (409)
--------- --------- ---------
Net cash used in financing activities (5,682) (32,499) (29,409)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 25 (60) (147)
Cash and cash equivalents at beginning of year 34 94 241
--------- --------- ---------
Cash and cash equivalents at end of year $ 59 $ 34 $ 94
========= ========= =========
</TABLE>
B-44
<PAGE> 162
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION
Following is the condensed financial information for the Company's significant
subsidiary, American Savings Bank, F.A. (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents $ 385,203 $ 215,049
Investment Securities (fair value of $38,311 and $76,676) 38,318 76,688
Receivables, net 11,101,010 12,638,520
Mortgage-Backed Securities, net (fair value of $2,959,608 and $1,698,338) 2,890,765 1,706,122
Assets Available-for-Sale:
Investment Securities 165,379 135,949
Mortgage-Backed Securities, net 4,061,282 1,321,425
Assets Held-for-Sale:
Receivables (fair value of $75,614 and $5,070) 74,021 5,070
New West Note - 1,682,040
Federal Home Loan Bank Stock 159,949 122,987
Interest Receivable 110,977 77,191
Premises and Equipment, net 227,282 181,467
Foreclosed Properties, net 100,037 118,645
Mortgage Servicing Rights, net 90,901 61,039
Deferred Tax Asset, net 112,596 112,596
Other Assets 90,223 82,003
----------- ------------
TOTAL ASSETS $19,607,943 $18,536,791
=========== ===========
LIABILITIES:
Deposits $13,005,029 $12,815,489
Federal Home Loan Bank Advances 1,004,337 391,366
Reverse Repurchase Agreements 4,016,441 3,982,659
Payable to Affiliate 16,001 2,867
Federal Funds Purchased - 50,000
Other Borrowed Money 6,579 9,153
Interest Payable 52,212 32,677
Remittances Due Banks 54,525 77,183
Remittances Due on Loans Serviced for Others 136,312 80,131
Accounts Payable and Accrued Expenses 77,557 81,203
----------- ------------
TOTAL LIABILITIES 18,368,993 17,522,728
----------- ------------
STOCKHOLDERS' EQUITY:
Participating Preferred Stock Series A (par value $0.01 per share, liquidation
preference $0.10 per share); Shares Authorized 10,000;
Shares Issued 3,503 - -
Common Stock (par value $1.00 per share); Shares Authorized 1,000,000;
Shares Issued and Outstanding 97,000 97 97
Additional Paid-in Capital 446,488 386,488
Unrealized Gain (Loss) on Available-for-Sale Securities 110,367 (29,161)
Retained Earnings - Substantially Restricted 681,998 656,639
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,238,950 1,014,063
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,607,943 $18,536,791
=========== ============
</TABLE>
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<PAGE> 163
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
---------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME:
Receivables $ 967,168 $ 708,369 $ 755,409
Mortgage-Backed Securities 272,320 167,073 106,764
New West Note 58,841 141,039 241,014
Investment Securities 37,846 18,745 10,346
----------- ----------- -----------
Total Interest Income 1,336,175 1,035,226 1,113,533
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 636,315 481,794 513,435
FHLB Advances 30,858 69,096 128,741
Reverse Repurchase Agreements 261,217 103,828 20,239
Other Borrowings 1,378 956 412
----------- ----------- -----------
Total Interest Expense 929,768 655,674 662,827
----------- ----------- -----------
NET INTEREST INCOME 406,407 379,552 450,706
Provision for Credit Losses 63,837 101,609 123,503
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 342,570 277,943 327,203
OTHER INCOME AND EXPENSE:
Gain From Disposition of Credit Card Receivables, net -- 24,981 --
Gain on Sale of Servicing Rights -- 20,396 --
Gain (Loss) on Sale of Receivables, net 34 (2,295) 9,776
Savings Fee Income 21,526 16,781 17,555
Commissions Income 16,890 15,150 17,590
Receivable Fee Income 11,811 12,982 13,829
Gain on Other Asset Sales, net 2,534 207 1,474
Net Expense of Foreclosed Properties (18,032) (13,390) (12,951)
Net Servicing Income 18,696 14,038 7,229
Loss on Sale of Covered Assets (37,399) -- --
Effect of FDIC Assistance on Covered Assets 55,630 -- --
Other Income and Expense 743 45 3,138
----------- ----------- -----------
Total Other Income and Expense 72,433 88,895 57,640
----------- ----------- -----------
EARNINGS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES AND TAXES 415,003 366,838 384,843
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and Fringe Benefits 146,292 151,797 149,770
Occupancy 32,151 34,801 40,568
Regulatory Premiums and Assessments 33,367 32,483 32,019
Data Processing 27,119 25,777 26,693
Advertising and Promotion 12,424 11,628 11,677
Deferred Origination Expenses (34,718) (38,931) (35,067)
Reimbursements from Affiliates (573) (1,144) (6,601)
Other Operating Expenses 38,130 40,325 39,584
----------- ----------- -----------
Total General and Administrative Expenses 254,192 256,736 258,643
----------- ----------- -----------
EARNINGS BEFORE TAXES 160,811 110,102 126,200
Provision (Benefit) for Federal and State Income Taxes 4,402 1,722 (2,830)
Provision (Benefit) for Payments in Lieu of Taxes 7,887 (824) 14,397
----------- ----------- -----------
NET EARNINGS $ 148,522 $ 109,204 $ 114,633
=========== =========== ===========
</TABLE>
B-46
<PAGE> 164
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 148,522 $ 109,204 $ 114,633
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Provision for Credit Losses 63,837 101,609 123,503
Depreciation and Amortization 16,447 12,502 38,951
Net Gain on Disposition of Credit Card Receivables -- (24,981) --
Net Gain on Sale of Servicing Rights -- (20,396) --
Net Loss (Gain) on Asset Sales (2,568) 2,088 (11,250)
Loss on Sale of Covered Assets 37,399 -- --
Effect of FDIC Assistance on Covered Assets (55,630) -- --
Federal Home Loan Bank Stock Dividend (7,188) (5,355) (2,772)
Interest Payable, Net Change 19,535 9,731 20,609
Remittances Due, Net Change 33,523 (78,759) 33,550
Increase (Decrease) in Accounts Payable and Accrued Expenses (3,646) 4,463 (13,644)
Originated Receivables, Held-for-Sale (782,583) (223,220) (920,151)
Proceeds from Sale of Receivables, Held-for-Sale 1,093,754 724,324 818,966
Purchase of Investment Securities, Held-for-Trading (128,510) (66,211) --
Proceeds from Sale of Investment Securities, Held-for-Trading 128,609 66,324 --
Decrease (Increase) in Interest Receivable (33,786) (14,569) 3,433
Other, Net (9,263) (39,009) 59,442
----------- ----------- -----------
Total Adjustments 369,930 448,541 150,637
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 518,452 557,745 265,270
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Available-for-Sale Securities (619,918) (355,975) (334,306)
Principal Payments and Maturities of Available-for-Sale Securities 446,303 188,405 142,116
Proceeds from Sales of Available-for-Sale Securities 453,874 164,587 262,132
Purchases of Held-to-Maturity Securities (443,322) (824,013) (13,137)
Principal Payments and Maturities of Held-to-Maturity Securities 606,767 532,304 199,951
Originated Real Estate Receivables (3,939,384) (4,491,645) (2,955,578)
Principal Payments on Real Estate Receivables 744,400 840,432 1,014,252
Consumer Receivables Originated or Collected, Net Change 3,698 16,023 3,735
Federal Home Loan Bank Stock Purchases (29,774) (11,102) (14,068)
New West Note, Net Payments Received 1,682,040 1,569,018 1,569,018
Proceeds from Sale of Premises and Equipment 4,871 2,211 8,130
Purchase of Premises and Equipment (65,169) (19,988) (17,438)
Foreclosed Properties, Net Sales Proceeds 125,889 168,141 151,513
Purchased Mortgage Servicing Rights (38,270) (37,605) --
Cash Proceeds from Disposition of Credit Card Receivables -- 166,315 --
Other, Net (7,149) 21,369 (3,928)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,075,144) (2,071,523) 12,392
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, Net 189,540 (552,151) (618,033)
Proceeds from Federal Home Loan Bank Advances 1,093,732 2,505,794 3,170,361
Payments for Federal Home Loan Bank Advances (480,761) (3,652,271) (3,219,518)
Proceeds from Long-Term Reverse Repurchase Agreements 597,557 1,103,000 --
Payments for Long-Term Reverse Repurchase Agreements (475,127) -- --
Short-Term Reverse Repurchase Agreements, Net Change (88,648) 1,845,064 534,842
Federal Funds Purchased, Net Change (50,000) 50,000 --
Tax Sharing Dividends Paid (77,173) (22,050) (49,793)
Common Stock Dividends Paid (39,700) (29,500) (25,000)
Capital Contributions from Parent 60,000 19,167 14,642
Other, Net (2,574) 932 (31,754)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 726,846 1,267,985 (224,253)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 170,154 (245,793) 53,409
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 215,049 460,842 407,433
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 385,203 $ 215,049 $ 460,842
=========== =========== ===========
</TABLE>
B-47
<PAGE> 165
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest Paid on Deposits $ 628,618 $ 481,834 $ 513,196
Interest Paid on Borrowings 280,763 164,109 129,022
Non-Cash Investing Activities:
Loans Exchanged for Mortgage-Backed Securities 4,214,911 8,697 1,557,485
Foreclosed Properties Acquired in Settlement of Loans 231,720 318,726 316,369
Loans Originated to Facilitate the Sale of Foreclosed Properties 65,693 92,415 47,832
Non-Cash Financing Activities:
Deposits Exchanged in Branch Swaps -- -- 152,382
Dividends Declared and Payable in Different Years:
Tax Sharing Dividends 9,206 2,916 (7,987)
</TABLE>
B-48
<PAGE> 166
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents $ 144,062 $ 385,561
Investment Securities (fair value of $106,089 and $116,721) 106,095 116,728
Receivables, net 12,812,492 11,101,010
Mortgage-Backed Securities, net (fair value of $2,820,495 and $2,959,608) 2,770,432 2,890,765
Assets Available-for-Sale:
Investment Securities 121,805 165,379
Mortgage-Backed Securities, net 3,542,364 4,061,202
Assets Held-for-Sale:
Receivables (fair value of $42,433 and $75,614) 42,141 74,021
Federal Home Loan Bank Stock 180,270 159,949
Interest Receivable 115,745 111,284
Premises and Equipment, net 231,455 233,687
Foreclosed Properties, net 84,036 100,037
Mortgage Servicing Rights, net 90,026 90,901
Deferred Tax Asset, net 112,596 112,596
Receivable from Affiliate 2,582 1,357
Other Assets 124,605 99,099
------------ ------------
TOTAL ASSETS $ 20,480,706 $ 19,703,656
============ ============
LIABILITIES:
Deposits $ 12,728,966 13,005,029
Federal Home Loan Bank Advances 2,013,439 1,004,337
Reverse Repurchase Agreements 3,987,359 4,016,441
Other Borrowings 493,734 371,079
Interest Payable 80,666 63,114
Remittances Due Banks 46,092 54,525
Remittances Due on Loans Serviced for Others 97,089 136,312
Dividend Payable 25,000 --
Accounts Payable and Accrued Expenses 150,984 91,199
------------ ------------
TOTAL LIABILITIES 19,623,329 18,742,036
------------ ------------
MINORITY INTEREST 306,979 293,061
STOCKHOLDER'S EQUITY:
Common Stock 1 1
Additional Paid-in Capital 30,419 30,419
Unrealized Gain (Loss) on Available-for-Sale Securities (1,411) 110,367
Retained Earnings - Substantially Restricted 521,389 527,772
------------ ------------
TOTAL STOCKHOLDER'S EQUITY 550,398 668,559
------------ ------------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY $ 20,480,706 $ 19,703,656
============ ============
</TABLE>
B-49
<PAGE> 167
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Receivables $ 448,397 $ 463,094 $ 230,568 $ 235,908
Mortgage-Backed Securities 242,465 112,497 117,954 66,249
New West Note -- 43,699 -- 19,432
Investment Securities 15,858 17,011 8,986 8,976
--------- --------- --------- ---------
Total Interest Income 706,720 636,301 357,508 330,565
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 298,357 308,414 147,227 160,913
Federal Home Loan Bank Advances 21,252 13,120 11,636 6,304
Reverse Repurchase Agreements 130,393 132,055 67,150 66,940
Other Borrowings 19,094 17,013 9,792 8,588
--------- --------- --------- ---------
Total Interest Expense 469,096 470,602 235,805 242,745
--------- --------- --------- ---------
NET INTEREST INCOME 237,624 165,699 121,703 87,820
Provision for Credit Losses 35,180 34,533 17,203 15,600
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 202,444 131,166 104,500 72,220
--------- --------- --------- ---------
OTHER INCOME AND EXPENSE:
Gain (Loss) on Sale of Receivables, net 2,965 777 1,332 (10,742)
Savings Fee Income 11,627 9,018 5,879 4,629
Commission Income 10,241 7,703 5,163 4,324
Receivable Fee Income 7,681 5,042 4,309 2,849
Gain (Loss) on Other Asset Sales, net (324) 890 45 734
Net Expense of Foreclosed Properties (7,496) (8,467) (3,772) (4,936)
Net Servicing Income 9,391 8,275 4,698 4,149
Loss on Sale of Covered Assets -- (667) -- (453)
Effect of FDIC Assistance on Covered Assets -- 16,741 -- 14,226
Other, net 539 445 360 (420)
--------- --------- --------- ---------
Total Other Income and Expense 34,624 39,757 18,014 14,360
--------- --------- --------- ---------
EARNINGS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES AND TAXES 237,068 170,923 122,514 86,580
General and Administrative Expenses 134,870 136,130 67,592 68,165
--------- --------- --------- ---------
EARNINGS BEFORE TAXES 102,198 34,793 54,922 18,415
Provisions for Federal and State Income Taxes 3,469 1,037 1,803 684
Provision (Benefit) for Payments in Lieu of Taxes 24,216 (6,476) 11,411 (42)
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS 74,513 40,232 41,708 17,773
Minority Interest in Earnings of Consolidated Subsidiaries (20,896) (14,708) (11,516) (5,488)
--------- --------- --------- ---------
NET EARNINGS $ 53,617 $ 25,524 $ 30,192 $ 12,285
========= ========= ========= =========
</TABLE>
B-50
<PAGE> 168
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on Retained
Additional Available- Earnings - Total
Common Paid-in for-Sale Substantially Stockholder's
Stock Capital Securities Restricted Equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1 $ 30,419 $ 110,367 $ 527,772 $ 668,559
Net Earnings -- -- -- 53,617 53,617
Dividends on Common Stock -- -- -- (60,000) (60,000)
Unrealized Loss on
Available-for-Sale Securities -- -- (111,778) -- (111,778)
--------- --------- --------- --------- ---------
Balance at June 30, 1996 $ 1 $ 30,419 $ (1,411) $ 521,389 $ 550,398
========= ========= ========= ========= =========
</TABLE>
B-51
<PAGE> 169
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 53,617 $ 25,524
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities
Provision for Losses 35,180 34,533
Depreciation and Amortization 19,439 13,141
Net Gain on Asset Sales (2,641) (1,667)
Loss on Sale of Covered Assets -- 667
Effect of FDIC Assistance on Covered Assets -- (16,741)
Federal Home Loan Bank Stock Dividend (4,394) (3,249)
Interest Payable, Net Change 17,552 31,725
Remittances Due, Net Change (47,656) 25,587
Originated Receivables, Held-for-Sale (538,310) (152,312)
Proceeds from Sale of Receivables, Held-for-Sale 561,428 284,200
Purchase of Mortgage-Backed Securities, Held-for-Trading (5,326) --
Proceeds from Sales of Mortgage-Backed Securities, Held-for-Trading 5,331 --
Purchase of Investment Securities, Held-for-Trading -- (29,827)
Proceeds from Sales of Investment Securities, Held-for-Trading -- 29,888
Increase in Interest Receivable (4,461) (27,780)
Increase (Decrease) in Federal and State Taxes (1,301) 108
Increase (Decrease) in Payable to FSLIC Resolution Fund 24,090 (6,267)
Other, Net 27,109 7,329
----------- -----------
Total Adjustments 86,040 189,335
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 139,657 214,859
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Available-for-Sale Securities (113,223) (290,604)
Principal Payments and Maturities of Available-for-Sale Securities 270,047 175,908
Proceeds from Sales of Available-for-Sale Securities 283,638 136,679
Purchases of Held-to-Maturity Securities (1,662,880) (322,595)
Principal Payments and Maturities of Held-to-Maturity Securities 1,800,566 357,261
Originated Real Estate Receivables (2,280,377) (1,944,071)
Principal Payments on Real Estate Receivables 507,667 270,835
Consumer Receivables Originated or Collected, Net Change 1,413 1,469
Federal Home Loan Bank Stock Purchases (15,927) (29,774)
New West Note, Payments Received -- 784,508
Proceeds from Sale of Premises and Equipment 1,178 1,990
Purchase of Premises and Equipment (10,623) (56,228)
Foreclosed Properties, Net Sales Proceeds 59,384 79,069
Purchased Mortgage Servicing Rights (5,170) (19,783)
Other, Net (2,080) 3,007
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,166,387) (852,329)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, net (276,063) 487,811
Proceeds from Federal Home Loan Bank Advances 2,130,844 103,292
Payments for Federal Home Loan Bank Advances (1,121,742) (110,350)
Proceeds from Issuance of Series C Notes -- 175,000
Repayment of Series A Notes -- (111,000)
Proceeds from Issuance of Subordinated Notes 99,172 --
Proceeds from Long-Term Reverse Repurchase Agreements 574,081 394,885
Payments for Long-Term Reverse Repurchase Agreements (202,672) --
Short-Term Reverse Repurchase Agreements, Net Change (400,491) (198,621)
Federal Funds Purchased, Net Change 30,000 (50,000)
Common Stock Dividends Paid (35,000) (5,500)
Preferred Stock Dividends Paid (6,977) (6,938)
Other, Net (5,921) (6,385)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 785,231 672,194
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (241,499) 34,724
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 385,561 215,253
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 144,062 $ 249,977
=========== ===========
</TABLE>
B-52
<PAGE> 170
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in Thousands)
(Unaudited)
Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Interest Paid on Deposits $281,943 $282,895
Interest Paid on Borrowings 168,584 154,977
Non-Cash Investing Activities:
Loans Exchanged for Mortgage-Backed Securities -- 918
Foreclosed Properties Acquired in Settlement of Loans 107,334 137,682
Loans Originated to Facilitate the Sale of Foreclosed Properties 40,533 16,627
Dividends Declared and Payable in Different Periods:
Common Dividends 25,000 --
</TABLE>
B-53
<PAGE> 171
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
Keystone Holdings commenced operations in December 1988 as an indirect holding
company for American Savings Bank, F.A. ("American"), a Federally chartered
savings bank. N.A. Capital Holdings, Inc. ("N.A. Holdings") owns all of the
outstanding common stock of American. N.A. Holdings is owned by New American
Capital, Inc. ("New American") whose common stock is owned by New American
Holdings, Inc., a subsidiary of the Company. The Company and its direct and
indirect subsidiaries are collectively referred to as the "Keystone Group."
The Company, through New American Holdings, Inc., owns the common stock of New
West Federal Savings and Loan Association ("New West"). Although the Company
holds the ownership interest in New West, the Company does not have a financial
interest in New West because of certain contractual provisions and
indemnifications. Any loss incurred by New West during its liquidation is the
financial responsibility of the FSLIC Resolution Fund. The Company does not
record any equity in the earnings or losses of New West and substantially all
decisions made by New West's management must be approved by the FDIC prior to
execution. Therefore, the accounts of New West are not included in Keystone
Holdings' consolidated financial statements. New West was considered a
nominee corporation of American for state and federal income tax purposes
until October 24, 1995.
The Condensed Consolidated Financial Statements included herein have been
prepared by the Company and are unaudited. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods covered have been made.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested that these Condensed Consolidated Financial Statements be read
in conjunction with the audited December 31, 1995 Consolidated Financial
Statements and the notes thereto. The Condensed Consolidated Financial
Statements have been prepared on a basis substantially consistent with that of
the audited consolidated financial statements referred to above. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported balances of certain assets and liabilities
as of the balance sheet dates and the revenues and expenses for the periods then
ended. In those cases where amounts reported in the Condensed Consolidated
Financial Statements are significantly influenced by such estimates and
assumptions, actual results could differ from those reported. Certain amounts in
the prior periods' financial statements have been reclassified to conform with
the current period presentation. The results for the periods covered hereby are
not necessarily indicative of the operating results for a full year.
The Condensed Consolidated Financial Statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 2 -- SUBORDINATED NOTES
On February 8, 1996, American completed the private placement of $100.0 million
of Subordinated Notes (the "Notes"). The Notes bear an interest rate of 6.625
percent per annum. Interest on the Notes is payable semi-annually in arrears on
each February 15 and August 15, beginning on August 15, 1996.
The Notes mature on February 15, 2006. However, the Notes are redeemable in
whole, or in part, at the option of American at any time prior to that date. The
redemption price is equal to the greater of (i) 100 percent of the principal and
interest discounted to the date of redemption on a semi-annual basis at the
Treasury Yield plus 15 basis points, plus in each case accrued interest to the
date of redemption.
The payment of the principal and interest on the Notes is subordinated to the
prior payment in full of all Senior Indebtedness. Senior Indebtedness, in
general, includes the principal and interest on (a) all claims against American
having the same priority as savings account holders of American or any higher
priority, (b) all indebtedness of American, other than the Notes, which is given
in connection with the acquisition of any businesses, properties or assets of
any kind and (c) obligations of American as lessee under capitalized leases.
B-54
<PAGE> 172
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The proceeds of the private placement were used to pay general corporate
expenses, to repay certain borrowings and to fund loan originations. The Notes
qualify to be included in regulatory capital.
The Notes do not restrict American from paying dividends or from incurring,
assuming or becoming liable for any type of debt or other obligation. In
addition, the Notes do not require American to maintain any financial ratios or
certain levels of regulatory capital or liquidity.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENT
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." This statement specifies when financial
assets and liabilities are to be removed from an entity's financial statements,
specifies the accounting for servicing assets and liabilities, and the
accounting for assets that can be contractually prepaid in such a way that the
holder would not recover substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities it
has incurred, derecognizes assets only when control has been surrendered, and
derecognizes liabilities only when they have been extinguished. SFAS 125
requires that the selling entity continue to carry retained interests,
including servicing assets, in assets it has derecognized. Such retained
interests are based on their relative fair values at the date of transfer.
Transfers not meeting the criteria for sale recognition are accounted for as a
secured borrowing with pledge of collateral. Under SFAS 125, certain
collateralized borrowings may result in asset derecognition when the assets
provided as collateral may be derecognized based on whether the secured party
takes control over the collateral and whether the secured party is: (1)
permitted to repledge or sell the collateral; and (2) the debtor does not have
the right to redeem the collateral on short notice. Extinguishments of
liabilities are recognized only when the debtor pays the creditor and is
relieved of its obligation for the liability or when the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets, that are retained in a transfer of assets, in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained interests
in securitizations, such as capitalized servicing fees receivable, that can
contractually be prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment, to require their
classification as available for sale or as trading securities. Interest-only
strips and retained interests are to be recorded at fair value. Changes in fair
value are included in stockholder's equity as unrealized holding gains or
losses, net of the related tax effect.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is
required to be applied prospectively. Keystone Holdings does not anticipate a
material impact on transactions covered by SFAS 125.
NOTE 4 -- SUBSEQUENT EVENT
On September 30, 1996, President Clinton signed legislation intended to
recapitalize the Savings Association Insurance Fund ("SAIF") and to reduce the
gap between SAIF premiums and the Bank Insurance Fund ("BIF") premiums, among
other things. The legislation provides for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured deposits.
Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amounting to
1.3 cents per $100 per year.
B-55
<PAGE> 173
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Keystone Holdings' special assessment will result in an estimated pre-tax charge
of $88.5 million in the quarter ended September 30, 1996.
B-56
<PAGE> 174
APPENDIX C
AGREEMENT FOR MERGER
This Agreement for Merger (the "Agreement") is made and entered into
this 21st day of July, 1996 by and among Washington Mutual, Inc., a Washington
corporation ("WMI"), Keystone Holdings Partners, L.P., a Texas limited
partnership ("KH Partners"), Keystone Holdings, Inc., a Texas corporation
("Keystone Holdings"), New American Holdings, Inc., a Delaware corporation ("New
Holdings"), New American Capital, Inc., a Delaware corporation ("New Capital"),
N.A. Capital Holdings, Inc., a Delaware corporation ("NACH Inc."), and American
Savings Bank, F.A., a federal savings association ("American Savings Bank").
RECITALS
A. KH Partners owns all of the issued and outstanding shares of capital
stock of Keystone Holdings. Keystone Holdings owns all of the issued and
outstanding shares of capital stock of New Holdings and all of the issued and
outstanding shares of American Savings Bank Preferred Stock (as hereinafter
defined). New Holdings owns all of the issued and outstanding shares of common
stock of New Capital. New Capital owns all of the issued and outstanding shares
of capital stock of NACH Inc. NACH Inc. owns all of the issued and outstanding
common stock of American Savings Bank.
B. The parties desire for Keystone Holdings to merge with WMI in a
transaction which qualifies as a pooling of interests for accounting purposes
and a reorganization within the meaning of Section 368(a) of the Code (as
hereinafter defined) (the "Merger"). WMI shall be the surviving corporation.
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements herein contained, the parties hereto agree as follows:
1. Table of Definitions. All capitalized terms used but not otherwise
defined in this Agreement shall have the meanings given to them below:
"1988 Acquisition" shall have the meaning specified in Section
4.4(f) hereof.
"1996 Business Plan" shall have the meaning specified in
Section 6.1(a) hereof.
"Adjustment Event" shall have the meaning specified in Section
2.2(d) hereof.
"Affiliated Person" shall have the meaning specified in
Section 4.17(b) hereof.
"Aggregate Escrow Distribution" shall mean the Distributed
Escrow Shares plus (i) all dividends and distributions (of whatever
nature) other than dividends payable in shares of WMI Common Stock paid
on or with respect to the Distributed Escrow Shares from the Effective
Time to and including the date the Distributed Escrow Shares are paid
pursuant to Section 2.3, (ii) any additional securities with respect
thereto, and (iii) any interest or earnings upon such dividends,
distributions or additional or substitute securities in accordance with
the terms of the Escrow Agreement. In the case of any Installment, the
Aggregate Escrow Distribution shall be determined in accordance with
the preceding sentence.
"American Savings Bank" shall have the meaning specified in
the preamble hereof.
"American Savings Bank Common Stock" shall have the meaning
specified in Section 4.3(e) hereof.
"American Savings Bank Environmental Policy" shall mean the
American Savings Bank Environmental Risk Policy, adopted October 24,
1995, a copy of which has been provided to WMI.
C-1
<PAGE> 175
"American Savings Bank Preferred Stock" shall have the meaning
specified in Section 4.3(e) hereof.
"American Savings Bank Defined Compensation Plan" shall have
the meaning specified in Section 7.3(e) hereof.
"American Savings Bank SERP" 7.3(e) shall have the meaning
specified in Section 7.3(e) hereof.
"AREG" shall mean American Real Estate Group, Inc., a Delaware
corporation.
"Assistance Agreement" shall mean that certain Assistance
Agreement, dated December 28, 1988, by and among Keystone Holdings, New
West, New Holdings, New Capital, NACH Inc., American Savings Bank and
the FSLIC.
"Bank Merger" shall have the meaning specified in Section
4.7(b) hereof.
"Bass Directors" shall have the meaning specified in Section
7.4(b) hereof.
"Bass Shares" shall have the meaning specified in Section
7.4(c) hereof.
"Benefit Plans" shall have the meaning specified in Section
4.14(e) hereof.
"BIF" means the Bank Insurance Fund, administered by the FDIC.
"Case" shall mean Case No. 92-782C resulting from a complaint
filed on December 28, 1992 in the United States Court of Federal Claims
and styled:
AMERICAN SAVINGS BANK, F.A.,
KEYSTONE HOLDINGS, INC.,
KEYSTONE HOLDINGS PARTNERS, L.P.,
N.A. CAPITAL HOLDINGS, INC.,
NEW AMERICAN CAPITAL, INC.
and
NEW AMERICAN HOLDINGS, INC.
v.
THE UNITED STATES
"Case Proceeds" shall equal the amount, if any, of cash
received by WMI or its subsidiaries (including the Keystone Entities
after the Effective Time) on or before the Escrow Expiration Date in
respect of (1) any judgment, fees, costs and expenses, interest and
other amounts that have been awarded to the plaintiffs (including any
successors thereto) in the Case, or (2) any final settlement of the
Case; provided, however, that any judgment referred to in (1) above
constitutes a final, nonappealable judgment in the Case. In the case of
any Installment, the Case Proceeds with respect to such Installment
shall be determined in accordance with the preceding sentence.
"CERCLA" shall have the meaning specified in Section 4.18(b)
hereof.
"Change of Control Agreements" has the meaning specified in
Section 4.14(f) hereof.
"Closing" shall have the meaning specified in Section 3
hereof.
"Closing Date" shall have the meaning specified in Section 3
hereof.
"COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended.
C-2
<PAGE> 176
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Commercial Real Estate Loans" shall mean (i) loans secured by
real property other than one-to-four family residential real property
and (ii) builder construction loans.
"Controlling Person" shall have the meaning specified in
Section 4.17(c) hereof.
"CRA" shall have the meaning specified in Section 4.22 hereof.
"D&O" shall have the meaning specified in Section 7.7(b)
hereof.
"Deloitte & Touche" shall mean Deloitte & Touche LLP.
"Designated Representative" shall have the meaning specified
in Section 8.1 hereof.
"Director" shall mean the Director of Financial Institutions
of the State of Washington.
"Disclosure Schedules" shall mean all WMI Disclosure Schedules
and Keystone Entities Disclosure Schedules.
"Distributed Escrow Shares" shall mean that number of whole
shares of WMI Common Stock (or any substitute securities with respect
thereto) resulting from dividing the Net Case Proceeds by the Market
Price Per Share; provided that, in no event shall the Distributed
Escrow Shares exceed the number of Escrow Shares. The Distributed
Escrow Shares with respect to any Installment shall be calculated in
accordance with the preceding sentence except that in no event shall
the Distributed Escrow Shares, when added to the Distributed Escrow
Shares with respect to earlier Installments, exceed the number of
Escrow Shares.
"Effective Date" shall have the meaning specified in Section 3
hereof.
"Effective Time" shall have the meaning specified in Section 3
hereof.
"Environmental Laws" shall have the meaning specified in
Section 4.18(b) hereof.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Escrow Agent" shall mean the escrow agent under the Escrow
Agreement.
"Escrow Agreement" shall mean an agreement substantially in
the form of Exhibit B attached hereto.
"Escrow Expiration Date" shall mean the date that is the sixth
anniversary of the Effective Date; provided, however, that (i) if,
prior to such date, there has been any judgment granted or entered in
favor of WMI or its subsidiaries (including the Keystone Entities after
the Effective Time), then the Escrow Expiration Date shall be
automatically extended to the earlier of the tenth anniversary of the
Effective Date and the date upon which the number of Escrow Shares
equals zero and (ii) if, prior to such sixth anniversary or any
extension pursuant to clause (i) of this definition, there has been any
settlement or final nonappealable judicial resolution of the Case
involving two or more Installments, then the Escrow Expiration Date
shall not occur until all such Installments have been paid.
"Escrow Shares" shall mean eight million (8,000,000) shares of
WMI Common Stock; provided that the number of Escrow Shares shall be
appropriately adjusted to reflect any reclassification,
recapitalization, split-up, combination or exchange of shares of WMI
Common Stock, or any stock dividend thereon declared with a record date
between the date of this Agreement and the Escrow Expiration Date;
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provided, further, that, in the event that the Escrow Expiration Date
is extended beyond the sixth anniversary of the Effective Date in
accordance with the definition of "Escrow Expiration Date" herein, the
number of Escrow Shares, as adjusted in accordance with the preceding
proviso, shall be reduced on the last day of each full calendar month
following the sixth anniversary of the Effective Date by an amount
equal to 1.25% of the number of Escrow Shares (as so adjusted) on the
sixth anniversary of the Effective Date; provided further, that if,
prior to the sixth anniversary of the Effective Date, there has been
any settlement or final nonappealable judicial resolution of the Case
involving two or more Installments, then there shall be no reduction in
the number of Escrow Shares pursuant to the immediately preceding
proviso.
"Family SB" shall mean Family Savings Bank, FSB, a federally
chartered savings association.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Income Tax Returns" shall have the meaning specified
in 4.13(b).
"FHLB of San Francisco" shall mean the Federal Home Loan Bank
of San Francisco.
"FHLB of Seattle" shall mean the Federal Home Loan Bank of
Seattle.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation.
"FIRREA" shall mean the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989.
"Fixed Fee Agreement" shall have the meaning specified in
Section 2.3(e) hereof.
"FNMA" shall mean the Federal National Mortgage Association.
"FRF" shall mean the FSLIC Resolution Fund, as successor to
the FSLIC, and which is managed by the FDIC.
"FRF Agreements" shall have the meaning specified in Section
4.23 hereof.
"FRF Initial Shares" shall have the meaning specified in
Section 2.2(c) hereof.
"FRF Litigation Shares" shall have the meaning specified in
Section 2.2(c) hereof.
"FRF Warrant Agreement" shall mean that certain Warrant
Agreement dated December 28, 1988, between NACH Inc. and the FSLIC.
"FRF Warrant Consideration" shall mean the shares of WMI
Common Stock to be paid to the FRF in exchange for the Warrants,
pursuant to the Warrant Exchange Agreement.
"FSLIC" shall mean the Federal Savings and Loan Insurance
Corporation.
"FTC" shall mean the Federal Trade Commission.
"GNMA" shall mean the Government National Mortgage
Association.
"HOLA" shall mean the Home Owners' Loan Act, as amended.
"Initial Shares" shall have the meaning specified in Section
2.2(c) hereof.
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"Installment" shall mean, in the event of a final,
nonappealable judicial resolution or a settlement of the Case occurring
after the Effective Time involving two or more installments or
structured payments of cash over a period of time, one of such
payments.
"Justice Department" shall have the meaning specified in
Section 4.8 hereof.
"Keystone Confidentiality Letter" shall mean that certain
letter, dated January 11, 1996, to Keystone Holdings and executed by
WMI.
"Keystone Consideration Shares" shall have the meaning
specified in Section 2.2(a) hereof.
"Keystone Entities" shall mean Keystone Holdings, New
Holdings, New Capital, NACH Inc. and American Savings Bank.
"Keystone Entities Disclosure Schedules" shall mean all of the
disclosure schedules required by this Agreement, dated as of the date
hereof, which have been delivered by KH Partners and the Keystone
Entities to WMI.
"Keystone Entity Subsidiary" shall have the meaning specified
in Section 4.2(b) hereof.
"Keystone Financial Statements" shall have the meaning
specified in Section 4.9 hereof.
"Keystone Holdings" shall have the meaning specified in the
preamble hereof.
"Keystone Holdings Common Stock" shall have the meaning
specified in Section 2.2 hereof.
"Keystone Initial Shares" shall have the meaning specified in
Section 2.2(a) hereof.
"Keystone Litigation Shares" shall have the meaning specified
in Section 2.2(a) hereof.
"Keystone March 1996 Financial Statements" shall have the
meaning specified in Section 4.9 hereof.
"KH Partners" shall have the meaning specified in the preamble
hereof.
"KPMG" means KPMG Peat Marwick LLP, the independent public
accountants for the Keystone Entities.
"Liquidations" shall have the meaning specified in Section
4.7(b) hereof.
"Litigation Escrow" shall mean the escrow described in Section
2.3 hereof.
"Loans" shall have the meaning specified in Section 4.4(a)
hereof.
"Long-Term Incentive Plan" shall have the meaning specified in
Section 6.10(c) hereof.
"Management Consultation Meetings" shall have the meaning
specified in Section 8.8 hereof.
"Market Price Per Share" shall mean the average closing price
of WMI Common Stock on The Nasdaq Stock Market (as reported in The Wall
Street Journal or, if not so reported, as otherwise publicly reported)
for the ten trading days preceding the third trading day before the
Effective Date; provided, however, that such price shall be
appropriately adjusted to reflect any reclassification,
recapitalization, split-up, combination or exchange of shares of WMI
Common Stock, or any stock dividend thereon declared with a record date
between the thirteenth day before the Effective Date and the Escrow
Expiration Date.
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"Material Adverse Effect" or "Material Adverse Change" with
respect to a Person shall mean any change or effect that is reasonably
likely to be materially adverse to the business, operations,
properties, condition (financial or otherwise), assets or liabilities
of such Person and such Person's subsidiaries taken as a whole. Any
change in the current CRA rating of American Savings Bank or WM Bank or
a CRA rating given to WMBfsb that would cause the OTS to prohibit the
transactions contemplated hereby and in the Plan of Merger from being
consummated shall constitute a Material Adverse Change with respect to
the Keystone Entities or the WM Entities, as applicable, taken as a
whole.
"Material Contract" shall have the meaning specified in
Section 6.1(c)(v) hereof.
"Merger" shall have the meaning specified in Recital B hereof.
"NACH Inc." shall have the meaning specified in the preamble
hereof.
"Net Case Proceeds" shall mean the Case Proceeds, minus the
sum of (1) the Tax on the Case Proceeds, (2) the out-of-pocket,
third-party fees, costs and expenses paid or accrued by WMI or its
subsidiaries to attorneys, accountants, experts or other third party
service providers in connection with the Case from the date of this
Agreement (excluding any amount paid to Arnold & Porter under the Fixed
Fee Agreement), (3) 200% of the allocated time costs of employees of
WMI or its subsidiaries for time reasonably devoted to the Case from
the Effective Date, in each case, to and including the date the Case
Proceeds are paid to WMI or its subsidiaries (including the Keystone
Entities after the date hereof), (4) fees and other amounts, if any,
paid or accrued by WMI to the Escrow Agent pursuant to the Escrow
Agreement and (5) all amounts paid by any Keystone Entity to Arnold &
Porter under the Fixed Fee Agreement in excess of $10 million. In the
event that the Case Proceeds are payable in two or more Installments,
Net Case Proceeds with respect to any given Installment shall mean all
Case Proceeds received by WMI from such Installment and all prior
Installments, if any, minus (x) the sum of (I) the Tax on the Case
Proceeds with respect to all Installments or portions thereof (whether
received or to be received) includible, in WMI's judgment, in its
income for federal income tax purposes for the year in which such
Installment is received or in prior years and (II) the amounts
described in clauses (2), (3), (4) and (5) of the preceding sentence,
and (y) the aggregate Net Case Proceeds calculated pursuant to this
sentence with respect to all prior Installments, if any.
"Net Pre-Tax Case Proceeds" shall mean the amount , if any,
resulting from subtracting from Case Proceeds the sum of the amounts
described in Clauses (2), (3), (4) and (5) in the definition of Net
Case Proceeds.
"New Capital" shall have the meaning specified in the preamble
hereof.
"New Capital Common Stock" shall have the meaning specified in
Section 4.3(c) hereof.
"New Capital Preferred Stock" shall have the meaning specified
in Section 4.3(c) hereof.
"New Holdings" shall have the meaning specified in the
preamble hereof.
"New Holdings Common Stock" shall have the meaning specified
in Section 4.3(b) hereof.
"New West" shall mean New West Federal Savings and Loan
Association.
"Offering Circulars" shall have the meaning specified in
Section 4.5(b) hereof.
"Old American" shall mean American Savings, a Federal Savings
and Loan Association.
"Other Returns" shall have the meaning specified in Section
4.13(c) hereof.
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"OTS" shall mean the Office of Thrift Supervision.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Permits" shall have the meaning specified in Section 4.15(a)
hereof.
"Person" shall mean an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
incorporated association, joint venture, governmental authority or
other entity of whatever nature.
"Phantom Share Plan" shall have the meaning specified in
Section 6.10(c) hereof.
"Plan of Merger" shall have the meaning specified in Section
2.1 hereof.
"Preferred Stock Circular" shall have the meaning specified in
Section 4.5(b) hereof.
"Receiver" shall have the meaning specified in Section 4.4(f)
hereof.
"Record Date" shall have the meaning specified in Section
7.4(b) hereof.
"Registration Rights Agreement" shall have the meaning
specified in Section 2.5 hereof.
"Regulation O" shall mean Part 215 of Title 12 of the Code of
Federal Regulations.
"REO" shall have the meaning specified in Section 4.18.
"Rights Agreement" shall mean that certain Rights Agreement,
dated as of October 16, 1990, between Washington Mutual Savings Bank
and First Interstate Bank of Washington, N.A., as supplemented by the
Supplement to Rights Agreement, dated as of November 29, 1994, between
WMI and First Interstate Bank of Washington, N.A.
"SAIF" shall mean the Savings Association Insurance Fund,
administered by the FDIC.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Reports" shall have the meaning specified in Section 5.4.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and any rules and regulations promulgated thereunder.
"Securities Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended, and any rules and regulations promulgated
thereunder.
"Securityholder Communications" shall have the meaning
specified in Section 4.5(b) hereof.
"Senior Note Circulars" shall have the meaning specified in
Section 4.5(b) hereof.
"Senior Notes" shall mean the Series B 9.60% Notes due 1999
issued by New Capital and the Series C Floating Rate Notes due 2000
issued by New Capital.
"Short-Term Incentive Plan" shall have the meaning specified
in Section 6.10(c) hereof.
"Subordinated Note Circular" shall have the meaning specified
in Section 4.5(b) hereof.
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"Subordinated Notes" shall mean the Subordinated Notes due
1998 issued by New Capital and the 6 5/8% Subordinated Notes due
February 15, 2006 issued by American Savings Bank.
"Surviving FRF Agreements" shall have the meaning specified in
Section 9.1(g).
"Taxes" shall have the meaning specified in Section 4.13(c)
hereof.
"Tax on the Case Proceeds" shall mean (1) the product of .28
and the Net Pre-Tax Case Proceeds, in the event the Case Proceeds are
accrued for federal income tax purposes prior to the Effective Time,
and (2) the product of .355 and the Net Pre-Tax Case Proceeds, in the
event the Case Proceeds are accrued for federal income tax purposes on
or after the Effective Time.
"Tax Settlement Agreement" shall have the meaning assigned it
in Section 9.2(m) hereof.
"Texas Secretary of State" shall mean the Secretary of State
of the State of Texas.
"Third Party Acquisition of WMI" shall mean the occurrence of
any of the following: (i) any Person or group (within the meaning of
Section 13(d)(3) of the Securities Exchange Act), other than KH
Partners or a Keystone Entity or an affiliate of either, purchases or
otherwise acquires securities representing a majority of the voting
shares of WMI or (ii) WMI or its board of directors enters into an
agreement or recommends to its shareholders an agreement or tender
offer or other transaction pursuant to which any such Person or group
would (A) merge or consolidate with, acquire a majority of the assets
and liabilities of, or enter into any similar transaction with WMI
whereby it would acquire securities representing a majority of the
voting shares of WMI or (B) purchase or otherwise acquire (including,
without limitation, by merger, consolidation, share exchange, tender
offer or any similar transaction) securities representing a majority of
the voting shares of WMI.
"Warrant Exchange Agreement" shall have the meaning specified
in Section 2.2(c) hereof.
"Warrants" shall mean the warrants issued to the FSLIC by NACH
Inc. pursuant to the FRF Warrant Agreement, and representing the right,
under certain circumstances specified in the FRF Warrant Agreement, to
purchase for the aggregate purchase price of $1.00 up to 3,000 shares
of Class B Common Stock of NACH Inc., none of which warrants has been
exercised as of the date hereof.
"Washington Secretary of State" shall mean the Secretary of
State of the State of Washington.
"WM Bank" shall mean Washington Mutual Bank, a Washington
stock savings bank and direct subsidiary of WMI.
"WMBfsb" shall mean Washington Mutual Bank fsb, a federal
savings association and direct subsidiary of WMI.
"WM Entities" shall mean WM Bank, WMBfsb and WMI.
"WMI" shall have the meaning specified in the preamble hereof.
"WMI Common Stock" shall have the meaning specified in Section
2.2 hereof.
"WMI Confidentiality Letter" shall mean that certain letter,
dated January 17, 1996, addressed to WMI and executed by Keystone
Holdings.
"WMI Disclosure Schedules" shall mean all of the disclosure
schedules required by this Agreement, dated as of the date hereof,
which have been delivered by WMI to KH Partners.
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"WMI Financial Statements" shall have the meaning specified in
Section 5.8 hereof.
"WMI Proxy Statement" shall have the meaning specified in
Section 2.4(a) hereof.
"WMI RSIP" shall have the meaning specified in Section 7.3(a)
hereof.
"WMI Stockholder Approval" shall have the meaning specified in
Section 2.4(a) hereof.
"WMI Stockholders' Meeting" shall have the meaning specified
in Section 2.4(a) hereof.
"WMI Subsidiaries" shall have the meaning specified in Section
5.2 hereof.
"WMI Welfare Benefit Plans" shall have the meaning specified
in Section 7.3(c) hereof.
It is understood that, as used in this Agreement, with respect to any
action to be taken by KH Partners (as distinct from the Keystone Entities and
the Keystone Entity Subsidiaries), the terms "reasonable efforts," "best
efforts," "reasonable best efforts" and any similar terms shall not, unless
otherwise indicated herein, require the payment by KH Partners of any money or
the agreement by KH Partners to suffer any economic harm.
2. Merger. Subject to the terms and conditions of this Agreement, the
Merger is to be accomplished in the manner described herein.
2.1 Merger of Keystone Holdings and WMI. Keystone Holdings
shall at the Effective Time be merged with and into WMI with WMI being the
survivor in accordance with the Plan of Merger by and between WMI and Keystone
Holdings, substantially in the form attached hereto as Exhibit A (the "Plan of
Merger"). The Plan of Merger provides for the terms of the Merger and the manner
of carrying it into effect. The terms and conditions of the Plan of Merger are
incorporated herein and made a part hereof.
2.2 Conversion of Keystone Holdings Common Stock. Subject to
the terms and conditions set forth herein and in the Plan of Merger, at the
Effective Time, all of the outstanding shares of common stock, par value $1.00
per share, of Keystone Holdings ("Keystone Holdings Common Stock") shall be
converted into the right to receive shares of common stock, no par value, of WMI
("WMI Common Stock"), as described below and in the Plan of Merger.
(a) Subject to the other provisions of this Section
2.2, the outstanding shares of Keystone Holdings Common Stock will in the
aggregate be converted at the Effective Time into the right to receive the
Keystone Consideration Shares. The "Keystone Consideration Shares" shall mean
the sum of the Keystone Initial Shares and the Keystone Litigation Shares (if
any). The "Keystone Initial Shares" shall mean 26,000,000 newly issued shares of
WMI Common Stock. The "Keystone Litigation Shares" shall mean that number of
newly issued shares of WMI Common Stock equal to 65% of the Escrow Shares (as to
which KH Partners has contingent rights pursuant to Section 2.3 hereof).
Certificates evidencing the Keystone Initial Shares shall be delivered to KH
Partners at the Effective Time. Certificates evidencing the Keystone Litigation
Shares shall be delivered into the Litigation Escrow as of the Effective Time.
(b) If between the date of this Agreement and the
Effective Time, the shares of WMI Common Stock shall be changed into a different
number of shares by reason of any reclassification, recapitalization, split-up,
combination or exchange of shares, or if a stock dividend thereon shall be
declared with a record date within such period, the number of Keystone Initial
Shares and the number of FRF Initial Shares (as contemplated by Section 2.2(c))
shall be adjusted accordingly.
(c) Concurrently with the execution of this
Agreement, the FDIC, WMI, KH Partners and certain other Persons are entering
into an agreement (the "Warrant Exchange Agreement") pursuant to which, among
other things, the FDIC and WMI are agreeing that, at the Effective Time, and in
exchange for the FDIC conveying any and all interest of the FRF in the Warrants
to WMI, WMI will convey (either directly to
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the FDIC or, at the direction of the FDIC, to a trust for the benefit of the
FRF) 14,000,000 newly issued shares of WMI Common Stock (the "FRF Initial
Shares" and, together with the Keystone Initial Shares, the "Initial Shares"),
together with a contingent right to 35% of the Escrow Shares (the "FRF
Litigation Shares"), all as more fully set forth in Section 2.3 hereof and the
Warrant Exchange Agreement. Certificates evidencing the FRF Initial Shares shall
be delivered to the FDIC, or, at the direction of the FDIC, to a trust for the
benefit of the FRF, and certificates evidencing the FRF Litigation Shares shall
be delivered to the Litigation Escrow, all in exchange for the Warrants at the
Effective Time.
(d) The parties acknowledge that as of the date of
this Agreement, Keystone Holdings is in the process of rescinding certain
dividends paid to KH Partners in excess of the amount set forth in Section
6.1(b)(ii) hereof. Notwithstanding any other provision of this Agreement to the
contrary, (i) if for any reason such rescission is not completed within 30 days
from the date of this Agreement or (ii) if such rescission, although completed,
is subsequently annulled or reversed on or prior to the Effective Date, whether
voluntarily or as a result of the action of any regulatory authority, or (iii)
if WMI reasonably concludes that such rescission will be so annulled or reversed
following the Effective Date, as a result of the action of any regulatory
authority (the "Adjustment Event"), then the Keystone Initial Shares shall be
reduced to 25,883,333 shares of WMI Common Stock, and the percentages set forth
in Sections 2.2(a) and 2.2(c) shall be changed to 64.9% and 35.1%, respectively,
and all references to the numbers 40,000,000 and 26,000,000 in this Agreement,
the Registration Rights Agreement, the Escrow Agreement or any other document
executed in connection with the transactions contemplated by this Agreement
shall be changed to the numbers 39,883,333 and 25,883,333, respectively, subject
to any further adjustment required by Section 2.2(b).
2.3 Litigation Escrow.
(a) Delivery of Shares into Escrow. As of the
Effective Time, KH Partners and the FDIC shall direct WMI to deliver, and WMI
shall deliver, the Escrow Shares to the Escrow Agent pursuant to an Escrow
Agreement in substantially the form attached hereto as Exhibit B. Pursuant to
the terms of the Escrow Agreement, the Escrow Agent shall hold such Escrow
Shares until the earlier of (i) the Escrow Expiration Date and (ii) the date
upon which the last Aggregate Escrow Distribution is distributed to KH Partners,
the FRF or their permitted assigns pursuant to Section 2.3(c). In the event that
the Escrow Expiration Date is extended beyond the sixth anniversary of the
Effective Date, and there are one or more reductions in the amount of Escrow
Shares as provided in the definition of "Escrow Shares" in Section 1, the shares
no longer required to be Escrow Shares shall, subject to the final sentence of
this Section 2.3(a), be returned by the Escrow Agent to WMI. In the event that
all of the Aggregate Escrow Distributions are not made pursuant to Section
2.3(b) by the Escrow Expiration Date (as it may be extended), the Escrow Agent
shall return Escrow Shares to WMI for cancellation. Upon any return of Escrow
Shares (and any additional or substitute securities with respect thereto) to WMI
pursuant hereto, the Escrow Agent shall also return all dividends and
distributions paid upon such shares from the Closing Date to and including the
date of such return plus any interest or earnings thereon in accordance with the
terms of the Escrow Agreement.
(b) Payment of Aggregate Escrow Distribution. Within
thirty (30) days after Case Proceeds (including those attributable to an
Installment) are received by WMI or its subsidiaries, WMI shall instruct the
Escrow Agent to pay to KH Partners, the FRF or their respective successors and
permitted assigns the pro rata portion of the Aggregate Escrow Distribution
attributable to such Person with respect to such Case Proceeds as specified in
this Agreement, the Warrant Exchange Agreement and the Escrow Agreement and to
return any remaining Escrow Shares (and any additional or substitute securities
with respect thereto) to WMI for cancellation (together with the dividends and
distributions received thereon and any interest or earnings on such dividends),
except that if Case Proceeds are received in Installments, no such property
shall be returned to WMI until no such Installments remain to be paid. No
payment shall be made in respect of fractional shares.
(c) Assignability of Right to Receive Escrow Shares.
The Escrow Shares will not be registered under the Securities Act nor will the
contingent right to receive them be registered as a separate security. If the
FRF or any partner of KH Partners desires to transfer its right to receive
Escrow Shares (and any additional or substitute securities with respect
thereto), the proposed transferor shall be required to provide to WMI an opinion
of counsel reasonably satisfactory to WMI that such transfer is exempt from the
registration requirements
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of the Securities Act and similar requirements under all applicable state
securities laws, as well as such other documentation as may be required by the
Escrow Agreement.
(d) Voting of Escrow Shares. For so long as the
Escrow Shares are held by the Escrow Agent in accordance with the terms of this
Article 2 and the Escrow Agreement, the respective holder of the contingent
right to receive such shares shall have the absolute right to have its Escrow
Shares (and any additional or substitute securities with respect thereto) voted
in its absolute discretion in accordance with the written instructions of such
holder as given to the Escrow Agent with respect to all matters with respect to
which the vote of holders of WMI Common Stock is required or solicited.
(e) Control of Case.
(i) WMI shall, and shall cause the Keystone
Entities to continue to, prosecute the Case vigorously following the Effective
Time with a view to resolution of the Case as promptly as practicable. In
furtherance of this prosecution of the Case, the parties shall, prior to the
Effective Time (and thereafter), designate a special litigation committee
comprised of two individuals designated by KH Partners and one individual
designated by WMI (the "Litigation Committee"). The Litigation Committee shall
have the exclusive right to oversee the prosecution of the Case and to settle
the case as hereinafter provided. Only the Litigation Committee shall be
authorized to make decisions relating to any proposal to dismiss, settle,
terminate, or cease prosecuting the Case, to decline to pursue any appeal or to
settle the Case prior to the Escrow Expiration Date; provided that any
settlement of the Case must involve a net cash payment or payments to the WM
Entities, as successors to the Keystone Entities; and, provided, further, that
without WMI's prior specific written approval, no settlement agreement shall
impose any obligation (other than standard settlement releases and related
obligations) on the WM Entities or restrict the operation of their business.
(ii) The Litigation Committee shall select
counsel of its choice to represent the WM Entities in the prosecution of the
Case; provided, that such selection shall be subject to the approval of WMI,
which approval will not be unreasonably withheld. WMI hereby consents to the
selection of Arnold & Porter. KH Partners represents, warrants and agrees that
prosecution of the Case will be pursuant to a fixed fee agreement between
Keystone Holdings and Arnold & Porter (the "Fixed Fee Agreement"). The Fixed Fee
Agreement (i) shall be in form and content acceptable to WMI, (ii) shall provide
for a one-time payment of not more than $11.5 million to Arnold & Porter, (iii)
shall be executed and delivered not more than 15 days after the date hereof,
(iv) shall be assigned to and assumed by WMI or a WMI Entity at the Effective
Time; and (v) shall provide that no WMI Entity or Keystone Entity shall have any
liability for any future costs or expenses associated with the prosecution of
the Case. The Litigation Committee shall have the right to replace counsel at
any time; provided, that such replacement counsel shall be subject to the
approval of WMI, which approval will not be unreasonably withheld and, provided
further, that such replacement counsel shall assume all of Arnold & Porter's
obligations, but not its rights, under the Fixed Fee Agreement and no WMI Entity
or Keystone Entity shall have any liability for any future costs or expenses
associated with the prosecution of the Case.
(iii) Counsel designated by the Litigation
Committee to prosecute the Case, and any outside counsel, experts, and/or
consultants that such counsel may retain to assist in the prosecution of the
Case, shall be authorized by this Agreement to accept directions from the
Litigation Committee on all matters concerning the Case that are within the
authority of the Litigation Committee, notwithstanding any possible conflict in
interest with respect to the Case between KH Partners on the one hand, and the
WM Entities on the other. The Litigation Committee shall have no duty to the WM
Entities to consider the interest any of such WM Entities may have in an early
termination or resolution of the Case.
(iv) WMI shall have the right to remove any
individual from the Litigation Committee in the event such removal is requested
by any federal or state regulator having jurisdiction over WMI or any of its
subsidiaries. If any individual is so removed, his or her replacement will be
designated by KH Partners or, if KH Partners shall no longer exist, by Robert M.
Bass if the removed individual was originally designated by KH Partners or
Robert M. Bass; otherwise, the replacement will be designated by WMI.
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(v) Nothing in this Agreement shall prevent
KH Partners from withdrawing as a plaintiff in the Case and KH Partners may
withdraw as a plaintiff in the Case at any time without creating any liability
to any WM Entity.
(f) No Settlement Prior to Closing. Notwithstanding
any other provision in this Agreement, in no event shall KH Partners or any
Keystone Entity settle the Case prior to the Effective Time.
(g) Waiver of Entitlement. After the Effective Time,
KH Partners will not assert entitlement (as against any of the WM Entities or
any of the Keystone Entities) to any proceeds from any settlement or judgment in
the Case, whether or not allocated by a court to KH Partners. KH Partners will
allow one or more of the Keystone Entities or the WM Entities directly to
receive such proceeds and will use its best efforts to cause such proceeds to be
paid directly to one or more Keystone Entities or WM Entities and not to KH
Partners. After the Effective Time, KH Partners will remit to WMI or its
designee any amounts actually recovered by it in the Case. In the event that KH
Partners remits to WMI or its designee any such proceeds, the WM Entities shall
indemnify each of the partners of KH Partners on a "grossed up" basis for the
amount of any increased tax liability incurred by such partner which results
from the fact that KH Partners received such proceeds and so remitted them
rather than such proceeds having been directly received by any of the WMI
Entities or any of the Keystone Entities. Nothing in this Section 2.3 is
intended to create any rights in the Keystone Entities or the WM Entities
against the United States, except as such parties may have had prior to the date
of this Agreement or may obtain by operation of law (whether by statutory merger
or otherwise).
(h) Tax Matters. The parties intend that the Keystone
Litigation Shares will be treated for income tax purposes as having been
received on the Closing Date pursuant to the Merger and that the "imputed
interest" rules of Section 483 of the Code (or any similar or successor
provision thereto) shall not apply to any Aggregate Escrow Distribution. The
parties agree that WMI intends to issue Forms 1099-DIV with respect to dividends
paid on the Escrow Shares and to report such dividends as ordinary dividends.
The parties agree that WMI shall file all tax returns, declarations and other
reports in a manner consistent with this sub-section, and that any transferee of
the Initial Shares or the Escrow Shares shall be required, as a condition of
such transfer, to acknowledge the foregoing and waive any rights against WMI in
respect thereof. In the event that WMI shall not have received prior to the
Effective Time effective waivers from partners holding in the aggregate no less
than 90% of the beneficial interest in KH Partners of any and all rights they
may have against WMI in respect of the foregoing provisions of this subsection
(h), WMI shall be relieved of all obligations set forth in this subsection (h).
2.4 WMI Shareholder Approval.
(a) WMI shall, as soon as practicable, hold a meeting
of its stockholders (the "WMI Stockholders' Meeting") to submit for stockholder
approval (the "WMI Stockholder Approval") this Agreement, the Plan of Merger,
the Merger and an amendment to its articles of incorporation increasing WMI's
authorized shares by not more than 100,000,000 shares. In connection with the
WMI Stockholder Approval, the parties hereto will cooperate in the preparation
of an appropriate proxy statement satisfying all applicable regulations, rules
and requirements of the SEC promulgated under the Securities Exchange Act and
satisfying any applicable state law (such proxy statement in the form mailed by
WMI to WMI stockholders, together with any and all amendments or supplements
thereto, being herein referred to as the "WMI Proxy Statement").
(b) WMI represents and warrants that the information
relating to the WM Entities to be contained in the WMI Proxy Statement will not,
at the time it is filed with the applicable governmental authorities, as of the
date of the WMI Proxy Statement or at the WMI Stockholders' Meeting contain any
untrue statement of a material fact or omit to state a material fact, necessary
to make such statements, in light of the circumstances under which such
statements were made, not misleading. KH Partners and the Keystone Entities
represent and warrant that the information relating to the KH Partners and the
Keystone Entities to be contained in the WMI Proxy Statement will not, at the
time it is filed with the applicable governmental authorities, as of the date of
the WMI Proxy Statement or at the WMI Stockholders' Meeting contain any untrue
statement of a material fact or omit to state a material fact, necessary to make
such statements, in light of the circumstances under which such statements were
made, not misleading.
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(c) Keystone Holdings will furnish such information
concerning Keystone Holdings and its subsidiaries as is necessary in order to
cause the WMI Proxy Statement, insofar as it relates to such corporations, to
comply with Section 2.4(b). The Keystone Entities shall also cause KPMG to
provide to WMI a letter substantially in compliance with Statement of Auditing
Standards #76 covering those items relating to the Keystone Entities designated
by WMI contained in the WMI Proxy Statement. Keystone Holdings agrees promptly
to advise WMI if at any time prior to the WMI Stockholders' Meeting any
information provided by Keystone Holdings or its subsidiaries for inclusion in
the WMI Proxy Statement becomes incorrect or incomplete in any material respect
and to provide the information needed to correct such inaccuracy or omission.
Keystone Holdings will continue to furnish WMI with such supplemental
information as may be necessary in order to cause the WMI Proxy Statement,
insofar as it relates to Keystone Holdings and its subsidiaries, to comply with
Section 2.4(b) after the mailing thereof to WMI stockholders.
(d) WMI will, as promptly as practicable, file the
WMI Proxy Statement, as required by law, with the SEC and will use all
reasonable efforts to cause the WMI Proxy Statement to be cleared for mailing
under federal securities laws at the earliest practicable date. WMI will advise
Keystone Holdings promptly when the WMI Proxy Statement has been cleared for
mailing.
2.5 Issuance of WMI Stock and Registration Rights.
(a) All shares of WMI Common Stock issued in
connection with the Merger will be issued pursuant to an exemption under Section
4(2) of the Securities Act and initially will be "Restricted Securities" as
defined in Rule 144 promulgated under the Securities Act by the SEC.
(b) Concurrently with the execution and delivery of
this Agreement, WMI has executed a Registration Rights Agreement (the
"Registration Rights Agreement") pursuant to which WMI will use its best efforts
to make available to the recipients of WMI Common Stock pursuant to this
Agreement and the Warrant Exchange Agreement the rights contemplated by the
Registration Rights Agreement.
2.6 Accounting Treatment.
(a) The parties hereto intend for the Merger to be
treated as a pooling of interests for accounting purposes. WMI and KH Partners
have received from KPMG a poolability letter dated July 21, 1996, with respect
to Keystone Holdings and its subsidiaries, and WMI and KH Partners will, at
closing, receive from Deloitte & Touche a pooling letter with respect to the
Merger. None of KH Partners, the Keystone Entities or the WM Entities are aware
of any reason that the transaction contemplated hereby is not eligible to be
treated as a pooling of interests for accounting purposes. From and after the
date hereof and until the Effective Time and thereafter, neither WMI nor KH
Partners nor any of their respective subsidiaries or other affiliates shall (i)
knowingly take any action, or knowingly fail to take any action, that would
jeopardize the treatment of the Merger as a "pooling of interests" for
accounting purposes; or (ii) enter into any contract, agreement, commitment or
arrangement with respect to any such action or failure to act; provided,
however, that the performance of the terms of the Fixed Fee Agreement and
Section 2.3(e)(ii) hereof shall not constitute a violation of this Section
2.6(a). The persons specified on Annex I hereto may be deemed to be "affiliates"
of Keystone Holdings for purposes of the SEC's ASR 135. Keystone Holdings shall
deliver to WMI within 30 days from the date of this Agreement, a written
agreement substantially in the form of Exhibit C hereto from each of the Persons
specified on Annex I. Prior to the Effective Time, Keystone Holdings shall use
all reasonable efforts to cause any additional Person who becomes or is
identified as an "affiliate" to execute such an agreement.
(b) In order to ensure that the Merger will be
treated as a pooling of interests, the parties understand that the Keystone
Initial Shares and the contingent right to receive Escrow Shares to be received
by KH Partners as a result of the Merger shall be distributed to the partners of
KH Partners immediately after the Effective Time. To facilitate such
distribution, WMI agrees to prepare and have available at the Closing up to 85
stock certificates for KH Partners representing the shares of WMI Common Stock
to which each such partner is entitled (pursuant to the terms of the partnership
agreement of KH Partners, dated December 16, 1988, as amended, with respect to
equity distributions). No fractional shares of WMI Common Stock shall be issued.
KH Partners
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shall, at least ten days prior to the Effective Time, provide WMI with the
necessary information to prepare such stock certificates. KH Partners agrees to
endorse and deliver such certificates to such partners at the Closing.
(c) WMI shall have the right to place a restrictive
legend on all shares of WMI Common Stock to be received by any affiliate of
Keystone Holdings so as to preclude their transfer or disposition in violation
of the letters executed by such affiliates, to instruct its transfer agent not
to permit the transfer of any such shares and/or to take any other steps
reasonably necessary to ensure compliance with ASR 135.
3. Effective Time; Closing. The Merger shall become effective at the
time and date of the occurrence of both (a) the filing of articles of merger
with the Washington Secretary of State and (b) the filing of articles of merger
with the Texas Secretary of State, or at such later time and date after such
filings as may be provided in such articles of merger. As used herein, the term
"Effective Time" shall mean the date and time when the Merger becomes effective
which in no event shall occur before December 2, 1996. As used herein, the term
"Effective Date" shall mean the day on which the Effective Time occurs. A
closing (the "Closing") shall take place on or immediately prior to the
Effective Date at the offices of Foster Pepper & Shefelman, 1111 Third Avenue,
Suite 3400, Seattle, Washington, or at such other place as the parties hereto
may mutually agree upon for the Closing to take place. "Closing Date" shall mean
the date on which the Closing occurs.
4. Representations and Warranties of Keystone Entities. Each of KH
Partners and the Keystone Entities hereby jointly and severally represents and
warrants to the WM Entities as follows:
4.1 Organization, Power, Good Standing, Etc.
(a) KH Partners is a limited partnership duly
organized and validly existing under the laws of the State of Texas and is duly
qualified to do business and is in good standing in each other jurisdiction
where its ownership or lease of property or the nature of the business conducted
by it requires it to be so qualified, except for such jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect on it. KH Partners is a duly registered savings and loan
holding company under HOLA. There has been no change in the provisions of the KH
Partners partnership agreement dealing with equity distributions since before
1994.
(b) Keystone Holdings is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and is duly qualified to do business and is in good standing in each other
jurisdiction where its ownership or lease of property or the nature of the
business conducted by it requires it to be so qualified, except for such
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect on it. Keystone Holdings has
previously delivered to WMI true and complete copies of its articles of
incorporation and bylaws, each as currently in effect. Keystone Holdings has the
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as it is now being conducted. Keystone
Holdings is a duly registered savings and loan holding company under HOLA. To
the knowledge of KH Partners and the Keystone Entities, OTS Order #92-66, dated
February 28, 1992, which approves the acquisition by Keystone Holdings of an
equity interest in Family SB in a Qualified Stock Issuance pursuant to Sections
10(a)(4) and 10(q) of HOLA and FDIC Order #92-98kk dated April 7, 1992,
Conditionally Granting Approval for Waiver of Cross-Guaranty, are, and at all
times since their respective dates have been, in full force and effect. The
Keystone Entities do not, directly or indirectly, or acting in concert with one
or more other Persons, or through one or more subsidiaries, own, control, or
hold with power to vote, or hold proxies representing more than 15 percent of
the voting shares of Family SB.
(c) New Holdings is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly qualified to do business and is in good standing in each other
jurisdiction where its ownership or lease of property or the nature of the
business conducted by it requires it to be so qualified, except for such
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect on it. New Holdings has previously
delivered to WMI true and complete copies of its certificate of incorporation
and bylaws, each as currently in effect. New Holdings has the requisite
corporate power and authority to own, lease and operate its properties and
assets and to carry on its
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business as it is now being conducted. New Holdings is a duly registered savings
and loan holding company under HOLA.
(d) New Capital is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly qualified to do business and is in good standing in each other
jurisdiction where its ownership or lease of property or the nature of the
business conducted by it requires it to be so qualified, except for such
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect on it. New Capital has previously
delivered to WMI true and complete copies of its certificate of incorporation
and bylaws, each as currently in effect. New Capital has the requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as it is now being conducted. New Capital is a duly
registered savings and loan holding company under HOLA.
(e) NACH Inc. is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly qualified to do business and is in good standing in each other
jurisdiction where its ownership or lease of property or the nature of the
business conducted by it requires it to be so qualified, except for such
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect on it. NACH Inc. has previously
delivered to WMI true and complete copies of its certificate of incorporation
and bylaws, each as currently in effect. NACH Inc. has the requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as it is now being conducted. NACH Inc. is a duly
registered savings and loan holding company under HOLA.
(f) American Savings Bank is a federally chartered
stock savings association, duly organized, validly existing and in good standing
under the laws of the United States and is duly qualified to do business and is
in good standing in each jurisdiction where its ownership or lease of property
or the nature of the business conducted by it requires it to be so qualified,
except for such jurisdictions where the failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect on it. American
Savings Bank has previously delivered to WMI true and complete copies of its
charter and bylaws, each as currently in effect. American Savings Bank has the
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as it is now being conducted. American
Savings Bank is a member in good standing of the FHLB of San Francisco and its
deposits are insured by the SAIF to the fullest extent permitted by law.
American Savings Bank has previously delivered or made available to WMI true and
complete copies of all agreements and other documents relating to American
Savings Bank's membership in, borrowings from or other financial arrangements
with the FHLB of San Francisco. American Savings Bank is and at all times since
December 28, 1988 has been, a qualified thrift lender pursuant to Section 10(m)
of HOLA. American Savings Bank is a savings association of the type described in
Section 10(c)(3)(B)(i) of HOLA.
4.2 Subsidiaries.
(a) Except as disclosed on Disclosure Schedule 4.2(a)
and except for equity interests in other Keystone Entities, no Keystone Entity
beneficially owns or controls, directly or indirectly, any shares of stock or
other equity interest in any corporation, firm, partnership, joint venture or
other entity.
(b) Disclosure Schedule 4.2(a) includes a list of
each corporation, partnership, joint venture and other entity in which any
Keystone Entity or any Keystone Entity Subsidiary beneficially owns or controls,
directly or indirectly, more than a 9% equity interest (each, other than New
West and its subsidiaries, Family SB and other entities specifically excluded
pursuant to Disclosure Schedule 4.2(a), a "Keystone Entity Subsidiary"). Each
investment shown on Disclosure Schedule 4.2(a) is a legal investment for a
federal savings association or a unitary savings and loan holding company, as
the case may be. Except as otherwise disclosed on Disclosure Schedule 4.2(a), a
Keystone Entity owns, directly or indirectly through a wholly owned subsidiary,
100% of the capital stock, partnership interests, joint venture interests or
other equity interests in each Keystone Entity Subsidiary. There is no
federally-insured depository institution, other than American Savings Bank, New
West and Family SB, in which any Keystone Entity owns or controls, directly or
indirectly, more than a 9.9% equity interest. Except as disclosed in Disclosure
Schedule 4.2(a), neither any Keystone Entity nor any Keystone Entity Subsidiary
is the general partner of any partnership or joint venture or is under any
obligation of any sort to acquire any capital
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stock or other equity interest in any Person. There are no options, contracts,
commitments, understandings or arrangements of any kind which might require the
issuance, delivery or sale by any Keystone Entity or by any Keystone Entity
Subsidiary of any additional equity interests or any securities convertible into
or representing the right to purchase or subscribe for such equity interests,
except for the Warrants or as otherwise described on Disclosure Schedule 4.2(b)
(which, among other things, describes certain options with respect to a Keystone
Entity which are held by another Keystone Entity) free and clear of any claim,
lien, encumbrance, or agreement with respect thereto (including any agreements
with respect to the voting of such shares). All of the shares of capital stock
of each Keystone Entity Subsidiary that is a corporation are fully paid and
nonassessable, and all such shares are owned directly by a Keystone Entity or a
Keystone Entity Subsidiary as set forth on Disclosure Schedule 4.2(a). Each
Keystone Entity Subsidiary that is a corporation is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation and is duly qualified to do business as
a foreign corporation in each other jurisdiction in which its ownership or lease
of property or the nature of the business conducted by it requires it to be so
qualified, except for such jurisdictions where the failure to be so qualified
would not, individually or in the aggregate, have a Material Adverse Effect on
American Savings Bank. Each Keystone Entity Subsidiary that is a corporation has
the corporate power to own, lease and operate its properties and assets and to
carry on its business as it is now being conducted.
(c) KH Partners and the Keystone Entities have each
previously delivered to, or made available for inspection by, WMI true and
complete copies of all agreements to which it is a party or by which it or any
of its assets may be bound, other than, in the case of American Savings Bank
only, loans, credit facility agreements or accounts in the ordinary course at
market rates and terms, with unaffiliated parties, (i) which relate to any
ownership interest by any Keystone Entity or Keystone Entity Subsidiary of an
equity interest in any partnership, joint venture, or similar enterprise, (ii)
pursuant to which either any Keystone Entity or Keystone Entity Subsidiary may
be required to transfer funds in respect of an equity interest to, make an
investment in, or guarantee or assume any debt, dividend or other obligation of,
any Person, or (iii) pursuant to which any of them are or may become an equity
investor in a real estate project.
(d) KH Partners has no assets other than (i) 100% of
the outstanding shares of Keystone Holdings, (ii) a note receivable in the
amount of $25,000 as of May 31, 1996, and (iii) its interest in the Case.
4.3 Capitalization.
(a) The authorized capital stock of Keystone Holdings
consists of 100,000 shares of Keystone Holdings Common Stock. As of the date
hereof, 1,048.4483 shares of Keystone Holdings Common Stock are issued and
outstanding. No shares of stock are held in Keystone Holdings' treasury. All of
the issued and outstanding shares of Keystone Holdings Common Stock have been
duly authorized, validly issued, and are fully paid and non-assessable, with no
personal liability attaching to the ownership thereof. Except as described in
Disclosure Schedule 4.2(b) (which, among other things, describes certain options
with respect to a Keystone Entity which are held by another Keystone Entity),
there are no outstanding subscriptions, options, warrants, calls, commitments,
agreements, understandings or arrangements of any kind which call for or might
require the transfer, sale, delivery or issuance of any shares of Keystone
Holdings' capital stock or other equity securities thereof or any securities
representing the right to purchase or otherwise receive any shares of Keystone
Holdings' capital stock or any securities convertible into or representing the
right to purchase or subscribe for any such shares. There are no agreements or
understandings to which KH Partners or any Keystone Entity is a party with
respect to voting any shares of Keystone Holdings capital stock. All of the
issued and outstanding shares of Keystone Holdings' capital stock are owned,
beneficially and of record, by KH Partners, free and clear of any claim,
security interest, lien or other encumbrance.
(b) The authorized capital stock of New Holdings
consists of 100,000 shares of common stock, par value $0.10 per share ("New
Holdings Common Stock"). As of the date hereof, 1,000 shares of New Holdings
Common Stock are issued and outstanding. No shares of stock are held in New
Holdings' treasury. All of the issued and outstanding shares of New Holdings
Common Stock have been duly authorized, validly issued, and are fully paid and
non-assessable, with no personal liability attaching to the ownership thereof.
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There are no outstanding subscriptions, options, warrants, calls, commitments,
agreements, understandings or arrangements of any kind which call for or might
require the transfer, sale, delivery or issuance of any shares of New Holdings'
capital stock or other equity securities of New Holdings or any securities
representing the right to purchase or otherwise receive any shares of New
Holdings' capital stock or any securities convertible into or representing the
right to purchase or subscribe for any such shares. There are no agreements or
understandings to which KH Partners or any Keystone Entity is a party with
respect to voting the shares of New Holdings Common Stock. All of the issued and
outstanding shares of New Holdings' capital stock are owned, beneficially and of
record, by Keystone Holdings, free and clear of any claim, security interest,
lien or other encumbrance.
(c) The authorized capital stock of New Capital
consists of 1,000,000 shares of common stock, par value $0.10 per share ("New
Capital Common Stock") and 800,000 shares of Cumulative Redeemable Preferred
Stock, par value $0.10 per share ("New Capital Preferred Stock"). As of the date
hereof, 1,000 shares of New Capital Common Stock are issued and outstanding and
800,000 shares of New Capital Preferred Stock are issued and outstanding. No
shares of stock are held in New Capital's treasury. All of the issued and
outstanding shares of New Capital Common Stock and New Capital Preferred Stock
have been duly authorized, validly issued, and are fully paid and
non-assessable, with no personal liability attaching to the ownership thereof.
There are no outstanding subscriptions, options, warrants, calls, commitments,
agreements, understandings or arrangements of any kind which call for or might
require the transfer, sale, delivery or issuance of any shares of New Capital's
capital stock or other equity securities or any securities representing the
right to purchase or otherwise receive any shares of New Capital's capital stock
or any securities convertible into or representing the right to purchase or
subscribe for any such shares. There are no agreements or understandings to
which KH Partners or any Keystone Entity is a party with respect to voting any
shares of New Capital Common Stock. All of the issued and outstanding shares of
New Capital Common Stock are owned, beneficially and of record, by New Holdings,
free and clear of any claim, security interest, lien or other encumbrance.
(d) The authorized capital stock of NACH Inc.
consists of 8,400 shares of Class A common stock, without par value, 3,600
shares of Class B common stock, without par value, 3,000 shares of Class C
common stock, without par value, and 1,000 shares of preferred stock, without
par value. As of the date hereof, 7,000 shares of NACH Inc.'s Class A common
stock are issued and outstanding. As of the date hereof, no shares of NACH
Inc.'s Class B common stock, Class C common stock or preferred stock are issued
and outstanding. No shares of stock are held in NACH Inc.'s treasury. All of the
issued and outstanding shares of NACH Inc.'s Class A common stock have been duly
authorized, validly issued, and are fully paid and non-assessable, with no
personal liability attaching to the ownership thereof. Except for the Warrants,
there are no outstanding subscriptions, options, warrants, calls, commitments,
agreements, understandings or arrangements of any kind which call for or might
require the transfer, sale, delivery or issuance of any shares of NACH Inc.'s
capital stock or other equity securities or any securities representing the
right to purchase or otherwise receive any shares of NACH Inc.'s capital stock
or any securities convertible into or representing the right to purchase or
subscribe for any such shares. There are no agreements or understandings to
which KH Partners or any Keystone Entity is a party with respect to voting any
issued and outstanding shares of NACH Inc.'s Class A common stock. All of the
issued and outstanding shares of NACH Inc.'s Class A common stock are owned,
beneficially and of record, by New Capital, free and clear of any claim,
security interest, lien or other encumbrance.
(e) The authorized capital stock of American Savings
Bank consists of 1,000,000 shares of common stock, par value $1.00 per share
("American Savings Bank Common Stock") and 100,000 shares of Serial Preferred
Stock Series A, par value $0.01 per share ("American Savings Bank Preferred
Stock"), of which 10,000 shares of American Savings Bank Preferred Stock have
been designated as Participating Preferred Stock Series A and authorized for
issuance by the Board of Directors of American Savings Bank. As of the date
hereof, 97,000 shares of American Savings Bank Common Stock are issued and
outstanding and 3,503 shares of American Savings Bank Preferred Stock are issued
and outstanding. No shares of stock are held in American Savings Bank's
treasury. All of the issued and outstanding shares of American Savings Bank
Common Stock and American Savings Bank Preferred Stock have been duly
authorized, validly issued, and are fully paid and non-assessable, with no
personal liability attaching to the ownership thereof. Except as set forth on
Disclosure Schedule 4.2(b), there are no outstanding subscriptions, options,
warrants, calls, commitments, agreements, understandings or arrangements of any
kind which call for or might require the transfer, sale, delivery or issuance of
any shares of American
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Savings Bank's capital stock or other equity securities or any securities
representing the right to purchase or otherwise receive any shares of American
Savings Bank's capital stock or any securities convertible into or representing
the right to purchase or subscribe for any such shares, and there are no
agreements or understandings to which KH Partners or any Keystone Entity is a
party with respect to voting any of such shares. All of the issued and
outstanding shares of American Savings Bank Common Stock are owned, beneficially
and of record, by NACH Inc., free and clear of any claim, security interest,
lien or other encumbrance. All of the issued and outstanding shares of American
Savings Bank Preferred Stock are owned, beneficially and of record, by Keystone
Holdings, free and clear of any claim, security interest, lien or other
encumbrance.
4.4 Loan Portfolio. To the knowledge of KH Partners and the
Keystone Entities:
(a) All evidences of indebtedness reflected as assets
on the books and records of American Savings Bank ("Loans") were, as of March
31, 1996 and will be as of the Closing Date, in all respects legal, valid and
binding obligations of the respective obligors named therein and no such
indebtedness is subject to any defenses which have been or may be asserted,
except for (i) defenses arising from applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights generally and
general principles of equity, and (ii) defenses advanced in defense of
foreclosure or other realization proceedings which are in every case fact
specific and which are not indicative of any pattern or practice by American
Savings Bank or any employee thereof which might give rise to a meritorious
class-action or other multi-party lawsuit.
(b) American Savings Bank has good title to and is
the sole owner of record of each Loan or any participation interest therein
shown as an asset on the books of American Savings Bank as of the date of this
Agreement free of any lien, encumbrance or claim by any other person, except for
Loans securing borrowings in the ordinary course (including borrowings with the
FHLB of San Francisco) or Loans subject to repurchase obligations as set forth
herein.
(c) Except as disclosed on Disclosure Schedule
4.4(c), all Loans in a principal amount in excess of $100,000 reflected as
assets in American Savings Bank's Financial Statements as of March 31, 1996 that
are primarily secured by an interest in real property are secured by a valid and
perfected first lien.
(d) All Loans with a principal balance in excess of
$1,000,000 as of March 31, 1996 which are either unsecured or secured by
property other than 1-4 family residences are listed on Disclosure Schedule
4.4(d), which indicates, for each such Loan, the Loan number, the borrower's
name and the unpaid balance as of March 31, 1996.
(e) Except as disclosed on Disclosure Schedule
4.4(e), no Loan, all or any part of which is an asset of American Savings Bank
was, as of March 31, 1996, more than 30 days past due.
(f) Except for (i) Loans acquired from the FSLIC as
receiver (the "Receiver") for Old American, in the acquisition by American
Savings Bank of Old American on December 28, 1988 (the "1988 Acquisition"), (ii)
Loans purchased from other third parties or (iii) as otherwise disclosed on
Disclosure Schedule 4.4(f), each outstanding Loan or commitment to extend credit
was solicited and originated and is administered in accordance with the relevant
loan documents, American Savings Bank's then applicable underwriting standards
and in material compliance with all applicable requirements of federal, state
and local laws and regulations. All Loans acquired from the Receiver in the 1988
Acquisition or purchased from other third parties, have, since their acquisition
by American Savings Bank, been administered in accordance with American Savings
Bank's normal loan servicing practices as from time to time in effect and,
except for claims relating to such Loans disclosed on Disclosure Schedule 4.12,
no borrower or obligor on any such Loan has alleged that they were originated or
administered in violation of any requirement of applicable federal, state, or
local laws.
(g) Except as disclosed on Disclosure Schedule
4.4(g), none of the agreements pursuant to which American Savings Bank has sold
Loans or pools of Loans or participations in Loans or pools of Loans contains
any obligation to repurchase such Loans or interests therein solely on account
of a payment default by the obligor on any such Loan.
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(h) Disclosure Schedule 4.4(h) sets forth, as of
March 31, 1996, as to each participation purchased, the total loan balance, the
percentage of interest purchased, the identity of the seller and an indication
of whether or not there are any put-back rights or indemnifications and whether
the percentage of interest purchased by American Savings Bank is superior to the
percentage of interest retained by the seller; provided, however, that as to
1-to-4 family residential loans, such information is provided by loan package
sold instead of by individual loans.
(i) (a) Disclosure Schedule 4.4(i)(a) sets forth all
Loans by American Savings Bank to executive officers (as such term is defined in
Regulation O) of American Savings Bank; (b) there are no employee, officer,
director or other affiliate Loans on which the borrower is paying a rate other
than that reflected in the note or the relevant credit agreement or on which the
borrower is paying a rate which was below market at the time the loan was made;
and (c) except as listed on Disclosure Schedule 4.4(i)(c), all such loans are
and were made in compliance with all applicable federal laws and regulations.
(j) All Loans which are assets of American Savings
Bank have been classified in accordance with the American Savings Bank Loan
classification policy, a copy of which has been provided to WMI.
(k) All Commercial Real Estate Loans were originated
in conformity with American Savings Bank's then-applicable environmental policy,
except for such Loans as were acquired from the Receiver in the 1988
Acquisition, and such Loans as were purchased from other third parties. Loans
acquired from the Receiver in the 1988 Acquisition, and Loans purchased from
other third parties have been serviced in accordance with the American Bank
Environmental Policy and, except as disclosed on Disclosure Schedule 4.4(k), KH
Partners and the Keystone Entities have no knowledge of any environmental
contamination issues raised by or with respect to the properties securing Loans
acquired from the Receiver in the 1988 Acquisition. Pursuant to the terms and
subject to the conditions contained in certain of the FRF Agreements, American
Savings Bank is entitled to receive certain federal assistance payments with
respect to Loans acquired from the Receiver in the 1988 Acquisition that were
secured by properties affected by certain specified environmental conditions.
(l) Except for Loans acquired from the Receiver in
the 1988 Acquisition and Loans purchased from other third parties, (i) each Loan
outstanding to an individual who is known to American Savings Bank to be an
individual who is not a resident of the United States was originated by American
Savings Bank in accordance with its Lending/Mortgage Origination Policy (Income
Property Lending - Foreign Borrowers), a copy of which has been provided to WMI,
and (ii) there are no Loans to a corporation or other entity headquartered
outside of the United States. There are no commitments outstanding to
nonresident individuals or entities to make loans or advances which, when made,
would not be in compliance with the preceding sentence.
(m) Except as shown on Disclosure Schedule 4.4(m), as
of March 31, 1996, American Savings Bank has no outstanding commitments,
including outstanding letters of credit and unfunded agreements to lend, in
excess of $500,000 for other than one-to-four family residential loans.
4.5 Reports.
(a) Each Keystone Entity has duly filed with the FDIC
and the OTS, in correct form in all material respects, the monthly, quarterly,
semiannual and annual reports required to be filed by it under applicable law
and regulations for all periods subsequent to December 31, 1992. The Keystone
Entities have previously delivered or made available to WMI accurate and
complete copies of such reports. At no time since January 1, 1989, has any
Keystone Entity had outstanding any securities registered under Section 12(b) or
required to be registered under Section 12(g) of the Securities Exchange Act.
(b) The Keystone Entities have previously delivered
or made available to WMI accurate and complete copies of (1) the Private
Placement Memorandum dated October 1991, and the final Offering Circular dated
March 16, 1995 relating to the Senior Notes (the "Senior Note Circulars"), (2)
the final Offering Circular dated February 5, 1996 relating to the 6 5/8%
Subordinated Notes due February 15, 2006 issued by American Savings Bank (the
"Subordinated Note Circular"), (3) the final Offering Circular dated July 28,
1995
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relating to the New Capital Preferred Stock (the "Preferred Stock Circular" and,
together with the Senior Note Circulars and the Subordinated Note Circulars, the
"Offering Circulars") and (4) the Note Purchase Agreement dated September 10,
1993 and each other written communication (other than general advertising
materials) mailed by any Keystone Entity to the holders of the Senior Notes, the
Subordinated Notes or the New Capital Preferred Stock (the "Securityholder
Communications"). None of the Offering Circulars, as of their respective dates,
contained an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that with respect to the
Preferred Stock Circular, no representation is made concerning (v) the terms of
the Deferred Payments Agreement dated as of August 1, 1995 or other arrangements
between Merrill Lynch Capital Services, Inc. and NA Preferred Partners, L.P.,
Acadia Partners, L.P. and Lerner Enterprises Limited Partnership relating to the
sale of the Preferred Stock referred to therein; (w) the financial condition or
results of operations of New Capital for any period subsequent to March 31,
1995; (x) management of New Capital; (y) compensation of executive officers and
directors of New Capital or (z) the federal income tax consequences of an
investment in the New Capital Preferred Stock. WMI acknowledges that each of the
Offering Circulars states that it is not to be relied upon as the sole basis for
making an investment decision in the related securities, and that the
circumstances under which the statements in the Offering Circulars were made
include, among other things, the fact that prospective investors were required
to rely upon their own independent investigation of New Capital or American
Savings Bank, as the case may be, and the terms of the related securities and
their offering. None of the Securityholder Communications, as of their
respective dates, contained an untrue statement of a material fact.
4.6 Authority.
(a) KH Partners has requisite partnership power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement,
and the consummation of the transactions contemplated hereby have been duly and
validly approved by all necessary partnership action. This Agreement has been
duly and validly executed and delivered by KH Partners and, assuming the due
authorization, execution and delivery thereof by the WM Entities, constitutes
the valid and binding obligation of KH Partners, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other laws relating to creditors' rights generally and to general
principles of equity.
(b) Keystone Holdings has requisite corporate power
and authority to execute and deliver this Agreement and the Plan of Merger and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the Plan of Merger and the consummation of
the transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of Keystone Holdings. Keystone Holdings has
obtained all stockholder approvals, if any, required under its articles, bylaws
or applicable law for the execution and delivery of this Agreement and the Plan
of Merger and the consummation of the transactions contemplated hereby or
thereby. No other corporate proceedings on the part of Keystone Holdings are
necessary to authorize this Agreement or the Plan of Merger or the transactions
contemplated hereby or thereby. This Agreement has been duly and validly
executed and delivered by Keystone Holdings and, assuming the due authorization,
execution and delivery thereof by the WM Entities, constitutes a valid and
binding obligation of Keystone Holdings, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other laws relating to creditors' rights generally and to general principles of
equity.
(c) Each of New Holdings, New Capital, NACH Inc. and
American Savings Bank has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by each of New Holdings,
New Capital, NACH Inc. and American Savings Bank and the consummation by each of
the transactions contemplated hereby have been duly and validly approved by its
respective Board of Directors. Each of New Holdings, New Capital, NACH Inc. and
American Savings Bank has obtained all stockholder approvals, if any, required
by its articles, charter or bylaws or under applicable law to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. No other corporate proceedings on the part of
any of New Holdings, New Capital, NACH Inc. or American Savings Bank are
necessary to authorize this Agreement or
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the consummation of the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by each of New Holdings, New
Capital, NACH Inc. and American Savings Bank and, assuming due authorization,
execution and delivery thereof by the WM Entities, constitutes a valid and
binding obligation of each of New Holdings, New Capital, NACH Inc. and American
Savings Bank, enforceable against each of them in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other laws relating
to creditors' rights generally, to general principles of equity and, in the case
of American Savings Bank, applicable receivership and conservatorship laws.
4.7 No Violation.
(a) Neither the execution and delivery of this
Agreement by KH Partners and the Keystone Entities or the Plan of Merger by
Keystone Holdings nor the consummation of the transactions contemplated hereby
and thereby, nor compliance by KH Partners and the Keystone Entities with any of
the terms or provisions hereof or thereof, will (i) violate any provision of the
partnership agreement of KH Partners or the articles, charter or bylaws of any
Keystone Entity, (ii) assuming the consents and approvals referred to in Section
9.1 hereof are duly obtained, violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to KH
Partners, any Keystone Entity or any Keystone Entity Subsidiary, or any of its
respective properties or assets, or (iii) except for the agreements listed on
Disclosure Schedule 4.7(a), violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, result in the termination of,
accelerate the performance required by, require any consent or notice under, or
result in the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of KH Partners, any Keystone
Entity or any Keystone Entity Subsidiary, under any of the terms, conditions or
provisions of any note, bond, mortgage indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which KH Partners, any Keystone
Entity or any Keystone Entity Subsidiary is a party, or by which it or any of
its properties or assets may be bound or affected. The parties agree that the
phrase "transactions contemplated herein" and words of similar import used in
this Agreement shall not be deemed to include the Liquidations and the Bank
Merger.
(b) If WMI determines, after the Effective Time, to
liquidate (by statutory merger) each of New Holdings, New Capital and NACH Inc.
(the "Liquidations") and, after the Liquidations, to merge American Savings Bank
with WM Bank or WMBfsb (the "Bank Merger"), neither the Liquidations nor the
Bank Merger will, to the knowledge of KH Partners and the Keystone Entities, (i)
violate any provision of the articles, charter or bylaws of any Keystone Entity,
(ii) assuming that WMI obtains the necessary consents and approvals from
applicable regulatory authorities and the FDIC under the FRF Agreements, violate
any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to any Keystone Entity or any Keystone Entity Subsidiary,
or any of its respective properties or assets, or (iii) except for the
agreements listed on Disclosure Schedule 4.7(b) or as would not have a Material
Adverse Effect on KH Partners and the Keystone Entities taken as a whole,
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, require any consent or notice under, or result in the
creation of any lien, security interest, charge or other encumbrance upon any of
the properties or assets of any Keystone Entity or any Keystone Entity
Subsidiary, under any of the terms, conditions or provisions of any note, bond,
mortgage indenture, deed of trust, license, lease, agreement or other instrument
or obligation to which any Keystone Entity or any Keystone Entity Subsidiary is
a party, or by which it or any of its properties or assets may be bound or
affected.
4.8 Consents and Approvals. Except for (i) consents and
approvals of or filings, deliveries or registrations with the OTS, the FRF, the
FDIC, the Director, the Washington Secretary of State, the Texas Secretary of
State, the FTC, the SEC, the United States Department of Justice (the "Justice
Department"), or other applicable governmental authorities and (ii) the
consents, approvals, filings or registrations required with respect to the
agreements set forth on Disclosure Schedule 4.7(a), 4.7(b) or 4.23, no consents
or approvals of or filings or registrations with any third party or public body
or authority are necessary in connection with the execution and delivery of this
Agreement by the Keystone Entities and KH Partners and the consummation by the
Keystone Entities and KH Partners of the transactions contemplated hereby.
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4.9 Financial Statements.
(a) The Keystone Entities have previously delivered
or made available to WMI copies of (i) the consolidated statements of financial
condition of each Keystone Entity as of December 31, in each of the three fiscal
years 1993, 1994 and 1995, and the related consolidated statements of income,
statements of stockholders' equity and statements of cash flows for each of the
three-year periods ending, respectively, on December 31, 1993, 1994 and 1995, in
each case accompanied by the audit reports of KPMG (the "Keystone 1993, 1994 and
1995 Financial Statements," respectively); and (ii) the unaudited consolidated
balance sheet of each Keystone Entity as of March 31, 1996 and the related
unaudited consolidated statements of income and statements of cash flows for the
three-month period then ended (the "Keystone March 1996 Financial Statements").
The Keystone 1993, 1994 and 1995 Financial Statements and the Keystone March
1996 Financial Statements are sometimes herein referred to collectively as the
Keystone Financial Statements. The consolidated statements of condition of each
Keystone Entity referred to herein (including the related notes) fairly present
in all material respects, using generally accepted accounting principles
consistently applied, the consolidated financial position of such Keystone
Entity as of the respective dates set forth therein, and the other financial
statements referred to herein (including the related notes) fairly present in
all material respects, using generally accepted accounting principles
consistently applied, the results of the consolidated operations and changes in
stockholders' equity and cash flows of such Keystone Entity for the respective
fiscal periods or as of the respective dates set forth therein, except that
interim unaudited financial statements are subject to normal adjustments.
(b) Each of the Keystone Financial Statements
(including the related notes) has been prepared in accordance with generally
accepted accounting principles consistently applied during the periods involved
(except as indicated in the notes thereto). To the knowledge of KH Partners and
the Keystone Entities, the books and records of each Keystone Entity have been,
and are being, maintained in all material respects in accordance with applicable
legal and accounting requirements, using generally accepted accounting
principles consistently applied, and reflect only actual transactions.
4.10 Brokerage. Except as disclosed on Disclosure Schedule
4.10 (which fees shall be payable by one or more of the Keystone Entities),
there are no claims for investment banking fees, brokerage commissions, finder's
fees or similar compensation arising out of or due to any act of KH Partners,
any Keystone Entity or any Keystone Entity Subsidiary in connection with the
transactions contemplated by this Agreement.
4.11 Absence of Certain Changes or Events. There has not been
any Material Adverse Change with respect to any of the Keystone Entities, from
that described in the Keystone March 1996 Financial Statements (except for
changes resulting from market and economic conditions which generally affect the
savings industry as a whole, including, without limitation changes in law or
regulation, and changes in generally accepted accounting principles or
interpretations thereof).
4.12 Litigation, Etc. As of June 30, 1996, except as disclosed
on Disclosure Schedule 4.12 or 4.14(c), there is no action, suit, claim,
inquiry, proceeding or, to the knowledge of KH Partners or any Keystone Entity,
investigation (other than condemnation or unlawful detainer actions and routine
bankruptcy matters involving Loans and the properties securing Loans) before any
court, commission, bureau, regulatory, administrative or governmental agency,
arbitrator, body or authority pending or, to the knowledge of KH Partners or any
Keystone Entity, threatened against any Keystone Entity or any Keystone Entity
Subsidiary which would reasonably be expected to result in any liabilities,
including defense costs, in excess of $100,000. Except as disclosed on
Disclosure Schedule 4.12 or 4.14(c), neither any Keystone Entity nor any
Keystone Entity Subsidiary is in default with respect to any orders, judgments
or decrees that in the aggregate require payment of more than $100,000.
4.13 Taxes, Payments in Lieu of Taxes and Tax Returns.
(a) Except as disclosed in Disclosure Schedule 4.13,
(i) the amounts set up as provisions for taxes on the Keystone 1995 Financial
Statements are sufficient for all material accrued and unpaid federal, state,
county and local taxes, interest and penalties of all corporations which were or
should have been included in the Keystone Holdings consolidated federal income
tax return, whether or not disputed, for the period
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ended December 31, 1995 and for all fiscal periods prior thereto; and (ii) the
amounts stated as provisions for payments in lieu of taxes in Note 18 of the
1995 financial statements of American Savings Bank are sufficient for all
material accrued and unpaid amounts owed to the FRF, whether or not disputed,
with respect to the period ended December 31, 1995 and for all fiscal periods
prior thereto. The federal income tax returns for all corporations which were or
should have been included in the Keystone Holdings consolidated federal income
tax return for the fiscal years ending in 1992, 1993, 1994 and 1995 are the only
such federal income tax returns open under the statute of limitations provisions
of the Code. With respect to California franchise tax matters, franchise tax
returns for American Savings Bank and the subsidiaries of American Savings Bank
for the income years ended December 31, 1988, 1989, 1990, 1992, 1993, 1994 and
1995 are open under the statute of limitations provisions of the Revenue and Tax
Code of the State of California. Complete and correct copies of the income tax
returns for all corporations which were or should have been included in the
Keystone Holdings consolidated federal income tax return for the three fiscal
years ending December 31, 1992, 1993 and 1994, as filed with the Internal
Revenue Service and all state and local taxing authorities, together with all
related correspondence and notices, have previously been delivered or made
available to WMI.
(b) Each of the corporations which was or should have
been included in the Keystone Holdings consolidated federal income tax return
has timely and correctly filed all federal income tax returns and reports
(collectively, "Federal Income Tax Returns") required by applicable law to be
filed (including, without limitation, estimated tax returns or income tax
returns), except to the extent that the failure to timely or correctly file such
Federal Income Tax Returns does not, when aggregated with all failures to timely
or correctly file all Other Returns (as hereinafter defined), result in
aggregate penalties or assessments of more than $5.0 million, and has paid all
taxes, charges and withholdings shown by such Federal Income Tax Returns to be
owed, or which are otherwise due and payable and to the extent any material
liabilities for such Taxes have not been fully discharged, full and complete
reserves have been established on the Keystone 1995 Financial Statements.
(c) Each Keystone Entity and each Keystone Entity
Subsidiary (excluding any subsidiaries of New West) has timely and correctly
filed all federal, state, county and local tax returns and reports other than
Federal Income Tax Returns (collectively, "Other Returns") required by
applicable law to be filed (including, without limitation, estimated tax
returns, income tax returns, excise tax returns, sales tax returns, use tax
returns, property tax returns, franchise tax returns, information returns and
withholding, employment and payroll tax returns), or required by contractual
provisions (including, without limitation, reports to the FDIC), except to the
extent that the failure to timely or correctly file such Other Returns does not
result in aggregate penalties or assessments, when combined with such penalties
relating to Federal Income Tax Returns, of more than $5.0 million, and has paid
all taxes, payments in lieu of taxes, levies, license and registration fees,
charges and withholdings of any nature whatsoever (hereinafter called "Taxes")
shown by such Other Returns to be owed, or which are otherwise due and payable
and to the extent any material liabilities therefor have not been fully
discharged, full and complete reserves have been established on the Keystone
1995 Financial Statements.
(d) No entity which was or should have been included
in the Keystone Holdings consolidated federal income tax return is in default in
the payment of any federal income taxes or Taxes due or payable or any
assessments received in respect thereof except for those which are being
contested in good faith. No additional assessments of federal income taxes or
Taxes are known to KH Partners or the Keystone Entities to be proposed, pending
or threatened, other than federal income taxes or Taxes for periods for which
returns are not yet filed.
(e) No Keystone Entity or Keystone Entity Subsidiary
has filed a consent to the application of Section 341(f) of the Code.
(f) Keystone Holdings is not an investment company as
defined in section 368(a)(2)(F)(iii) and (iv) of the Code.
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4.14 Employees; Employee Benefit Plans.
(a) To the knowledge of KH Partners or the Keystone
Entities, (A) except as set forth in Disclosure Schedule 4.14(a)(i) neither KH
Partners, any Keystone Entity nor any Keystone Entity Subsidiary is a party to
or bound by any contract, arrangement or understanding (whether written or oral)
with respect to the employment or compensation of any (x) consultants receiving
in excess of $50,000 annually or (y) employees and, (B) except as provided under
the Benefit Plans (as defined below) set forth in Disclosure Schedule
4.14(a)(ii) and other agreements or arrangements set forth in Disclosure
Schedule 4.14(a)(ii), consummation of the transactions contemplated by this
Agreement and the Plan of Merger will not (either alone or upon the occurrence
of any additional acts or events) result in any payment (whether of severance
pay or otherwise) becoming due from any Keystone Entity or any Keystone Entity
Subsidiary to any officer or employee thereof. The Keystone Entities have
previously delivered or made available to WMI true and complete copies of all
consulting agreements calling for payments in excess of $50,000 annually and
employment, and deferred compensation agreements that are in writing, to which
any Keystone Entity or any Keystone Entity Subsidiary is a party.
(b) Except as set forth on Disclosure Schedule
4.14(b) no employee of any Keystone Entity or any Keystone Entity Subsidiary
received aggregate remuneration (bonus, salary and commissions) in excess of
$200,000 for 1995 or would reasonably be expected to receive aggregate
remuneration (excluding severance or other payments which, pursuant to an
agreement or arrangement set forth on Disclosure Schedule 4.14(a)(ii), are made
as a result of consummation of the transactions contemplated by this Agreement
and the Plan of Merger, either alone or upon the occurrence of any additional
acts or events) in excess of $200,000 in 1996.
(c) Except as disclosed on Disclosure Schedule
4.14(c), as of the date of this Agreement, there are not, and have not been at
any time since January 1, 1994, any actions, suits, claims or proceedings before
any court, commission, bureau, regulatory, administrative or governmental
agency, arbitrator, body or authority (which in any case have been served on KH
Partners, any Keystone Entity or any Keystone Entity Subsidiary) pending or, to
the best of KH Partners' and the Keystone Entities' knowledge, threatened by any
employees, former employees or other persons relating to the employment
practices or activities of any Keystone Entity or any Keystone Entity Subsidiary
(except for actions which have subsequently been resolved). Neither any Keystone
Entity nor any Keystone Entity Subsidiary is a party to any collective
bargaining agreement, and no union organization efforts are pending or, to the
best of KH Partners' and the Keystone Entities' knowledge, threatened nor have
any occurred during the last three years.
(d) The Keystone Entities have made available to WMI
true and complete copies of all personnel codes, practices, procedures,
policies, manuals, affirmative action programs and similar materials.
(e) Except as disclosed on Disclosure Schedule
4.14(e), KH Partners and the Keystone Entities represent and warrant as follows:
(i) All employee benefit plans, as defined
in Section 3(3) of ERISA, and any other pension, bonus, deferred compensation,
stock bonus, stock purchase, post-retirement medical, hospitalization, health
and other employee benefit plan, program or arrangement under which any Keystone
Entity or any Keystone Entity Subsidiary has any obligation or liability to any
employee or former employee (the "Benefit Plans") are set forth on Disclosure
Schedule 4.14(e)(i). All Benefit Plans that are subject to the funding
requirements in Title I, Subtitle B, Part 3 of ERISA or Section 412 of the Code,
are in compliance with such funding standards, and no waiver or variance from
such funding requirements has been obtained or applied for under Section 412(d)
of the Code. None of the Benefit Plans is subject to Title IV of ERISA or is a
"multiemployer plan," as such term is defined in Section 3(37) of ERISA.
(ii) In all material respects, the terms of
the Benefit Plans are, and the Benefit Plans have been administered, in
accordance with the requirements of ERISA, the Code, applicable law and the
respective plan documents. None of the Benefit Plans is under audit or to the
knowledge of the Keystone Entities is the subject of an investigation by the
Internal Revenue Service, the U.S. Department of Labor or any other federal or
state governmental agency. All material reports and information required to be
filed with, or
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provided to, the U.S. Department of Labor, Internal Revenue Service, the PBGC
and plan participants and beneficiaries with respect to each Benefit Plan have
been timely filed or provided. With respect to each Benefit Plan for which an
annual report has been filed, to the knowledge of KH Partners and the Keystone
Entities, no material change has occurred with respect to the matters covered by
the most recent annual report since the date thereof.
(iii) Each of the Benefit Plans which is
intended to be "qualified" within the meanings of Section 401(a) of the Code is
so qualified and has been the subject of a determination letter from the
Internal Revenue Service to the effect that each such Plan is qualified and
exempt from Federal income taxes under Section 401(a) and 501(a), respectively,
of the Code.
(iv) Prior to the Closing, KH Partners and
the Keystone Entities shall deliver or make available to WMI complete and
correct copies (if any) of (w) the most recent Internal Revenue Service
determination letter relating to each Benefit Plan intended to be tax qualified
under Section 401(a) and 501(a) of the Code, (x) the most recent annual report
(Form 5500 Series) and accompanying schedules of each Benefit Plan, filed with
the Internal Revenue Service or an explanation of why such annual report is not
required, (y) the most current summary plan description for each Benefit Plan,
and (z) the most recent audited financial statements of each Benefit Plan.
(v) With respect to each Benefit Plan, all
contributions, premiums or other payments due or required to be made to such
plans as of the Effective Time have been or will be made prior to the Effective
Time.
(vi) To the knowledge of KH Partners and
the Keystone Entities, there are not now, nor have there been, any non-exempt
"prohibited transactions", as such term is defined in Section 4975 of the Code
or Section 406 of ERISA, involving any Keystone Entity or any Keystone Entity
Subsidiary, or any officer, director or employee thereof, with respect to the
Benefit Plans that could subject any Keystone Entity or any Keystone Entity
Subsidiary or, to the knowledge of KH Partners and the Keystone Entities, any
other party-in-interest to the penalty or tax imposed under Section 502(i) of
ERISA and Section 4975 of the Code.
(vii) No claim, lawsuit, arbitration or
other action has been instituted, asserted (and no such lawsuit has been served
on any Keystone Entity or any Keystone Entity Subsidiary) or, to the best of KH
Partners' and the Keystone Entities' knowledge, threatened by or on behalf of
such Benefit Plan or by any employee alleging a breach of fiduciary duty or
violations of other applicable state or federal law with respect to such Benefit
Plans, which could result in liability on the part of any Keystone Entity, any
Keystone Entity Subsidiary or a Benefit Plan under ERISA or any other law, nor
is there any known basis for successful prosecution of such a claim, and WMI
will be notified promptly in writing of any such threatened or pending claim
arising between the date hereof and the Closing.
(viii) No Benefit Plan which is an
"employee welfare benefit plan" (within the meaning of Section 3(1) of ERISA)
provides for continuing benefits or coverage for any participant or beneficiary
of a participant after such participant's termination of employment, except as
may be required by COBRA, nor does any Keystone Entity or any Keystone Entity
Subsidiary have any material current or projected liability under any such plans
(such disclosure being made in accordance with the principles of Financial
Accounting Standard No. 106 of the Financial Accounting Standards Board).
(ix) Except for (y) the plan adopted by the
American Savings Bank Board of Directors on March 26, 1996 and reaffirmed with
amendments on June 6, 1996, and (z) the American Savings Bank Special Severance
Protection Program (as of January 1, 1994), copies of which have been provided
to WMI, the Keystone Entities and the Keystone Entity Subsidiaries have not
maintained or contributed to, and do not currently maintain or contribute to,
any severance pay plan.
(x) Except as disclosed on Disclosure
Schedule 4.14(a)(ii), no individual will accrue or receive any additional
benefits, service, or accelerated rights to payment or vesting of benefits under
any Benefit Plan as a result of the transactions contemplated by this Agreement.
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(xi) The Keystone Entities will obtain the
requisite stockholder approval, in accordance with Section 280G(b)(5)(B) of the
Code, prior to the Effective Time, of all payments to be made to individuals
under any Benefit Plan or otherwise as a result of the transactions contemplated
by this Agreement which would, without such approval, have constituted a
"parachute payment" as defined in Section 280G(b)(2) of the Code.
(f) Disclosure Schedule 4.14(f) is a complete listing
of all individual agreements with employees which provide for the possibility of
bonus payments in the event of a change of control (the "Change of Control
Agreements").
(g) The termination and distribution of American
Savings Bank's defined benefit plan was done in accordance with all applicable
laws and regulations. An Internal Revenue Service letter of determination has
been requested by American Savings Bank and American Savings Bank has no reason
to believe it will not be issued in due course. Except for surplus trust assets
in the amount of approximately $1.3 million, all distributions have been made
and there are no employees (present or former) or retirees that are owed any
benefits under such terminated plan that have not been remitted in accordance
with all applicable laws and regulations. There are no outstanding obligations
or liabilities relating to the winding up of such plan.
4.15 Compliance With Applicable Law.
(a) Each Keystone Entity and Keystone Entity
Subsidiary holds all licenses, certificates, franchises, permits and other
governmental authorizations ("Permits") necessary for the lawful conduct of its
respective business and such Permits are in full force and effect, and each
Keystone Entity and Keystone Entity Subsidiary is in all respects complying
therewith except in each case where such failure to hold any Permit or to comply
with any Permit would not have a Material Adverse Effect on the Keystone
Entities.
(b) Each Keystone Entity and Keystone Entity
Subsidiary is and for the past three years has been in compliance with all
foreign, federal, state and local laws, statutes, ordinances, rules, regulations
and orders applicable to the operation, conduct or ownership of its business or
properties except for any noncompliance which is not reasonably likely to have
in the aggregate a Material Adverse Effect on any of the Keystone Entities.
4.16 Contracts and Agreements. To the knowledge of KH Partners
and the Keystone Entities, (i) except (A) with respect to deposits or other
borrowings in the ordinary course, (B) leases of and contracts relating to
interests in real property, (C) contracts, agreements, commitments or
instruments relating to loan servicing, insurance, tax or utility matters or the
employment or retention of (or compensation or other benefits payable with
respect to) employees or consultants (including attorneys and accountants, (D)
the FRF Agreements, the Senior Notes, the Subordinated Notes, the New Capital
Preferred Stock and the American Savings Bank Preferred Stock, (E) commitments,
contracts, agreements or other instruments which are terminable by the Keystone
Entities or a Keystone Entity Subsidiary upon notice of not more than 90 days,
and (F) as otherwise disclosed on Disclosure Schedule 4.16(i), neither any
Keystone Entity nor any Keystone Entity Subsidiary is a party to or bound by any
existing commitment, contract, agreement or other instrument which involved
payments by any Keystone Entity or any Keystone Entity Subsidiary to any party
(other than a Keystone Entity or a Keystone Entity Subsidiary) during 1995 of
more than $750,000 or which could reasonably be expected to involve payments
during 1996 of more than $750,000; and (ii) except as set forth on Disclosure
Schedule 4.16(ii), no commitment, contract, agreement or other instrument to
which any Keystone Entity or any Keystone Entity Subsidiary is a party or by
which it is bound, limits the freedom of any Keystone Entity or any Keystone
Entity Subsidiary to compete in any line of business, in any geographic area, or
with any Person.
4.17 Affiliate Transactions.
(a) To the knowledge of KH Partners and the Keystone
Entities and except as disclosed in Disclosure Schedule 4.17, since July 31,
1994, neither any Keystone Entity nor any Keystone Entity Subsidiary has engaged
in, or is currently obligated to engage in (whether in writing or orally), any
transaction with any Affiliated Person (as defined below) involving aggregate
payments by or to a Keystone Entity or a Keystone
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Entity Subsidiary of $60,000 or more during any consecutive 12 month period
other than transactions between or among Keystone Entities or Keystone Entity
Subsidiaries which are not in violation of Sections 23A and 23B of the Federal
Reserve Act.
(b) For purposes of this Section 4.17, "Affiliated
Person" means:
(i) a director, executive officer or
Controlling Person (as defined below) of any Keystone Entity;
(ii) a spouse of a director, executive
officer or Controlling Person of any Keystone Entity;
(iii) a member of the immediate family of a
director, executive officer, or Controlling Person of any Keystone Entity who
has the same home as such person;
(iv) any company (other than a Keystone
Entity) of which a director, executive officer or Controlling Person of any
Keystone Entity directly or indirectly, or acting through or in concert with one
or more persons, (v) owns, controls or has the power to vote 25% or more of any
class of voting securities of the company; (w) controls in any manner the
election of a majority of the directors of the company; (x) has the power to
exercise a controlling influence over the management or policies of the company;
(y) is an executive officer or director of the company and owns, controls or has
the power to vote more than 10% of any class of voting securities of the
company; or (z) owns, controls or has the power to vote more than 10% of any
class of voting securities of the company and no other person owns, controls or
has the power to vote a greater percentage of that class of voting securities;
(v) any trust or estate in which a
director, executive officer, or Controlling Person of any Keystone Entity or the
spouse of such person has a substantial beneficial interest or as to which such
person or his spouse serves as trustee or in a similar fiduciary capacity.
(c) For purposes of this Section 4.17 the term
"Controlling Person" means any person or entity which, either, directly or
indirectly, or acting in concert with one or more other persons or entities
owns, controls or holds with power to vote, or holds proxies representing ten
percent or more of the outstanding common stock of any entity.
(d) For purposes of this Section 4.17, the term
"director" means any director, trustee, or other person performing similar
functions with respect to any organization whether incorporated or
unincorporated.
(e) For purposes of this Section 4.17, the term
"executive officer" means the chief executive officer, the president, any
executive vice president, and any other person performing similar functions with
respect to any organization whether incorporated or unincorporated.
(f) For purposes of this Section 4.17, the term
"company" means any corporation, partnership, trust (business or otherwise),
association, joint venture, pool syndicate, sole proprietorship, unincorporated
organization or any other form of business entity other than a Keystone Entity.
4.18 Title to Property.
(a) Real Property. Disclosure Schedule 4.18(a)
contains a description of all interests in real property (other than real
property security interests received in the ordinary course of business or real
property acquired through foreclosure or deed in lieu thereof or other
realization proceedings ("REO")), whether owned, leased or otherwise claimed,
including a list of all leases of real property, in which any Keystone Entity or
Keystone Entity Subsidiary has or claims an interest as of the date of this
Agreement and any guarantees of any such leases by any of such parties. True and
complete copies of such leases have previously been delivered or made
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available to WMI, together with all amendments, modifications, agreements or
other writings related thereto which are in the possession of any Keystone
Entity or any Keystone Entity Subsidiary. Except as disclosed on Disclosure
Schedule 4.18(a), to the knowledge of the Keystone Entities and the Keystone
Entity Subsidiaries, each such lease is valid and binding as between a Keystone
Entity or a Keystone Entity Subsidiary and the other party or parties thereto,
and the occupant is a tenant or possessor in good standing thereunder, free of
any default or breach whatsoever (except as otherwise disclosed on Disclosure
Schedule 4.18(a)) and quietly enjoys the premises provided for therein. Except
as disclosed on Disclosure Schedule 4.18(a), to the knowledge of KH Partners and
the Keystone Entities, each Keystone Entity and Keystone Entity Subsidiary has
owner's policies of title insurance insuring it to be the owner of all real
property owned by it on the date of this Agreement, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any nature whatsoever,
except liens for current taxes not yet due and payable and other standard
exceptions commonly found in title policies in the jurisdiction where such real
property is located, and such encumbrances and imperfections of title, if any,
as do not materially detract from the value of the properties and do not
materially interfere with the present or proposed use of such properties or
otherwise materially impair such operations. All real property and fixtures
material to the business, operations or financial condition of each Keystone
Entity and each Keystone Entity Subsidiary are in substantially good condition
and repair.
(b) Environmental Matters. Except as set forth on
Disclosure Schedule 4.18(b), to the knowledge of KH Partners and the Keystone
Entities, real property owned or leased by any Keystone Entity or any Keystone
Entity Subsidiary on the date of this Agreement does not contain any underground
storage tanks, asbestos, ureaformaldehyde, uncontained polychlorinated
biphenyls, or, except for materials which are ordinarily used in office
buildings and office equipment such as janitorial supplies and do not give rise
to financial liability therefor under the hereafter defined Environmental Laws,
releases of hazardous substances as such terms may be defined by all applicable
federal, state or local environmental protection laws and regulations
("Environmental Laws"). As of the date of this Agreement (i) no part of any such
real property has been listed, or to the knowledge of KH Partners and the
Keystone Entities, proposed for listing on the National Priorities List pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or on a registry or inventory of inactive hazardous waste sites
maintained by any state, and, (ii) except as set forth on Disclosure Schedule
4.18(b), no notices have been received alleging that any Keystone Entity or any
Keystone Entity Subsidiary is a potentially responsible person under CERCLA or
any similar statute, rule or regulation. Neither any Keystone Entity nor any
Keystone Entity Subsidiary knows of any violation of law, regulation, ordinance
(including, without limitation, laws, regulations and ordinances with respect to
hazardous waste, zoning, environmental, city planning or other similar matters)
relating to its respective properties, which violations could have in the
aggregate a Materially Adverse Effect on any Keystone Entity.
(c) Personal Property. To the knowledge of KH
Partners and the Keystone Entities, American Savings Bank has good, valid and
marketable title to all tangible personal property owned by it on the date
hereof, free and clear of all liens, pledges, charges or encumbrances of any
nature whatsoever except as disclosed on Disclosure Schedule 4.18(c). With
respect to personal property used in the business of American Savings Bank which
is leased rather than owned, American Savings Bank is not in default under the
terms of any such lease the loss of which would have a Material Adverse Effect
on American Savings Bank.
(d) Repurchase Agreements. With respect to each
repurchase agreement where American Savings Bank is the purchaser of the
securities, the value of the collateral securing each such repurchase obligation
equals or exceeds the amount of the debt secured by the collateral under such
agreement and such collateral is held by American Savings Bank or a party other
than the repurchaser pursuant to an agreement substantially in the form of the
standard PSA agreement.
4.19 Patents, Trademarks, Etc. American Savings Bank owns or
possesses all legal rights to use all proprietary rights, including without
limitation all trademarks, trade names, service marks and copyrights, that are
material to the conduct of American Savings Bank's existing and proposed
businesses. Except for the agreements listed on Disclosure Schedule 4.19,
American Savings Bank is not bound by or a party to any options, licenses or
agreements of any kind with respect to any trademarks, service marks or trade
names which American Savings Bank claims to own. None of KH Partners or any
Keystone Entity has received any communications
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alleging that American Savings Bank has violated or would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity.
4.20 Insurance. Disclosure Schedule 4.20 contains a true and
complete list and a brief description (including name of insurer, agent,
coverage and expiration date) of all insurance policies in force on the date
hereof with respect to the business and assets of the Keystone Entities (other
than insurance policies under which any Keystone Entity is named as a loss
payee, insured or additional insured as a result of its position as a secured
lender on specific Loans and mortgage insurance policies on specific Loans). The
Keystone Entities are in compliance with all of the material provisions of their
insurance policies and are not in default under any of the material terms
thereof. Each such policy is outstanding and in full force and effect and,
except as set forth on Disclosure Schedule 4.20, a Keystone Entity is the sole
beneficiary of such policies. All premiums and other payments due under any such
policy have been paid.
4.21 Powers of Attorney. Neither any Keystone Entity nor any
Keystone Entity Subsidiary has any powers of attorney outstanding other than
those issued pursuant to the requirements of regulatory authority or in the
ordinary course of business with respect to routine matters.
4.22 Community Reinvestment Act Compliance. Except as
disclosed on Disclosure Schedule 4.22, American Savings Bank is in substantial
compliance with the applicable provisions of the Community Reinvestment Act of
1977 and the regulations promulgated thereunder (collectively, "CRA") and has
received a CRA rating of "outstanding" from the OTS in its most recent exam, and
neither KH Partners nor any Keystone Entity has knowledge of the existence of
any fact or circumstance or set of facts or circumstances which could be
reasonably expected to result in American Savings Bank failing to be in
substantial compliance with such provisions or having its current rating
lowered.
4.23 Agreements with the FRF. Disclosure Schedule 4.23
contains a true and complete list of all of the currently applicable agreements
between the Keystone Entities and the FRF arising from the 1988 Acquisition.
Except as disclosed on Disclosure Schedule 4.23, such agreements (hereinafter
the "FRF Agreements") are all in full force and effect and none of the Keystone
Entities is aware of (a) the existence of any event of default or breach by any
Keystone Entity or (b) any event or set of circumstances which, with the passage
of time, will constitute such a default or breach by any Keystone Entity under
any provisions thereof. All monies due to the FDIC or the FRF pursuant to the
terms of the FRF Agreements (other than pursuant to the FRF Warrant Agreement)
have been paid for all time periods through (i) June 30, 1993 (in the case of
certain loans sold prior to December 28, 1988 that New West is obligated to
repurchase in certain events, as managed by American Savings Bank pursuant to
the FRF Agreements); (ii) June 30, 1994 in all other cases, and (iii) to the
best of KH Partners' knowledge through December 31, 1995. The "Guaranteed
Minimum Amount" as defined in the Assistance Agreement, as modified by the July
21, 1992 Settlement Agreement, has been paid to New West for the benefit of the
FRF. Except as noted on Disclosure Schedule 4.23, no consent is required under
the FRF Agreements to the transactions contemplated by this Agreement.
4.24 Agreements with Bank Regulators. Except for the FRF
Agreements and as set forth in Disclosure Schedule 4.24, neither KH Partners nor
any Keystone Entity is a party to or is subject to any written order, decree,
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is a recipient of any currently applicable
extraordinary supervisory letter from, any federal or state governmental agency
or authority charged with the supervision or regulation of depository
institutions or the insurance of deposits therein which is outside the ordinary
course of business or not generally applicable to entities engaged in the same
business. Neither KH Partners nor any Keystone Entity has been advised within
the last 18 months by any such regulatory authority that such authority is
contemplating issuing, requiring or requesting (or is considering the
appropriateness of issuing, requiring or requesting) any such order, decree,
agreement, memorandum of understanding, commitment letter or submission.
4.25 Regulatory Approvals. On the date of this Agreement,
there is no pending or, to the knowledge of KH Partners or any Keystone Entity,
threatened legal or governmental proceedings against any Keystone Entity or any
subsidiary or affiliate thereof which would affect the WM Entities' ability to
obtain any of
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the required regulatory approvals or any party's ability to satisfy any of the
other conditions required to be satisfied in order to consummate the
transactions contemplated by this Agreement. KH Partners will promptly notify
WMI if any of the representations contained in this Section 4.25 ceases to be
true and correct.
4.26 Rights Agreement. Upon the distribution of shares of WMI
Common Stock to the partners of KH Partners immediately after the Effective Time
pursuant to Section 2.6(b), no such partner of KH Partners will be an "Acquiring
Person" as defined in the Rights Agreement.
4.27 AREG Matters. To the knowledge of KH Partners and the
Keystone Entities:
(a) (i) New West has not made any assertion denying
its obligation to indemnify AREG and American Savings Bank and their respective
officers, directors, agents, employees and stockholders to the extent set forth
in Section 8.03 of the AREG Management Agreement dated December 28, 1988 (as
such section was preserved in accordance with its terms by Section 3.1a of the
AMD Residual Agreement dated as of June 30, 1993) and Section 8.03 of the
Amended and Restated NA Management Agreement dated as of June 30, 1993,
respectively, and (ii) the FDIC, as manager of the FRF, has not made any
assertion that New West is not so obligated.
(b) AREG has conducted no business, other than
pursuant to the AREG Management Agreement dated December 28, 1988.
4.28 Investment Intent. KH Partners is acquiring the Keystone
Consideration Shares hereunder for its own account and with no present intention
of distributing or selling such securities in violation of the Securities Act or
any applicable state securities law. KH Partners agrees that it will not sell or
otherwise dispose of any of the Keystone Consideration Shares being acquired
hereunder unless such sale or other disposition has been registered or is exempt
from registration under the Securities Act and has been registered or qualified
or is exempt from registration under applicable state securities laws. KH
Partners, alone or with its financial advisors, has such knowledge and
experience in financial business matters that it is capable of evaluating the
merits and risks of the investment to be made by it hereunder.
5. Representations and Warranties of WMI. WMI hereby represents and
warrants to KH Partners and the Keystone Entities as follows:
5.1 Organization, Power, Good Standing, Etc.
(a) WMI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Washington and is
duly qualified to do business and is in good standing in each other jurisdiction
where its ownership or lease of property or the nature of the business conducted
by it requires it to be so qualified, except for such jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect on it. WMI has previously delivered to KH Partners true
and complete copies of its articles of incorporation and bylaws, each as
currently in effect. WMI has the requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business as it
is now being conducted. WMI is a duly registered savings and loan holding
company under HOLA.
(b) WM Bank is a stock savings bank, duly organized,
validly existing and in good standing under the laws of the State of Washington
and is duly qualified to do business and is in good standing in each other
jurisdiction where its ownership or lease of property or the nature of the
business conducted by it requires it to be so qualified, except for such
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect on it. WM Bank has previously
delivered to KH Partners true and complete copies of its amended and restated
articles of incorporation and charter and its bylaws, each as currently in
effect. WM Bank has the requisite corporate power and authority to own, lease
and operate its properties and assets and to carry on its business as it is now
being conducted. WM Bank is a member in good standing of the FHLB of Seattle and
its deposits are insured by the BIF and SAIF to the fullest extent permitted by
law.
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(c) WMBfsb is a federally chartered stock savings
bank, duly organized, validly existing and in good standing under the laws of
the United States and is duly qualified to do business and is in good standing
in each jurisdiction where its ownership or lease of property or the nature of
the business conducted by it requires it to be so qualified, except for such
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, have a Material Adverse Effect on it. WMBfsb has previously
delivered to KH Partners true and complete copies of its charter and bylaws,
each as currently in effect. WMBfsb has the requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as it is now being conducted. WMBfsb is a member in good standing
of the FHLB of Seattle and its deposits are insured by the SAIF to the fullest
extent permitted by law.
5.2 Subsidiaries. As used herein, "WMI Subsidiaries" shall
mean WM Bank, WMBfsb and WM Life Insurance Company. Substantially all of the
business of WMI and its subsidiaries is done through WMI and the WMI
Subsidiaries. All of the WMI Subsidiaries' capital stock, which is issued and
outstanding, is owned by WMI directly or indirectly through wholly-owned
subsidiaries. There are outstanding no options, convertible securities, warrants
or other rights to purchase or acquire capital stock from any of the WMI
Subsidiaries, and there is no commitment of any of the WMI Subsidiaries to issue
any of the same. Except as set forth on Disclosure Schedule 5.2, no WMI
Subsidiary is the general partner of any partnership or joint venture or is
under any obligation of any sort to acquire any capital stock or other equity
interest in any corporation, partnership, joint venture or other entity.
5.3 Capitalization. As of June 30, 1996, the authorized
capital stock of WMI consists of the following: 100,000,000 shares of WMI Common
Stock, of which 72,200,356 shares were duly authorized and validly issued and
outstanding, fully paid and non-assessable, with no personal liability attaching
to the ownership thereof, and 10,000,000 shares of preferred stock, of which
6,122,500 shares were issued and outstanding, fully paid and nonassessable with
no personal liability attaching to the ownership thereof. Assuming receipt of
WMI Stockholder Approval, the WMI Common Stock to be issued in the Merger and
pursuant to the Warrant Exchange Agreement when issued in accordance with the
Plan of Merger and the Warrant Exchange Agreement, (i) will be duly authorized
and validly issued and fully paid and nonassessable, with no personal liability
attaching to the ownership thereof, and no shareholder of WMI will have any
preemptive rights thereto and (ii) will be exempt from registration under the
Securities Act. Upon consummation of the Merger, KH Partners and the FRF will
acquire valid title to such shares, free and clear of any and all liens, claims,
encumbrances and restrictions on transfer other than those contemplated by this
Agreement. Except as provided for in this Agreement or as set forth on
Disclosure Schedule 5.3 hereto, there are no outstanding subscriptions, options,
warrants, calls, commitments, agreements, understandings or arrangements of any
kind which call for or might require the transfer, sale, delivery or issuance of
any shares of WMI capital stock or other equity securities or any securities
representing the right to acquire stock or securities convertible into or
representing the right to purchase or subscribe for any such shares.
5.4 Reports. WMI and the WMI Subsidiaries have duly filed with
the Director (or his predecessor), the FDIC, the OTS and the SEC in correct form
in all material respects, the monthly, quarterly, semi-annual and annual reports
required to be filed by them under applicable regulations for all periods
subsequent to December 31, 1992. The WM Entities have previously delivered or
made available to KH Partners accurate and complete copies of such reports.
Except as disclosed on Disclosure Schedule 5.4, WMI (or its predecessor
Washington Mutual Savings Bank) has timely filed all reports required to be
filed by it pursuant to the Securities Exchange Act and the rules and
regulations promulgated by the SEC and the FDIC thereunder ("SEC Reports"). The
WM Entities have previously delivered or made available to KH Partners an
accurate and complete copy of each (i) final registration statement, offering
circular, and definitive proxy statement filed by WMI or Washington Mutual
Savings Bank since January 1, 1993, with the SEC or the FDIC, and (ii)
communication (other than general advertising materials) mailed by WMI or
Washington Mutual Savings Bank to its stockholders since January 1, 1993. No
such SEC Report, registration statement, offering circular, proxy statement or
communication, as of its date, contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
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5.5 Authority. WMI has full corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of WMI. Except for the approval of WMI's shareholders and an
amendment to WMI bylaws to increase the number of directors, no other corporate
proceedings on the part of WMI are required to authorize this Agreement, the
Plan of Merger or the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by WMI and, assuming due authorization,
execution and delivery hereof by the Keystone Entities and KH Partners,
constitutes the valid and binding obligation of WMI, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium of other laws relating to creditors' rights generally and to general
principles of equity.
5.6 No Violation. Neither the execution and delivery of this
Agreement or the Plan of Merger by WMI nor the consummation by WMI of the
transactions contemplated hereby and thereby, nor compliance by WMI with any of
the terms hereof or thereof, will (i) assuming an increase in the authorized
shares of WMI stock and approval of an amendment to WMI's bylaws to increase the
number of directors violate any provision of the articles of incorporation or
charter or bylaws of any of the WM Entities, or (ii) assuming that the consents
and approvals referred to in Section 9.1 are duly obtained, violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to any of the WM Entities or any of their respective properties or
assets, or (iii) violate, conflict with, result in the breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the respective
properties or assets of any WM Entity under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which any WM Entity is a
party, or by which they or any of their respective properties or assets may be
bound or affected, except, with respect to (iii) above, for such violations,
conflicts, breaches, defaults, terminations, accelerations or encumbrances which
in the aggregate will not prevent or delay the consummation of the transactions
contemplated hereby.
5.7 Consents and Approvals. Except for consents and approvals
of or filings, deliveries or registrations with the OTS, the FRF, the FDIC, the
Director, the Washington Secretary of State, the Texas Secretary of State, the
SEC, the FTC, the Justice Department and other applicable governmental
authorities, no consents or approvals of or filings or registrations with any
third party, public body or authority are necessary in connection with the
execution and delivery by WMI of this Agreement and the Plan of Merger and the
consummation of the transactions contemplated hereby by WMI.
5.8 Financial Statements. WMI has previously delivered or made
available to KH Partners copies of (i) audited consolidated statements of
financial condition for WMI and its subsidiaries as of the end of WMI's last
three fiscal years, and audited consolidated statements of income, stockholders'
equity, and cash flows for each of the last three fiscal years, including the
notes to such audited consolidated financial statements, together with the
reports of WMI's independent certified public accountants, pertaining to such
audited consolidated financial statements (the "WMI 1993, 1994 and 1995
Financial Statements," respectively), and (ii) the unaudited consolidated
statement of financial condition as of March 31, 1996 and the related unaudited
consolidated statements of income, stockholders' equity and cash flows for the
three-month period then ended (the "WMI March 1996 Financial Statements"). The
WMI 1993, 1994 and 1995 Financial Statements and the WMI March 1996 Financial
Statements are sometimes herein referred to collectively as the WMI Financial
Statements. The consolidated statements of financial condition of WMI referred
to herein (including the related notes) present fairly in all material respects
the financial condition of the companies indicated on a consolidated basis at
the dates thereof, using generally accepted accounting principles consistently
applied. Such audited and unaudited consolidated statements of operations,
stockholders' equity and cash flows present fairly in all material respects the
results of the operations of the companies indicated on a consolidated basis for
the periods or at the dates indicated, using generally accepted accounting
principles consistently applied. To the knowledge of WMI and the WMI
Subsidiaries, the books and records of WMI and the WMI Subsidiaries have been,
and are being, maintained in accordance with applicable legal
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and accounting requirements using generally accepted accounting principles
consistently applied in all material respects and reflect only actual
transactions.
5.9 Brokerage. Except for payments owed to CS First Boston,
there are no claims for investment banking fees, brokerage commissions, finder's
fees or similar compensation arising out of or due to any act of WMI or any of
its subsidiaries in connection with the transactions contemplated by this
Agreement.
5.10 Absence of Material Adverse Change. Since March 31, 1996,
there has not been any Material Adverse Change with respect to WMI (except for
changes resulting from market and economic conditions which generally affect the
savings industry as a whole including, without limitation, changes in law or
regulation, and changes in generally accepted accounting principles or
interpretations thereof).
5.11 Litigation. Except as set forth on Disclosure Schedule
5.11 hereto, no action, suit, counterclaim or other litigation, investigation or
proceeding to which WMI or any of its subsidiaries is a party is pending, or is
known by the executive officers of WMI or any of its subsidiaries to be
threatened, against WMI or any of its subsidiaries before any court or
governmental or administrative agency, domestic or foreign which would be
reasonably expected to result in any liabilities which would, in the aggregate,
have a Material Adverse Effect on WMI. Except as set forth on Disclosure
Schedule 5.11 hereto, neither WMI nor any of its subsidiaries is in default with
respect to any orders, judgments, or decrees that would in the aggregate require
payment of more than $100,000.
5.12 Compliance With Applicable Law.
(a) Each of WMI and each WMI Subsidiary hold all
Permits necessary for the lawful conduct of their respective businesses and such
Permits are in full force and effect, and each of WMI and each WMI Subsidiary is
in all material respects complying therewith, except in each case where the
failure to possess or comply with such Permits would not have a Material Adverse
Effect on WMI.
(b) Except as set forth on Disclosure Schedule
5.12(b), each of WMI and each WMI Subsidiary is and since January 1, 1993 has
been in compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules, regulations and orders applicable to the operation, conduct
or ownership of its business or properties except for any noncompliance which
has not and will not have in the aggregate a Material Adverse Effect on WMI.
5.13 CRA Compliance. Each of WM Bank and WMBfsb is in
substantial compliance with the applicable provisions of CRA. The most recent
CRA rating for WM Bank is "outstanding". WMBfsb has not received a CRA rating.
WMI has no knowledge of the existence of any fact or circumstance or set of
facts or circumstances which could reasonably be expected to result in WM Bank
or WMBfsb failing to be in substantial compliance with such provisions or, in
the case of WM Bank, having its current rating lowered.
5.14 Agreements With Bank Regulators. No WM Entity is a party
to or is subject to any written order, decree, agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is a recipient of any currently applicable extraordinary supervisory
letter from, any federal or state governmental agency or authority charged with
the supervision or regulation of depository institutions or the insurance of
deposits therein which is outside the ordinary course of business or not
generally applicable to entities engaged in the same business. No WM Entity has
been advised within the last 18 months by any such regulatory authority that
such authority is contemplating issuing, requiring or requesting (or is
considering the appropriateness of issuing, requiring or requesting) any such
order, decree, agreement, memorandum of understanding, commitment letter or
submission.
5.15 Regulatory Approvals. On the date of this Agreement,
there is no pending or, to the knowledge of WMI, threatened legal or
governmental proceeding against any WM Entity or any subsidiary or affiliate
thereof which would affect the WM Entities' ability to obtain any of the
required regulatory approvals or satisfy any of the other conditions required to
be satisfied in order to consummate the transactions contemplated by
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this Agreement. WMI will promptly notify KH Partners if any of the
representations contained in this Section 5.15 ceases to be true and correct.
5.16 Tax Matters.
(a) Neither WMI nor any of its affiliates or
subsidiaries has any plan or intention of taking any action prior to, at or
after the Effective Time or of permitting any of the Keystone Entities to take
any action after the Effective Time, including any transfer or other disposition
of any assets of or any interest in any of the Keystone Entities, that would
cause the Merger to fail to qualify as a reorganization within the meaning of
section 368(a) of the Code.
(b) Neither WMI nor any of its affiliates or
subsidiaries has any plan or intention to acquire or reacquire, as the case may
be, any of the shares of WMI Common Stock to be issued as contemplated by this
Agreement.
(c) WMI has no plan or intention to sell or otherwise
dispose of any of the assets of Keystone Holdings acquired in the Merger, except
for dispositions made in the ordinary course of business or transfers described
in section 368(a)(2)(C) of the Code.
(d) WMI is not an investment company as defined in
section 368(a)(2)(F)(iii) and (iv) of the Code.
5.17 WMI Rights Agreement. Subject to the accuracy of the
representation of KH Partners and the Keystone Entities contained in Section
4.26 hereof, WMI has taken all necessary action so that the entering into of
this Agreement, the Merger and the other transactions contemplated hereby, and
the payment to KH Partners, and the distribution to its partners pursuant to
Section 2.6(b) hereof, of the Keystone Consideration Shares do not and will not
result in the grant of any rights to any person under the Rights Agreement or
enable or require the rights issued thereunder to be exercised, distributed,
triggered or adjusted.
6. Covenants of the Keystone Entities. In addition to other covenants
and agreements set forth herein, KH Partners and each Keystone Entity covenant
and agree as follows:
6.1 Conduct of the Business of Keystone Entities.
(a) During the period from the date of this Agreement
to the Effective Time, KH Partners and the Keystone Entities will conduct the
business of each Keystone Entity and each Keystone Entity Subsidiary in a manner
consistent with prudent banking practice and with the American Savings Bank 1996
Business Plan Presentation of November 28, 1995, taken as a whole, and approved
board changes made thereto as set forth in Disclosure Schedule 6.1(a) (the "1996
Business Plan"). KH Partners and the Keystone Entities will use their best
efforts to (x) preserve the business organization of American Savings Bank and
each Keystone Entity Subsidiary intact, (y) keep available to themselves and to
the WM Entities the present services of the employees of American Savings Bank
and each Keystone Entity Subsidiary, and (z) preserve for themselves and for the
WM Entities the goodwill of the customers of American Savings Bank and others
with whom business relationships exist.
(b) Without limiting the generality of the foregoing,
KH Partners and the Keystone Entities agree that from the date hereof to the
Effective Time, no Keystone Entity or Keystone Entity Subsidiary shall:
(i) change any provisions of its articles,
charter or bylaws or any similar governing documents;
(ii) change the number of shares of its
authorized or issued capital stock or issue, grant or amend any option, warrant,
call, commitment, subscription, right to purchase or agreement of any character
relating to the authorized or issued capital stock of any Keystone Entity or any
Keystone Entity Subsidiary,
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or any securities convertible into shares of such stock, or split, combine or
reclassify any shares of its capital stock, or declare, set aside or pay any
dividend, or other distributions (whether in cash, stock or property or any
combination thereof) in respect of the capital stock of any Keystone Entity or
any Keystone Entity Subsidiary, or redeem or otherwise acquire any shares of
such capital stock; provided, however, that Keystone Holdings may make ordinary
dividends or other distributions in cash during 1996 so long as the aggregate
amount of such dividends and distributions made in 1996 does not exceed
$56,500,000, subject to Section 2.2(d) hereof, and so long as such dividends or
other distributions are in accordance with an established dividend policy and
consistent with past dividend practice and do not preclude the treatment of the
Merger as a pooling transaction; provided, further, that cash dividends may be
declared and paid by direct and indirect wholly owned subsidiaries of Keystone
Holdings, subject to compliance with applicable regulatory requirements, but in
no event shall any dividend permitted by this proviso be used to facilitate or
fund any payment, and no dividend shall be declared or paid, directly or
indirectly, by Keystone Holdings, to Keystone Partners or the partners thereof
other than (A) as set forth in the preceding proviso, (B) payments in the
ordinary course consistent with past practice under existing agreements listed
on Schedule 4.17, in an aggregate amount not to exceed $3,000,000, or (C) as set
forth on Annex II.
(iii) liquidate, sell, transfer, assign,
encumber or otherwise dispose of any shares of capital stock of any Keystone
Entity or Keystone Entity Subsidiary;
(iv) merge or consolidate with any other
Person or acquire any capital stock of or other equity interest in any Person or
create any subsidiary;
(c) KH Partners and the Keystone Entities agree that
from the date hereof to the Effective Time, no Keystone Entity or Keystone
Entity Subsidiary shall do any of the following without complying with the
notification procedure in Section 6.1(d) below:
(i) make any capital expenditures in excess
of (A) $500,000 per project or related series of projects or (B) $3,000,000 in
the aggregate, other than expenditures necessary to maintain existing assets in
good repair;
(ii) make application for the opening,
relocation or closing of any, or open, relocate or close any, branches;
(iii) change in any material manner its
lending or pricing policies or approval policies for making loans, its
investment policies, its deposit pricing policies, its asset/liability
management policies or any other material banking policies;
(iv) make or acquire any loan or issue a
commitment for any loan except for loans and commitments that are made in the
ordinary course of business consistent with past practice or issue or agree to
issue any letters of credit or otherwise guarantee the obligations of any other
persons except in the ordinary course of business in order to facilitate the
sale of REO;
(v) except for the Fixed Fee Agreement,
enter into, amend or terminate any contract (other than contracts for deposits
at or borrowings by American Savings Bank or agreements for American Savings
Bank to lend money or contracts involving capital markets transactions not
otherwise restricted under this Agreement, so long as such contract does not
involve a public offering of securities or an offering under Rule 144A of the
Securities Act) that calls for the payment by any Keystone Entity or Keystone
Entity Subsidiary of $250,000 or more after the date of this Agreement and that
cannot be terminated on not more than 30 days' notice without cause and without
payment or loss of any material amount as a penalty, bonus, premium or other
compensation for termination (a "Material Contract");
(vi) engage or participate in any material
transaction or incur or sustain any material obligation not in the ordinary
course of business;
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(vii) except after having followed the
American Savings Bank Environmental Policy, foreclose upon or otherwise acquire
(whether by deed in lieu of foreclosure or otherwise) any real property (other
than 1-to-4 family residential properties in the ordinary course of business);
(viii) liquidate, sell, transfer, assign,
encumber or otherwise dispose of any assets of any Keystone Entity or Keystone
Entity Subsidiary other than as has been customary in its ordinary course of
business; or
(ix) agree to do any of the foregoing.
(d) If any of the Keystone Entities or Keystone
Entity Subsidiaries wishes to engage in an activity listed in subsection (c)
above it shall provide notice to WMI at least 10 days prior to taking any
irrevocable action with regard to such activity. The notification shall be sent
to the attention of S. Liane Wilson and shall contain a brief description of the
proposed activity, the associated cost, if relevant, and the proper contact
person for discussing the proposal. If the designated contact person has not
heard from a representative of WMI within 10 days of providing such notice, it
shall be deemed conclusively that WMI has no objection to the action being
proposed. If WMI so requests within such 10 day period, the action shall be
delayed until after the next regularly scheduled Management Consultation Meeting
(as defined in Section 8.8 below).
(e) To the extent that it may be necessary in order
to effect satisfaction of the conditions set forth in Section 9.2(b)(i) and
(ii), Keystone Holdings may sell or transfer shares of Family SB to an
unaffiliated Person, provided such sale or transfer does not preclude the Merger
from being treated as a pooling of interests.
6.2 No Solicitation. Neither KH Partners, any Keystone Entity
nor any of their partners, directors, officers, representatives, agents or other
Persons controlled by any of them, shall directly or indirectly encourage or
solicit, or hold discussions or negotiations with, or provide any information
to, any person, entity or group, other than the WM Entities, concerning any
merger, sale of substantial assets not in the ordinary course of business, sale
of shares of capital stock or similar transactions involving any Keystone
Entity, any division thereof or any Keystone Entity Subsidiary. KH Partners and
the Keystone Entities will promptly communicate to WMI the terms of any proposal
that any of them may receive in respect of any such transaction.
6.3 Access to Properties and Records. Each Keystone Entity
shall, and American Savings Bank shall cause each Keystone Entity Subsidiary to,
give representatives of the WM Entities reasonable access to its properties, and
shall disclose and make available to the WM Entities all books, papers and
records relating to the assets, stock, ownership, properties, obligations,
operations and liabilities of the Keystone Entities and the Keystone Entity
Subsidiaries, including but not limited to, all books of account (including the
general ledger), tax records, minute books of directors and stockholders
meetings, organizational documents, bylaws, material contracts and agreements,
loan files, filings with any regulatory authority, accountants work papers
(subject to the consent of such accountants), litigation files, plans affecting
employees, and any other business activities or prospects in which a WM Entity
may have a reasonable interest in each case during normal business hours and
upon reasonable notice. The Keystone Entities and the Keystone Entity
Subsidiaries shall not be required to provide access to or disclose information
where such access or disclosure would jeopardize the attorney-client privilege
of any Keystone Entity or any Keystone Entity Subsidiary or would contravene any
law, rule, regulation, order, judgment, decree or binding agreement entered into
prior to the date hereof. The parties will use all reasonable efforts to make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
6.4 Assignment of Contract Rights. KH Partners and the
Keystone Entities shall use reasonable efforts (best efforts in the case of the
four branch leases previously identified to KH Partners) to obtain any consents,
waivers or revisions necessary to allow the WM Entities to accede to all of the
rights of each Keystone Entity and each Keystone Entity Subsidiary under all
existing real property and personal property leases, licenses and other
contracts, including without limitation loan servicing contracts, which WMI
wishes to have continue in effect after the Effective Time, without incurring
substantial costs in connection therewith. The WM
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Entities will reasonably cooperate with KH Partners and the Keystone Entities in
obtaining such consents, waivers and revisions, it being understood that the
obligation to use reasonable efforts to obtain such consents, waivers and
revisions shall nevertheless be the obligation of KH Partners and the Keystone
Entities.
6.5 Amendment to Environmental Policy. Promptly following the
execution of this Agreement, American Savings Bank will amend the American
Savings Bank Environmental Policy so that between the date hereof and the
Effective Time, American Savings Bank will not foreclose on any Commercial Real
Estate Loan with an outstanding principal balance of $1,000,000 or more without
first having had conducted a "Phase I" environmental study of the property
serving as security for such Loan.
6.6 FRF Agreements. KH Partners and the Keystone Entities
shall (a) use their best efforts to obtain any necessary consents and
modifications so that the FRF Agreements shall be assumed by WM Bank, or such
other subsidiary or subsidiaries of WMI as WMI shall reasonably designate, at
Closing or provisions consistent with, or necessary to implement, the provisions
of Sections 6.7 and 6.12 hereof; (b) use their best efforts to resolve, without
material liability to the Keystone Entities or the WMI Entities, all material
outstanding differences between KH Partners and the Keystone Entities, on the
one hand, and the FDIC, on the other hand, relating to the FRF Agreements; and
(c) use their best efforts to facilitate a renegotiation of such agreements to
simplify the remaining effective provisions thereof.
6.7 New West. KH Partners and the Keystone Entities shall use
reasonable efforts to take such steps and obtain such approvals as shall be
necessary or advisable so that the shares of stock in New West, and any
obligation or liabilities in connection with the ownership, business or
operation thereof, are transferred to and assumed by an entity other than any
Keystone Entity or any Keystone Entity Subsidiary.
6.8 Payment of Notes and Preferred Stock. KH Partners and the
Keystone Entities shall take such steps as WMI may reasonably request in order
that the Senior Notes, the Subordinated Notes and the New Capital Preferred
Stock may be paid or redeemed at or as soon as practicable after the Effective
Time. It is agreed that KH Partners and the Keystone Entities shall be under no
obligation to issue irrevocable notices of redemption prior to the Effective
Time; provided, that KH Partners shall use reasonable efforts to obtain a waiver
of the right to receive prior irrevocable notice of redemption from Merrill
Lynch & Co.
6.9 Tax Return and Section 9 Report Amendments. KH Partners
and the Keystone Entities shall file or cause to be filed with the IRS, amended
consolidated federal income tax returns of Keystone Holdings for the years 1992
and 1993 no later than September 14, 1996. The amendments shall reduce the
amount of the addition to the qualifying real property loan loss reserve
established pursuant to Section 593 of the Code for 1992 to approximately $88
million and the amount of such addition for 1993 to approximately $134 million.
In addition, KH Partners and the Keystone Entities shall cause to be filed no
later than October 15, 1996 with the California Franchise Tax Board an amended
return for American Savings Bank reducing the amount of the tax bad debt reserve
at December 31, 1993 to approximately $369 million. KH Partners and the Keystone
Entities shall contemporaneously cause to be provided to the FDIC (i) copies of
the amended tax returns referred to above and (ii) revised computations of the
amounts due to the FDIC under Section 9 of the Assistance Agreement.
6.10 Employees, Employee Benefit Plans.
(a) Without the consultation and approval of WMI
(which shall not be unreasonably withheld, delayed or conditioned), American
Savings Bank shall not establish any Benefit Plan and shall not amend or
terminate any Benefit Plan (except as may be required by law) or make any
contribution to any Benefit Plan except in such amount and at such times as may
be required by law or as are consistent with past practices.
(b) American Savings Bank shall not disseminate or
make available any memoranda, notices, plan summaries, or other communications
regarding the terms and conditions of employment or benefits payable as a result
of employment or the Benefit Plans (other than materials customarily furnished
by American Savings Bank to new employees or as required by law or the
applicable Plan) without the consultation and approval
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(J) UNDERWRITING GUIDELINES/PURCHASING GUIDELINES: as may be
determined from time to time by Buyer.
(K) The terms Loan to Value Rate, "Marked-up" Title Insurance
Policy, Binder or Certificate, Mortgaged Property or Subject Property,
Mortgagor or Borrowed as utilized in this Agreement shall have the meaning
such words and phrases are generally given in agreements contemplating the
purchase and sale of mortgage loans.
III. OFFER TO SELL AND ACCEPTANCE OF OFFER
(A) OFFER. The Seller may offer from time to time to submit
to the Buyer a list of Loans, along with the Essential Mortgage File Documents,
as defined herein, for each of such Loans, for the Buyer's review. The Buyer
shall then deliver to the Seller a Schedule of Loans Delivered on which the
Buyer has indicated which Loans, if any, the Buyer is offering to purchase from
the Seller and the Purchase Price offered to be paid for the Loans Buyer is
willing to purchase.
(B) ACCEPTANCE. The Seller shal endorese the Notes and
endorse or assign the Mortgages and Other Collateral evidencing the Loans on
which the Seller agrees to accept the Buyer's offer to purchase. Such
endorsement and assignment shall constitute the Seller's acceptance of the
Buyer's offer to purchase the indicated Loans pursuant to the terms and
conditions of this Agreement.
On occasion, Buyer may issue Seller a written Approval
Advice in the form attached hereto, made a part hereto and market EXHIBIT "A,"
to cover a specific Loan purchase by Buyer hereunder which is approved by Buyer
in advance of said specific Loan being made by Seller. Any purchase made
hereunder that is subject to an Approval Advice shall be governed first by the
terms of such Approval Advice and then by the terms of this Agreement, and to
the extent of a conflict between the Approval Advice and this Agreement, the
Approval Advice shall govern for that purchase and only that purchase.
Buyer shall have the absolute and sole discretion and option to
agree or decline to purchase any Loan(s) submitted by Seller for review.
IV. PURCHASE AND SALE OF LOANS
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of WMI or the Plan Administration Committee of WMI (which shall not be
unreasonably withheld, delayed or conditioned).
(c) All necessary action shall be taken to initiate
termination of the American Savings Bank Phantom Share Plan (the "Phantom Share
Plan"), the American Savings Bank Executive Short-Term Incentive Plan (the
"Short-Term Incentive Plan") and the American Savings Bank Executive Long-Term
Incentive Plan (the "Long-Term Incentive Plan"), in each case in accordance with
its terms so that termination can occur within 120 days following Closing. All
amounts due and owing to participants in any of such plans shall be accrued as a
liability of American Savings Bank prior to Closing and thereafter paid in
accordance with their terms.
(d) Other than in the ordinary course of business
consistent with past practice or except as required by agreements disclosed on
Disclosure Schedule 4.14(a)(i), American Savings Bank shall not grant any
severance or termination pay to or enter into or amend any employment agreement
with, or increase the amount of payments or fees to, any of its employees,
officers or directors; provided that American Savings Bank may, with the prior
written consent of WMI, pay or agree to pay reasonable amounts to induce
officers and other employees to remain in the employ of American Savings Bank.
(e) No amendments will be made to the Change of
Control Agreements listed on Disclosure Schedule 4.14(f) except for a First
Amendment to Change of Control Agreement with respect to each such agreement,
the form of which was approved by the Compensation Committee of the board of
directors of American Savings Bank and a copy of which has been provided to WMI.
(f) Prior to Closing American Savings Bank shall make
all contributions required by the terms of that certain Grantor Trust/Trust
Agreement between American Savings Bank and Security Pacific National Bank dated
June 25, 1991. In addition, American Savings Bank shall, prior to Closing, cause
the trust to eliminate corporate owned life insurance from the trust assets.
(g) The Keystone Entities shall not make any changes
to the Phantom Share Plan, the Long-Term Incentive Plan, the Change of Control
Agreements and the Short-Term Incentive Plan without the prior written consent
of WMI. The total payments, net of accrual, to be made to employees under such
plans and agreements shall not exceed $27 million, assuming that the applicable
price per share of WMI Common Stock is less than or equal to $28.00 and without
giving effect to any increase if such per share amount is greater than $28.00.
(h) Prior to the Effective Time, KH Partners, the
Keystone Entities and the Keystone Entity Subsidiaries shall take all action
necessary to insure that no individual will receive an "excess parachute
payment," as defined in Section 280G(b)(1) of the Code, as a result of the
Closing or any change described in Section 280G(b)(2)(A)(i) of the Code.
(i) During the period from the date of this Agreement
to the Effective Time, American Savings Bank shall not authorize, designate or
permit any additional employee of American Savings Bank to participate in the
American Savings Bank Executive Compensation Program's Life Insurance Plan.
(j) The Keystone Entities agree to amend their 401(k)
plan prior to Closing so that participant loans are no longer available, and may
amend their 401(k) plan to allow partial repayments of existing loans
thereunder.
6.11 Assets of KH Partners. Prior to the Effective Time, KH
Partners shall take all steps necessary to contribute all of its assets to the
Keystone Entities, other than shares of Keystone Holdings, its claims in the
Case (which shall be subject to the provision set forth in Section 2.3(g)
hereof) and its rights hereunder.
6.12 New West Dissolution. KH Partners shall not permit New
West to be dissolved or liquidated without obtaining the prior written consent
of the FDIC to indemnify both AREG and American Savings Bank to the full extent
that AREG and American Savings Bank are currently indemnified by New West
pursuant
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to Section 8.03 of the AREG Management Agreement dated December 28, 1988 (as
such section was preserved by Section 3.1a of the AMD Residual Agreement dated
as of June 30, 1993) and Section 8.03 of the Amended and Restated NA Management
Agreement dated as of June 30, 1993, respectively.
6.13 Waiver of Notice. On or prior to the Closing Date, KH
Partners and the Keystone Entities shall, and shall cause their affiliates to,
as the case may be, irrevocably waive the requirement of thirty days' written
notice of termination under each of the following two affiliate agreements which
are set forth on Disclosure Schedule 4.17: (i) the Consulting Agreement, dated
December 16, 1993, by and between Keystone Holdings and Keystone, Inc., a Texas
corporation, and (ii) the First Amended and Restated Service Agreement, dated
February 19, 1993, by and among Bass Enterprises Production Company, a Texas
corporation, and each of the Keystone Entities.
7. Covenants of the WM Entities. In addition to other covenants and
agreements set forth herein, each WM Entity covenants and agrees as follows:
7.1 Conduct of Business of WM Entities. During the period from
the date of this Agreement to the Effective Time:
(a) The WM Entities will conduct the business of WMI
and each WMI Subsidiary in a manner consistent with prudent banking and (in the
case of WM Life Insurance Company) insurance practice and with the 1996 WMI
Strategic Plan.
(b) No WM Entity, or any of its directors, officers,
representatives, agents or other persons controlled by any of them, shall
directly or indirectly encourage or solicit, or hold discussions or negotiations
with, or provide any information to, any Person or group concerning any
transaction which, if consummated, would constitute a Third Party Acquisition of
WMI. WMI will promptly communicate to KH Partners the terms of any proposal that
it may receive in respect of any such transaction. Notwithstanding the foregoing
two sentences, if the board of directors of WMI receives an unsolicited offer or
inquiry with respect to such a transaction, the board may respond to such offer
if the board determines in its good faith judgment (after receiving advice of
counsel) that such response is reasonably required in order to discharge its
fiduciary duties.
(c) Without the prior written consent of KH Partners,
neither WMI nor any of its subsidiaries shall enter into, or agree to enter
into, any transaction whereby WMI or any of its subsidiaries would acquire or
assume, whether by merger, a purchase of stock, a purchase and assumption
agreement or otherwise, (i) another Person with more than $5,000,000,000 in
assets, (ii) assets of another Person in excess of $5,000,000,000 or (iii)
deposits and other liabilities of another Person in excess of $5,000,000,000.
7.2 Approval of WMI Stockholders. WMI will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on this Agreement,
the Plan of Merger and the transactions contemplated hereby and of increasing
the number of authorized shares of WMI Common Stock and for such other purposes
as may be necessary or desirable, (b) include in the WMI Proxy Statement the
recommendation of WMI's Board of Directors that the WMI stockholders approve
this Agreement and the other transactions contemplated hereby and such other
matters as may be submitted to its stockholders in connection with this
Agreement, (c) use all reasonable efforts to obtain, as promptly as practicable,
the necessary approvals by WMI stockholders of this Agreement and the
transactions contemplated hereby. Prior to the Effective Time (subject to the
receipt of WMI Stockholder Approval), WMI will take all other necessary actions
to permit it to issue the number of shares of WMI Common Stock required pursuant
to the terms of this Agreement and the Warrant Exchange Agreement.
7.3 Employees; Employee Benefit Plans.
(a) All employees of American Savings Bank or the
Keystone Entity Subsidiaries who have worked for such entities for (i) at least
one year (a minimum of 1,000 hours in a calendar year) who continue as employees
of an WM Entity or any WMI Subsidiary or (ii) less than one year but who
continue as
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employees of an WM Entity or any WMI Subsidiary for the balance of one year (a
minimum of an aggregate of 1,000 hours in a calendar year) shall receive service
credit for employment at any Keystone Entity and any Keystone Entity Subsidiary
of one year for purposes of meeting all eligibility and vesting requirements for
participation in the WMI Retirement Savings and Investment Plan (the "WMI
RSIP").
(b) At the Effective Time or as soon thereafter as is
operationally reasonable for WMI, the Keystone Entities' 401(k) plan shall be
merged into the WMI RSIP. On the Effective Date, deferrals and contributions to
the Keystone Entities' 401(k) shall cease and such plan will be frozen. As soon
as practical following the Effective Date, the American Savings Bank employees
will be enrolled in the WMI RSIP. The profit sharing contribution for Keystone
Entity employees made for the period following the Effective Time shall be
prorated for the period of time that the Keystone Entity employee is a
participant in the merged plan.
(c) Effective as of the Effective Time, all employees
of American Savings Bank or the Keystone Entity Subsidiaries shall, at the
option of WMI, either continue to participate in the Benefit Plans that are
employee welfare benefit plans (within the meaning of Section 3(1) of ERISA) or
"cafeteria plans" (within the meaning of Section 125 of the Code) and are in
effect immediately prior to the Effective Time or become participants in similar
WMI employee benefit plans, practices and policies (the "WMI Welfare Benefit
Plans") on the same terms and conditions as similarly situated WMI employees. If
any of the employees of American Savings Bank or the Keystone Entity
Subsidiaries shall become eligible to participate in any WMI Welfare Benefit
Plans that provide medical, hospitalization or dental benefits, WMI shall waive
any pre-existing condition exclusions and actively at work requirements (to the
extent that a waiver of the actively at work requirement would be available to
an employee of WMI or its subsidiaries under similar circumstances, (but shall
not waive general requirements of formal employment with WMI or its
subsidiaries).
(d) All vacation accrued and not used by employees of
American Savings Bank and the Keystone Entity Subsidiaries prior to the
Effective Time shall be maintained by WMI after the Effective Time; provided,
however, that following the Closing, such vacation shall accrue at the same rate
as for similarly situated WMI employees (counting service credit earned prior to
the Effective Time). All sick leave or short-term disability accrued by
employees of American Savings Bank and the Keystone Entity Subsidiaries prior to
the Effective Time shall be maintained by WMI after the Effective Time provided,
however, that following the Closing, such sick leave and short-term disability
shall accrue at the same rate as for similarly situated WMI employees (counting
service credit earned prior to the Effective Time). Promptly following Closing,
to the extent not inconsistent with specific employment agreements employees of
American Savings Bank and the Keystone Entity Subsidiaries shall be paid for any
vacation or sick leave accrued prior to the Effective Time to which such
employees will no longer be entitled as WMI employees.
(e) The American Savings Bank Grantor Trust which is
intended to provide the funding for the American Savings Bank Executive
Compensation Program's Supplemental Executive Retirement Plan I for both Senior
Vice Presidents and for the Executive Vice Presidents and above (collectively
the "American Savings Bank SERP") and for the American Savings Bank Executive
Compensation Program's Deferred Compensation Plan (as restated as of January 1,
1995) (the "American Savings Bank Deferred Compensation Plan"), the American
Savings Bank SERP and the Deferred Compensation Plan will be maintained for the
benefit of all persons with a vested interest in the American Savings Bank SERP
and/or the American Savings Bank Deferred Compensation Plan at Closing.
7.4 WMI Board of Directors.
(a) As of the Effective Time, two representatives
mutually agreeable to Robert M. Bass and WMI will be invited to fill vacant
seats on the WMI board of directors. It is currently anticipated that, assuming
that the Effective Time occurs prior to the Record Date (as defined below) for
the 1997 annual meeting of the WMI stockholders, one director will be appointed
to the class whose term ends at the WMI annual meeting in 1997 and one will be
appointed to the class whose term ends at the WMI annual meeting in 1999.
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(b) WMI agrees to propose these directors or their
successors mutually agreed to by Robert M. Bass and WMI (the "Bass Directors")
for reelection to the WMI board of directors in accordance with the following
arrangement:
(i) If, on the record date for any annual
meeting of the WMI stockholders at which directors are to be elected (a "Record
Date"), the number of Bass Shares outstanding exceeds the sum of (A) 8.5 million
and (B) 21.3% of the Escrow Shares (if any) released by the Escrow Agent to the
holders of the contingent right thereto as of such Record Date, then WMI will
renominate any and all Bass Directors whose terms are expiring in connection
with such meeting.
(ii) If on any Record Date the number of
Bass Shares outstanding is not greater than the sum of (A) and (B) in Section
7.4(b)(i) but is greater than the sum of (C) 5.0 million and (D) 21.3% of the
Escrow Shares (if any) released to the holders of the contingent right thereto
as of such Record Date, then WMI will renominate any Bass Director whose term is
expiring in connection with such meeting only if there is no other Bass Director
then serving on the WMI Board.
(iii) Notwithstanding subsections (i) and
(ii) above, if on any Record Date the Bass Shares constitute less than five
percent of the total number of shares of WMI Common Stock then outstanding, WMI
will have no obligation to renominate any Bass Director.
(c) For purposes of this Agreement, "Bass Shares"
shall be defined as shares of WMI Common Stock held of record or beneficially by
the Persons set forth on Annex III. Robert M. Bass shall be the sole
representative of the holders of the Bass Shares with respect to any proposal
for successors to the initial Bass Directors. Robert M. Bass shall have the
burden of establishing to WMI's satisfaction record or beneficial ownership for
the Bass Shares for purposes of this Section 7.4.
7.5 Tax Reorganization Matters.
(a) WMI and its affiliates and subsidiaries shall not
take or permit any of the Keystone Entities to take any action after the
Closing, including any transfer or other disposition of any assets of or any
interest in any of the Keystone Entities, that would cause the Merger to fail to
qualify as a reorganization within the meaning of Section 368(a) of the Code.
(b) WMI shall report the Merger for income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code
and any comparable state or local tax statute.
(c) Following the Merger, WMI will continue the
historic business of Keystone Holdings or use a significant portion of Keystone
Holdings' historic business assets in a business.
7.6 Access to Information/Updated Due Diligence. During the 30
day period prior to Closing, KH Partners and its representatives shall have a
reasonable opportunity to conduct an update of their due diligence review of WMI
and its subsidiaries. In order to permit such due diligence update, the WM
Entities agree to provide KH Partners and its representatives reasonable access
to the properties of WMI and its subsidiaries, and shall disclose and make
available to the KH Partners all books, papers and records relating to the
assets, stock, ownership, properties, obligations, operations and liabilities of
WMI and its subsidiaries, including, but not limited to, all books of account
(including the general ledger), tax records, minute books of directors and
stockholders meetings, organizational documents, bylaws, material contracts and
agreements, loan files, filings with any regulatory authority, accountants work
papers (subject to such accountants' consents), litigation files, plans
affecting employees, and any other business activities or prospects in which KH
Partners may have a reasonable interest in each case during normal business
hours and upon reasonable notice. WMI and its subsidiaries shall not be required
to provide access to or disclose information where such access or disclosure
would jeopardize the attorney-client privilege of WMI or any WMI subsidiaries or
would contravene any law, rule, regulation, order, judgment, decree or binding
agreement entered into prior to the date hereof. The parties will use all
reasonable efforts to make
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appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
7.7 Indemnification and Insurance.
(a) From and after the Effective Time, WMI shall
indemnify and hold harmless each current and former director and officer of any
Keystone Entity or Keystone Entity Subsidiary, against any costs or expenses
(including advancing reasonable attorneys' fees and expenses as incurred,
subject to any undertaking to reimburse such advances required by applicable
law), judgments, fines, losses, claims, damages or liabilities incurred by
reason of the fact that he is or was a director or officer of such Keystone
Entity or Keystone Entity Subsidiary in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent permitted by the applicable Keystone Entity's or
Keystone Entity Subsidiary's Articles of Incorporation, bylaws, as well as
applicable law and regulations, subject to any limitations provided therein (all
as in effect on the date hereof); provided, however, that this indemnity shall
not apply to any costs, expenses, judgments, fines, losses, claims, damages or
liabilities incurred by or on behalf of the individuals listed on Annex IV in
connection with any claim, action, suit, proceeding or investigation (i) arising
out of actions or omissions relating to their service as officers, directors or
agents of New West, and (ii) made or alleged by any person who is or was a
direct or indirect beneficial owner of an interest in KH Partners. This
indemnity shall be exclusive with respect to the individuals listed on Annex IV
and shall supersede in its entirety any right to indemnity contained in the
articles or bylaws of any Keystone Entity or Keystone Entity Subsidiary or under
applicable law.
(b) WMI shall allow Keystone Holdings to purchase
discovery period or "runoff" directors and officers ("D&O") insurance coverage
with limits of not less than $50,000,000 and for a period of not less than 5
years for prior acts for all current and former directors and officers of the
Keystone Entities and the Keystone Entity Subsidiaries and those other entities
covered on Keystone Holding's current D&O policies.
8. Mutual Covenants of the Parties. In addition to other covenants and
agreements of the parties contained herein, the parties agree and covenant as
follows:
8.1 Current Information. No later than ten (10) business days
from the date of this Agreement, KH Partners and WMI will each designate an
individual acceptable to the other party (a "Designated Representative" and,
together, the "Designated Representatives") to be the recipients of updated
information, including any revisions to the Disclosure Schedules as discussed in
Section 8.5. The Keystone Designated Representative will promptly notify the WMI
Designated Representative of any governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated) or the
institution or the threat of any litigation involving any Keystone Entity or any
Keystone Entity Subsidiary, and will keep the WMI Designated Representative
fully informed of such events and the progress of any already existing
litigation. The WMI Designated Representatives shall likewise notify and keep
informed the Keystone Designated Representative.
8.2 Reports.
(a) As soon as reasonably available, but in no event
more than 45 days after the end of each fiscal quarter ending after the date of
this Agreement (other than the last quarter of any fiscal year), KH Partners
will deliver to WMI any quarterly reports provided to the holders of New Capital
Preferred Stock, the Senior Notes or the Subordinated Notes. As soon as
reasonably available but in no event more than 120 days after the end of each
fiscal year ending after the date of this Agreement, KH Partners will deliver to
WMI any annual reports provided to the holders of New Capital Preferred Stock,
the Senior Notes or the Subordinated Notes.
(b) As soon as reasonably available, but in no event
more than 45 days after the end of each fiscal quarter ending after the date of
this Agreement (other than the last quarter of any fiscal year), WMI will
deliver to KH Partners its quarterly report on Form 10-Q as filed under the
Securities Exchange Act. As soon as reasonably available, but in no event more
than 120 days after the end of each fiscal year ending after the date
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of this Agreement, WMI will deliver to KH Partners its annual report on Form
10-K as filed under the Securities Exchange Act.
(c) KH Partners shall provide WMI with copies of
director reports prepared for meetings of the Board of Directors of each
Keystone Entity no later than three business days after such meeting. WMI shall
provide KH Partners with copies of director reports prepared for meeting of the
board of directors of WMI no later than three business days after such meeting.
8.3 Regulatory Matters.
(a) The parties hereto will cooperate with each other
and use all reasonable efforts to prepare all necessary documentation, to effect
all necessary filings and to obtain all necessary permits, consents, approvals
and authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement including, without
limitation, those that may be required from the SEC, the FDIC, the OTS, the
Justice Department and other regulatory authorities. KH Partners and WMI shall
each have the right to review reasonably in advance all information relating to
the WM Entities or the Keystone Entities, as the case may be, and any of their
respective subsidiaries, together with any other information reasonably
requested, which appears in any filing made with or written material submitted
to any governmental body in connection with the transactions contemplated by
this Agreement.
(b) The KH Partners and WMI shall furnish each other
with all reasonable information concerning themselves, their subsidiaries,
directors, officers and stockholders and such other matters as may be necessary
or advisable in connection with the WMI Proxy Statement, or any other statement
or application made by or on behalf of WMI or the KH Partners, or any of their
respective subsidiaries to any governmental body in connection with the Merger
and the other transactions, applications or filings contemplated by this
Agreement.
(c) The KH Partners and WMI will promptly furnish
each other with copies of written communications received by WMI or American
Savings Bank or any of their respective subsidiaries from, or delivered by any
of the foregoing to, any governmental body in respect of the transactions
contemplated hereby other than any such written communications received or
delivered in connection with any proposed settlement of the Case where the
furnishing of such communications would reasonably be expected to jeopardize the
attorney-client privilege of KH Partners or any Keystone Entity.
8.4 Further Assurances. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is reasonably
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party to this Agreement shall take all reasonably
necessary action, subject to the terms and conditions of this Agreement.
8.5 Disclosure Supplements.
(a) As soon as practicable after the end of each
calendar quarter, at such other times as WMI may reasonably request and on the
date five business days prior to Closing, KH Partners and the Keystone Entities
will promptly supplement or amend the Disclosure Schedules delivered in
connection herewith with respect to any matter hereafter arising and known to KH
Partners or any Keystone Entity which, if existing, occurring or known at the
date of this Agreement would have been required to be set forth or described in
such Schedules or which is necessary to correct any information in such
Schedules which has been rendered inaccurate thereby. Notwithstanding this
provision, no supplement or amendment to the Disclosure Schedules shall be
deemed to modify any representation or warranty for the purpose of determining
satisfaction of the conditions hereinafter set forth in Section 9.2(a)(ii) and
(iii).
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(b) As soon as practicable after the end of each
calendar quarter, at such other times as KH Partners may reasonably request and
at least five business days prior to Closing, the WM Entities will promptly
supplement or amend the Disclosure Schedules delivered in connection herewith
with respect to any matter hereafter arising and known to any of the WM Entities
which, if existing, occurring or known at the date of this Agreement would have
been required to be set forth or described in such Schedules or which is
necessary to correct any information in such Schedules which has been rendered
inaccurate thereby. Notwithstanding this provision, no supplement or amendment
to such Schedules shall be deemed to modify any representation or warranty for
the purpose of determining satisfaction of the conditions hereinafter set forth
in Section 9.3(b).
8.6 Confidentiality.
(a) All information furnished by, or on behalf of,
any Keystone Entity or any Keystone Entity Subsidiary to the WM Entities or
their representatives or affiliates pursuant to, or in any negotiation in
connection with, this Agreement shall be treated as the sole property of the
Keystone Entity or the Keystone Entity Subsidiary until consummation of the
Merger and, if the Merger shall not occur, the WM Entities and their agents and
advisers shall return to the Keystone Entity or the Keystone Entity Subsidiary,
as appropriate, all documents or other materials containing, reflecting,
referring to such information, and shall keep confidential all such information
and shall not disclose or use such information for competitive purposes.
The obligation to keep such information confidential shall not apply to
any information which would be excluded from the definition of "Evaluation
Materials" pursuant to the last sentence of the first paragraph of the WMI
Confidentiality Letter. Disclosure of any confidential information pursuant to
federal securities laws or under the terms of a subpoena, discovery request or
other order issued by a court of competent jurisdiction or other government
agency shall be handled in the same manner as provided in the WMI
Confidentiality Letter for such disclosure of Evaluation Material.
(b) All information furnished by, or on behalf of,
any WM Entity or any WM Bank Subsidiary to the Keystone Entities or their
representatives or affiliates pursuant to, or in any negotiation in connection
with, this Agreement shall be treated as the sole property of the WM Entity or
the WM Bank Subsidiary, and upon consummation of the Merger or termination of
this Agreement in accordance with Section 10.1, the Keystone Entities and their
agents and advisers shall return to the WM Entity or the WM Bank Subsidiary, as
appropriate, all documents or other materials containing, reflecting, referring
to such information, and shall keep confidential all such information and shall
not disclose or use such information for competitive purposes.
The obligation to keep such information confidential shall not apply to
any information which would be excluded from the definition of "Evaluation
Materials" pursuant to the last sentence of the first paragraph of the Keystone
Confidentiality Letter. Disclosure of any confidential information pursuant to
federal securities laws or under the terms of a subpoena, discovery request or
other order issued by a court of competent jurisdiction or other government
agency shall be handled in the same manner as provided in the Keystone
Confidentiality Letter for such disclosure of Evaluation Material.
8.7 Public Announcements. The mutually agreed upon initial
press release announcing this Agreement and the Merger is attached hereto as
Exhibit D. Thereafter, no release or other public disclosures shall be made by
any of the WM Entities, on the one hand, or by KH Partners or any of the
Keystone Entities, on the other hand, with respect to this Agreement or any of
the transactions contemplated hereby without the prior consultation and approval
of KH Partners, on the one hand, or of WMI, on the other hand (which shall not
be unreasonably withheld, delayed or conditioned), except as may be otherwise
required by law.
8.8 Management Consultation Meetings. From the date of this
Agreement until the Effective Time, management of WMI and of American Savings
Bank shall confer on a regular basis regarding the business and operations of
American Savings Bank and WMI. The parties shall agree upon a mutually
convenient time and place for such meetings (the "Management Consultation
Meetings"), which shall occur no less frequently than monthly.
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8.9 Failure to Fulfill Conditions. In the event that WMI or KH
Partners determines that a condition to its obligation to consummate the
transactions contemplated hereby cannot be, or is not likely to be, fulfilled on
or prior to June 30, 1997 and that it will not waive that condition, it will
promptly notify the other party.
9. Closing Conditions.
9.1 Conditions to Each Party's Obligations Under This
Agreement. The respective obligations of each party under this Agreement to
consummate the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement, the Plan of
Merger, the increase in WMI's authorized shares of common stock, and the
transactions contemplated hereby shall have been approved by the requisite vote
of the stockholders of WMI.
(b) Regulatory Approvals. All necessary regulatory or
governmental approvals and consents required to consummate the transactions
contemplated hereby shall have been obtained and shall remain in full force and
effect and all statutory or regulatory waiting periods in respect thereof shall
have expired.
(c) No Injunction. No party hereto shall be subject
to any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Merger.
(d) Tax Opinion. An opinion shall be obtained from
Foster Pepper & Shefelman in a form reasonably satisfactory to WMI and KH
Partners with respect to federal income tax laws substantially to the effect
that the Merger will qualify as a "reorganization" under Section 368(a) of the
Code. No opinion will be expressed with respect to the tax consequences of
receiving cash in lieu of fractional shares of WMI Common Stock.
(e) Antitrust Law. Any applicable pre-merger
notification provisions of Section 7A of the Clayton Act shall have been
complied with by the parties hereto, and no other statutory or regulatory
requirements with respect to the Clayton Act shall be applicable other than
Section 18(c) of the Federal Deposit Insurance Act and rules and regulations in
connection therewith. There shall be no pending or threatened proceedings by the
California Attorney General or any other public entity under any applicable
antitrust law of the State of California.
(f) New West. The shares of stock in New West,
together with any obligations or liabilities in connection with the ownership,
business or operation thereof, shall have been transferred to and assumed by an
entity other than a Keystone Entity or a Keystone Entity Subsidiary, without any
substantial cost being incurred by any Keystone Entity.
(g) FRF Matters. The FDIC, WMI, the Keystone
Entities, KH Partners and certain other Persons shall have entered into,
concurrently with the execution of this Agreement, the Warrant Exchange
Agreement and such agreement shall be in full force and effect and be
consummated concurrently with the Closing hereunder. Pursuant to the Warrant
Exchange Agreement certain of the FRF Agreements, namely the Securityholders
Agreement, the FRF Warrant Agreement and the Option Agreement, shall be
terminated (all of the FRF Agreements except for the Warrant Agreement, the
Securityholders Agreement and the Option Agreement are hereinafter referred to
as the "Surviving FRF Agreements."). The Keystone Entities shall have obtained
all consents relating to and modifications of the Surviving FRF Agreements
necessary in order for the Merger to be consummated and so that the FRF
Agreements may be assumed by the WMI Entities at the Effective Time.
Notwithstanding any other provision of this Agreement, the condition in the
first sentence of this Section 9.1(g) shall not be waivable by any of the
parties hereto.
(h) Pooling Letter. Deloitte & Touche shall have
delivered a letter addressed to WMI and KH Partners, in a form reasonably
satisfactory to each of WMI and KH Partners, that the transaction contemplated
hereby qualifies for pooling of interests accounting treatment.
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(i) Execution of Escrow Agreement. The Escrow
Agreement shall have been duly executed by all parties thereto.
9.2 Conditions to the Obligations of the WM Entities under
this Agreement. The obligations of the WM Entities under this Agreement shall be
further subject to the satisfaction, at or prior to the Effective Time, of the
following conditions, any one or more of which may be waived by the WM Entities.
(a) (i) Each of the obligations or covenants of KH
Partners and the Keystone Entities required to be performed by them at or prior
to the Closing pursuant to the terms of this Agreement shall have been duly
performed and complied with in all material respects and (ii) each of the
representations and warranties of KH Partners and the Keystone Entities
contained in this Agreement shall be true and correct as of the date of this
Agreement and as of the Effective Time as though made at and as of the Effective
Time (except as to any representation or warranty that specifically relates to
an earlier date, which shall be true and correct as of such earlier date),
except where the failure of such representations and warranties to be true and
correct would not in the aggregate (without regard to any materiality standard
contained in any such representation and warranty) have a Material Adverse
Effect on the Keystone Entities taken as a whole and (iii) each of the
representations and warranties of KH Partners and Keystone Entities contained in
Sections 4.1, 4.2(a), (b) and (d), 4.3, 4.6, 4.7 (other than clause (iii) of
each of (a) and (b)), 4.8, 4.14(a), 4.23, 4.25, 4.26 and 4.28 of this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made at and as of the Effective
Time (except as to any representation or warranty that specifically relates to
an earlier date, which shall be true and correct as of such earlier date).
(b) (i) Any consents, waivers, clearances, approvals
and authorizations of regulatory or governmental bodies that are necessary in
connection with the consummation of the transactions contemplated hereby shall
have been obtained, and none of such consents, waivers, clearances, approvals or
authorizations shall contain any term or condition that (x) is a term or
condition that has not heretofore been normally imposed in such transactions and
which would have a Material Adverse Effect on the Keystone Entities or WMI, or
(y) would require WM Bank or WMBfsb to raise additional capital other than to
increase either or both of such institutions' leverage capital (as defined in
Appendix B to 12 C.F.R. Part 325 as proposed or adopted by the FDIC) or core
capital (as defined in 12 C.F.R. Part 567 as proposed or adopted by the OTS) to
a level no higher than 5.0 percent (as adjusted to account for the Merger). It
is hereby agreed that any term or condition contained in any previous approval
granted to a WM Entity for a merger or acquisition transaction shall be deemed a
"normal" condition for purposes of this Section 9.2(b). For purposes of Section
10 hereof, any "approval" which contains any of the foregoing unacceptable terms
or conditions shall be deemed to be a regulatory "denial."
(ii) WMI shall have received (x) from the
OTS confirmation that upon consummation of the Merger, WMI will not be deemed to
control Family SB for purposes of 12 U.S.C. Section 1467a and (y) from the FDIC
either confirmation that upon consummation of the Merger, WMI will not be deemed
to control Family SB for purposes of 12 U.S.C. Section 1815(e) or a waiver for
subsidiaries of WMI that are insured depository institutions from
"cross-guaranty" liability under 12 U.S.C. Section 1815(e) with respect to the
default of Family SB; provided, however, that WMI agrees that it will accept
conditions from the OTS and the FDIC that are identical to or as stringent as
but no more stringent than those contained in OTS Order Number 92-66 dated
February 28, 1992 and FDIC Order Conditionally Granting Approval for Waiver of
Cross-Guaranty Number 92- 98kk dated April 7, 1992, respectively.
(iii) All material outstanding differences
between KH Partners and the Keystone Entities, on the one hand, and the FDIC, on
the other hand, relating in any way to the FRF Agreements or the Keystone
Entities shall have been resolved without material liability to the Keystone
Entities.
(c) The WM Entities shall have received an opinion or
opinions reasonably satisfactory to them in form and substance, dated the date
of the Closing, from Cleary, Gottlieb, Steen & Hamilton and Kelly, Hart &
Hallman, special counsel to KH Partners.
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(d) WMI shall have received an opinion reasonably
satisfactory to it from CS First Boston, a financial advisory firm, dated as of
the date of the WMI Proxy Statement, as to the fairness, from a financial point
of view, of the consideration to be paid by WMI pursuant to this Agreement.
(e) Since the date of this Agreement there shall have
been no Material Adverse Change with respect to the Keystone Entities and the
Keystone Entity Subsidiaries (except for changes resulting from market and
economic conditions which generally affect the savings industry as a whole
including, without limitation, changes in law or regulation or changes in
generally accepted accounting principles or interpretations thereof); provided,
however, that the following expenses and adjustments shall be excluded in
determining whether a Material Adverse Change has occurred: (i) fees and
expenses relating to the negotiation and consummation of the transactions
contemplated hereby, (ii) charges for severance and other payments to officers
and employees made or expected to be made in connection with the transactions
contemplated hereby, (iii) other closing adjustments requested by WMI, and (iv)
payments under the Fixed Fee Agreement.
(f) Except as otherwise requested by WMI, the
directors of each Keystone Entity and each Keystone Entity Subsidiary shall have
executed letters of resignation effective on or prior to the Effective Time and,
in such letters (or in a separate letter, in the case of any former director
listed on Annex IV) all Persons listed on Annex IV shall have waived any and all
rights they may have to make claims for indemnification, other than the rights
specifically provided in Section 7.7.
(g) KH Partners and the Keystone Entities shall have
furnished the WM Entities with such certificates of their officers and such
other documents to evidence fulfillment of the conditions set forth in this
Section 9.2 as WMI may reasonably request.
(h) KH Partners and the Keystone Entities shall have
obtained (i) all Keystone Entities' real property lease transfer consents
necessary, as a result of consummation of the Merger, to permit American Savings
Bank to continue 90% of its branch deposit operations in the ordinary course
(measured by deposit balances at March 31, 1996) without having incurred
substantial costs to the Keystone Entities or the Keystone Entity Subsidiaries,
and (ii) all of the other consents, waivers and revisions described in Section
6.4, without having incurred substantial costs to the Keystone Entities or the
Keystone Entity Subsidiaries in connection therewith, except for any such
consents, waivers and revisions the failure to obtain which would, in the
aggregate, cause material disruption of such operations.
(i) KH Partners shall have obtained the consents and
modifications referred to in Section 6.6(a).
(j) Affiliates of KH Partners shall have waived the
right to receive irrevocable notice in connection with the redemption of the
Subordinated Notes or the New Capital Preferred Stock owned by such Affiliates.
(k) The amendments to the 1992 and 1993 Federal
Income Tax Returns referred to in Section 6.9 hereof shall have been filed with
the appropriate authorities (including the provision of copies thereof to the
FDIC) within the time limits specified in Section 6.9; none of those amendments
shall have been challenged by the relevant taxing authority; and no additional
payment to the FRF of more than $500,000 by any Keystone Entity shall have
resulted from such amendments.
(l) The FDIC Office of Inspector General (the "OIG")
shall have completed a compliance audit (the "Audit") of the schedules of
activity maintained by New West and American Savings Bank in the Special Reserve
Accounts (as described in the Assistance Agreement), both debits and credits,
and any related book value adjustments resulting from such debits and credits or
from FRF contributions or payments, for the period from July 1, 1994 through
December 31, 1995 or such later date as is reasonably practicable, including
without limitation, with respect to the Intercompany Note and the Liquidity
Account (each as defined in the Assistance Agreement) and to credits and
payments pursuant to Section 9 of the Assistance Agreement for the period from
January 1, 1994 through the tax return filed or anticipated to be filed no later
than September 15, 1996 for the year
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ended December 31, 1995. In addition, as (x) tax returns for years 1988 through
1991 were amended during this audit period and (y) tax returns for the years
1992 and 1993 will be amended by September 15, 1996, tax benefits generated from
all such amended returns shall also be included in the audit.
All disputes arising with respect to items or periods covered by the
Audit will be resolved without the payment of additional amounts in excess of
$500,000 in the aggregate by all Keystone Entities, and the FDIC and the
Keystone Entities shall have entered into a release in which the FDIC shall
agree that, absent a finding of fraud or mathematical error, all matters covered
by the Audit will be deemed approved at all levels of audit review and for all
purposes, and shall constitute (and shall state that it is) a final resolution
for purposes of further challenges by the FDIC to any entries covered by the
Audit; provided, however, that the FDIC may reserve its rights with respect to
the matters covered by the Tax Settlement Agreement (as defined in section
9.2(m)) in the event this Agreement is terminated in accordance with Article 10
hereof.
(m) The tax settlement agreement, dated as of July
21, 1996, by and among the Keystone Entities, New West and the FDIC (the "Tax
Settlement Agreement"), shall be in full force and effect and shall not have
been modified or amended in any respect without the prior consent of WMI, which
shall not be unreasonably withheld.
9.3 Conditions to the Obligations of KH Partners and the
Keystone Entities Under This Agreement. The obligations of KH Partners and the
Keystone Entities under this Agreement shall be further subject to the
satisfaction, at or prior to the Effective Time, of the following conditions,
any one or more of which may be waived by the KH Partners and the Keystone
Entities:
(a) Each of the obligations or covenants of the WM
Entities required to be performed by them at or prior to the Closing pursuant to
the terms of this Agreement shall have been duly performed and complied with in
all material respects.
(b) Each of the representations and warranties of the
WM Entities contained in this Agreement shall be true and correct as of the date
of this Agreement and as of the Effective Time as though made at and as of the
Effective Time (except as to any representation or warranty which specifically
relates to an earlier date, which shall be true and correct as of such earlier
date), except where the failure of any such representation and warranty to be
true and correct would not in the aggregate (without regard to any materiality
standard contained in such representations and warranties) have a Material
Adverse Effect on WMI, and each of the representations and warranties contained
in Sections 5.1, 5.2, 5.3, 5.5, 5.6 (other than clause (iii)), 5.7, 5.15 and
5.17 of this Agreement shall be true and correct in all material respects as of
the date of this Agreement and as of the Effective Time as though made at and as
of the Effective Time (except as to any representation or warranty that
specifically relates to an earlier date, which shall be true and correct as of
such earlier date).
(c) The KH Partners shall have received an opinion
reasonably satisfactory to it in form and substance, dated the date of the
Closing, from Foster, Pepper & Shefelman, counsel to the WM Entities. Foster,
Pepper & Shefelman may rely as to certain matters of New York law on an opinion,
dated as of the Closing Date, of Gibson, Dunn & Crutcher, special counsel to
WMI.
(d) Since the date of this Agreement, there shall
have been no Material Adverse Change with respect to WMI (except for changes
resulting from market and economic conditions which generally affect the savings
industry as a whole including, without limitation, changes in law or regulation
or changes in general accepted accounting principles or interpretations
thereof); provided, however, that fees and expenses relating to the negotiation
and consummation of the transactions contemplated hereby shall be excluded in
determining whether a Material Adverse Change has occurred.
(e) The WM Entities shall have furnished KH Partners
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions set forth in this Section 9.3 as KH
Partners may reasonably request.
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(f) WMI shall have instructed its transfer agent with
respect to the issuance of WMI Common Stock to the Keystone Holdings stockholder
at least two days prior to Closing.
10. Termination, Amendment and Waiver.
10.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the Merger by
the WMI stockholders:
(a) by mutual written consent of all the parties
hereto;
(b) by any party hereto (i) if the Effective Time
shall not have occurred on or prior to June 30, 1997, unless the failure of such
occurrence shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe its agreements and conditions set forth herein
to be performed or observed by such party at or before the Effective Time; or
(ii) 31 days after the date on which any application for regulatory approval
prerequisite to the consummation of the transactions contemplated hereby shall
have been denied or withdrawn at the request of the applicable regulatory
authority; provided, that, if prior to the expiration of such 31-day period WMI
is engaged in litigation or an appeal procedure relating to an attempt to obtain
such approval, KH Partners and the Keystone Entities may not terminate this
Agreement until the earlier of (A) June 30, 1997 and (B) 31 days after the
completion of such litigation and appeal procedures, and of any further
regulatory or judicial action pursuant thereto, including any further action by
a government agency as a result of any judicial remand, order or directive or
otherwise; or (iii) 10 days after written certification of the vote of the WMI's
stockholders is delivered to KH Partners indicating that such stockholders
failed to adopt the resolution to approve this Agreement and the transactions
contemplated hereby at the stockholders' meeting (or any adjournment thereof)
contemplated by Section 2.4 hereof;
(c) by the WM Entities (i) if at the time of such
termination there shall have been a Material Adverse Change with respect to the
Keystone Entities from that set forth in March 1996 Keystone Financial
Statements (except for changes resulting from market and economic conditions
which generally affect the savings industry as a whole, including, without
limitation, changes in law or regulation or changes in generally accepted
accounting principles or interpretations thereof), it being understood that any
of the matters set forth in the Keystone Entities' Disclosure Schedules as of
the date of this Agreement or any of the matters described in clauses (i) or
(ii) of Section 9.2(e) are not deemed to be a Material Adverse Change for
purposes of this paragraph (c); or (ii) if there shall have been any material
breach of any covenant of KH Partners or the Keystone Entities hereunder and
such breach shall not have been remedied within 45 days after receipt by
American Savings Bank of notice in writing from WMI specifying the nature of
such breach and requesting that it be remedied;
(d) by KH Partners and the Keystone Entities (i) if
at the time of such termination there shall have been a Material Adverse Change
with respect to WMI from that set forth in WMI's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996 (except for changes resulting from market
and economic conditions which generally affect the savings industry as a whole
including, without limitation, changes in law or regulation or changes in
generally accepted accounting principles or interpretations thereof), it being
understood that any of the matters set forth in WM Entities' Disclosure
Schedules as of the date of this Agreement or items described in the proviso in
Section 9.3(d) are not deemed to be a Material Adverse Change for purposes of
this paragraph (d); (ii) if there shall have been any material breach of any
covenant of the WM Entities hereunder and such breach shall have not been
remedied within 45 days after receipt by WMI of notice in writing from KH
Partners specifying the nature of such breach and requesting that it be
remedied; or (iii) if a Third Party Acquisition of WMI shall have occurred.
10.2 Effect of Termination. In the event of termination of
this Agreement by any party as provided in Section 10.1, this Agreement shall
forthwith become void (other than Section 8.6, this Section 10.2, Section 11.1
and Section 11.7 hereof, which shall remain in full force and effect) and, there
shall be no further liability on the part of any party or its officers or
directors except for the liability of the WM Entities under Section 8.6.
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10.3 Amendment, Extension and Waiver. Subject to applicable
law, at any time prior to the consummation of the Merger, whether before or
after approval thereof by the stockholders of WMI, the parties may (a) amend
this Agreement (including the Plans of Merger incorporated herein), (b) extend
the time for the performance of any of the obligations or other acts of any
other party hereto, (c) waive any inaccuracies in the representations and
warranties of any other party contained herein or in any document delivered
pursuant hereto, or (d) waive compliance with any of the agreements or
conditions contained herein; provided, however, that after any approval of the
Merger by the WMI stockholders, there may not be, without further approval of
such stockholders, any amendment or waiver of this Agreement (or the Plan of
Merger) that changes the amount of consideration to be delivered to the Keystone
Holdings stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto. Any agreement on the
part of a party hereto to any extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party, but such
waiver or failure to insist on strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
11.Miscellaneous.
11.1 Expenses. All legal and other costs and expenses incurred
by KH Partners in connection with this Agreement and the transactions
contemplated hereby shall be the responsibility of the Keystone Entities and not
KH Partners, other than legal fees incurred in connection with negotiations with
the FDIC to determine the appropriate consideration the FDIC will receive in
exchange for the Warrants, which fees shall be the responsibility of KH
Partners. All other legal and other costs and expenses shall be borne by the
party incurring such costs and expenses unless otherwise specified in this
Agreement.
11.2 Survival. Except for the covenants of Sections 7.3, 7.4,
7.5, 7.7, the second sentence of Section 8.4, Sections 2.3(a)-(e), (g) and (h),
the third sentence of Section 2.6(a), the first sentence of Section 2.6(b),
Sections 2.6(c), 8.6(b), 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7 and 11.8, the
respective representations and warranties, covenants and agreements set forth in
this Agreement and all Disclosure Schedules shall not survive the Effective
Time.
11.3 Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by delivery, by registered or
certified mail (return receipt requested) or by cable, telecopier, or telex to
the respective parties as follows:
(a) If to a WM Entity, to:
Washington Mutual, Inc.
1201 Third Avenue, 15th Floor
Seattle, WA 98101
Attn: Marc R. Kittner, Senior Vice President
Telecopy Number: (206) 554-2790
With copies to:
Foster Pepper & Shefelman
1111 Third Avenue Bldg., 34th Floor
Seattle, WA 98101
Attn: Fay L. Chapman
Telecopy Number: (206) 447-9700
and
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Gibson, Dunn & Crutcher
One Montgomery Street, Telesis Tower
San Francisco, CA 94104-4505
Attn: Todd H. Baker
Telecopy Number: (415) 986-5309
If to KH Partners or a Keystone Entity, to:
Keystone Holdings Partners, L.P.
201 Main Street, 23rd Floor
Fort Worth, TX 76102
Attn: Ray L. Pinson
Telecopy Number: (817) 338-2047
With copies to:
Kelly, Hart & Hallman
201 Main Street, Suite 2500
Ft. Worth, TX 76102
Attn: Billie J. Ellis, Jr.
Telecopy Number: (817) 878-9280
and
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Attn: Michael L. Ryan
Telecopy Number: (212) 225-3999
and
Paul Weiss Rifkind Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019
Attn: David R. Sicular
Telecopy Number: (212) 757-3990
or such other address as shall be furnished in writing by any party to the
others in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
11.4 Parties in Interest. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any party
hereto without the prior written consent of the other parties. Nothing in this
Agreement is intended to confer, expressly or by implication, upon any other
Person any rights or remedies under or by reason of this Agreement (except for
Sections 2.3(e), 7.3, 7.4 and 7.7, which are intended to benefit third party
beneficiaries) and except for Sections 2.2(c), 2.2(d), 2.3 (a)-(d), 2.3(f), the
second sentence of Section 3, Sections 6.1(b)(ii), 6.13, 8.4 and the second
sentence of 10.3, which provisions are also intended for the benefit of the
FDIC.
11.5 Entire Agreement. This Agreement, including the documents
and other writings referred to herein or delivered pursuant hereto (including
without limitation the Warrant Exchange Agreement), contains the entire
agreement and understanding of the parties with respect to its subject matter.
There are no restrictions, agreements, promises, warranties, covenants or
undertakings between the parties other than those expressly set forth
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herein or therein. This Agreement supersedes all prior agreements and
understandings between the parties, both written and oral, with respect to its
subject matter other than the terms of the WMI Confidentiality Letter and the
Keystone Confidentiality Letter incorporated by reference in Section 8.6 hereof.
11.6 Counterparts. This Agreement may be executed in one or
more counterparts all of which shall be considered one and the same agreement
and each of which shall be deemed an original.
11.7 Governing Law. This Agreement, in all respects, including
all matters of construction, validity and performance, is governed by the
internal laws of the State of New York as applicable to contracts executed and
delivered in New York by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
11.8 Headings. The Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
WASHINGTON MUTUAL, INC.
By:/s/ Craig E. Tall
------------------------------------------
Its Executive Vice President
--------------------------------------
KEYSTONE HOLDINGS PARTNERS, L.P.
By: KH Group Management, Inc.,
its General Partner
By:/s/ Ray L. Pinson
-----------------------------------
Its Sr. Vice President
------------------------------
KEYSTONE HOLDINGS, INC.
By:/s/ Ray L. Pinson
------------------------------------------
Its Sr. Vice President
---------------------------------------
NEW AMERICAN HOLDINGS INC.
By:/s/ Ray L. Pinson
------------------------------------------
Its Sr. Vice President
--------------------------------------
NEW AMERICAN CAPITAL, INC.
By:/s/ Ray L. Pinson
------------------------------------------
Its Sr. Vice President
--------------------------------------
N.A. CAPITAL HOLDINGS, INC.
By:/s/ Ray L. Pinson
------------------------------------------
Its Sr. Vice President
--------------------------------------
AMERICAN SAVINGS BANK, F.A.
By:/s/ Mario Antoci
------------------------------------------
Its Chief Executive Officer
--------------------------------------
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EXHIBIT A TO APPENDIX C - AGREEMENT FOR MERGER
PLAN OF MERGER
FOR THE MERGER OF
KEYSTONE HOLDINGS, INC.
WITH AND INTO
WASHINGTON MUTUAL, INC.
This Plan of Merger is made by and between Keystone Holdings, Inc., a
Texas corporation ("Keystone Holdings") and Washington Mutual, Inc., a
Washington corporation ("WMI") in connection with the transactions described in
an Agreement for Merger dated July 21, 1996 (the "Merger Agreement") among WMI,
Keystone Holdings Partners, L.P., a Texas limited partnership ("KH Partners"),
Keystone Holdings, New American Holdings, Inc., a Delaware corporation ("New
Holdings"), New American Capital, Inc., a Delaware corporation ("New Capital"),
N.A. Capital Holdings, Inc., a Delaware corporation ("NACH Inc."), and American
Savings Bank, a federal savings association ("American Savings Bank").
All of the issued and outstanding shares of capital stock of Keystone
Holdings are owned by KH Partners. Keystone Holdings owns, directly or
indirectly, all of the issued and outstanding shares of voting capital stock of
New Holdings, New Capital, NACH Inc. and American Savings Bank.
Capitalized terms not otherwise defined herein shall have the meaning
given them in the Merger Agreement. This Plan of Merger, including related
documents, is intended to constitute a "Plan of Reorganization" as that term is
used in section 354 of the Code. Further, this Merger is intended to constitute
a "Reorganization" as defined in section 368(a)(1) of the Code.
The boards of directors and the shareholders of Keystone Holdings and
WMI have approved this Plan of Merger (the "Plan of Merger") under which
Keystone Holdings shall be merged with and into WMI.
Keystone Holdings and WMI hereby agree as follows:
1. Merger. At and on the Effective Time of the Merger, Keystone
Holdings shall be merged with and into WMI in accordance with the terms hereof.
WMI shall be the surviving corporation.
2. Effective Time. The effective time ("Effective Time") of this Merger
shall be the time and date of the occurrence of both (a) the filing of articles
of merger with the Washington Secretary of State and (b) the filing of articles
of merger with the Texas Secretary of State, or at such later time or date after
such filings as may be specified in such articles of merger.
3. Name. The name of the surviving corporation shall continue to be
"Washington Mutual, Inc."
4. Directors and Principal Officers. The names of the directors of the
surviving corporation are set forth on Schedule I hereto. The principal officers
of WMI immediately prior to the Effective Time shall continue to serve as
principal officers of the surviving corporation after the Effective Time.
5. Terms and Conditions of Merger. At the Effective Time of the Merger:
(a) Conversion of Keystone Holdings Common Stock. Subject to
the provisions below, at the Effective Time, each outstanding share of Keystone
Holdings Common Stock shall be converted into the right to receive
_______________ [insert the number determined by dividing the number of Keystone
Initial Shares by the number of aggregate outstanding shares of Keystone
Holdings Common Stock as of the Effective Time] shares of WMI Common Stock,
together with a contingent right to ______________ [insert the number determined
by dividing the Keystone Litigation Shares by the number of aggregate
outstanding shares of Keystone Holdings
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Common Stock as of the Effective Time] which shall be delivered to
_______________________ [insert name of Escrow Agent] (the "Escrow Agent")
pursuant to an Escrow Agreement among the Escrow Agent, KH Partners, WMI and the
Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund.
Cash will be paid in lieu of fractional shares as provided in Section 5(c)
below.
(b) WMI Common Stock. Each share of WMI Common Stock issued
and outstanding immediately prior to the Effective Time shall remain outstanding
and unchanged and shall continue to be owned by the stockholder thereof.
(c) No Fractional Shares. Notwithstanding any term or
provision hereof, no fractional shares of WMI Common Stock, and no certificates
or scrip therefor, or other evidence of ownership thereof, shall be issued in
exchange for any shares of Keystone Holdings Common Stock; no dividend or
distribution with respect to WMI Common Stock shall be payable on or with
respect to any fractional share interests; and no such fractional share interest
shall entitle the owner thereof to vote or to any other rights of a stockholder
of WMI.
6. Method of Effectuation; Exchange of Certificates. At the Effective
Time, or, if later, promptly upon receipt by WMI of certificates evidencing all
of the issued and outstanding shares of capital stock of Keystone Holdings, WMI
shall deliver to KH Partners certificates evidencing the shares of WMI Common
Stock to which KH Partners is entitled pursuant to Section 5(a) hereof. In
addition, at the same time, WMI shall deliver certificates to the Escrow Agent
evidencing the shares of WMI Common Stock to which KH Partners and the FRF have
contingent rights pursuant to Section 5(a) hereof.
All certificates evidencing WMI Common Stock described in Section 5(a)
hereof delivered by WMI shall bear the following legend:
These shares have not been registered under the Securities Act of 1933
as amended, or under the laws of any state, and thus may not be sold or
transferred in the absence of an effective registration under such laws
or an opinion of counsel acceptable to WMI to the effect that such
registration is not required.
Certificates delivered which are to be distributed by KH Partners to persons who
are deemed affiliates of Keystone Holdings may, at the option of WMI, bear the
following legend:
These shares shall not be pledged, sold, assigned, transferred or
otherwise disposed of until three (3) days after the date that
consolidated financial results covering at least 30 days of post-Merger
combined operations of WMI and Keystone Holdings have been published by
WMI in accordance with SEC Accounting Series Release No. 130, as
amended by Release 135, and other applicable accounting rules.
At the Effective Time, the stock transfer books of Keystone Holdings
shall be closed, and there shall be no further registration of transfers of
shares of Keystone Holdings Common Stock thereafter on the records of Keystone
Holdings. From and after the Effective Time, the holders of certificates shall
cease to have any rights with respect to the shares of Keystone Holdings Common
Stock represented thereby immediately prior to the Effective Time except as
provided herein.
No interest shall be paid or accrue on or in respect of any portion of
the WMI Common Stock, or the cash in lieu of fractional shares, to be delivered
in exchange for the surrendered Certificates.
7. Articles and Bylaws. At and after the Effective Time, the Articles
of Incorporation and Bylaws of WMI as in effect immediately prior to the
Effective Time shall continue to be the Articles of Incorporation and Bylaws of
the surviving corporation until amended in accordance with law. A copy of WMI's
Articles of Incorporation are attached as Exhibit A.
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8. Rights and Duties of the Surviving Corporation. At the Effective
Time, Keystone Holdings shall be merged with and into WMI, which shall be the
surviving corporation and which shall continue to be a Washington corporation.
All assets, rights, privileges, powers, franchises and property (real, personal
and mixed) of Keystone Holdings shall be automatically vested in WMI as the
surviving corporation by virtue of the Merger without any deed or other document
of transfer. The surviving corporation, without any order or action on the part
of any court or otherwise and without any documents of assumption or assignment,
shall hold and enjoy all of the properties, franchises and interests, including
appointments, powers, designations, nominations and all other rights and
interests as agent or other fiduciary in the same manner and to the same extent
as such rights, franchises and interests and powers were held or enjoyed by WMI
and Keystone Holdings, respectively. The surviving corporation shall be
responsible for all the liabilities of every kind and description of both WMI
and Keystone Holdings immediately prior to the Effective Time, including
liabilities for all debts, obligations and contracts of WMI and Keystone
Holdings, respectively, matured or unmatured, whether accrued, absolute,
contingent or otherwise and whether or not reflected or reserved against on
balance sheets, books or accounts or records of either WMI or Keystone Holdings.
All rights of creditors and other obligees and all liens on property of either
WMI or Keystone Holdings shall be preserved and shall not be released or
impaired.
9. Execution. This Plan of Merger may be executed in any number of
counterparts each of which shall be deemed an original and all of such
counterparts shall constitute one and the same instrument.
Dated as of _______________, 1996.
WASHINGTON MUTUAL, INC.
By:__________________________________________
Its______________________________________
By:__________________________________________
Its______________________________________
KEYSTONE HOLDINGS, INC.
By:__________________________________________
Its______________________________________
By:__________________________________________
Its______________________________________
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APPENDIX D
WARRANT EXCHANGE AGREEMENT
This WARRANT EXCHANGE AGREEMENT (the "Agreement") is dated as of July
21, 1996 and is entered into by and among WASHINGTON MUTUAL, INC., a Washington
corporation ("WMI"), KEYSTONE HOLDINGS, INC., a Texas corporation ("Keystone
Holdings"), NEW AMERICAN HOLDINGS, INC., a Delaware corporation ("NAHI"), NEW
AMERICAN CAPITAL, INC., a Delaware corporation (the "Intermediate Holding
Company"), N.A. CAPITAL HOLDINGS, INC., a Delaware corporation (the "Company"
and collectively, Keystone Holdings, NAHI, the Intermediate Holding Company, and
the Company being hereinafter referred to as the "Keystone Entities"), AMERICAN
SAVINGS BANK, F.A., a federal savings association ("ASB"), NEW WEST FEDERAL
SAVINGS AND LOAN ASSOCIATION, a federal savings association ("New West"), the
FEDERAL DEPOSIT INSURANCE CORPORATION (the "FDIC"), in its capacity as manager
of the FSLIC RESOLUTION FUND (the "FRF"), and certain persons who are executing
this Agreement under the caption "Investors" on the signature page hereto (the
"Investors"), including KEYSTONE HOLDINGS PARTNERS, L.P. (the "Keystone
Partnership"). All references herein to the FDIC shall be interpreted to mean
the FDIC in its capacity as manager of the FRF.
RECITALS
WHEREAS, on December 28, 1988, the Company and the FSLIC entered into
that certain Warrant Agreement (the "Warrant Agreement") pursuant to which the
Company issued to the FSLIC 3,000 warrants (the "Warrants") representing the
right, under certain circumstances specified in the Warrant Agreement, to
acquire up to 3,000 shares of Class B Common Stock, without par value, of the
Company for an aggregate purchase price of $1.00;
WHEREAS, on December 28, 1988, the Keystone Entities, the FSLIC and the
Investors also entered into that certain Securityholders Agreement (the
"Securityholders Agreement") which provides, among other things, that in the
event of a Change of Control (as defined in the Securityholders Agreement) of
the Company, the FSLIC may elect to have the Warrants acquired by Keystone
Holdings or its designee for a price as determined in accordance with the terms
of the Securityholders Agreement;
WHEREAS, pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, the FSLIC was abolished and the FRF was established as
successor in interest to the Federal Savings and Loan Insurance Corporation (the
"FSLIC"), and the Warrants, among other assets and liabilities of the FSLIC,
were transferred from the FSLIC to the FRF;
WHEREAS, none of the Warrants has been exercised as of the date hereof;
WHEREAS, concurrently with the execution hereof, WMI, the Keystone
Entities, the Keystone Partnership and ASB are entering into an Agreement for
Merger (the "Merger Agreement") pursuant to which Keystone Holdings is agreeing
to merge with and into WMI (the "Merger") and, in consideration thereof, common
stock, par value $1.00 per share, of Keystone Holdings (the "Keystone Common
Stock") will upon the consummation of the Merger be converted into the right to
receive a specified amount of common stock, no par value, of WMI ("WMI Common
Stock");
WHEREAS, the Merger will result in a Change of Control of the Company;
WHEREAS, it is a condition to each party's obligations to consummate
the Merger under the Merger Agreement that the FDIC enter into an agreement
concurrently with the execution of the Merger Agreement, to be consummated
concurrently with the consummation of the Merger, and pursuant to which the FDIC
agrees to exchange all of the Warrants for shares of WMI Common Stock in the
Merger (the "FDIC Condition");
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WHEREAS, the Merger Agreement provides that, at the Effective Time (as
defined in the Merger Agreement), WMI will issue 40,000,000 newly issued shares
of WMI Common Stock (the "Initial Shares") in the aggregate to the Keystone
Partnership (which intends to immediately distribute the shares of WMI Common
Stock that it receives to its partners) and the FRF, all as more fully set forth
in the Merger Agreement;
WHEREAS, the Merger Agreement further provides that, in addition to the
Initial Shares, WMI will also issue 8,000,000 additional newly issued shares of
WMI Common Stock with regard to the Case (as defined in the Merger Agreement),
which shares are to be deposited in an escrow and which shares (or a portion
thereof) are to be distributed to the Keystone Partnership (which intends to
immediately distribute the shares of WMI Common Stock that it receives to its
partners) and the FRF (or to their respective permitted successors and assigns)
following the receipt by WMI or its subsidiaries of proceeds, if any, of any
judgment or settlement involving the Case, all as more fully set forth and
described in this Agreement, the Merger Agreement, and the Escrow Agreement (as
defined in the Merger Agreement);
WHEREAS, the FDIC wishes to enter into this Agreement to transfer the
Warrants to WMI in exchange for WMI Common Stock, and WMI wishes to enter into
this Agreement to acquire the Warrants in exchange for WMI Common Stock, all
upon the terms and subject to the conditions set forth in this Agreement and the
other agreements referred to herein; and
WHEREAS, the Keystone Entities, ASB, New West, the Investors, the FDIC
and WMI wish to enter into this Agreement to satisfy the purpose and intent of
Section 1.4 of the Securityholders Agreement, to fulfill the FDIC Condition, and
to provide for certain other agreements and arrangements as between or among the
parties with regard to the Merger;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I
DISPOSITION OF WARRANTS IN THE MERGER AND RELATED
MATTERS
Section 1.01. Disposition; FRF Initial Shares. (a) Subject to the terms
and conditions set forth in this Agreement, and in reliance on the
representations, warranties and covenants contained herein, at the Warrant
Closing (as defined in Section 1.03), the FDIC shall sell, assign, transfer and
deliver the Warrants to WMI and WMI will issue and deliver to the FDIC, in
exchange for the Warrants transferred and delivered hereunder, 14,000,000 newly
issued shares of WMI Common Stock (the "FRF Initial Shares"), which number of
shares represents 35% of the Initial Shares.
(b) Each of WMI, each of the Keystone Entities, the Keystone
Partnership and ASB covenant and agree that (i) they shall not amend or
otherwise modify the terms of the Merger Agreement so as to increase or decrease
the amount of consideration, or in any way modify the form of consideration,
that WMI (or any subsidiary or affiliate thereof) is to provide or shall
provide, directly or indirectly, to the Keystone Partnership or the partners
thereof or any affiliates of such Persons (as hereinafter defined) in exchange
for the Keystone Common Stock pursuant to the Merger Agreement, and AM they
shall not enter into any other agreement or arrangement with each other that has
the effect described in clause (i) of this Section 1.01(b), in either case
without the prior written consent of the FDIC, which consent the FDIC may
withhold in its sole and absolute discretion.
(c) For purposes of this Agreement, the terms "subsidiary" and
"affiliate" shall have the respective meanings ascribed thereto in Rule 12b-2
promulgated by the Securities Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
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Section 1.02. Satisfaction of Securityholders Agreement. Each of the
Keystone Entities, the Investors and the FDIC acknowledge that a Change of
Control of the Company will occur upon the consummation of the Merger, and agree
that they are entering into this Agreement, the Registration Rights Agreement
and the Escrow Agreement as a means of satisfying the purpose and intent of
Section 1.4 of the Securityholders Agreement.
Section 1.03. The Warrant Closing. The closing of the transactions
contemplated by this Agreement (the "Warrant Closing") shall occur concurrently
with or at the Closing (as defined in the Merger Agreement). At the Warrant
Closing, WMI shall deliver to the FDIC or to an independent trustee, as may be
directed by the FDIC, duly executed stock certificates representing the FRF
Initial Shares and registered in the name of the FRF, against receipt of the
Warrants, and the FDIC shall deliver to WMI the original, manually executed
certificate representing the Warrants, against receipt of the FRF Initial
Shares. The Warrant Closing shall take place at the time when, and the place
where, the Closing takes place under the Merger Agreement or at such other time
and place as the parties hereto may mutually agree. The term "Warrant Closing
Date" shall mean the date on which the Warrant Closing occurs.
Section 1.04. Litigation Escrow. (a) In addition to the FRF Initial
Shares to be paid to the FDIC pursuant to Section 1.01 hereof, at the Effective
Time the FDIC shall also be entitled to receive, and shall receive, in further
consideration for transferring the Warrants to WMI, a contingent right to
receive 35% of the Escrow Shares (as defined in the Merger Agreement, with such
percentage of shares being hereinafter referred to as the "FRF Litigation
Shares," and the FRF Litigation Shares together with FRF Initial Shares being
hereinafter referred to as the "FRF Consideration Shares"). WMI hereby agrees to
deliver a certificate or certificates evidencing the FRF Litigation Shares into
the Litigation Escrow (as defined in the merger Agreement) as of the Effective
Time, all as more fully set forth in the Escrow Agreement (which shall be
substantially in the form of Exhibit B to the Merger Agreement) and consistent
with the terms of the Merger Agreement.
(b) The Escrow Agreement to be entered into as contemplated by the
Merger Agreement shall provide for such arrangements with respect to the voting
of the FRF's pro rata portion of the Escrow Shares as the FDIC directs, and
shall provide that the Escrow Agent (as defined in the Merger Agreement) shall
distribute the FRF's pro rata portion of any Aggregate Escrow Distribution to
the FDIC, all to be more fully set forth therein.
Section 1.05. Stock Splits, Etc. If between the date of this Agreement
and the Effective Time, the shares of WMI Common Stock shall be changed into a
different number of shares by reason of any reclassification, recapitalization,
split-up, combination or exchange of shares, or if a stock dividend thereon
shall be declared with a record date within such period, the number of shares
making up the FRF Initial Shares and the FRF Litigation Shares shall be adjusted
accordingly.
Section 1.06. Termination of Warrant-Related Provisions. If, and only
if, the Merger is consummated, upon delivery of the FRF Initial Shares to the
FDIC as contemplated herein, WMI's delivery to the Escrow Agent of the FRF
Litigation Shares as contemplated by this Agreement, the Merger Agreement, and
the Escrow Agreement, and the FDIC's delivery of the Warrants to WMI, (a) the
FRF shall thereafter have no further rights whatsoever in the Warrants, and (b)
the Securityholders Agreement, the Warrant Agreement, and that certain Option
Agreement, dated December 28, 1988, by and among Keystone Holdings, the Company
and the FSLIC, and Sections 43 and 46 of that certain Assistance Agreement,
dated December 28, 1988, by and among the Keystone Entities, ASB, New West and
the FSLIC (the "Assistance Agreement") shall all be terminated and shall be of
no further force or effect.
Section 1.07. Closure of Accounts Through Stated Date. (a) The FDIC
represents that proposals have been solicited in connection with a compliance
audit (the "Audit") that the FDIC Office of Inspector General (the "OIG")
intends to commence after the execution of this Agreement with regard to the
Transaction-Related Documents (as defined in the Assistance Agreement), as such
documents and agreements may have been amended, supplemented or modified from
time to time, or as such documents are the subject of any settlement agreement
or agreements related thereto.
(b) The FDIC and the other parties hereto agree that, to the extent
that the Audit is completed prior to the Warrant Closing, the parties will use
their respective good faith efforts to (i) resolve any dispute that may
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arise with respect to items or periods covered by the Audit, and (ii) enter into
a release in which the parties will agree that, absent a finding of fraud or
mathematical error, and except for those items or matters that are not resolved
in accordance with clause (i) of this Section 1.07(b), all entries on the
schedules of activities will be deemed approved at all levels of audit review
(including compliance audits and OIG audits) and for all purposes. To the extent
that the release referred to in this Section 1.07 is entered into, such release
shall constitute (and shall state that it is) a final resolution for purposes of
further challenges by the FDIC to any entries referred to herein, whether or not
such entries were specifically tested as part of any audit.
Section 1.08. Issuance of WMI Common Stock; Registration Rights. (a)
All shares of WMI Common Stock issued in connection with this Agreement will be
issued pursuant to an exemption under Section 4(2) of the Securities Act (as
herein defined), and initially will be "Restricted Securities" as defined in
Rule 144 promulgated under such act. For purposes of this Agreement, the term
Securities Act shall mean the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder and any successor federal statute, rules
or regulations.
(b) Concurrently herewith, WMI, the FDIC, and the Keystone Partnership
are executing a Registration Rights Agreement (the "Registration Rights
Agreement") pursuant to which WMI is granting to the parties thereto the rights
described therein.
Section 1.09. Adjustment. Notwithstanding any other provision of this
Agreement to the contrary, if an Adjustment Event (as defined in the Merger
Agreement) shall have occurred, then the Keystone Initial Shares (as defined in
the Merger Agreement) shall be reduced to 25,883,333 shares of WMI Common Stock.
and the percentage set forth in Sections 1.01 and 1.04 of this Agreement shall
be changed to 35.1% and all references to the number 40,000,000 in this
Agreement shall be changed to the number 39,883,333, subject to Section 1.05.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE FDIC
To induce WMI, the Keystone Entities, ASB, New West and the Investors
to enter into this Agreement and to consummate the transactions contemplated
hereby, the FDIC makes the following representations and warranties to such
parties:
Section 2.01. Power and Authorization. The execution, delivery and
performance of this Agreement, the Registration Rights Agreement and the Escrow
Agreement (a) are within the statutory authority of the FDIC, and (b) have been
duly authorized by all necessary action on the part of the FDIC, and such
authorization has not been withdrawn or amended in any manner.
Section 2.02. Binding Agreement. Each of this Agreement, the
Registration Rights Agreement and the Escrow Agreement has been duly authorized,
executed and delivered (except for the Escrow Agreement, which will be executed
and delivered at the Warrant Closing) by the FDIC, and, when duly authorized,
executed, and delivered by WMI, each of the Keystone Entities, the Investors,
ASB and New West in the case of this Agreement, and WMI and the Keystone
Partnership in the case of the Registration Rights Agreement, and WMI, the
Keystone Partnership and the Escrow Agent in the case of the Escrow Agreement,
each of this Agreement, the Registration Rights Agreement and the Escrow
Agreement shall constitute a legal, valid and binding obligation of the FDIC,
enforceable against it in accordance with its terms, except as (a) the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization
or moratorium or other similar laws affecting the enforcement of creditors'
rights generally, and (b) the availability of equitable remedies may be limited
by equitable principles of general applicability.
Section 2.03. Consents and Approvals. No consent, approval of,
authorization or other action by, or filing with or notification to, any other
Person (as hereinafter defined) is necessary or required to be obtained by the
FDIC in connection with the execution, delivery and performance by the FDIC of
this Agreement, the Registration Rights Agreement or the Escrow Agreement and
the consummation of the transactions contemplated hereby and thereby.
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For purposes of this Agreement, the term "Person" shall mean an individual,
partnership, corporation, limited liability company, business trust, joint stock
company, trust, unincorporated association, joint venture, governmental entity,
regulatory authority, instrumentality or agency, or any other entity of whatever
nature.
Section 2.04. No Conflict. The execution and delivery of each of this
Agreement, the Registration Rights Agreement and the Escrow Agreement by the
FDIC does not, and performance by the FDIC of this Agreement, the Registration
Rights Agreement and the Escrow Agreement will not, violate any law or
regulation with respect to its organization or any other law or regulation
applicable to the FDIC or the FRF.
Section 2.05. Title to the Warrants. The FRF is the sole legal and
beneficial owner of the Warrants, and has good title to such warrants, free and
clear of any liens, pledges, claims, charges, security interests, options or
other legal or equitable encumbrances, limitations or restrictions of any kind
(collectively, "Liens"), other than those that may be created by this Agreement.
Upon consummation of the transactions contemplated hereby, and delivery of the
Warrants and payment of the FRF Consideration Shares therefor as contemplated
hereby, WMI will receive good title to the Warrants, free and clear of all
Liens. Notwithstanding the terms of this Section 2.05, WMI on behalf of itself
and all of its direct and indirect subsidiaries and affiliates (whether now
existing or hereafter formed) (a) acknowledges to the FDIC and the FRF that each
such entity is aware of the existence of the Case (as defined in the Merger
Agreement); (b) agrees that under no circumstances whatsoever shall any
judgment, settlement or other determination involving the Case (whether based on
arguments, allegations or assertions of which WMI currently has knowledge or
otherwise), be construed or interpreted as, or result in or be deemed to result
in, any breach of this Section 2.05 or cause the representations and/or
warranties contained in this Section 2.05 to be untrue or incorrect; and (c)
covenants and agrees that it shall not at any time make any claim that any
judgment, settlement or other determination involving the Case has the effect
described in clause (b) of this Section 2.05. Each of the Keystone Entities, the
Keystone Partnership and ASB hereby covenants and agrees with WMI that, in the
event that the Effective Time occurs, (x) none of such entities or any
affiliates thereof shall seek any relief or remedies in the Case with respect to
the Warrants other than money damages against the United States, and (y) at no
time after the Effective Time shall any such entity or affiliate thereof make
any claim against WMI or any subsidiary thereof that such entity has, or has any
right to, any equity interest in WMI (other than the Keystone Litigation Shares
(as defined in the Merger Agreement)) or any subsidiary thereof (including any
of the Keystone Entities after the Effective Time) as a result of any judgment,
settlement or other determination in the Case with respect to the Warrants.
Section 2.06. Investment Intent; Investor Knowledge. The FDIC agrees
that the WMI Common Stock being acquired hereunder by the FRF is for the FRF's
own account and the FDIC has no present intention of distributing or selling
such securities in violation of the Securities Act or any applicable state
securities law. The FDIC agrees that it will not sell or otherwise dispose of
any of the WMI Common Stock being acquired hereunder unless such sale or other
disposition has been registered or is exempt from registration under the
Securities Act and has been registered or qualified or is exempt from
registration under applicable state securities laws. The FDIC (alone or with its
financial advisor) has such knowledge and experience in financial business
matters that it is capable of evaluating the merits and risks of the investment
to be made by it hereunder on behalf of the FRF.
Section 2.07. WMI Rights Agreement. In connection with the
representation provided by WMI in Section 4.16, the FDIC represents that it is
not the beneficial owner (as defined in Rule 13d-3 of the Exchange Act), nor
except as disclosed on Schedule 2.07, is it aware of any Affiliate or Associate
(as those terms are defined in Rule 12b-2 of the Exchange Act) of the FDIC who
is the beneficial owner, of any shares of WMI Common Stock other than those
shares being acquired under or pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE KEYSTONE
ENTITIES AND THE KEYSTONE PARTNERSHIP
To induce the FDIC and WMI to enter into this Agreement and to
consummate the transactions contemplated hereby, each of the Keystone Entities
and the Keystone Partnership makes the following
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representations and warranties (to the extent applicable to itself) to such
parties:
Section 3.01. Corporate Existence and Authority. (a) ASB is a
federally-chartered savings association duly organized and validly existing
under the laws of the United States of America, with all requisite power and
authority to execute and deliver this Agreement and to perform and comply with
all of the terms, covenants and conditions to be performed and complied with by
it hereunder.
(b) Each of the Keystone Entities, other than ASB and Keystone
Holdings, is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware, with requisite corporate power
and authority to execute and deliver this Agreement and to perform and comply
with all of the terms, covenants and conditions to be performed and complied
with by such party hereunder.
(c) Keystone Holdings is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Texas, with
requisite corporate power and authority to execute and deliver this Agreement
and to perform and comply with all of the terms, covenants and conditions to be
performed and complied with by it hereunder.
(d) Keystone Partnership is a limited partnership duly organized and
validly existing under the laws of the State of Texas, with requisite power and
authority to execute and deliver this Agreement, the Registration Rights
Agreement and the Escrow Agreement and to perform and comply with all the terms,
covenants and conditions to be performed and complied with by it hereunder or
thereunder.
(e) New West is a federally-chartered savings association duly
organized and validly existing under the laws of the United States of America,
with requisite corporate power and authority to execute and deliver this
Agreement and to perform and comply with all the terms, covenants and conditions
to be performed and complied with by it hereunder.
(f) KH Group Management, Inc. ("KHGM") is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Texas,
with requisite corporate power and authority to execute and deliver this
Agreement and to perform and comply with all of the terms, covenants and
conditions to be performed and complied with by it hereunder.
Section 3.02. Due Authorization. (a) The execution, delivery and
performance by each of the Keystone Entities, ASB, New West, the Keystone
Partnership and KHGM of this Agreement and the consummation by each of the
Keystone Entities, ASB New West, the Keystone Partnership and KHGM of the
transactions contemplated hereby, have been duly and validly authorized by all
necessary corporate action (or partnership action as applicable) on each of
their parts and such authorization has not been withdrawn or amended in any
manner. No other corporate action (or partnership action as applicable) is
necessary for the authorization, execution, delivery and performance by each of
the Keystone Entities, ASB, New West, and the Keystone Partnership and KHGM of
this Agreement or for the consummation of the transactions contemplated hereby.
(b) The execution, delivery and performance by the Keystone Partnership
of the Registration Rights Agreement and the Escrow Agreement and the
consummation by the Keystone Partnership of the transactions contemplated
thereby, have been duly and validly authorized by all necessary partnership
action on its part and such authorization has not been withdrawn or amended in
any manner. No other corporate action is necessary for the authorization,
execution, delivery and performance by the Keystone Partnership of the
Registration Rights Agreement and the Escrow Agreement or for the consummation
of the transactions contemplated thereby.
Section 3.03. Binding Agreement. (a) This Agreement has been duly
authorized, executed and delivered by each of the Keystone Entities, ASB, New
West, and each of the Investors and, when duly authorized, executed, and
delivered by each of the FDIC and WMI, this Agreement shall constitute a legal,
valid and binding obligation of each of the Keystone Entities, ASB, New West,
and each of the Investors enforceable against each of them in accordance with
its terms, except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization or moratorium or other similar laws
affecting the enforcement of creditors, rights generally, and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
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(b) The Registration Rights Agreement has been, and the Escrow
Agreement, when delivered in connection with the Warrant Closing will be, duly
authorized, executed and delivered by the Keystone Partnership and, when duly
authorized, executed, and delivered by each of the FDIC and WMI in the case of
the Registration Rights Agreement, and the FDIC, WMI and the Escrow Agent, in
the case of the Escrow Agreement, such agreements shall constitute a legal,
valid and binding obligation of the Keystone Partnership, enforceable against it
in accordance with their respective terms, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, or moratorium
or other similar laws affecting the enforcement of creditors' rights generally,
and (ii) the availability of equitable remedies may be limited by equitable
principles of general applicability.
Section 3.04. Consents and Approvals. (a) Except for any consents and
approvals of, or filings, deliveries or registrations with the SEC, the FTC, the
office of Thrift Supervision ("OTS"), the Justice Department or other applicable
governmental authorities that may be required in connection with this Agreement,
no consent, approval of, authorization or other action by, or filing with or
notification to, any other Person is necessary or required to be obtained by any
of the Keystone Entities, ASB, New West, or the Investors in connection with the
execution, delivery and performance of this Agreement by such entity and the
consummation of the transactions contemplated hereby.
(b) Except for any consents and approvals of, or filings, deliveries or
registrations with the SEC, the OTS, the FTC, the Justice Department or other
applicable governmental authorities that may be required in connection with the
Registration Rights Agreement or the Escrow Agreement, no consent, approval of,
authorization or other action by, or filing with or notification to, any other
Person is required to be obtained by the Keystone Partnership in connection with
the execution, delivery and performance by the Keystone Partnership of the
Registration Rights Agreement and the Escrow Agreement and the consummation of
the transactions contemplated thereby.
Section 3.05. No Violation. Neither the execution and delivery of this
Agreement by each of the Keystone Entities, ASB, New West, or any of the
Investors, nor execution and delivery of the Registration Rights Agreement or
the Escrow Agreement by the Keystone Partnership, nor the consummation of the
transactions contemplated hereby and thereby, nor compliance by each of the
Keystone Entities, ASB, New West, or each of the Investors with any of the terms
or provisions hereof, nor compliance by the Keystone Partnership with the terms
or provisions of the Registration Rights Agreement or the Escrow Agreement, will
(a) violate any provision of the partnership agreement of the Keystone
Partnership or the articles, charter or bylaws of any Keystone Entity, ASB, New
West, or KHGM, or (b) assuming the consents and approvals referred to in Section
9.1 of the Merger Agreement are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to any Keystone Entity, ASB, New West, or any of the Investors.
Section 3.06. No Adjustments; Consent. No event has occurred subsequent
to the initial issuance of the Warrants to the FSLIC on December 28, 1988 that
would, pursuant to Section 6 of the Warrant Agreement, require any adjustment to
(a) the Warrants, or (b) shares of the Company issuable upon exercise of the
Warrants. Based on the books and records of the Company, the Company represents
and warrants that the FRF is the sole holder of the Warrants. By entering into
this Agreement, the Company, each of the Keystone Entities other than Company,
and the Investors hereby consent for purposes of the Warrant Agreement and the
Securityholders Agreement to the sale, exchange, transfer or disposition of the
Warrants as contemplated herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WMI
To induce the FDIC, each of the Keystone Entities, ASB, New West and
the Investors to enter into this Agreement and to consummate the transactions
contemplated hereby, WMI, on behalf of itself and its direct and indirect
subsidiaries, makes the following representations and warranties to such
parties:
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Section 4.01. Organization, Power, Good Standing, Etc. WMI is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Washington and is duly qualified to do business and is in good
standing in each other jurisdiction where its ownership or lease of property or
the nature of the business conducted by it requires it to be so qualified,
except for such jurisdictions where the failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect (as defined in
the Merger Agreement) on it. WMI has the requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business
as it is now being conducted. As of the date hereof, WMI is a duly registered
savings and loan holding company under HOLA.
Section 4.02. Subsidiaries. As used herein, "WMI Subsidiaries" shall
mean Washington Mutual Bank, a Washington stock savings bank ("WM Bank") ,
Washington Mutual Bank fsb, a federal savings association ("WMBfsb") and WM Life
Insurance Company. Substantially all of the business of WMI and its subsidiaries
is done through WMI and the WMI Subsidiaries. All of the WMI Subsidiaries,
capital stock that is issued and outstanding is owned by WMI directly or
indirectly through wholly-owned subsidiaries. There are outstanding no options,
convertible securities, warrants or other rights to purchase or acquire capital
stock from any of the WMI Subsidiaries, and there is no commitment of any of the
WMI Subsidiaries to issue any of the same. Except as set forth on Disclosure
Schedule 5.2 to the Merger Agreement, no WMI Subsidiary is the general partner
of any partnership or joint venture or is under any obligation of any sort to
acquire any capital stock or other equity interest in any corporation,
partnership, joint venture or other entity.
Section 4.03. Capitalization. As of June 30, 1996, the authorized
capital stock of WMI consists of 100,000,000 shares of WMI Common Stock, of
which 72,200,356 shares were duly authorized and validly issued and outstanding,
fully paid and nonassessable, with no personal liability attaching to the
ownership thereof and 10,000,000 shares of preferred stock, of which 6,122,500
shares were issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof. Assuming receipt of WMI
Stockholder Approval (as defined in the Merger Agreement), the shares of WMI
Common Stock to be issued to the FRF in the Merger and pursuant hereto, when
issued in accordance with the Plan of merger and this Agreement, (i) will be
duly authorized and validly issued and fully paid and nonassessable, with no
personal liability attaching to the ownership thereof, no shareholder of WMI
will have any preemptive rights thereto and the FRF will acquire valid and
marketable title to such shares free and clear of all Liens, and (ii) assuming
the accuracy of the representations made by the FDIC in Section 7.06 hereof,
will be exempt from registration under the Securities Act. Assuming the receipt
of WMI Stockholder Approval, prior to the Warrant Closing, WMI shall have taken
all necessary action to permit it to issue to the FRF the FRF Consideration
Shares. Except as set forth on Disclosure Schedule 5.3 to the Merger Agreement,
there are no outstanding subscriptions, options, warrants, calls, commitments,
agreements, understandings or arrangements of any kind which call for or might
require the transfer, sale, delivery or issuance of any shares of WMI capital
stock or other equity securities or any securities representing the right to
acquire stock or securities convertible into or representing the right to
purchase or subscribe for any such shares.
Section 4.04. Reports. WMI and the WMI Subsidiaries have duly filed
with the Director of Financial Institutions of the State of Washington (or his
predecessor, and in either case, the "Director"), the FDIC and the OTS in
correct form, the monthly, quarterly, semi-annual and annual reports required to
be filed by them under applicable regulations for all periods subsequent to
December 31, 1992. Except as disclosed on Disclosure Schedule 5.4 to the Merger
Agreement, WMI (or its predecessor WMSB) has timely filed all reports, proxy
statements and other filings required to be filed by it pursuant to the Exchange
Act and the rules and regulations promulgated by the SEC and the FDIC thereunder
("SEC Reports"). No such SEC Report, as of its date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
Section 4.05. Authority. WMI has full corporate power and authority to
execute and deliver this Agreement, the Merger Agreement, the Plan of Merger,
the Registration Rights Agreement and the Escrow Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement, the Merger Agreement, the Plan of Merger, the Registration Rights
Agreement, and the Escrow Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of WMI. Other than the WMI Stockholder Approval and approval of an
amendment to WMI's bylaws to increase the number of directors, no other
corporate proceedings on the part of
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WMI are required to authorize this Agreement, the Merger Agreement, the Plan of
Merger, the Registration Rights Agreement or the Escrow Agreement or the
transactions contemplated hereby or thereby. Each of this Agreement, the
Registration Rights Agreement, and the Escrow Agreement has been duly and
validly executed and delivered by WMI and, assuming due authorization, execution
and delivery hereof and thereof by the other parties thereto, constitutes the
valid and binding obligation of WMI, enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium of other
laws relating to creditors' rights generally and to general principles of
equity.
Section 4.06. No Violation. Neither the execution and delivery of this
Agreement, the Merger Agreement, the Plan of Merger, the Registration Rights
Agreement or the Escrow Agreement by WMI, nor the consummation by WMI of the
transactions contemplated hereby or thereby, nor compliance by WMI with any of
the terms of the respective agreements, will (i) assuming receipt of WMI
Stockholder Approval and approval of an amendment to WMI's bylaws to increase
the number of directors, violate any provision of the articles of incorporation
or charter or bylaws of WMI, or (ii) assuming that the consents and approvals
referred to in Section 9.1 of the Merger Agreement are duly obtained, violate
any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to WMI or any of its respective properties or assets, or
(iii) violate, conflict with, result in the breach of any provisions of,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any Lien upon any of the
properties or assets of WMI under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which WMI is a party, or by which they or any
of its properties or assets may be bound or affected, except, with respect to
(iii) above, for such violations, conflicts, breaches, defaults, terminations,
accelerations or encumbrances which in the aggregate will not prevent or
unreasonably delay the consummation of the transactions contemplated hereby.
Section 4.07. Consents and Approvals. Except for consents and approvals
of or filings, deliveries or registrations with the OTS, the FDIC, the Director,
the Secretary of State of the State of Washington, the Texas Secretary of State,
the SEC, the FTC, the Justice Department and other applicable governmental
authorities, no consents or approvals of or filings or registrations with any
third party, public body or authority are necessary in connection with the
execution and delivery by WMI of this Agreement, the Registration Rights
Agreement, the Merger Agreement or the Escrow Agreement and the consummation of
the transactions contemplated hereby and thereby.
Section 4.08. Financial Statements. WMI has previously delivered or
made available to the FDIC copies of (i) audited consolidated statements of
financial condition for WMI and its subsidiaries as of the end of WMI's last
three fiscal years, and audited consolidated statements of income, stockholders
equity, and cash flows for each of the last three fiscal years, including the
notes to such audited consolidated financial statements, together with the
reports of WMI's independent certified public accountants, pertaining to such
audited consolidated financial statements (the "WMI 1993, 1994 and 1995
Financial Statements," respectively), and (ii) the unaudited consolidated
statement of financial condition as of March 31, 1996 and the related unaudited
consolidated statements of income, stockholders' equity and cash flows for the
three-month period then ended (the "WMI March 1996 Financial Statements"). The
WMI 1993, 1994 and 1995 Financial Statements and the WMI March 1996 Financial
Statements are sometimes herein referred to collectively as the WMI Financial
Statements. The consolidated statements of financial condition of WMI referred
to herein (including the related notes) present fairly in all material respects
the financial condition of the companies indicated on a consolidated basis at
the dates thereof, using generally accepted accounting principles consistently
applied. Such audited and unaudited consolidated statements of operations,
stockholders, equity and cash flows present fairly in all material respects the
results of the operations of the companies indicated on a consolidated basis for
the periods or at the dates indicated, using generally accepted accounting
principles consistently applied.
Section 4.09. Absence of Material Adverse Change. Since March 31, 1996,
except as set forth on Disclosure Schedule 5.9 to the Merger Agreement, there
has been no Material Adverse Change (as defined in the Merger Agreement) with
respect to WMI or any of its subsidiaries (except for changes resulting from
market and economic conditions which generally affect the savings industry as a
whole, including, without limitation, changes in law or regulation and changes
in generally accepted accounting principles or interpretations thereof).
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Section 4.10. Litigation. Except as set forth on Schedule 5.10 to the
Merger Agreement, no action, suit, counterclaim or other litigation,
investigation or proceeding to which WMI or any of its subsidiaries is a party
is pending, or is known by the executive officers of WMI or any of its
subsidiaries to be threatened, against WMI or any of its subsidiaries before any
court or governmental or administrative agency, domestic or foreign which would
be reasonably expected to result in any liabilities which would, in the
aggregate, have a Material Adverse Effect on WMI. Neither WMI nor any of its
subsidiaries is subject to any order, judgment or decree. Neither WMI nor any of
its subsidiaries is in default with respect to any such order, judgment or
decree.
Section 4.11. Compliance With Applicable Law. (a) Each of WMI and each
WMI Subsidiary hold all Permits (as defined in the Merger Agreement) necessary
for the lawful conduct of their respective businesses and such Permits are in
full force and effect, and each of WMI and each WMI Subsidiary is in all
material respects complying therewith, except where the failure to possess or
comply with such Permits would not have a Material Adverse Effect on WMI.
(b) Except as set forth on Disclosure Schedule 5.12(b) to the Merger
Agreement, WMI and each WMI Subsidiary is and since January 1, 1993 has been in
compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules, regulations and orders applicable to the operation, conduct
or ownership or its business or properties except for any noncompliance which
has not and will not have in the aggregate a Material Adverse Effect on WMI.
Section 4.12. CRA Compliance. Each of WM Bank and WMBfsb is in
substantial compliance with the applicable provisions of The Community
Reinvestment Act of 1977 and the regulations promulgated thereunder
(collectively, the "CRA"). The most recent CRA rating for WM Bank is
"outstanding." WMBfsb has not received a CRA rating. WMI has no knowledge of the
existence of any fact or circumstance or set of facts or circumstances which
could reasonably be expected to result in WM Bank or WMBfsb failing to be in
substantial compliance with such provisions or, in the case of WM Bank, having
its current rating lowered.
Section 4.13. Agreements with Bank Regulators. Neither WMI nor any
subsidiary thereof is a party to or is subject to any written order, decree,
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is a recipient of any currently applicable
extraordinary supervisory letter from, any federal or state governmental agency
or authority charged with the supervision or regulation of depository
institutions or the insurance of deposits therein which is outside the ordinary
course of business or not generally applicable to entities engaged in the same
business. Neither WMI nor any subsidiary thereof has been advised within the
last 18 months by any such regulatory authority that such authority is
contemplating issuing, requiring or requesting (or is considering the
appropriateness of issuing, requiring or requesting) any such order, decree,
agreement, memorandum of understanding, commitment letter or submission.
Section 4.14. Regulatory Approvals. On the date of this Agreement,
there is no pending or, to the knowledge of WMI, threatened legal or
governmental proceeding against WMI, any subsidiary or affiliate thereof which
would affect WMI's ability to obtain any of the required regulatory approvals or
satisfy any of the other conditions required to be satisfied in order to
consummate the transactions contemplated by this Agreement. WMI will promptly
notify the FDIC if any of the representations contained in this Section 4.14
ceases to be true and correct.
Section 4.15. Tax Matters. (a) Neither WMI nor any of its affiliates or
subsidiaries has any plan or intention of taking any action prior to, at or
after the Effective Time or of permitting any of the Keystone Entities to take
any action after the Effective Time, including any transfer or other disposition
of any assets of or any interest in any of the Keystone Entities, that would
cause the Merger to fail to qualify as a reorganization within the meaning of
section 368 (a) of the Code.
(b) Neither WMI nor any of its affiliates or subsidiaries has any plan
or intention to acquire or reacquire, as the case may be, any of the Keystone
Consideration Shares (as defined in the Merger Agreement).
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(c) WMI has no plan or intention to sell or otherwise dispose of any of
the assets of Keystone Holdings acquired in the Merger, except for dispositions
made in the ordinary course of business or transfers described in section
368(a)(2)(C) of the Code.
(d) WMI is not an investment company as defined in section
368(a)(2)(F)(iii) and (iv) of the Code.
Section 4.16. WMI Rights Agreement. Subject to the accuracy of the
representation contained in Section 2.07 hereof, WMI has taken all necessary
action so that entering into this Agreement, the Merger Agreement, the Plan of
Merger, the Registration Rights Agreement, the Escrow Agreement and the other
transactions contemplated hereby and thereby, and the payment of the FRF
Consideration Shares in accordance herewith does not and will not result in the
grant of any rights to any Person under the Rights Agreement (as defined in the
Merger Agreement) or enable or require the rights issued thereunder to be
exercised, distributed, triggered or adjusted.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.01. Conduct of Business of WMI, et al. During the period from
the date of this Agreement to the Warrant Closing, WMI shall conduct the
business of WMI, and shall cause each WMI Subsidiary to conduct its respective
business, in a manner materially consistent with prudent banking and (in the
case of WM Life Insurance Company) insurance practice.
Section 5.02. Approval of WMI Stockholders. (a) WMI will take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on the Merger
Agreement, the Plan of Merger, and the transactions contemplated thereby and, if
required, this Agreement and the transactions contemplated hereby, and of
increasing the number of authorized shares of WMI Common Stock and for such
other purposes as may be necessary or desirable. Prior to the Warrant Closing,
subject to the receipt of WMI Stockholder Approval, WMI will take all other
necessary actions to permit it to issue the number of shares of WMI Common Stock
required pursuant to the terms of this Agreement, the Merger Agreement and the
Escrow Agreement.
(b) The information relating to WMI and its subsidiaries to be
contained in the WMI Proxy Statement will not, at the time it is filed with the
applicable governmental authorities, as of the date of the WMI Proxy Statement
or at the WMI Stockholders' Meeting (as defined in the Merger Agreement) contain
any untrue statement of a material fact or omit to state a material fact
necessary to make such statements, in light of the circumstances under which
such statements were made, not misleading.
(c) WMI will, as promptly as practicable, file the WMI Proxy Statement,
as required by law, with the SEC and will use all reasonable efforts to cause
the Proxy Statement to be cleared for mailing under federal securities laws at
the earliest practicable date. WMI will advise the FDIC promptly when the Proxy
Statement has been cleared for mailing.
Section 5.03. Further Assurances. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things, necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
the Registration Rights Agreement and the Escrow Agreement. In case at any time
after the Warrant Closing any further action is reasonably necessary or
desirable to carry out the purposes of this Agreement, the Registration Rights
Agreement and the Escrow Agreement or the transactions contemplated hereby or
thereby, the proper officers and directors of each party to this Agreement, the
Registration Rights Agreement and the Escrow Agreement shall take such action,
subject to the terms and conditions hereof and thereof.
Section 5.04. Merger Agreement Covenants. The parties agree that, to
the extent that (a) the Keystone Partnership or the Keystone Entities on the one
hand, or WMI on behalf of itself and its subsidiaries on the other
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hand, provide any information or reports to the other party pursuant to the
terms of the second and third sentences of Section 8.1 of the Merger Agreement
or Section 8.2(b) thereof, such party providing such information or reports
shall provide copies of such information or reports to the FDIC; (b) any of the
documentation or filings referred to in Section 8.3(a)-(b) of the Merger
Agreement directly or indirectly refers or relates to the FRF or the FDIC, the
FDIC shall have the right to review reasonably in advance all such statements
made therein related thereto, and comment thereon in a timely manner, and in any
event to promptly receive from WMI or the Keystone Entities or the Keystone
Partnership, as the case may be, copies of all such documentation upon filing or
distribution thereof as the FDIC may reasonably request, including copies
referred to in Section 8.3(c); (c) any supplemented or amended Disclosure
Schedules are provided to the Keystone Partnership pursuant to Section 8.5(b) of
the Merger Agreement, then WMI will promptly provide a copy thereof to the FDIC;
(d) any press release referred to in Section 8.7 of the Merger Agreement
directly or indirectly references or relates to the FDIC or the FRF, then the
FDIC shall have the right to review reasonably in advance all such statements
made therein directly or indirectly related thereto and comment thereon in a
timely manner (and if any press release issued by the FDIC related to the
matters described herein directly or indirectly references or relates to WMI,
the Keystone Entities, ASB, New West, or the Investors, then such party so
referred to shall have the right to review reasonably in advance all such
statements made therein directly or indirectly related thereto and comment
thereon in a timely manner); and (e) WMI receives the opinion of Deloitte &
Touche referred to in Section 9.2(h) of the Merger Agreement, it shall promptly
provide a copy thereof to the FDIC (and the Keystone Partnership has, prior to
the date hereof, provided to the FDIC a copy of the letter referred to in
Section 2.6 of the Merger Agreement). WMI further agrees that, solely in
connection with the FDIC's anticipated receipt of WMI Common Stock and not in
its regulatory capacity, the FDIC Division of Resolutions (and its legal and
financial advisors on the FDIC's behalf) shall have the same rights as the
Keystone Partnership pursuant to Section 7.6 of the Merger Agreement and the
FDIC agrees that it shall be subject to the same restrictions as imposed on the
Keystone Partnership therein; provided, however, that the FDIC agrees that, as
soon as practicable after the Effective Time, it shall destroy all materials
received or obtained in connection with the exercise of its rights pursuant to
this sentence (including copies thereof and notes containing information
contained in such materials).
Section 5.05. Failure to Fulfill Conditions. In the event that any
party hereto determines that a condition to its obligation to consummate the
transactions contemplated hereby cannot be, or is not likely to be, fulfilled on
or prior to June 30, 1997 and that it will not waive that condition, it will
promptly notify the other parties hereto.
Section 5.06. Certain Indemnities. The FDIC hereby agrees that, as of
the earlier of the date that New West is liquidated or the date that it is
transferred to the FDIC, the FDIC shall (a) indemnify American Real Estate
Group, Inc. ("AREG") and its officers, directors, agents, employees, and
stockholders (collectively, the "AREG Indemnitees") to the same extent as New
West currently indemnifies the AREG Indemnitees pursuant to Section 8.03 of the
AREG Management Agreement, dated December 28, 1988, by and among AREG, New West,
ASB and the FSLIC, as such section was preserved in accordance with its terms in
Section 3.1 of the AMD Residual Agreement, dated June 30, 1993, by and among the
Keystone Entities, ASB, AREG and the FDIC and the Resolution Trust Corporation
and (b) indemnify ASB and its officers, directors, agents, employees, and
stockholders, (collectively, the "ASB Indemnities") to the same extent as New
West currently indemnifies ASB pursuant to Section 6.03 and 8.03 of the Amended
and Restated NA Management Agreement, dated as of June 30, 1993, by and among
New West, ASB and the FDIC, whether or not such agreement or the AMD Residual
Agreement is in effect at such time; provided, however, that the indemnification
to be provided hereunder shall replace but not be in addition to any existing
indemnification referred to herein.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PARTIES
Section 6.01. Conditions to Each Party's Obligations Under this
Agreement. The respective obligations of each party under this Agreement to
consummate the transactions contemplated hereby shall be subject to the
fulfillment, at or prior to the Warrant Closing, of the following conditions:
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(a) Merger. Concurrently with the consummation of the transactions
contemplated by this Agreement, the Merger shall have been consummated in
accordance with its terms as set forth in the Merger Agreement.
(b) Consents: Approvals. All necessary regulatory or governmental
approvals and consents, if any, required to consummate the transactions
contemplated hereby shall have been obtained and shall remain in full force and
effect and all statutory or regulatory waiting periods, if any, in respect
thereof shall have expired.
(c) No Injunction. No party hereto shall be subject to any order,
decree or injunction of any court or agency of competent jurisdiction that
enjoins or prohibits the transactions contemplated by this Agreement.
Section 6.02. Conditions to the Obligations of the FDIC Under this
Agreement. The obligations of the FDIC under this Agreement shall be further
subject to the fulfillment, at or prior to the Warrant Closing, of the following
conditions, all or any of which may be waived in whole or in part by the FDIC:
(a) Covenants. Each of the obligations or covenants of WMI and each of
the Keystone Entities and the Keystone Partnership required to be performed by
it at or prior to the Warrant Closing pursuant to the terms of this Agreement
(other than those in Section 5.01, Section 5.02(c) and Section 5.05) shall have
been duly performed and complied with in all material respects.
(b) Representations. Each of the representations and warranties of WMI
(other than those contained in Section 4.02; the last sentence of Section 4.03;
the first sentence of Section 4.04; the final two sentences of Section 4.10;
Section 4.11; Section 4.12; Section 4.13; the final sentence of Section 4.14;
and Section 4.15, as to all of which no condition to closing shall be
applicable) and each of the Keystone Entities and the Investors contained in
this Agreement shall be true and correct as of the date of this Agreement and as
of the Warrant Closing as though made at and as of the Warrant Closing (except
as to any representation or warranty that specifically relates to an earlier
date, which shall be true and correct as of such earlier date), except where the
failure of any such representation and warranty to be true and correct would not
in the aggregate (without regard to any materiality standard contained in such
representation or warranty) have a Material Adverse Effect on WMI or have a
material adverse effect on such party's ability to consummate the transactions
contemplated hereby.
(c) Stock Issued. WMI shall have taken all actions necessary to
authorize and issue the WMI Common Stock to be issued to the FRF pursuant to the
terms hereof and to be deposited in the Litigation Escrow.
(d) Opinion. The FDIC shall have received an opinion, reasonably
satisfactory in form and substance, dated the date of the Warrant Closing, from
Foster, Pepper & Shefelman, counsel to WMI. Foster, Pepper & Shefelman may rely
as to certain matters of New York law on an opinion, dated as of the Closing
Date, of Gibson, Dunn & Crutcher, special counsel to WMI.
(e) Certificates. WMI, each of the Keystone Entities and the Keystone
Partnership and KHGM shall have furnished the FDIC with such certificates
(including incumbency certificates) of their officers and such other documents
to evidence fulfillment of the conditions set forth in this Section 6 as the
FDIC may reasonably request.
(f) Transfer Agent. WMI shall have instructed its transfer agent with
respect to the issuance of the FRF Initial Shares to the FDIC at least two days
prior to the Warrant Closing.
(g) FRF Consideration Shares. At the Warrant Closing, WMI shall have
issued to the FRF the FRF Initial Shares in exchange for the Warrants as
specified in Section 1.01 hereof.
(h) Registration Rights Agreement. The FDIC, WMI and the Keystone
Partnership shall have executed and delivered the Registration Rights Agreement
concurrently with the execution of this Agreement and
such agreement shall be in full force and effect.
(i) Escrow Agreement. WMI, the Keystone Partnership, the FDIC and the
Escrow Agent shall have entered into the Escrow Agreement concurrently with the
consummation of the Merger under the Merger Agreement
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and the FRF Litigation Shares shall have been delivered to the Litigation Escrow
(as defined in the Merger Agreement).
(j) No Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to WMI (except for
changes resulting from market and economic conditions which generally affect the
savings industry as a whole, including, without limitation, changes in law or
regulation or changes in generally accepted accounting principles or
interpretations thereof); provided, however, that fees and expenses relating to
the negotiation and consummation of the transactions contemplated hereby shall
be excluded in determining whether a Material Adverse Change has occurred.
Section 6.03. Conditions to the Obligations of WMI Under this
Agreement. The obligations of WMI under this Agreement shall be further subject
to the fulfillment, at or prior to the Warrant Closing, of the following
conditions, all or any of which may be waived in whole or in part by WMI:
(a) Covenants. Each of the obligations or covenants of the FDIC, the
Keystone Entities, ASB, New West, and each of the Investors required to be
performed by it at or prior to the Warrant Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(b) Representations. Each of the representations and warranties of the
FDIC, the Keystone Entities, ASB, New West, and the Investors contained in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as of the Warrant Closing as though made at and as of the
Warrant Closing except as to any representation or warranty which specifically
relates to an earlier date, which shall be true and correct as of such earlier
date, except in the case of such representations and warranties, where the
failure of such representations and warranties to be true and correct would not
(without regard to any materiality standard contained in such representation or
warranty) have a material adverse effect on the ability of the FDIC, the
Keystone Entities, ASB, New West or the Investors, as the case may be, to
consummate the transactions contemplated hereby.
(c) Certificates. Each of the FDIC, each of the Keystone Entities, ASB,
New West and each of the Keystone Partnership and KHGM shall have furnished to
WMI such certificates (including incumbency certificates) of its officers or
others and such other documents to evidence fulfillment of the conditions set
forth in this Section 6.03 as WMI may reasonably request, including from the
FDIC (i) evidence of the approval of this Agreement, the Registration Rights
Agreement and the Escrow Agreement and the transactions contemplated hereby and
thereby (including a certified copy of any resolutions) by the Board of
Directors of the FDIC, and (ii) copies of the delegations of authority to the
person executing such agreements on behalf of the FDIC; provided, however, that,
upon the execution hereof, the FDIC shall deliver to WMI a letter, executed by
one of the senior counsel of the FDIC, to the effect that the resolutions and
delegations authorizing the FDIC to enter into such agreements and the
transactions contemplated thereby are in full force and effect and have not been
subsequently amended or modified and that the person executing this Agreement
and the Registration Rights Agreement on behalf of the FDIC has full power and
due authority to do so.
(d) Warrants Delivered. The FDIC shall have delivered on behalf of the
FRF the original, manually executed Warrants held by it with an assignment to
WMI in a form reasonably acceptable to WMI.
Section 6.04. Conditions to the Obligations of the Keystone Entities,
ASB, New West, and the Investors Under this Agreement. The obligations of each
of the Keystone Entities, ASB, New West and the Investors under this Agreement
shall be further subject to the fulfillment, at or prior to the Warrant Closing,
of the following conditions, all or any of which may be waived in whole or in
part by the Keystone Entities, ASB and New West or the Investors, as the case
may be:
(a) Covenants. Each of the obligations or covenants of the FDIC
required to be performed by it at or prior to the Warrant Closing pursuant to
the terms of this Agreement shall have been duly performed and complied with in
all material respects.
(b) Representations. Each of the representations and warranties of the
FDIC contained in this Agreement and each of the representations and warranties
of WMI contained in Sections 4.05, 4.06 and 4.07 of this
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Agreement shall be true and correct as of the date of this Agreement and as of
the Warrant Closing as though made at and as of the Warrant Closing except as to
any representation or warranty which specifically relates to an earlier date,
which shall be true and correct as of such earlier date, except in the case of
such representations and warranties, where the failure of such representations
and warranties to be true and correct would not (without regard to any
materiality standard contained in such representation or warranty) have a
Material Adverse Effect on WMI or have a material adverse effect on the ability
of the FDIC or WMI, as the case may be, to consummate the transactions
contemplated hereby.
(c) Certificates. Each of the FDIC and WMI shall have furnished the
Keystone Entities, ASB, New West and the Investors with such certificates
(including incumbency certificates) of its officers or others and such other
documents to evidence fulfillment of the conditions set forth in this Section
6.04 as the Keystone Entities and the Keystone Partnership may reasonably
request, including from the FDIC (i) evidence of the approval of this Agreement,
the Registration Rights Agreement and the Escrow Agreement and the transactions
contemplated hereby and thereby (including a certified copy of any resolutions)
by the Board of Directors of the FDIC, and (ii) copies of the delegations of
authority to the person executing such agreements on behalf of the FDIC;
provided, however, that upon the execution hereof, the FDIC shall deliver to the
Keystone Entities, ASB, New West, and each of the Investors a letter, executed
by one of the senior counsel of the FDIC, to the effect that the resolutions and
delegations authorizing the FDIC to enter into such agreements and the
transactions contemplated thereby are in full force and effect and have not been
subsequently amended or modified and that the person executing this Agreement
and the Registration Rights Agreement on behalf of the FDIC has full power and
due authority to do so.
ARTICLE VII
TERMINATION
SECTION 7.01. Termination. This Agreement may be terminated at any time
prior to the Warrant Closing:
(a) by mutual written consent of all the parties hereto;
(b) by any party hereto (i) if the Warrant Closing shall not have
occurred on or prior to June 30, 1997, unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this Agreement to
perform or observe its agreements and conditions set forth herein to be
performed or observed by such party at or before the Warrant Closing; or (ii) 31
days after the date on which any application for regulatory approval
prerequisite to the consummation of the transactions contemplated by the Merger
Agreement or this Agreement shall have been denied or withdrawn at the request
of the applicable regulatory authority; provided, however, that, if prior to the
expiration of such 31-day period WMI is engaged in litigation or an appeal
procedure relating to an attempt to obtain such approval, the FDIC may not
terminate this Agreement until the earlier of (A) June 30, 1997 and (B) 31 days
after the completion of such litigation and appeal procedures, and of any
further regulatory or judicial action pursuant thereto, including any further
action by a government agency as a result of any judicial remand, order or
directive or otherwise; or (iii) 10 days after written certification of the vote
of the WMI's stockholders is delivered to the FDIC (which notice WMI shall be
obligated to provide to the FDIC) indicating that such stockholders failed to
adopt the resolution to approve the Merger Agreement and the transactions
contemplated thereby, an increase in the authorized amount of WMI Common Stock
and (if necessary) the transactions contemplated hereby at the stockholders,
meeting (or any adjournment thereof) contemplated by Section 2.4 of the Merger
Agreement.
(c) by the FDIC if at the time of such termination there shall have
been a Material Adverse Change with respect to WMI from that set forth in WMI's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (except for
changes resulting from market and economic conditions which generally affect the
savings industry as a whole, including, without limitation, changes in law or
regulation or changes in generally accepted accounting principles or
interpretations thereof), it being understood that any of the matters set forth
in the WMI Disclosure Schedules to the Merger Agreement or items described in
the proviso in Section 9.3(d) of the Merger Agreement are not deemed to be a
Material Adverse Change for purposes of this paragraph 7.01(c).
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(d) by any party hereto in the event that the Merger Agreement is
terminated in accordance with any of its terms as set forth in Section 10.1 of
the Merger Agreement.
(e) by WMI, the FDIC, the Keystone Entities or the Keystone Partnership
if there shall be in effect any final, non-appealable judgment, decree or order
that would make unlawful or prevent the Warrant Closing.
SECTION 7.02. Effect of Termination. (a) In the event of
termination of this Agreement by any party pursuant to the terms of Section
7.01, this Agreement shall forthwith become void and no longer be of any force
or effect (other than this Section 7.02 and Section 8.01, which shall remain in
full force and effect) and there shall be no liability on the part of any party
or its respective directors, officers, employees or stockholders to the other
parties.
(b) In the event that this Agreement is terminated where the FDIC is
not in breach (so as to cause the terminating party to terminate this
Agreement), WMI shall have no obligation to acquire or exchange the Warrants,
and the FDIC shall not have any obligation to sell, transfer or exchange the
Warrants as contemplated herein or otherwise to any Person, and the obligations
of the respective parties in this Agreement or the Registration Rights Agreement
shall be of no further force and effect (whether with respect to the Warrants or
otherwise), and neither this Agreement or the Registration Rights Agreement or
the Merger Agreement nor any of the terms hereof or thereof shall have any
effect whatsoever with regard to the terms of the Warrants, the Warrant
Agreement, the Securityholders Agreement or any other Transaction Related
Documents or have any bearing whatsoever on any current or future determination
of the value of the Warrants.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01. Expenses of the Parties. Except as otherwise specifically
provided herein or therein, all costs and expenses incurred in connection with
or incidental to the preparation, negotiation, authorization, entering into and
performance of this Agreement, the Registration Rights Agreement and the Escrow
Agreement, including all fees and expenses of agents, representatives, counsel,
financial advisors, investment bankers and accountants of the respective parties
in connection therewith, shall be borne solely by the party that shall have
incurred the same, and the other parties hereto shall have no liability with
respect thereto.
Section 8.02. Survival. Except for the representations, warranties and
covenants contained in Sections 1.01(b)-(c), 1.02, 1.04, 1.06, 2.05, 2.06, the
first two sentences of Section 4.03, Section 5.03, Section 5.06, and Article
VIII and those that by their terms apply in whole or in part after the Warrant
Closing, the representations and warranties, covenants and agreements set forth
in this Agreement shall not survive after the Warrant Closing.
Section 8.03. Parties in Interest; Third-Party Beneficiaries;
Assignment. This Agreement is binding upon, will inure to the benefit of, and be
enforceable by, the parties hereto and their respective permitted successors and
assigns. Except as expressly provided in this Agreement, nothing contained in
this Agreement, express or implied, is intended to or shall confer on any Person
other than the parties hereto and their permitted successors and assigns, any
rights, benefits, remedies or claims of any nature whatsoever under or by reason
of this Agreement. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned, in whole or in part by operation of law
(except in the case of the FRF) or otherwise by any of the parties, without the
prior written consent of each of the other parties.
Section 8.04. Entire Agreement. This Agreement together with the Merger
Agreement, the Plan of Merger, the Registration Rights Agreement and the Escrow
Agreement (and the other agreements or documents referred to or delivered
pursuant to such agreements) constitute the entire agreement and understanding
of the parties hereto with respect to the transactions contemplated hereby and
thereby and supersede any and all prior and contemporaneous negotiations,
agreements, arrangements and understandings between or among the parties,
written or oral, with regard to such transactions. Each party acknowledges and
agrees that, except for the representations
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and warranties expressly set forth in this Agreement, no other representations
and warranties, written or oral, are made by any of them with respect to this
Agreement or the subject matter hereof.
Section 8.05. Amendment; Modification. This Agreement may not be
amended or modified except by a written instrument executed by the FDIC, WMI,
the Keystone Entities, ASB, New West and each of the Investors.
Section 8.06. Extensions; Waivers; Remedies. No failure or delay on the
part of any party in exercising any right, privilege, power or remedy under this
Agreement, and no course of dealing among the parties, shall operate as a waiver
of such right, privilege, power or remedy; nor shall any single or partial
exercise of any right, privilege, power or remedy under this Agreement preclude
any other or further exercise of such right, privilege, power or remedy, or the
exercise of any other right, privilege, power or remedy. Unless otherwise
expressly provided for herein, the rights, privileges, powers and remedies
available to the parties hereunder are cumulative and not exclusive of any other
rights, privileges, powers or remedies provided by statute, at law, in equity or
otherwise. No notice to or demand on any party in any case shall entitle such
party to any other or further notice or demand in any similar or other
circumstances or constitute a waiver of the right of the party giving such
notice or making such demand to take any other or further action in any
circumstances without further notice or demand.
Section 8.07. Section Headings; Interpretation. Unless otherwise
indicated, reference in this Agreement to a Section shall constitute reference
to a Section of this Agreement. The section headings and article titles
contained in this Agreement are for convenience of reference purposes only and
do not form a part hereof and shall not affect in any way the meaning or
interpretation of this Agreement. The words "herein," "hereinafter," and
"hereunder," and words of similar import used in this Agreement shall refer to
this Agreement as a whole and not to any particular provision of this Agreement.
When a reference is made in this Agreement to "party," such reference shall be
to a party or parties to this Agreement unless otherwise indicated.
Section 8.08. Severability. The parties agree that the provisions of
this Agreement shall be severable in the event that any of the provisions
hereof, or the application thereof to any Person or circumstance, is held by a
court of competent jurisdiction to be invalid, void or otherwise unenforceable,
and the balance of this Agreement shall not be affected and shall remain
enforceable to the fullest extent permitted by law.
Section 8.09. Transaction-Related Documents. Except as otherwise set
forth in this Agreement, the Transaction-Related Documents, as such documents
and agreements may have been amended, supplemented or modified from time to
time, or as such documents are subject to any settlement agreement or agreements
related thereto, shall continue to govern the rights and duties of the parties
thereto with respect to the matters described therein and nothing herein shall
be interpreted or construed to modify any such documents or agreements except as
expressly set forth herein.
Section 8.10. No Brokers. Each of the FDIC, WMI, the Keystone Entities,
ASB, and each of the Investors agrees to indemnify and hold the other parties
hereto harmless from any and all claims, losses, liabilities, expenses
(including attorney fees), demands or commissions or other compensation by any
broker, finder, agent, investment bankers or similar intermediary claiming to
have been employed by or on behalf of such party.
Section 8.11. Notices. All notices, requests or other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given if delivered in person or by telecopy or mailed
by registered or certified mail, postage prepaid and return receipt requested,
or if sent by an overnight delivery service (which provides for evidence of
receipt) to the parties at the addresses specified in this Section 8.11 (or to
such other address as any party may specify by like notice). Each such notice or
other communication shall be effective (a) if given by telecopy, on the business
day (or the next succeeding business day if the date of delivery is not a
business day) when such telecopy is transmitted to the telecopy number specified
and the appropriate answerback or confirmation is received, and (b) if given by
any other means, on the business day (or the next succeeding business day if the
date of delivery is not a business day) when delivered at the address specified.
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a. If to the FDIC to:
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429-0001
Attn: Director, Division of Resolutions, Room F-380
Telecopy No: (202) 898-7024
With a copy to:
Legal Division
Federal Deposit Insurance Corporation
1717 H Street, N.W., Room H-10025
Washington, D.C. 20434-0001
Attn: David M. Gearin, Senior Counsel
Telecopy No: (202) 736-0382
b. If to WMI to:
Washington Mutual, Inc.
1201 Third Avenue, 15th Floor
Seattle, WA 98101
Attn: Marc R. Kittner, Senior Vice President
Telecopy No: (206) 554-2790
With a copy to:
Foster Pepper & Shefelman
1111 Third Avenue Bldg., 34th Floor
Seattle, WA 98101
Attn: Fay L. Chapman
Telecopy No: (206) 447-9700
and
Gibson, Dunn & Crutcher
One Montgomery Street, Telesis Tower
San Francisco, CA 94104
Attn: Todd H. Baker
Telecopy No: (415) 986-5309
c. If to any of Keystone Partners, the Keystone Entities or the
Investors to:
Keystone Holdings Partners, L.P.
201 Main Street, 23rd Floor
Fort Worth, TX 76102
Attn: Ray L. Pinson
Telecopy No: (817) 338-2047
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with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Michael L. Ryan
Telecopy No: 212-225-3999
Section 8.13. Governing Law. This Agreement shall be construed,
performed and enforced in accordance with, and be governed by, the internal laws
of the State of New York, without giving effect to the principles of conflicts
of law thereof.
Section 8.14. Other Matters. (a) This Agreement and the transactions
contemplated hereby do not resolve or settle, and shall not be deemed to resolve
or settle (i) any claims for damages and other forms of relief that plaintiffs
have asserted or may assert against the United States in the Case, which claims
defendants therein and the FDIC dispute, or (ii) any defenses or counterclaims
the United States has asserted or may assert in that litigation, including, but
not limited to, the defense, which plaintiffs therein dispute, that plaintiffs
have settled the claims presented in such litigation.
(b) The FDIC hereby consents to the execution by New West of this
Agreement (to the extent that the Transaction Related Documents require or
otherwise contemplate such consent) and confirms that it does not have any
objection to such execution by New West.
Section 8.15. Counterparts. For convenience of the parties hereto, this
Agreement may be executed in two or more counterparts, each of which when
executed and delivered shall be deemed an original, and all of which when taken
together shall be considered one and the same agreement, it being understood
that all parties need not sign the same counterpart.
(SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have executed, or caused this Agreement
to be executed by their respective officers thereunto duly authorized, as of the
date first written above.
WASHINGTON MUTUAL, INC.
By: /s/ Craig E. Tall
----------------------------------------
Name: Craig E. Tall
---------------------------------
Title: Executive Vice President
---------------------------------
KEYSTONE HOLDINGS, INC.
By: /s/ Ray L. Pinson
--------------------------------------
Name: Ray L. Pinson
---------------------------------
Title: Senior Vice President
--------------------------------
NEW AMERICAN HOLDINGS, INC;
By: /s/ Ray L. Pinson
--------------------------------------
Name: Ray L. Pinson
---------------------------------
Title: Senior Vice President
--------------------------------
NEW AMERICAN CAPITAL, INC.
By: /s/ Ray L. Pinson
--------------------------------------
Name: Ray L. Pinson
---------------------------------
Title: Senior Vice President
--------------------------------
N.A. CAPITAL HOLDINGS, INC.
By: /s/ Ray L. Pinson
--------------------------------------
Name: Ray L. Pinson
---------------------------------
Title: Senior Vice President
--------------------------------
AMERICAN SAVINGS BANK, F.A.
By: /s/ Mario J. Antoci
---------------------------------------
Name: Mario J. Antoci
----------------------------------
Title: Chief Executive Officer
---------------------------------
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NEW WEST FEDERAL SAVINGS AND LOAN ASSOCIATION
By: /s/ Robert T. Barnum
---------------------------------------
Name: Robert T. Barnum
----------------------------------
Title: Chief Executive Officer
---------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION, as
manager of the FSLIC Resolution Fund
By: /s/ James A. Meyer
---------------------------------------
Name: James A. Meyer
----------------------------------
Title: Assistant Director
---------------------------------
INVESTORS:
KEYSTONE HOLDINGS PARTNERS, L.P.
By: K.H. Group Management, Inc., its General
Partner
By: /s/ Ray L. Pinson
------------------------------------
Name: Ray L. Pinson
-----------------------------
Title: Vice President
----------------------------
K.H. GROUP MANAGEMENT, INC.
By: /s/ Ray L. Pinson
----------------------------------
Name: Ray L. Pinson
-----------------------------
Title: Vice President
----------------------------
/s/ J. Taylor Crandall
---------------------------------------
as Attorney in Fact for:
Robert M. Bass
Bernard J. Carl
Andrew E. Furer
David Bonderman
John H. Scully
William E. Oberndorf
Peter T. Joseph
J. Taylor Crandall
David M. Schwarz
Thomas J. Barrack, Jr.
William P. Hallman, Jr.
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APPENDIX E
FORM OF ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Agreement") is made this ____ day of
___________, 1996, by and among ________________________________ (the "Escrow
Agent"), WASHINGTON MUTUAL, INC., a Washington corporation ("WMI"), KEYSTONE
HOLDINGS PARTNERS, L.P., a Texas limited partnership ("KH Partners"), and the
FEDERAL DEPOSIT INSURANCE CORPORATION (the "FDIC"), as manager of the FSLIC
Resolution Fund (the "FRF"), as successor in interest to the Federal Savings and
Loan Insurance Corporation.
Recitals
WHEREAS, WMI and KH Partners, together with certain of KH Partners'
affiliates, have entered into an Agreement for Merger, dated as of July 21, 1996
(the "Merger Agreement"), pursuant to which Keystone Holdings, Inc. ("Keystone
Holdings") will merge with and into WMI (the "Merger");
WHEREAS, pursuant to Section 2 of the Merger Agreement, the Escrow
Shares (as defined in the Merger Agreement) are to be delivered by WMI into
escrow at the direction of KH Partners and the FDIC;
WHEREAS, KH Partners owned all of the issued and outstanding stock of
Keystone Holdings immediately prior to the Merger and has under the Merger
Agreement a contingent right to have 65% of the Escrow Shares released to it
from the Escrow;
WHEREAS, the FDIC is selling, assigning, transferring and delivering
the Warrants (as defined in the Merger Agreement) to WMI at the Closing of the
Merger pursuant to a Warrant Exchange Agreement, dated as of July 21, 1996 (the
"Warrant Exchange Agreement"), by and among WMI, the Keystone Entities (as
defined in the Warrant Exchange Agreement), KH Partners, New West Federal
Savings and Loan Association, American Savings Bank, F.A. and the FDIC and, as
part of the consideration to be received in exchange for the Warrants, has a
contingent right to have 35% of the Escrow Shares released to it from the
Escrow; provided, however, that if an Adjustment Event (as defined in the Merger
Agreement) has occurred, then the percentage of the Escrow Shares to which the
FDIC shall have a contingent right shall be changed to 35.1% and the percentage
of the Escrow Shares to which KH Partners shall have a contingent right shall be
changed to 64.9%; and
WHEREAS, the parties desire to appoint the Escrow Agent as escrow agent
hereunder, and the Escrow Agent has agreed to accept such appointment.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions. All capitalized terms used and not otherwise defined
herein shall have the respective meanings set forth in the Merger Agreement.
2. Appointment of Escrow Agent. WMI, KH Partners, and the FDIC hereby
appoint the Escrow Agent, and the Escrow Agent hereby accepts its appointment,
as escrow agent to hold and dispose of the Escrow Fund (as hereinafter defined)
in accordance with the terms hereof.
3. Delivery of Escrow Shares. Concurrently with the execution and
delivery of this Agreement, KH Partners and the FDIC have directed WMI to
deliver, or cause to be delivered, and WMI has so delivered or caused to be
delivered, the Escrow Shares (as adjusted pursuant to the Merger Agreement),
registered in the name of [the Escrow Agent] to the Escrow Agent. By execution
hereof, the Escrow Agent evidences its receipt from WMI of the Escrow Shares.
The term "Escrow Fund" shall mean the Escrow Shares together with (i) all
dividends and distributions (of whatever nature) (other than dividends payable
in shares of WMI Common Stock paid on or with respect to the Escrow Shares),
(ii) any additional or substitute securities with respect thereto, and (iii) any
interest
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or earnings upon such dividends, distributions or additional or substitute
securities in accordance with the terms of this Agreement (including without
limitation amounts payable under the Notes (as hereinafter defined)).
4. Subaccounts. The Escrow Agent shall establish and maintain a
subaccount with respect to each Holder (as defined herein) representing the pro
rata portion of the Escrow Fund attributable to each such Holder.
5. Investment of Funds.
(a) The Escrow Agent shall invest and reinvest the cash
portion of the Escrow Fund in U.S. Treasury Bills with maturities not exceeding
26 weeks except as otherwise directed in a joint letter signed by both KH
Partners and the FDIC.
The Escrow Agent shall not be liable for any loss suffered in
connection with any investments made pursuant to joint instructions received
from KH Partners and the FDIC. No instructions, requests or notices from KH
Partners and the FDIC to the Escrow Agent shall be effective until received by
the Escrow Agent in writing, and no such instructions, requests or notices shall
be effective unless executed by both KH Partners and the FDIC.
(b) As and when any amounts invested as aforesaid may be
needed for disbursement from the Escrow Fund as herein provided (including the
funding of loans made pursuant to Section 8 hereof), the Escrow Agent shall
cause a sufficient amount of such investments to be sold or otherwise converted
into cash to the credit of the Escrow Fund. The Escrow Agent shall not be held
liable for any loss of income due to the liquidation of any investment which the
Escrow Agent, in its sole discretion and acting in good faith, believes
necessary to make payments or disbursements in accordance with this Agreement.
6. Transfers. KH Partners and the FDIC are the initial holders of
contingent rights to receive the Escrow Shares. It is understood that KH
Partners intends to distribute its contingent right in the Escrow Fund to the
partners of KH Partners immediately after the Effective Time. Such partners, the
FDIC and their transferees may transfer any or all of their respective
contingent rights to the Escrow Fund, provided that no transfer shall be
effective unless and until the proposed transferor has delivered to WMI the
following documents:
(a) an opinion of counsel reasonably satisfactory to WMI that
such transfer is exempt from the registration requirements of the Securities Act
of 1933 and similar requirements under all applicable state securities laws,
accompanied by such other documentation as WMI shall reasonably require to
demonstrate compliance with applicable requirements of federal and state
securities laws, and
(b) a written instrument executed by the proposed transferee
whereby such party agrees to be bound by all applicable obligations contained in
this Agreement.
As used herein, the term "Holder" shall mean any Person owning from
time to time a contingent right to receive a portion of the Escrow Fund. No
Holder shall be allowed to transfer such Holder's contingent right to its
allocated portion of the Escrow Fund until the Holder has repaid all outstanding
Notes (as defined below in Section 8). The Escrow Agent shall not be required to
treat any purported transfer as effective until such time as it has received (x)
written notice of such transfer from the transferor, (y) written notice from WMI
that the opinion of counsel and other documentation described above has been
received, and (z) receipt of any tax or other information or documents
reasonably requested by the Escrow Agent. The Escrow Agent shall maintain a list
of the Holders and their addresses.
7. Voting of Escrow Shares. For so long as any Escrow Shares (or any
additional or substitute securities with respect thereto) are held by the Escrow
Agent in accordance with the terms of this Agreement, each Holder of the
contingent right to receive such shares shall have the absolute right to have
its pro rata portion of the Escrow Shares (and any additional or substitute
securities with respect thereto) voted on all matters with respect to which the
vote of the holders of WMI Common Stock is required or solicited in accordance
with the written instructions of such Holder at the time of the applicable
record date as given to the Escrow Agent. The right of a Holder to instruct the
Escrow Agent to vote any portion of the Escrow Shares shall be determined as of
the record date established by WMI with respect to such vote. If no written
instructions are timely received by the Escrow
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Agent from a Holder, then the Escrow Agent shall not vote any of the shares in
the Escrow Fund to which such Holder owns a contingent right.
8. Loans from the Escrow Fund. Each Holder shall have the right to
request that the Escrow Agent make a loan to it out of the cash portion of the
subaccount established with respect to it pursuant to Section 4. Such request
must be delivered in writing to the Escrow Agent no later than 30 days following
notice to such Holder of the payment to the Escrow Agent of any cash dividends
or distributions on the Escrow Shares attributable to such Holder. Such request
may be for a loan in a principal amount equal to no more than 45 percent of the
amount of such dividend or distribution. Such request shall be accompanied by
(a) an executed promissory note substantially in the form attached hereto as
Exhibit 1 (the "Note"), (b) an opinion of counsel in form reasonably
satisfactory to the Escrow Agent that the Note will not violate any applicable
usury or similar laws and (c) receipt of any tax or other information or
documents reasonably requested by the Escrow Agent. The loan shall accrue
interest and be payable as provided in Exhibit A. The Escrow Agent shall
calculate the Investment Rate as defined in Exhibit A within 30 days following
the end of each calendar quarter and notify the borrowers of such rate.
9. Release of Escrow Funds. The Escrow Agent will hold the Escrow Fund
in its possession until authorized hereunder to deliver the Escrow Fund or any
specified portion thereof as provided in this Section 9. The Escrow Agent shall
take all actions called for in any notice delivered by WMI under this Section 9
within ten (10) business days of the date such notice is received; provided that
the Escrow Agent shall not deliver to any Holder that Holder's Aggregate Escrow
Distribution until any such Holder's Notes have been fully repaid or offset
pursuant to subsection (d).
(a) Unless the Escrow Expiration Date shall have occurred,
within thirty (30) days of the date on which Case Proceeds are received by WMI
or its subsidiaries (including the Keystone Entities), WMI shall deliver written
instructions to the Escrow Agent to deliver to each Holder such Holder's pro
rata portion of the Aggregate Escrow Distribution and, (unless the provisions of
subsection (c) apply) after making such distribution as to each and every Holder
(or after setting aside a Holder's allocable portion of the Aggregate Escrow
Distribution with respect to any Holder who has not repaid any outstanding Note
or who has not delivered information or documents reasonably requested by the
Escrow Agent), to return any remaining Escrow Shares to WMI for cancellation
(together with the remainder of the Escrow Fund). The Escrow Agent shall not be
required to make any payment to any Holder until such time as it has received
any tax or other information or documents reasonably requested by it. No Holder
shall be entitled to receive or shall receive any fractional shares of WMI
Common Stock or cash in lieu of fractional shares.
(b) In the event that the Escrow Expiration Date has occurred
and no Case Proceeds have been received by WMI or its subsidiaries (including
the Keystone Entities), then WMI shall deliver written instructions to the
Escrow Agent to return the Escrow Shares to WMI for cancellation together with
the remainder of the Escrow Fund.
(c) Unless the Escrow Expiration Date shall have occurred, in
the event that the Case Proceeds are received in Installments, then, within
thirty (30) days of the date on which any Installment is received by WMI or its
subsidiaries (including the Keystone Entities), WMI shall deliver written
instructions to the Escrow Agent (i) to pay each Holder the pro rata portion of
the Aggregate Escrow Distribution with respect to such Installment attributable
to such Person, and (ii) after making the last Aggregate Escrow Distribution
with respect to the last Installment as to each and every Holder (or after
setting aside a Holder's allocable portion of the Escrow Fund with respect to
any Holder who has not repaid any outstanding Note or who has not delivered
information or documents reasonably requested by the Escrow Agent), to return
any remaining Escrow Shares to WMI for cancellation, (together with the
remainder of the Escrow Fund). No Holder shall be entitled to receive or shall
receive any fractional shares of WMI Common Stock or cash in lieu of fractional
shares.
(d) Upon receipt of the instructions described in (a), (b) or
(c) above, the Escrow Agent shall promptly notify the obligors under each
outstanding Note that such Note is due and payable in full within seven days of
the date of such notice and shall take all reasonable steps to effect such
distribution within 30 days of receipt of WMI's written instructions. In the
event that any obligor fails to pay the Note in full within ten (10) days of the
date of such notice, the Escrow Agent shall deduct the amount of the Note (plus
any interest or other amounts due
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<PAGE> 255
thereunder) from the pro rata portion of the Aggregate Escrow Distribution
otherwise due such obligor. In the event that (i) any obligor fails to pay such
obligor's Note in full within ten (10) days of the date of such notice; (ii) the
Escrow Expiration Date has occurred; and (iii) no Case Proceeds have been
received by WMI or its subsidiaries (including the Keystone Entities), the
Escrow Agent shall declare the Note to be in default and shall endorse the Note
and assign all of its right, title and interest in the Note to WMI, without
recourse.
(e) Beginning on the last day of the full calendar month
immediately following the sixth anniversary of this Agreement and on the last
day of every succeeding month, WMI shall deliver written instructions to the
Escrow Agent to return to WMI a number of shares equal to 1.25% of the number of
Escrow Shares (as adjusted pursuant to the definition of Escrow Shares in the
Merger Agreement) held by the Escrow Agent on the sixth anniversary of this
Agreement (together with any dividends and distributions received on such shares
and any interest or earnings on such dividends); provided, that if there has
been a final, nonappealable judicial resolution or settlement of the Case
involving two or more Installments prior to the sixth anniversary of this
Agreement, the provisions of this subsection shall not apply.
10. Escrow Agent's Responsibility.
(a) The Escrow Agent's sole responsibility shall be for the
safekeeping of the Escrow Fund, the establishment and maintenance of subaccounts
pursuant to Section 4, the investment of the Escrow Fund pursuant to Section 5,
the making of loans as provided in Section 8, and the disbursement thereof in
accordance with Section 9, and the Escrow Agent shall not be required to take
any other action with reference to any matters which might arise in connection
with the Escrow Fund, this Agreement, the Merger Agreement or the Warrant
Exchange Agreement. The Escrow Agent may act upon any written instruction or
other instrument which the Escrow Agent in good faith believes to be genuine and
to be signed and sent by the proper Persons. The Escrow Agent shall not be
required to take any action until such time as it has received written
instructions as provided above and any tax or other information or documents
reasonably requested by it. The Escrow Agent shall not be liable for any action
taken by it in good faith and believed to be authorized or within the rights or
powers conferred upon it by this Escrow Agreement or for anything which the
Escrow Agent may do or refrain from doing in connection herewith unless the
Escrow Agent is guilty of gross negligence, bad faith or willful misconduct. The
Escrow Agent may from time to time consult with legal counsel of its own choice
for advice concerning its obligations under this Agreement, and it shall have
full and complete authorization and protection for any action taken or suffered
by it hereunder in good faith and in accordance with the opinion of such
counsel. The Escrow Agent has no duty to determine or inquire into the
occurrence of any event or the performance or failure of performance of any of
the parties hereto with respect to any agreements or arrangements with each
other or with any other party or parties including, without limitation, the
Merger Agreement or the Warrant Exchange Agreement.
(b) The duties and obligations of the Escrow Agent shall be
determined solely by the express provisions of this Agreement. The Escrow
Agent's duties and obligations are purely ministerial in nature, and nothing
herein shall be construed to give rise to any fiduciary obligations of the
Escrow Agent. In the event of any disagreement or the presentation of any
adverse claim or demand in connection with the disbursement of the Escrow Fund,
the Escrow Agent shall, at its option, be entitled to refuse to comply with any
such claims or demands during the continuance of such disagreement and may
refrain from delivering any items affected thereby, and in so doing, the Escrow
Agent shall not become liable to the undersigned or to any other Person, due to
its failure to comply with such adverse claim or demand. The Escrow Agent shall
be entitled to continue, without liability, to refrain and refuse to act:
(i) until authorized to disburse by a court order
from a court having jurisdiction of the parties and the money, after
which time the Escrow Agent shall be entitled to act in conformity with
such adjudication; or
(ii) until all differences shall have been adjusted
by agreement and the Escrow Agent shall have been notified thereof and
shall have been directed in writing, signed jointly or in counterpart
by the undersigned and by all Persons making adverse claims or demands,
at which time the Escrow Agent shall be protected in acting in
compliance therewith.
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(c) The Escrow Agent shall treat all communications pursuant
to this Agreement, whether oral or written, confidentially and shall not make
any public disclosure of communications to or from any party hereto. In the
event that the Escrow Agent is requested in any proceeding to disclose any
communications, the Escrow Agent shall give prompt notice to KH Partners, the
FDIC, any Holder and WMI of such request so that KH Partners, the FDIC, such
Holder or WMI may seek an appropriate protective order or other remedy.
11. Indemnification of Escrow Agent. WMI agrees to indemnify and hold
the Escrow Agent and its officers and employees harmless for and from all
claims, losses, liabilities and expenses (including, without limitation,
reasonable legal fees and expenses, including any legal fees in any appeal or
bankruptcy proceeding) arising out of or in connection with its acting as Escrow
Agent under this Agreement, except in those instances where the Escrow Agent has
been guilty of gross negligence, bad faith or willful misconduct. In addition,
WMI agrees to pay to the Escrow Agent its reasonable fees and expenses in
connection with the performance of its duties under this Agreement as set forth
in the Escrow Fee Schedule as Schedule 1. Under no circumstances shall the
Escrow Agent be entitled to charge the Escrow Fund for any amounts otherwise due
to the Escrow Agent from WMI. The provisions of this Section 10 shall survive
the termination of this Agreement.
12. Termination. This Agreement shall terminate upon the complete
disbursement of the remaining assets constituting the Escrow Fund in accordance
with this Agreement. Upon such termination, the Escrow Agent shall close its
records, and all of the Escrow Agent's liability and obligations in connection
with the Escrow Fund and this Agreement shall terminate, other than liabilities
and obligations incurred by it hereunder prior to such resignation becoming
effective.
13. Notices and Communications. All notices and communications
hereunder shall be in writing and shall be deemed to be duly given if delivered
in person or by courier, if by facsimile transmission (with receipt thereof
acknowledged), or if sent by certified mail, return receipt requested and shall
be deemed to have been received on the date of delivery in person, by courier,
or by facsimile transmission, or on the date set forth in the return receipt, as
follows:
If to the Escrow Agent, at:
------------------------------------
------------------------------------
------------------------------------
Attn: _______________________________
Facsimile Number: _________________
If to KH Partners, at:
Keystone Holdings Partners, L.P.
201 Main Street, 23rd Floor
Fort Worth, TX 76102
Attn: Ray L. Pinson
Facsimile Number: (817) 338-2047
Copies to:
Kelly, Hart & Hallman
201 Main Street, Suite 2500
Ft. Worth, TX 76102
Attn: Billie J. Ellis, Jr.
Facsimile Number: (817) 878-9280
and
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Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Attn: Michael L. Ryan
Facsimile Number: (202) 225-3999
If to the FDIC, at:
Federal Deposit Insurance Corporation
801 17th Street, N.W.
Washington, D.C. 20434-0001
Attn: Director, Division of Resolutions
Facsimile Number: (202) 898-7024
Copy to:
Legal Division
Federal Deposit Insurance Corporation
1717 H Street, N.W.
Washington, D.C. 20434-0001
Attn: David M. Gearin, Senior Counsel
Facsimile Number: (202) 736-0382
If to WMI, at:
Washington Mutual, Inc.
1201 Third Avenue, 15th Floor
Seattle, WA 98101
Attn: Marc R. Kittner, Senior Vice President
Facsimile Number: (205) 554-2790
Copy to:
Foster Pepper & Shefelman
1111 Third Avenue, 34th Floor
Seattle, WA 98101
Attn: Fay L. Chapman
Facsimile Number: (206) 447-9700
Any party may change its address for notice purposes by providing
written notice thereof in accordance with this Section . Notices to a Holder
other than KH Partners or the FDIC shall be made in the manner described above
to the address of such Holder as shown on the Escrow Agent's records.
14. Resignation; Removal.
(a) The Escrow Agent may resign and be discharged from its duties or
obligations hereunder by giving 30 days' prior written notice of such
resignation to WMI, KH Partners and the FDIC, specifying a date when such
resignation shall take effect; provided, that no such resignation shall be
effective until a successor Escrow Agent shall have been appointed and shall
have accepted its appointment in writing as hereinafter set forth. Upon such
notice, KH Partners, the FDIC and WMI shall use commercially reasonable efforts
to mutually agree upon and appoint a successor Escrow Agent. If KH Partners, the
FDIC and WMI are unable to agree upon a successor Escrow Agent within 30 days
after such notice or such appointed Escrow Agent has not accepted such
appointment in writing within such 30 day period, the Escrow Agent shall be
entitled to appoint its successor, which shall be a commercial bank organized
under the laws of the United States or any state thereof that has a combined
capital and surplus of at least $1 billion.
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(b) Any successor Escrow Agent (whether succeeding a resigning or
removed Escrow Agent) shall deliver a written acceptance of its appointment to
the resigning Escrow Agent, WMI, KH Partners, and the FDIC, and immediately
thereafter, (i) the resigning Escrow Agent shall transfer and deliver the Escrow
Fund to the successive Escrow Agent, whereupon the resignation of the resigning
Escrow Agent shall become effective, and (ii) the successor Escrow Agent shall
constitute the "Escrow Agent" for all purposes hereunder and all applicable
provisions of this Agreement shall apply to the successor Escrow Agent as though
it had been named herein. Any such resignation shall not relieve the resigning
Escrow Agent from any liability incurred by it hereunder prior to such
resignation becoming effective.
(c) The Escrow Agent shall continue to serve until its successor
accepts the duties of Escrow Agent hereunder. KH Partners, the FDIC and WMI
shall have the right at any time upon their mutual consent to remove the Escrow
Agent and substitute a new Escrow Agent, by giving 30 days' notice thereof to
the then acting Escrow Agent. Any successor Escrow Agent appointed under this
Section 14 shall be qualified to act as an escrow agent under applicable law.
15. Miscellaneous.
(a) This Agreement, in all respects, including all matters of
construction, validity and performance, is governed by the internal laws of the
State of New York as applicable to contracts executed and delivered in New York
by citizens of such state to be performed wholly within such state without
giving effect to the principles of conflicts of laws thereof.
(b) Unless the context otherwise requires, under this
Agreement words in the singular number include the plural, and words in the
plural include the singular; and words of the masculine gender include the
feminine and the neuter, and when the context so indicates words of the neuter
gender may refer to any gender.
(c) All titles and headings in this Agreement are intended
solely for convenience of reference and shall in no way limit or otherwise
affect the interpretation of any of the provisions hereof.
(d) The provisions of this Agreement may be waived, altered,
amended or supplemented, in whole or in part, only by a writing signed by all of
the parties hereto or their successors or assigns.
(e) Neither this Agreement nor, except as explicitly provided
in this Agreement, any right or interest hereunder may be assigned in whole or
in part by any party without the prior written consent of the other parties.
(f) This Agreement constitutes the entire agreement between
the Escrow Agent, on the one hand, and KH Partners, the FDIC and WMI, on the
other hand. This Agreement supersedes all proposals, oral or written, and all
other communications, oral or written, between the parties relating to the
subject matter of this Agreement.
(g) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(h) Each party hereto and each Holder, except the Escrow
Agent, shall provide the Escrow Agent with their Tax Identification Number (TIN)
as assigned by the Internal Revenue Service.
(i) If any provision hereunder shall require the action by or
notice to KH Partners, the provision shall be read to require the action by or
notice to Robert M. Bass if KH Partners shall no longer be in existence.
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IN WITNESS WHEREOF, the parties, by their officers thereunto duly
authorized, have executed and delivered this Agreement the date first above
written.
KEYSTONE HOLDINGS PARTNERS, L.P.
By: _____________________________
Name: ____________________________
Title: ___________________________
WASHINGTON MUTUAL, INC.
By: ______________________________
Name: _____________________________
Title: ____________________________
FEDERAL DEPOSIT
INSURANCE CORPORATION,
as manager of the FSLIC Resolution Fund
By: ______________________________
Name: _____________________________
Title: ____________________________
[ESCROW AGENT]:
By: ______________________________
Name: _____________________________
Title: ____________________________
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APPENDIX F
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of July 21, 1996, by and among Keystone Holdings Partners L.P.,
a Texas limited partnership (the "Partnership"), the Federal Deposit Insurance
Corporation ("FDIC"), as manager of the FSLIC Resolution Fund (the "FRF")
(collectively with the FDIC, the "Initial Securities Holders"), and Washington
Mutual, Inc., a Washington corporation (the "Company").
WHEREAS, the Partnership owns all of the outstanding capital stock of
Keystone Holdings Inc., a Delaware corporation ("Keystone");
WHEREAS, the Partnership, Keystone, the Company, and certain direct and
indirect subsidiaries of Keystone are concurrently with the execution of this
Agreement entering into an Agreement for Merger (the "Merger Agreement"),
providing for the merger of Keystone with and into the Company in exchange for
26,000,000 newly issued shares of Common Stock, no par value, of the Company
("Common Stock") to be issued to the Partnership, all in accordance with the
terms of the Merger Agreement;
WHEREAS, the Partnership, the FDIC, the Company, Keystone, certain of
Keystone's direct and indirect subsidiaries and certain other parties are,
concurrently with the execution of this Agreement, entering into that certain
agreement (the "Warrant Exchange Agreement") pursuant to which the FDIC is to
transfer at the Effective Time (as defined in the Merger Agreement) warrants
that the FRF holds for capital stock of N.A. Capital Holdings, Inc. to the
Company in exchange for 14,000,000 newly issued shares of Common Stock, all in
accordance with the terms of the Warrant Exchange Agreement;
WHEREAS, pursuant to the Merger Agreement and the Warrant Exchange
Agreement, the Company will issue at the Effective Time an additional 8,000,000
newly issued shares of Common Stock (the "Litigation Shares") and deliver such
shares to an escrow agent for release on a proportional basis to the Initial
Securities Holders, or their permitted assigns, in the event of a cash recovery
in the Case after the Closing, all in accordance with the terms of the Merger
Agreement, the Warrant Exchange Agreement and the Escrow Agreement (as defined
in the Merger Agreement);
WHEREAS, the transactions contemplated by the Merger Agreement and the
Warrant Exchange Agreement are to be consummated at the Closing;
WHEREAS, in connection with the Merger Agreement and the Warrant
Exchange Agreement, the Company has agreed to provide the registration rights
set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS.
1.1 Defined Terms. (a) As used in this Agreement, the following terms
shall have the following meanings:
"affiliate" shall have the meaning ascribed thereto in Rule
12b-2 promulgated by the Commission under the Exchange Act as in effect
on the date hereof.
"Agreement" shall mean this Registration Rights Agreement, as
it may be amended, supplemented or otherwise modified from time to
time.
"Closing" shall have the meaning assigned to such term in the
Recitals.
"Closing Date" shall mean the date on which the Closing occurs.
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"Commission" shall mean the United States Securities and
Exchange Commission or any successor thereto.
"Common Stock" shall have the meaning assigned to such term in
the Recitals.
"Company" shall have the meaning assigned to such term in the
Preamble.
"Company Public Sale Event" shall mean any sale by the Company
of Common Stock for its own account as contemplated by subsection 4.1
pursuant to an effective Registration Statement filed by the Company,
filed on Form S-1 or any other form for the general registration of
securities with the Commission (other than a Registration Statement
filed by the Company on either Form S-4 or Form S-8 or any registration
in connection with a standby underwriting in connection with the
redemption of outstanding convertible securities).
"Company Sale Notice" shall mean a Notice of Offering pursuant
to Subsection 4.1 from the Company to each Security Holder stating that
the Company proposes to effect a Company Public Sale Event.
"Effective Time" shall have the meaning assigned to such term
in the Recitals.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and any rules and regulations promulgated thereunder, and
any successor federal statute, rules or regulations.
"FDIC" shall have the meaning assigned to such term in the
Preamble.
"Form S-1" shall mean such form of registration statement
under the Securities Act as in effect on the date hereof or any
successor form thereto.
"Form S-3" shall mean such form of registration statement
under the Securities Act as in effect on the date hereof or any
successor form thereto.
"Form S-4" shall mean such form of registration statement
under the Securities Act as in effect on the date hereof or any
successor form thereto.
"Form S-8" shall mean such form of registration statement
under the Securities Act as in effect on the date hereof or any
successor form thereto.
"FRF" shall have the meaning assigned to such term in the
Preamble.
"Initial Merger Shares" shall mean the aggregate of 40,000,000
newly issued shares of Common Stock issued by the Company pursuant to
the terms of the Merger Agreement and the Warrant Exchange Agreement at
the Effective Time, which shall consist of the 26,000,000 Keystone
Initial Shares (as defined in the Merger Agreement) and the 14,000,000
FRF Initial Shares (as defined in the Merger Agreement).
Notwithstanding the foregoing, if an Adjustment Event (as defined in
the Merger Agreement) shall have occurred, then the Keystone Initial
Shares shall be reduced to 25,883,333 shares of Common Stock, and the
numbers 40,000,000 and 26,000,000 in this Agreement, shall be changed
to the numbers 39,883,333 and 25,883,333, respectively, subject to
Section 2.2(c) of the Merger Agreement.
"Initial Securities Holders" shall have the meaning assigned
to such term in the Preamble of this Agreement.
"Initial Underwriting" shall mean the underwritten public
offering referred to in Section 2.
"Keystone" shall have the meaning assigned in the first
Recital.
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"Litigation Shares" shall have the meaning assigned to such
term in the Recitals.
"Litigation Shelf" shall have the meaning assigned to such
term in subsection 3.1(b) hereof.
"Merger Agreement" shall have the meaning assigned to such
term in the Recitals.
"NASD" shall mean the National Association of Securities
Dealers, Inc. or any successor thereto.
"Notice of Offering" shall mean a written notice with respect
to (a) the Initial Underwriting, or (b) a proposed underwritten public
offering pursuant to the Shelf Registration Statement or (c) a Company
Public Sale Event, in each case setting forth (i) the expected maximum
and minimum number of shares of Registrable Common or Common Stock, as
the case may be, proposed to be offered and sold, (ii) the lead
managing underwriter, if applicable or selected and (iii) the proposed
method of distribution and the expected timing of the offering.
"Partnership" shall have the meaning assigned to such term in
the Preamble of this Agreement.
"Person" shall mean an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or
other entity of whatever nature.
"Piggybacking Securities Holder" shall mean Securities Holders
selling Registrable Common in connection with a Company Public Sale
Event pursuant to subsection 4.3.
"Preliminary Prospectus" shall mean each preliminary
prospectus included in a Registration Statement or in any amendment
thereto prior to the date on which such Registration Statement is
declared effective under the Securities Act, including any prospectus
filed with the Commission pursuant to Rule 424(a) under the Securities
Act.
"Prospectus" shall mean each prospectus included in a
Registration Statement (including, without limitation, a prospectus
that discloses information previously omitted from a prospectus filed
as part of an effective Registration Statement in accordance with Rule
430A), together with any supplement thereto, and any material
incorporated by reference into such Prospectus, all as filed with, or
transmitted for filing to, the Commission pursuant to Rule 424(b) under
the Securities Act.
"Public Sale Event" shall mean the Initial Underwriting, an
underwritten public offering under the Shelf Registration Statement or
the Litigation Shelf, or a Company Public Sale Event, as the case may
be.
"Purchase Agreement" shall mean any written agreement entered
into by any Securities Holder providing for the sale of Registrable
Common in the manner contemplated by a related Registration Statement,
including the sale thereof to an underwriter for an offering to the
public.
"Registrable Common" shall mean (a) the Initial Merger Shares
and (b) any other securities issued as (or issuable upon the conversion
or exercise of any warrant, right, option or other security which is
issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, the Initial Merger Shares; provided,
however, that any such Registrable Common shall cease to be Registrable
Common when (i) a Registration Statement with respect to the sale of
such Registrable Common has been declared effective under the
Securities Act and such securities have been disposed of in accordance
with the plan of distribution set forth in such Registration Statement,
(ii) such shares are disposed of pursuant to Rule 144 (or any similar
provisions then in force) under the Securities Act, (iii) such
Registrable Common shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer
under the Securities Act shall have been delivered by the Company and
they may be resold without subsequent registration or qualification
under the Securities Act or any state securities laws then in force, or
(iv) such securities shall cease to be outstanding; provided, further,
that any securities that have
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ceased to be Registrable Common cannot thereafter become Registrable
Common, and any security that is issued or distributed in respect to
securities that have ceased to be Registrable Common shall not be
Registrable Common.
"Registrable Litigation Shares" shall mean (a) the Litigation
Shares and (b) any other securities issued as (or issuable upon the
conversion or exercise of any warrant, right, option or other security
which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, the Litigation Shares;
provided, however, that any such Registrable Litigation Shares shall
cease to be Registrable Litigation Shares when (i) a Registration
Statement with respect to the sale of such Registrable Litigation
Shares has been declared effective under the Securities Act and such
securities have been disposed of in accordance with the plan of
distribution set forth in such Registration Statement, (ii) such shares
are disposed of pursuant to Rule 144 (or any similar provisions then in
force) under the Securities Act, (iii) such Registrable Litigation
Shares shall have been otherwise transferred, new certificates for them
not bearing a legend restricting further transfer under the Securities
Act shall have been delivered by the Company and they may be resold
without subsequent registration or qualification under the Securities
Act or any state securities laws then in force, or (iv) such securities
shall cease to be outstanding; provided, further, that any securities
that have ceased to be Registrable Litigation Shares cannot thereafter
become Registrable Litigation Shares, and any security that is issued
or distributed in respect to securities that have ceased to be
Registrable Litigation Shares shall not be Registrable Litigation
Shares.
"Registration" shall mean a registration of securities
pursuant to the Securities Act.
"Registration Statement" shall mean any registration statement
(including the Preliminary Prospectus, the Prospectus, any amendments
(including any post-effective amendments) thereof, any supplements and
all exhibits thereto and any documents incorporated therein by
reference pursuant to the rules and regulations of the Commission),
filed by the Company with the Commission under the Securities Act in
connection with any Public Sale Event.
"Responsible Officer" shall mean, as to the Company, the chief
executive officer, the president, the chief financial officer or any
executive or senior vice president of the Company.
"Rule 144" shall mean Rule 144 promulgated by the Commission
under the Securities Act, or any successor to such Rule.
"Rule 415" shall mean Rule 415 promulgated by the Commission
under the Securities Act, or any successor to such Rule.
"Rule 424" shall mean Rule 424 promulgated by the Commission
under the Securities Act, or any successor to such Rule.
"Rule 430A" shall mean Rule 430A promulgated by the Commission
under the Securities Act, or any successor to such Rule.
"Sale Event" shall mean any sale by the Company of Common
Stock pursuant to a Company Public Sale Event or any sale by any
Securities Holder of Registrable Common pursuant to the Initial
Underwriting or the Shelf Registration Statement, or Registrable
Litigation Shares pursuant to the Litigation Shelf.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and any rules and regulations promulgated thereunder and, any
successor federal statutes, rules or regulations.
"Securities Holder" shall mean any Initial Securities Holder
and any transferee thereof to whom are transferred the rights and
obligations of a Securities Holder pursuant to subsection 6.8.
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"Securities Holders' Counsel" shall mean the single law firm
from time to time representing the Securities Holders collectively as
appointed by Securities Holders owning a majority of the Registrable
Common and Registrable Litigation Shares held by Securities Holders at
the time of such appointment.
"Securities Holder's Questionnaire" shall mean the
questionnaire to be provided by each Securities Holder to the Company,
substantially in the form of Annex A, as the same from time to time may
be amended, supplemented or otherwise modified.
"Shelf Registration Statement" shall have the meaning assigned
to such term in subsection 3.1.
"Significant Securities Holder" shall mean, on any date of
determination thereof, a Securities Holder then holding or beneficially
owning in the aggregate more than 5% of the number of shares of the
Common Stock then outstanding.
"Supplemental Addendum" shall mean a Supplemental Addendum
substantially in the form of Annex B to this Agreement.
"Termination Date" shall mean the later of the respective
dates on which the Company has no further obligation under the terms of
this Agreement to file or keep effective the Shelf Registration
Statement or the Litigation Shelf, as the case may be.
"Warrant Exchange Agreement" shall have the meaning assigned
to it in the Recitals.
(b) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. Unless otherwise specified,
references to sections, subsections, schedules and exhibits are references to
such in this Agreement.
SECTION 2. INITIAL UNDERWRITING.
2.1 Underwritten Offering. The Company will use its best efforts to
cause to be effective on the Closing Date, or as soon as practicable thereafter
(recognizing that time is of the essence), a Registration Statement with respect
to an underwritten public offering of not less than 7.5 million and not more
than 20 million shares of Registrable Common; provided, however, that the
Company agrees that it shall not cause such Registration Statement to be
effective on the Closing Date or as soon as practicable thereafter if the
Company and the holders of a majority of the Registrable Common participating in
the Initial Underwriting mutually agree prior to the Closing Date, or
thereafter, to cause such Registration Statement to be declared effective on
another date, which date shall not be under any circumstances later than the
date three (3) days after the Company publishes financial results covering
thirty (30) days or more of post-Merger combined operations. Promptly after the
execution hereof, the Company shall send a Notice of Offering to the Initial
Securities Holders with respect to the Initial Underwriting. The Initial
Securities Holders shall thereafter have thirty (30) days within which to submit
a written response to the Company expressing their interest in participating in
the Initial Offering and specifying the number of shares of Registrable Common
they desire to sell in the Offering. Subject to subsection 2.3 hereof, all
Securities Holders will be entitled to participate in the Initial Underwriting
in accordance with the related Notice of Offering to the full extent of their
Registrable Common; provided, however, that no Securities Holder shall be
entitled to participate in the Initial Underwriting if such participation would
be a violation of the pooling representation letter given by such Securities
Holder to the Company pursuant to the Merger Agreement.
2.2 Underwriters. The underwriters for the Initial Underwriting will be
nationally recognized underwriters chosen by Securities Holders owning a
majority of the Registrable Common held by Securities Holders anticipated to be
participating in the Initial Underwriting, as previously identified to the
Company.
2.3 Allocation in Initial Underwriting. If all the eligible shares of
Registrable Common requested to be included in the Initial Underwriting cannot
be so included as a result of the limit on the aggregate number of
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shares of Registrable Common set forth in subsection 2.1, the number of shares
of Registrable Common that may be so included shall be allocated among the
Securities Holders pro rata on the basis of the number of shares of Registrable
Common held by such eligible Securities Holders; provided, however, that such
allocation shall not operate to reduce the aggregate number of shares of
Registrable Common that may be so included in such underwriting. If any
Securities Holder does not request inclusion of the maximum number of eligible
shares of Registrable Common allocated to it pursuant to the above-described
procedure, the remaining portion of its allocation shall be reallocated among
those requesting eligible Securities Holders whose allocation did not satisfy
their requests pro rata on the basis of the number of shares of Registrable
Common held by such Securities Holders, and this procedure shall be repeated
until all of the shares of Registrable Common which may be included in the
underwriting have been so allocated.
SECTION 3. SHELF REGISTRATION.
3.1 Shelf Registration. (a) The Company agrees to prepare and file with
the Commission a "shelf" Registration Statement on Form S-3 for an offering to
be made on a continuous basis pursuant to Rule 415 covering all of the
Registrable Common not previously sold in the Initial Underwriting (the "Shelf
Registration Statement"). The permitted methods of distribution of shares of
Registrable Common under the Shelf Registration Statement shall be limited to
transactions complying with the provisions of Rule 144(f) and underwritten
offerings of shares of Registrable Common under the Shelf Registration Statement
in accordance with this Section 3. The Company will use its best efforts to have
such Registration Statement declared effective by the Commission on or as soon
as practicable after the date that is nine (9) months after the Effective Date
(as defined in the Merger Agreement). The Company shall use its best efforts to
keep the Shelf Registration Statement continuously effective until the earlier
of (A) the date three (3) years after the effective date of the Shelf
Registration Statement (subject to any "black-out" periods and extensions of
such three-year period pursuant to subsection 5.1) and (B) the date on which no
Registrable Common remains outstanding.
(b) The Company agrees to prepare and file with the Commission
a "shelf" Registration Statement on Form S-3 for an offering to be made on a
continuous basis pursuant to Rule 415 covering all of the Litigation Shares that
are distributed to the Initial Securities Holders or their permitted assigns
pursuant to the Merger Agreement (the "Litigation Shelf"). The permitted method
of distribution of such Litigation Shares shall be limited to transactions
complying with the provisions of Rule 144(f). The Company will use its best
efforts to (i) have such Registration Statement declared effective by the
Commission on or as soon as practicable after the first date any Litigation
Shares are distributed from the escrow established at the Closing under the
Merger Agreement, and (ii) to keep such Registration Statement continuously
effective until the earlier of (A) the date three (3) years thereafter (subject
to any "black-out" periods and extensions of such three-year period pursuant to
subsection 5.1), and (B) the date on which no Registrable Litigation Shares
remain outstanding. Notwithstanding the foregoing, in the event any Aggregate
Escrow Distribution (as defined in the Merger Agreement) is made over time as a
result of Installments (as defined in the Merger Agreement), the Company shall
be obligated to use its best efforts to keep the Litigation Shelf continuously
effective until the earlier of (I) the date one (1) year after the last
distribution of Litigation Shares from the escrow (so long as such date is at
least three (3) years after the first date any Litigation Shares are distributed
from such escrow) and (II) the date on which no Registrable Litigation Shares
remain outstanding.
3.2 Demand Underwritings. (a) If the Company shall at any time receive
a Notice of Offering from any Securities Holder or Securities Holders holding a
minimum of 15% of the Registrable Common then outstanding (but in no event less
than 3,000,000 shares) requesting an underwritten public offering of Registrable
Common under the Shelf Registration Statement that has anticipated aggregate
proceeds at the time of the request (net of underwriting discounts, commissions
and expenses) in excess of $10,000,000, the Company shall, subject to the terms
and conditions hereof, be obligated to use its best efforts to facilitate such
proposed underwritten public offering pursuant to the terms of this Agreement.
The provisions of this subsection 3.2 shall not be applicable to Registrable
Litigation Shares.
(b) Following receipt of the notice referred to in subsection
3.2(a), the Company shall promptly give a Notice of Offering to all Securities
Holders (other than the demanding Securities Holders), which
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shall set forth the right of such Securities Holders to include any or all
shares of Registrable Common held by such Securities Holders in the proposed
offering, subject to the terms of this Agreement. Subject to subsection 3.2(e),
the Company shall use its best efforts to facilitate the inclusion in the
proposed underwritten public offering of the number of shares of Registrable
Common specified in written requests from such Securities Holders that are
received by the Company within fifteen (15) days after the Company provides its
Notice of Offering to all Securities Holders.
(c) The Securities Holders shall be entitled to a total of
four (4) underwritten public offerings of Registrable Common under the Shelf
Registration Statement during the three (3) year period following the effective
date of the Shelf Registration Statement (subject to any "black out" periods and
extensions of such three (3) year period pursuant to subsection 5.1); provided,
that no more than two of such underwritten public offerings may take place in
any twelve (12) month period.
(d) All underwritten public offerings of Registrable Common
under the Shelf Registration Statement shall be broadly distributed. If at any
time any of the Securities Holders of the Registrable Common covered by the
Shelf Registration Statement desire to sell Registrable Common in an
underwritten offering in accordance with the limitations of this subsection 3.2,
the investment banker or investment bankers that will manage the offering will
be nationally recognized underwriters selected jointly by the Company and by the
Securities Holders owning a majority of the Registrable Common held by
Securities Holders included in such offering.
(e) If all the shares of Registrable Common requested to be
included in any underwritten public offering pursuant to this Section 3 cannot
be so included as a result of any reasonable limit established by the
underwriters on the aggregate number of shares of Registrable Common included in
such underwriting, the number of shares of Registrable Common that may be so
included shall be allocated among the Securities Holders pro rata on the basis
of the number of shares of Registrable Common held by such Securities Holders;
provided, however, that such allocation shall not operate to reduce the
aggregate number of shares of Registrable Common that may be so included in such
underwriting. If any Securities Holder does not request inclusion of the maximum
number of shares of Registrable Common allocated to it pursuant to the
above-described procedure, the remaining portion of its allocation shall be
reallocated among those requesting Securities Holders whose allocation did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Common held by such Securities Holders, and this procedure shall be
repeated until all of the Registrable Shares which may be included in the
underwriting have been so allocated.
(f) Securities Holders holding a majority of the Registrable
Common exercising a demand right for an underwritten public offering under this
subsection 3.2 may withdraw the exercise of such right on behalf of all such
exercising Securities Holders as a result of a material adverse change in the
earnings, condition, financial or otherwise, or prospects of the Company, or a
material adverse change in the market for equity securities generally by giving
written notice to the Company prior to the date the Purchase Agreement for such
underwritten public offering is signed, and such withdrawn demand registration
right shall not be deemed to be one of the four demand rights provided under
Section 3.2(c); provided, however, that the Company shall not be required to
deliver a Notice of Offering with respect to a renewed or new demand for an
underwritten public offering pursuant to subsection 3.2 or to take any other
action with respect to any such renewed or new demand for a period of ninety
(90) days following any such notice of withdrawal.
SECTION 4. COMPANY SALE EVENTS.
4.1 Determination. Subject to subsection 5.2, the Company may at any
time effect a Company Public Sale Event pursuant to a Registration Statement
filed by the Company if the Company gives each Securities Holder a Company Sale
Notice, provided that such Company Sale Notice is given not less than 21 days
prior to the initial filing of the related Registration Statement. The
obligation of the Company to give to each Securities Holder a Company Sale
Notice and to permit piggyback registration rights to Securities Holders with
respect to Registrable Common in connection with Company Sale Events in
accordance with this Section 4 shall terminate on the earlier of (A) the date
three (3) years after the effective date of the Shelf Registration Statement
(subject to any "black-out" periods and extensions of such three-year period
pursuant to subsection 5.1) and (B) the date on which no
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Registrable Common remains outstanding. The provisions of this Section 4 shall
not be applicable to Registrable Litigation Shares.
4.2 Notice. The Company Sale Notice shall offer the Securities Holders
the opportunity to participate in such offering and include the number of shares
of Registrable Common which represents the best estimate of the lead managing
underwriter (or, if not known or applicable, the Company) that will be available
for sale by the Securities Holders in the proposed offering.
4.3 Piggyback Rights of Securities Holders. (a) If the Company shall
have delivered a Company Sale Notice, Securities Holders shall be entitled to
participate on the same terms and conditions as the Company in the Company
Public Sale Event to which such Company Sale Notice relates and to offer and
sell shares of Registrable Common therein only to the extent provided in this
subsection 4.3. Each Securities Holder desiring to participate in such offering
shall notify the Company no later than ten (10) days following receipt of a
Company Sale Notice of the aggregate number of shares of Registrable Common that
such Securities Holder then desires to sell in the offering.
(b) Each Securities Holder desiring to participate in a Company Public
Sale Event may include shares of Registrable Common in any Registration
Statement relating to a Company Public Sale Event to the extent that the
inclusion of such shares shall not reduce the number of shares of Common Stock
to be offered and sold by the Company to be included therein. If the lead
managing underwriter selected by the Company for a Company Public Sale Event
advises the Company in writing that the total number of shares of Common Stock
to be sold by the Company together with the shares of Registrable Common which
such holders intend to include in such offering would be reasonably likely to
adversely affect the price or distribution of the Common Stock offered in such
Company Public Sale Event or the timing thereof, then there shall be included in
the offering only that number of shares of Registrable Common, if any, that such
lead managing underwriter reasonably and in good faith believes will not
jeopardize the marketing of the offering; provided that if the lead managing
underwriter determines that such factors require a limitation on the number of
shares of Registrable Common to be offered and sold as aforesaid and so notifies
the Company in writing, the number of shares of Registrable Common to be offered
and sold by Securities Holders desiring to participate in the Company Public
Sale Event, shall be allocated among those Securities Holders desiring to
participate in such Company Public Sale Event on a pro rata basis based on their
holdings of Registrable Common. If any Securities Holder does not request
inclusion of the maximum number of shares of Registrable Common allocated to it
pursuant to the above-described procedure, the remaining portion of its
allocation shall be reallocated among those requesting Securities Holders whose
allocation did not satisfy their requests pro rata on the basis of the number of
shares of Registrable Common held by such Securities Holders, and this procedure
shall be repeated until all of the shares of Registrable Common which may be
included in the underwriting have been so allocated.
4.4 Discretion of the Company. In connection with any Company Public
Sale Event, subject to the provisions of this Agreement, the Company, in its
sole discretion, shall determine whether (a) to proceed with, withdraw from or
terminate such Company Public Sale Event, (b) to enter into a purchase agreement
or underwriting agreement for such Company Public Sale Event, and (c) to take
such actions as may be necessary to close the sale of Common Stock contemplated
by such offering, including, without limitation, waiving any conditions to
closing such sale which have not been fulfilled. No public offering effected
pursuant to this Section 4 shall be deemed to have been effected pursuant to
Section 2 or Section 3 hereof.
SECTION 5. BLACK-OUT PERIODS.
5.1 Black-Out Periods for Securities Holders. (a) No Securities Holder
shall offer to sell or sell any shares of Registrable Common pursuant to the
Shelf Registration Statement or Registrable Litigation Shares pursuant to the
Litigation Shelf during the 60-day period immediately following the effective
date of any Registration Statement filed by the Company in respect of a Company
Public Sale Event.
(b) No Securities Holder shall offer to sell or sell any
shares of Registrable Common pursuant to the Shelf Registration Statement or
Registrable Litigation Shares pursuant to the Litigation Shelf, and the
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Company shall not be required to supplement or amend any Registration Statement
or otherwise facilitate the sale of Registrable Common or Registrable Litigation
Shares pursuant thereto, during the 90-day period (or such lesser number of days
until the Company makes its next required filing under the Exchange Act)
immediately following the receipt by each Securities Holder of a certificate of
an authorized officer of the Company to the effect that the Board of Directors
of the Company has determined in good faith that such offer, sale, supplement or
amendment is likely to (1) interfere with or affect the negotiation or
completion of any transaction that is being contemplated by the Company (whether
or not a final decision has been made to undertake such transaction) at the time
the right to delay is exercised, or (2) involve initial or continuing disclosure
obligations that might not be in the best interest of the Company or its
stockholders. If any proposed sale is so postponed as provided herein,
Securities Holders having filed the Notice of Offering pursuant to subsection
3.2 to which the deferral relates may, within 30 days after receipt of the
notice of postponement, advise the Company in writing that it has determined to
withdraw its request for registration, and such demand registration request
shall be deemed to be withdrawn and such request shall be deemed not have been
exercised for purposes of determining whether such holders retain the right to
demand registrations pursuant to Section 3.2(c). Any period described in
subsection 5.1(a) or 5.1(b) during which Securities Holders are not able to sell
shares of Registrable Common pursuant to the Shelf Registration Statement or
Registrable Litigation Shares pursuant to the Litigation Shelf is herein
referred to as a "black-out" period. The Company shall notify each Securities
Holder of the expiration or earlier termination of any "black-out" period (the
nature and pendency of which need not be disclosed during such "black-out"
period).
(c) The period during which the Company is required pursuant
to subsection 3.1(a) or 3.1(b), respectively, to keep the Shelf Registration
Statement or the Litigation Shelf continuously effective shall be extended by a
number of days equal to the number of days, if any, of any "black-out" period
applicable to Securities Holders pursuant to this subsection 5.1 occurring
during such period, plus a number of days equal to the number of days during
such period, if any, of any period during which the Securities Holders are
unable to sell any shares of Registrable Common pursuant to the Shelf
Registration Statement or Registrable Litigation Shares pursuant to the
Litigation Shelf as a result of the happening of any event of the nature
described in subsection 6.3(c)(ii), 6.3(c)(iii) or 6.3(c)(v).
5.2 Black-Out Period for the Company. Except for offers to sell and
sales of Common Stock pursuant to a Registration Statement on Form S-8 or on
Form S-4, standby underwritings in connection with the redemption of outstanding
convertible securities, the conversion of outstanding convertible securities or
in connection with the acquisition by the Company of another company or
business, the Company shall not publicly offer to sell or sell any shares of
capital stock of the Company during the 60-day period immediately following the
initial sale of shares by any Securities Holder in an underwritten public
offering of shares of Registrable Common pursuant to Sections 2 or 3.
5.3 Financial Reporting. The Company agrees that during the period from
and after the Effective Time to and including the date 90 days thereafter, it
will not publish financial results covering 30 or more days of post-Merger
combined operations, except as part of the publication of financial results in
the ordinary course for a quarterly operating period that includes such
post-Merger combined operations, unless otherwise required by law.
SECTION 6. AGREEMENTS CONCERNING OFFERINGS.
6.1 Obligations of Securities Holders. (a) Each Securities Holder
shall, upon the reasonable request of the Company, advise the Company of the
number of shares of Registrable Common and Registrable Litigation Shares then
held or beneficially owned by it.
(b) It shall be a condition precedent to the obligations of
the Company to effect a Registration of, or facilitate any Public Sale Event
with respect to, any shares of Registrable Common or Registrable Litigation
Shares for any Securities Holder that such Securities Holders shall have
furnished to the Company a complete Securities Holder's Questionnaire and such
additional information regarding such Securities Holder, the Registrable Common
or Registrable Litigation Shares held by them and the intended method of
disposition of such securities as shall be required by law, the Commission or
the NASD, and any other information relating to such Registration reasonably
required by the Company.
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6.2 Obligations of the Company. Whenever required under this Agreement
to proceed with a Registration of any Registrable Common or Registrable
Litigation Shares, the Company shall, subject to the terms and conditions of
this Agreement, use its best efforts to proceed as expeditiously as reasonably
possible to:
(a) Prepare and file with the Commission a Registration
Statement with respect to such Registrable Common or Registrable Litigation
Shares and use its best efforts to cause such Registration Statement to become
effective; provided, however, that before filing a Registration Statement or
Prospectus or any amendments or supplements thereto, the Company will furnish to
the Security Holders covered by such Registration Statement and to Securities
Holders' counsel copies of any such Registration Statement or Prospectus
proposed to be filed.
(b) Prepare and file with the Commission such amendments
(including post-effective amendments) to such Registration Statement and
supplements to the related Prospectus used in connection with such Registration
Statement, and otherwise use its best efforts, to the end that such Registration
Statement reflects the plan of distribution of the securities registered
thereunder that is included in the relevant Notice of Offering and is effective
until the completion of the distribution contemplated by such Registration
Statement or so long thereafter as a broker or dealer is required by law to
deliver a Prospectus in connection with the offer and sale of the shares of
Registrable Common or Registrable Litigation Shares covered by such Registration
Statement and/or as shall be necessary so that neither such Registration
Statement nor the related Prospectus shall contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and so that such
Registration Statement and the related Prospectus will otherwise comply with all
applicable legal and regulatory requirements. The Company shall not be deemed to
have effected a Registration for any purpose under this Agreement unless and
until such Registration Statement is declared effective by the Commission.
(c) Provide to any Securities Holder requesting to include
Registrable Common or Registrable Litigation Shares in such Registration
Statement and any managing underwriter(s) participating in any distribution
thereof and to any attorney, accountant or other agent retained by such
Securities Holder or managing underwriter(s), reasonable access to appropriate
officers and directors of the Company, its independent auditors and counsel to
ask questions and to obtain information (including any financial and other
records and pertinent corporate documents) reasonably requested by any such
Securities Holder, managing underwriter(s), attorney, accountant or other agent
in connection with such Registration Statement or any amendment thereto,
provided, however, that (i) in connection with any such access or request, any
such requesting Persons shall cooperate to the extent reasonably practicable to
minimize any disruption to the operation by the Company of its business and (ii)
any records, information or documents shall be kept confidential by such
requesting Persons, unless (i) such records, information or documents are in the
public domain or otherwise publicly available or (ii) disclosure of such
records, information or documents is required by court or administrative order
or by applicable law (including, without limitation, the Securities Act).
(d) Furnish at the Company's expense to the participating
Securities Holders and any managing underwriter(s) and to any attorney,
accountant or other agent retained by such Securities Holder or managing
underwriter(s), such number of copies of any Registration Statement and
Prospectus, including any Preliminary Prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the shares of
Registrable Common or Registrable Litigation Shares owned by them.
(e) Prior to any Public Sale Event, use its best efforts to
register and qualify the securities covered by such Registration Statement (to
the extent exemptions are not available) under securities or "Blue Sky" laws of
such other jurisdictions as shall be reasonably requested by the Securities
Holders or the managing underwriter(s) and to keep each such registration or
qualification effective during the period required for such Public Sale Event to
be consummated; provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions in
which it has not already done so.
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(f) Enter into and perform its obligations under a Purchase
Agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter(s) of such underwritten offering; provided,
however, that each Securities Holder participating in such Public Sale Event
shall also enter into and perform its obligations under such Purchase Agreement
so long as such obligations are usual and customary obligations of selling
stockholders in a registered public offering.
(g) Use its best efforts to cause the Registrable Common or
Registrable Litigation Shares covered by the Registration Statement to be listed
on each national securities exchange in the United States on which the Common
Stock is then listed or quoted on each inter-dealer quotation system on which
the Common Stock is then quoted.
(h) Provide for or designate a transfer agent and registrar
(which may be the same entity) for the Registrable Common or Registrable
Litigation Shares covered by the Registration Statement from and after the
effective date of such Registration Statement.
(i) Cooperate with the selling Securities Holders of
Registrable Common and any managing underwriters to facilitate the timely
issuance and delivery to any underwriters to which any Securities Holder may
sell Registrable Common in such offering certificates evidencing shares of the
Registrable Common not bearing any restrictive legends and in such denominations
and registered in such names as the managing underwriters may request.
6.3 Agreements Related to Offerings. Subject to the terms and
conditions hereof, in connection with the Registration Statement covering the
Initial Underwriting, any Company Public Sale Event, the Shelf Registration
Statement and the Litigation Shelf, as applicable:
(a) The Company will cooperate with the underwriters for any
underwritten public offering of Registrable Common proposed to be sold pursuant
to a Registration Statement, and will, unless the parties to the Purchase
Agreement otherwise agree, use its best efforts to enter into a Purchase
Agreement not inconsistent with the terms and conditions of this Agreement and
containing such other terms and conditions of a type and form reasonable and
customary for companies of similar size and credit rating (including, but not
limited to, such provisions for delivery of a "comfort letter" and legal opinion
as are customary), and use its best efforts to take all such other reasonable
actions as are necessary or advisable to permit, expedite and facilitate the
disposition of such shares of Registrable Common in the manner contemplated by
such Registration Statement in each case to the same extent as if all the shares
of Registrable Common then being offered were for the account of the Company.
(b) Neither such Registration Statement nor any amendment or
supplement thereto will be filed by the Company until Securities Holders'
Counsel shall have had a reasonable opportunity to review the same and to
exercise its rights under subsection 6.2(c) with respect thereto. No amendment
to such Registration Statement naming any Securities Holder as a selling
security holder shall be filed with the Commission until such Securities Holder
shall have had a reasonable opportunity to review such Registration Statement as
originally filed. Neither such Registration Statement nor any related Prospectus
or any amendment or supplement thereto shall be filed by the Company with the
Commission which shall be disapproved (for reasonable cause) by the managing
underwriters named therein or Securities Holders' Counsel within a reasonable
period after notice thereof.
(c) The Company will use its reasonable efforts to keep the
Securities Holders informed of the Company's best estimate of the earliest date
on which such Registration Statement or any post-effective amendment thereto
will become effective and will notify each Securities Holder, Securities
Holders' Counsel and the managing underwriter(s), if any, participating in the
distribution pursuant to such Registration Statement promptly (i) when such
Registration Statement or any post-effective amendment to such Registration
Statement is filed or becomes effective, (ii) of any request by the Commission
for an amendment or any supplement to such Registration Statement or any related
Prospectus, or any other information request by any other governmental agency
directly relating to the offering, and promptly deliver to each Securities
Holder participating in the offering and the managing underwriter(s), if any,
copies of all correspondence between the Commission or any such governmental
agency or self-regulatory body and all written memoranda relating to discussions
with the Commission
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or its staff with respect to the Registration Statement or proposed sale of
shares, to the extent not covered by attorney-client privilege or constituting
attorney work product, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of such Registration Statement or of any order
preventing or suspending the use of any related Prospectus or the initiation or
threat of any proceeding for that purpose, (iv) of `the suspension of the
qualification of any shares of Common Stock included in such Registration
Statement for sale in any jurisdiction or the initiation or threat of a
proceeding for that purpose, (v) of any determination by the Company that an
event has occurred (the nature and pendency of which need not be disclosed
during a "black-out period" pursuant to subsection 5.1(b)) which makes untrue
any statement of a material fact made in such Registration Statement or any
related Prospectus or which requires the making of a change in such Registration
Statement or any related Prospectus in order that the same will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, (vi) of the completion
of the distribution contemplated by such Registration Statement if it relates to
a Company Sale Event, and (vii) if at any time the representations and
warranties of the Company under Section 7 cease to be true and correct in all
material respects.
(d) In the event of the issuance of any stop order suspending
the effectiveness of such Registration Statement or of any order suspending or
preventing the use of any related Prospectus or suspending the qualification of
any shares of Common Stock included in such Registration Statement for sale in
any jurisdiction, the Company will use its reasonable best efforts to obtain its
withdrawal at the earliest possible time.
(e) The Company agrees to otherwise use its best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to the Security Holders, as soon as reasonably practicable, but not
later than fifteen months after the effective date of such Registration
Statement, an earnings statement covering the period of at least twelve months
beginning with the first full fiscal quarter after the effective date of such
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act.
(f) The Company shall, subject to permitted "black-out"
periods, upon the happening of any event of the nature described in subsection
6.3(c)(ii), 6.3(c)(iii) or 6.3(c)(v), as expeditiously as reasonably possible,
prepare a supplement or post-effective amendment to the applicable Registration
Statement or a supplement to the related Prospectus or any document incorporated
therein by reference or file any other required documents and deliver a copy
thereof to each Securities Holder so that, as thereafter delivered to the
purchasers of the Registrable Common or Registrable Litigation Shares being sold
thereunder, such Prospectus will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
6.4 Certain Expenses. The Company shall pay all fees, disbursements and
expenses in connection with the Initial Underwriting, any Company Sale Event,
the Shelf Registration Statement and the Litigation Shelf and the performance of
its obligations hereunder (including those pursuant to Section 3.2 hereof),
including, without limitation, to the extent applicable, all registration and
filing fees, printing, messenger and delivery expenses, fees of the Company's
auditors, listing fees, registrar and transfer agents' fees, reasonable fees and
disbursements of Securities Holders' Counsel in connection with the registration
but not the disposition of the Registrable Common and Registrable Litigation
Shares (provided that the Company shall have no obligation to reimburse the fees
and disbursements of any other counsel to any Securities Holder), fees and
disbursements for counsel for the Company, fees and expenses (including
reasonable fees and disbursements of counsel) of complying with applicable state
securities or "Blue Sky" laws and the fees of the NASD in connection with its
review of any offering contemplated in any such Registration Statement, but not
including underwriting discounts and commissions or brokerage commissions on any
shares of Registrable Common or Registrable Litigation Shares sold in any such
offering.
6.5 Reports Under the Exchange Act. (a) From the date hereof to the
Termination Date, the Company agrees to:
(i) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act or
the Exchange Act; and
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(ii) furnish to any Securities Holder, forthwith upon
request (A) a written statement by the Company that it has complied
with the current public information and reporting requirements of Rule
144 and the Exchange Act, (B) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so
filed by the Company, and (C) such other information as may be
reasonably requested in connection with any Securities Holder availing
itself of any rule or regulation of the Commission which permits the
selling of any such securities without Registration or pursuant to such
rule or regulation.
(b) If any Securities Holder is required to file a Form 144
with respect to any sale of shares of Registrable Common or Registrable
Litigation Shares, such Securities Holder shall promptly deliver to the Company
a copy of such completed Form 144 filed with the Commission.
6.6 Limitations on Subsequent Registration Rights. From the date hereof
to the Termination Date, the Company shall not, without the prior written
consent of Securities Holders owning a majority of the shares of Registrable
Common and Registrable Litigation Shares held by Securities Holders at such
time, enter into any agreement (other than this Agreement) which would allow any
holder or prospective holder of Common Stock to include such securities in the
Shelf Registration Statement or the Litigation Shelf, or which would provide any
holder or prospective holder of Common Stock piggyback registration rights for
such Common Stock unless the piggyback registration rights provided to the
Securities Holders hereunder shall have priority in the event of any cutback.
6.7 Indemnification and Contribution. (a) In connection with (x) the
Shelf Registration Statement and the Litigation Shelf, subsections 6.7(a)(i),
(ii) and (v), 6.7(c) and 6.5(e) hereof shall be in full force and effect upon
the effective date of the Shelf Registration Statement or the Litigation Shelf,
as the case may be, and (y) a Registration Statement which covers the Initial
Underwriting or Registrable Common being sold by Piggybacking Securities Holders
or in connection with an underwritten offering pursuant to the Shelf
Registration Statement under subsection 3.2, provisions substantially in
conformity with the following provisions shall be contained in the related
Purchase Agreement unless the parties to such Purchase Agreement agree otherwise
(references in such provisions to a Securities Holder or an underwriter being
references to a Securities Holder or an underwriter participating in the
offering covered by such Registration Statement):
(i) The Company agrees to indemnify and hold harmless each
Securities Holder and each Person, if any, who controls such Securities
Holder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and each of their respective officers,
directors and employees against any losses, claims, damages or
liabilities, joint or several, or actions in respect thereof to which
such Securities Holder or Persons may become subject under the
Securities Act, or otherwise (collectively, "Losses"), insofar as such
Losses arise out of, or are based upon, any untrue statement or alleged
untrue statement of any material fact contained in such Registration
Statement, any related Preliminary Prospectus or any related
Prospectus, or any amendment or supplement thereto, or arise out of, or
are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse such Securities
Holder or Persons for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such Losses;
provided, however, that the Company shall not be so liable to the
extent that any such Losses arise out of, or are based upon, an untrue
statement or alleged untrue statement of a material fact or an omission
or alleged omission to state a material fact in said Registration
Statement in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of such Securities Holder
specifically for use therein. Notwithstanding the foregoing, the
Company shall not be liable in any such instance to the extent that any
such Losses arise out of, or are based upon, an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus if (i) after the Company had made available
sufficient number of copies of the Prospectus, such Securities Holder
failed to send or deliver a copy of the Prospectus with or prior to the
delivery of written confirmation of the sale of Registrable Common to
the Person asserting such Losses or who purchased the Registrable
Common the purchase of which is the basis of the action if, in either
instance, such delivery by such Securities Holder is required by the
Securities Act and (ii) the Prospectus would have corrected such untrue
statement
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or alleged untrue statement or alleged omission; and the Company shall
not be liable in any such instance to the extent that any such Losses
arise out of, or are based upon, an untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact in the Prospectus, if such untrue statement or alleged
untrue statement, omission or alleged omission is corrected in an
amendment or supplement to the Prospectus and if, having previously
been furnished by or on behalf of the Company with copies of the
Prospectus as so amended or supplemented, such Securities Holder
thereafter fails to deliver such Prospectus as so amended or
supplemented, prior to or concurrently with the sale of Registrable
Common if such delivery by such Securities Holder is required by the
Securities Act. This indemnity agreement will be in addition to any
liability which the Company may otherwise have and shall remain in full
force and effect regardless of any investigation made by or on behalf
of such holder or any such Person and shall survive the Termination
Date and the transfer of Registrable Common by such holder as otherwise
permitted hereby.
(ii) Each Securities Holder severally agrees to indemnify
and hold harmless the Company, each other Securities Holder and each
Person, if any, who controls the Company or such other Securities
Holder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and their respective officers,
directors and employees, against any Losses to which the Company, such
other Securities Holder or such Persons may become subject under the
Securities Act, or otherwise, insofar as such Losses arise out of, or
are based upon, any untrue statement or alleged untrue statement of any
material fact contained in such Registration Statement, any related
Preliminary Prospectus or any related Prospectus, or any amendment or
supplement thereto, or arise out of, or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse the Company, such other Securities Holder or such
Persons for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such Losses, in each
instance to the extent, but only to the extent, that any such Losses
arise out of, or are based upon, an untrue statement or alleged untrue
statement of a material fact or an omission or alleged omission to
state a material fact in said Registration Statement, said Preliminary
Prospectus or said Prospectus, or any said amendment or supplement
thereto in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of such Securities Holder
specifically for use therein; provided, however, that the liability of
each Securities Holder under this subsection 6.7(a)(ii) shall be
limited to an amount equal to the proceeds of the sale of shares of
Registrable Common by such Securities Holder in the offering which gave
rise to the liability (net of all costs and expenses (including
underwriting commissions and disbursements) paid or incurred by such
Securities Holder in connection with the registration, if any, and
sale).
(iii) The Company will indemnify and hold harmless each
underwriter and each Person, if any, who controls any such underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and their respective officers, directors and
employees, against any Losses to which such underwriter or Persons may
become subject under the Securities Act, or otherwise, insofar as such
Losses arise out of, or are based upon, any untrue statement or alleged
untrue statement of any material fact contained in such Registration
Statement, any related Preliminary Prospectus or any related
Prospectus, or any amendment or supplement thereto, or arise out of, or
are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse such underwriter
or Persons for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Losses;
provided, however, that (i) the Company shall not be so liable to the
extent that any such Losses arise out of, or are based upon, an untrue
statement or alleged untrue statement of a material fact or an omission
or alleged omission to state a material fact in said Registration
Statement, said Preliminary Prospectus or said Prospectus or any said
amendment or supplement in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of such
underwriter specifically for use therein; and (ii) such indemnity with
respect to any Preliminary Prospectus shall not inure to the benefit of
any underwriter (or any Person controlling such underwriter) from whom
the Person asserting any such Losses purchased shares of Common Stock
if such Person did not receive a copy of the Prospectus (or the
Prospectus as amended or supplemented) at or prior to the confirmation
of the sale of such shares of
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Common Stock to such Person in any case where such delivery is required
by the Securities Act and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact in such
Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented); provided, further, that the
Company shall only be required to provide the indemnification described
in this subsection 6.7(a)(iii) to an underwriter and each Person, if
any, who controls such underwriter, and their respective officers,
directors and employees, if such underwriter agrees to indemnification
provisions substantially in the form set forth in subsection 6.7(b).
(iv) Each Securities Holder will severally indemnify and
hold harmless each underwriter and each Person, if any, who controls
such underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, and their respective officers,
directors and employees, against any Losses to which such underwriter
or such Persons may become subject under the Securities Act, or
otherwise, insofar as such Losses arise out of, or are based upon, any
untrue statement or alleged untrue statement of any material fact
contained in such Registration Statement, any related Preliminary
Prospectus or any related Prospectus, or any amendment or supplement
thereto, or arise out of, or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will
reimburse such underwriter or such Persons for any legal or other
expenses reasonably incurred by them in connection with investigating
or defending any such Losses, in each case to the extent, but only to
the extent, that any such Losses arise out of, or are based upon, an
untrue statement or alleged untrue statement of a material fact or an
omission or alleged omission to state a material fact in said
Registration Statement in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of such
Securities Holder specifically for use therein; provided, however, that
such Securities Holder shall only be required to provide the
indemnification described in this subsection 6.7(a)(iv) to an
underwriter and each Person, if any, who controls such underwriter if
such underwriter agrees to indemnification provisions substantially in
the form set forth in subsection 6.7(b); and provided, further, that
such Securities Holder shall not be liable in any such case to the
extent that any such Losses arise out of, or are based upon, an untrue
statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus if (i) such underwriter failed to
send or deliver a copy of the Prospectus with or prior to the delivery
of written confirmation of the sale of Registrable Common to the Person
asserting such Loss who purchased the Registrable Common which is the
subject thereof where such delivery is required by the Securities Act
and (ii) the Prospectus would have corrected such untrue statement or
omission or alleged untrue statement or alleged omission; and such
Securities Holder shall not be liable in any such case to the extent
that any such Losses arises out of, or are based upon, an untrue
statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact in the Prospectus, if such
untrue statement or alleged untrue statement, omission or alleged
omission is corrected in an amendment or supplement to the Prospectus
and if, having previously been furnished by or on behalf of such
Securities Holder with copies of the Prospectus as so amended or
supplemented, such underwriter thereafter fails to deliver such
Prospectus as so amended or supplemented, prior to or concurrently with
the sale of Registrable Common to the Person asserting such Loss who
purchased such Registrable Common which is the subject thereof or where
such delivery is required by the Securities Act, and provided, further,
that the liability of such Securities Holder under this subsection
6.7(a)(iv) shall be limited to an amount equal to the proceeds of the
sale of shares of Common Stock by such Securities Holder in the
offering which gave rise to the liability (net of all costs and
expenses (including underwriting commissions and disbursements) paid or
incurred by such Securities Holders in connection with the
registration, if any, and sale).
(v) Promptly after any Person entitled to indemnification
under this subsection 6.7 or such Purchase Agreement receives notice of
any claim or the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party pursuant to the indemnification provisions of this
subsection 6.7 or such Purchase Agreement, notify the indemnifying
party in writing of the claim or the commencement of such action;
provided, however, that the failure or delay to so notify the
indemnifying party shall not relieve it from any liability which it may
have to the indemnified party hereunder unless and to the extent such
failure or delay has materially prejudiced the rights of the
indemnifying party and shall not, in any event, relieve it from any
liability which it may have
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to the indemnified party other than pursuant to the indemnification
provisions of this subsection 6.7 or such Purchase Agreement. If any
such claim or action shall be brought against an indemnified party, and
it has notified the indemnifying party thereof in accordance with the
terms hereof, the indemnifying party shall be entitled to participate
in the defense of such claim, or, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified
party, upon written notice to the indemnified party of such assumption.
After notice from the indemnifying party to the indemnified party of
its election to assume the defense of such claim or action, (i) the
indemnifying party shall not be liable to the indemnified party
pursuant to the indemnification provisions hereof or of such Purchase
Agreement for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than
reasonable costs of investigation, (ii) the indemnifying party shall
not be liable for the costs and expenses of any settlement of such
claim or action unless such settlement was effected with the consent of
the indemnifying party (which consent shall not be unreasonably
withheld or delayed) and (iii) the indemnified party shall be obligated
to cooperate with the indemnifying party in the investigation of such
claim or action; provided, however, that any indemnified party
hereunder shall have the right to employ separate counsel and to
participate in the defense of such claim assumed by the indemnifying
party, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (a) the employment of such
counsel has been specifically authorized in writing by the indemnifying
party, (b) the indemnifying party shall have failed to assume the
defense of such claim from the Person entitled to indemnification
hereunder and failed to employ counsel within a reasonable period
following such assumption, or (c) in the reasonable judgment of the
indemnified party, based upon advice of its counsel, a material
conflict of interest may exist between such indemnified party and the
indemnifying party with respect to such claims or there may be one or
more material legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which
case, if the indemnified party notifies the indemnifying party in
writing that the indemnified party elects to employ separate counsel at
the expense of the indemnifying party, the indemnifying party shall not
have the right to assume the defense of such claim on behalf of the
indemnified party). Notwithstanding the foregoing, the Securities
Holders (together with their respective controlling Persons and
officers, directors and employees) and the underwriters (together with
their respective controlling Persons and officers, directors and
employees) shall, each as a separate group, have the right to employ at
the expense of the Company only one separate counsel for each such
group to represent such Securities Holders and such underwriters (and
their respective controlling Persons and officers, directors and
employees) who may be subject to liability arising out of any one
action (or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or
circumstances) in respect of which indemnity may be sought by such
Securities Holders and underwriters against the Company pursuant to the
indemnification provisions of this subsection 6.7 or such Purchase
Agreement. If such defense is not assumed by the indemnifying party,
the indemnifying party will not be subject to any liability for any
settlement made without its consent (but such consent will not be
unreasonably withheld or delayed). No indemnifying party will consent
to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect to such claim or litigation. All fees and expenses to be paid
by the indemnifying party hereunder shall be paid a commercially
reasonable time after they are billed to the indemnified party, subject
to receipt of a written undertaking from the indemnified party to repay
such fees and expenses if indemnity is not ultimately determined to be
available to such indemnified party under this subsection 6.7.
(b) As a condition to agreeing in any Purchase Agreement to
the indemnification provisions set forth in subsections 6.7(a)(iii) and
6.7(a)(iv) in favor of an underwriter participating in the offering covered by
the related Registration Statement, its controlling Persons, if any, and their
respective officers, directors and employees, the Company and the Securities
Holders participating in an offering pursuant to such Registration Statement may
require that such underwriter agree in the Purchase Agreement to provisions
substantially in the form set forth in subsection 6.7(a)(v) and to severally
indemnify and hold harmless the Company, each Securities Holder participating in
such offering, each Person, if any, who controls the Company or such Securities
Holder within the meaning of the Securities Act, and their respective officers,
directors and employees against any Loss to which the Company, such Securities
Holder or such Persons may become subject under the Securities Act, or
otherwise,
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insofar as such Losses arise out of, or are based upon, any untrue statement or
alleged untrue statement of any material fact contained in such Registration
Statement in which such underwriter is named as an underwriter, any related
Preliminary Prospectus or any related Prospectus, or any amendment or supplement
thereto, or arise out of, or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and to reimburse the Company, such
Securities Holder or such Persons for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such Losses
in each case to the extent, but only to the extent, that any such Loss arises
out of, or are based upon, an untrue statement or alleged untrue statement of a
material fact in said Registration Statement, said Preliminary Prospectus or
said Prospectus or any said amendment or supplement in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
such underwriter specifically for use therein.
(c) In order to provide for just and equitable contribution
between the Company and such Securities Holders in circumstances in which the
indemnification provisions of this subsection 6.7 or the related Purchase
Agreement are for any reason insufficient or inadequate to hold the indemnified
party harmless, the Company and such Securities Holders shall contribute to the
aggregate Losses (including any investigation, legal and other fees and expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claims asserted, but after deducting any
contribution actually received from Persons other than the Company and such
Securities Holders) to which the Company and one or more of its directors or its
officers who sign such Registration Statement or such Securities Holders or any
controlling Person of any of them, or their respective officers, directors or
employees may become subject, under the Securities Act, under any other statute,
at common law or otherwise, insofar as such Losses or actions in respect thereof
arise out of, or are based upon, any untrue statement or alleged untrue
statement of any material fact contained in such Registration Statement or arise
out of, or are based upon, the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading. Such contributions shall be in such amounts that the
portion of such Losses for which each such Securities Holder shall be
responsible under this subsection 6.7(c) shall be limited to the portion of such
Losses which are directly attributable to an untrue statement of a material fact
or an omission to state a material fact in said Registration Statement in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any such Securities Holder specifically for use
therein, and the Company shall be responsible for the balance of such Losses;
provided, however, that the liability of each such Securities Holder to make
such contribution shall be limited to an amount equal to the proceeds of the
sale of shares of Registrable Common by such Securities Holder in the offering
which gives rise to the liability (net of all cost and expenses (including
underwriting commissions and disbursements) paid or incurred in connection with
the registration, if any, and sale). As among themselves, such Securities
Holders agree to contribute to amounts payable by other such Securities Holders
in such manner as shall, to the extent permitted by law, give effect to the
provisions in subsection 6.7(a)(ii) and those provisions in the Purchase
Agreement comparable to such subsection 6.7(a)(ii). The Company and such
Securities Holders agree that it would not be just and equitable if their
respective obligations to contribute pursuant to this subsection were to be
determined by pro rata allocation (other than as set forth above) of the
aggregate Losses by reference to the proceeds realized by such Securities
Holders in a sale pursuant to said Registration Statement or said Prospectus or
by any other method of allocation which does not take account of the
considerations set forth in this subsection 6.7(c). No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution under this subsection from any
Person who was not guilty of such fraudulent misrepresentation.
(d) The Company and the Securities Holders participating in an
offering pursuant to a Registration Statement agree that, if the underwriters
participating in a Public Sale Event are agreeable, the Purchase Agreement, if
any, relating to such Registration Statement shall contain provisions to the
effect that in order to provide for just and equitable contribution between such
underwriters on the one hand and the Company and such Securities Holders on the
other hand in circumstances in which the indemnification provisions of such
Purchase Agreement are for any reason insufficient or inadequate to hold the
indemnified party harmless, the Company and such Securities Holders on the one
hand and such underwriters on the other hand will contribute on the basis herein
set forth to the aggregate Losses, (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or claims asserted, but after deducting any
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contribution actually received from Persons other than the Company and such
Securities Holders and such underwriters) to which the Company and one or more
of its directors or its officers who sign such Registration Statement or such
Securities Holders or such underwriters or any controlling Person of any of
them, or their respective officers, directors or employees may become subject,
under the Securities Act, under any other statute, at common law or otherwise
insofar as such Losses, arise out of, or are based upon an untrue statement or
alleged untrue statement of any material fact contained in such Registration
Statement, any related Preliminary Prospectus or any related Prospectus, or any
amendment or supplement thereto, or arise out of, or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading. Such
contribution shall be in such proportions as is appropriate to reflect the
relative benefits received by the Company and such Securities Holders on the one
hand and such underwriters on the other hand from the offering of the shares of
Common Stock covered by such offering. The relative benefits received by the
Company and such Securities Holders on the one hand and such underwriters on the
other hand shall be deemed to be in the same proportion as the aggregate total
net proceeds from the offering (before deducting expenses) received by the
Company and such Securities Holders bear to the total underwriting discounts and
commissions received by such underwriters for such offering. Notwithstanding the
provisions set forth above, no underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the shares of
Common Stock underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution under the provision set forth above from any
Person who was not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and the Securities Holders
under the provisions of this subsection 6.7 and provisions in any Purchase
Agreement substantially similar to subsections 6.7(a), 6.7(b) 6.7(c) or 6.7(d)
shall survive the termination of any or all of the other provisions of this
Agreement or such Purchase Agreement.
6.8 Transfer of Rights Under this Agreement; Transfers of Registrable
Common. (a) During the period from the date hereof to the Termination Date, the
rights and obligations of a Securities Holder under this Agreement may be
transferred by a Securities Holder to a transferee of Registrable Common or
Registrable Litigation Shares (subject to the provisos to the definitions of
Registrable Common and Registrable Litigation Shares), provided that, within a
reasonable period of time (but in no event less than five (5) days) prior to
such transfer, (i) the transferring Securities Holder shall have furnished the
Company and the other Securities Holders written notice of the name and address
of such transferee and the number of shares of Registrable Common or Registrable
Litigation Shares with respect to which such rights are being transferred and
(ii) such transferee shall furnish the Company and the Securities Holders (other
than the transferring Securities Holder) a copy of a duly executed Supplemental
Addendum by which such transferee (A) assumes all of the obligations and
liabilities of its transferor hereunder, (B) enjoys all of the rights of its
transferor hereunder and (C) agrees itself to be bound hereby.
(b) If the stock certificates of a transferring Securities
Holder bear a restrictive legend pursuant to subsection 6.10, the stock
certificates of its transferee to whom the rights hereunder are being
transferred shall, subject to such subsection 6.10, also bear such a restrictive
legend.
(c) Except with respect to transfers pursuant to paragraph (a)
above, and subject to the provisions of paragraph (b) above, a transferee of
Registrable Common or Registrable Litigation Shares shall neither assume any
liabilities or obligations nor enjoy any rights hereunder and shall not be bound
by any of the terms hereof.
(d) Each Securities Holder hereby agrees that any transfer of
shares of Registrable Common or Registrable Litigation Shares by such Securities
Holder shall be made (i) in compliance with, or in a transaction exempt from,
the registration requirements set forth in the Securities Act and (ii) in
compliance with all other applicable laws. The Company may request, as a
condition to the transfer of any Registrable Common or Registrable Litigation
Shares, that the transferring Securities Holder provide the Company with (A)
evidence that the proposed transferee is an "accredited investor" as defined in
Rule 501 under the Securities Act and appropriate
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"private placement" representations pursuant to Section 4(2) of the Securities
Act, and (B) an opinion of securities counsel reasonably satisfactory to it with
regard to compliance with this subsection (d).
6.9 Restrictive Legend. Each certificate evidencing shares of
Registrable Common or Registrable Litigation Shares shall, unless and until such
shares are sold or otherwise transferred pursuant to an effective Registration
Statement under the Securities Act or unless, in the absence of such a
Registration Statement, the Company receives an opinion of counsel reasonably
satisfactory to it that the restrictive legend set forth below may be removed
without violation of applicable law (including, without limitation, the
Securities Act), be stamped or otherwise imprinted with a conspicuous legend in
substantially the following form:
"The transfer of the securities evidenced by this certificate
is subject to a Registration Rights Agreement dated as of July 21,
1996, with the issuer as from time to time amended, and no transfer of
the securities evidenced by this certificate shall be valid or
effective unless made in accordance with said Agreement. A copy of said
agreement is on file and may be inspected at the principal executive
office of the issuer. The securities evidenced by this certificate have
not been registered under the Securities Act of 1933, as amended, and
may not be offered or sold unless there is in effect with respect
thereto a registration statement under said Act or unless an opinion of
counsel reasonably satisfactory to the issuer has been furnished to the
issuer that registration is not required under said Act."
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
In connection with the Shelf Registration Statement and the Litigation
Shelf, the Company shall, on the respective date of effectiveness of each such
Registration Statement with the Commission (the "effective date"), certify to
each Securities Holder in a certificate of a Responsible Officer of the Company
to the effect that the representations and warranties set forth below are true
and correct at and as of such effective date. In connection with any other Sale
Event in which Securities Holders participate, except as otherwise may be agreed
upon by such participating Securities Holders and the Company, the Company shall
represent and warrant in the Purchase Agreement relating to such Sale Event to
the Securities Holders and any underwriters participating in such Sale Event as
follows (except as otherwise indicated, each reference in this Section to the
"Registration Statement" shall refer to the Shelf Registration Statement, the
Litigation Shelf or a Registration Statement in respect of any other such Sale
Event in which Securities Holders participate, as the case may be, including all
information deemed to be a part thereof, as amended, and each reference to "the
Prospectus" shall refer to the related Prospectus):
(a) At the time of filing, the Registration Statement (i)
complied in all material respects with the applicable requirements of the
Securities Act and (ii) did not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein in light of the circumstances under which
they were made not misleading; provided, however, that the Company makes no
representations or warranties as to the information contained in or omitted from
the Registration Statement in reliance upon and in conformity with the
information furnished in writing to the Company by or on behalf of any
Securities Holder specifically for use in connection with the preparation
thereof or any information furnished in writing to the Company by or on behalf
of any underwriter specifically for use in connection with the preparation
thereof, other than that the Company has no knowledge of any such untrue
statement or omission in respect of such information.
(b) (i) When the Registration Statement became (in the case of
a Registration Statement filed pursuant to Rule 415) or shall become effective,
the Registration Statement did or will comply in all material respects with the
applicable requirements of the Securities Act; (ii) when the Prospectus is filed
in accordance with Rule 424(b), the Prospectus (and any supplements thereto)
will comply in all material respects with the applicable requirements of the
Securities Act; (iii) the Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading; and (iv) the Prospectus, if not filed pursuant to Rule 424(b), did
not or will not, and on the date of any filing pursuant to Rule 424(b), the
Prospectus (together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the
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statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to the information contained in or omitted from
the Registration Statement, or the Prospectus (or any supplement thereto) in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Securities Holder specifically for use in
connection with the preparation of the Registration Statement or the Prospectus
(or any supplement thereto) or any information furnished in writing to the
Company by or on behalf of any underwriter specifically for use in connection
with the preparation of the Registration Statement or the Prospectus (or any
supplement thereto), other than that the Company has no knowledge of any such
untrue statement or omission in respect of such information.
(c) The public accountants who certified the Company's
financial statements in the Registration Statement are independent certified
public accountants within the meaning of the Securities Act; the historical
consolidated financial statements, together with the related schedules and
notes, forming part of the Registration Statement and the Prospectus comply in
all material respects with the requirements of the Securities Act and have been
prepared, and present fairly the consolidated financial condition, results of
operations and changes in financial condition of the Company and its
consolidated subsidiaries at the respective dates and for the respective periods
indicated, in accordance with generally accepted accounting principles applied
consistently throughout such periods (except as specified therein); and the
historical consolidated financial data set forth in the Prospectus is derived
from the accounting records of the Company and its consolidated subsidiaries,
and is a fair presentation of the data purported to be shown; and the pro forma
consolidated financial statements (if any), together with the related notes,
forming part of the Registration Statement and the Prospectus, comply in all
material respects with the requirements of Regulation S-X under the Securities
Act.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF THE SECURITIES HOLDERS.
Each participating Securities Holder shall, in connection with a Public
Sale Event, if required by the terms of a Purchase Agreement, if any, relating
to such Public Sale Event, for itself severally and not jointly represent and
warrant to the underwriter or underwriters and each other Securities Holder
participating in such Public Sale Event as follows:
(a) Such Securities Holder has all requisite power and
authority (or with respect to the FDIC statutory authority) to enter into and
carry out the terms of this Agreement and such Purchase Agreement and the other
agreements and instruments related to such agreements to which it is a party.
(b) Each of this Agreement and such Purchase Agreement has
been duly authorized, executed and delivered by or on behalf of such Securities
Holder and constitutes the legal, valid and binding obligation of such
Securities Holder, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles.
(c) Such Securities Holder, immediately prior to any sale of
shares of Registrable Common pursuant to such Purchase Agreement, will have good
title to such shares of Registrable Common, free and clear of all liens,
encumbrances, equities or claims (other than those created by this Agreement);
and, upon payment therefor, good and valid title to such shares of Registrable
Common will pass to the purchaser thereof, free and clear of any lien, charge or
encumbrance created or caused by such Securities Holder.
(d) Such Securities Holder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in, under the Exchange Act or
other applicable law, stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of shares of Registrable Common.
(e) Written information furnished by or on behalf of such
Securities Holder to the Company expressly for use in the Registration Statement
or related Prospectus or amendment thereof or supplement thereto will not
contain as of the effective date of such Registration Statement or as of the
date of any Prospectus or as of
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the date of any amendment thereof or supplement thereto any untrue statement of
a material fact or omit to state any material fact required be stated or
necessary to make the statements in such information not misleading.
SECTION 9. DELIVERY OF COMFORT LETTERS AND LEGAL OPINIONS.
(a) On (i) the respective dates that the Shelf Registration
Statement and the Litigation Shelf are declared effective by the Commission,
(ii) the date a post-effective amendment to the Shelf Registration Statement or
the Litigation Shelf, if any, covering the most recent annual or quarterly
financial statements of the Company is declared effective by the Commission and
(iii) the date that a Registration Statement relating to a Sale Event in which
Securities Holders participate is declared effective by the Commission, the
Company shall comply with the following:
(x) The Company shall have received, and delivered to
each Securities Holder
participating in such Sale Event, a copy of a "comfort" letter or letters, or
updates thereof according to customary practice, of the independent certified
public accountants who have certified the Company's financial statements
included in the Registration Statement covering substantially the same matters
with respect to the Registration Statement (including the Prospectus) and with
respect to events subsequent to the date of the Company's financial statements
as are reasonably customarily covered in accountants' letters delivered to
underwriters in underwritten public offerings of securities. The Company will
use its best efforts to cause such "comfort" letters to be addressed to such
Securities Holders.
(y) Each Securities Holder participating in such
offering shall have received an opinion and any updates thereof of outside
counsel to the Company reasonably satisfactory to such Securities Holders and
any underwriters or purchasers covering substantially the same matters as are
customarily covered in opinions of issuer's counsel delivered to underwriters in
underwritten public offerings of securities, addressed to each of such
Securities Holders and any underwriters or purchasers participating in such
offering and dated the closing date thereof.
(b) On the Closing Date, the Company shall deliver to each
Initial Securities Holder an opinion of Gibson, Dunn & Crutcher, special outside
counsel to the Company, substantially to the effect that:
(i) The Company has the corporate power and authority
to enter into and carry out the terms of this Agreement; and
(ii) This Agreement has been duly authorized,
executed and delivered by or on behalf
of the Company and, assuming the due authorization, execution and delivery
thereof by the other parties hereto, constitutes the valid and binding
obligation of the Company, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles.
(c) On the Closing Date, the FDIC shall deliver to the Company
an opinion of the General Counsel of the FDIC, substantially to the effect that:
(i) The FDIC has statutory authority to enter into
and carry out the terms of this
Agreement; and except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles.
(ii) This Agreement has been duly authorized,
executed and delivered by or on behalf of the FDIC and, assuming the due
authorization, execution and delivery thereof by the other parties thereto,
constitutes the valid and binding obligation of the FDIC, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
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(d) On the Closing Date the Partnership shall deliver to the
Company an opinion of Kelly, Hart & Hallman, special counsel to the Partnership,
substantially to the effect that:
(i) The Partnership has all requisite power and
authority to enter into and carry out the terms of this Agreement; and
(ii) This Agreement has been duly authorized,
executed and delivered by or on behalf of the Partnership and, assuming the due
authorization, execution and delivery thereof by the other parties thereto,
constitutes the valid and binding obligation of the Partnership, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
SECTION 10. MISCELLANEOUS.
10.1 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
facsimile transmission), and shall be mailed by United States registered mail,
postage prepaid, return receipt requested, sent by facsimile or delivered by
hand or by courier or overnight delivery service. Unless otherwise expressly
provided herein, all such notices, requests and demands shall be deemed to have
been duly given or made, as the case may be, (a) five (5) days after deposit in
the United States mail, (b) when actually delivered by hand or by courier or
overnight delivery service to the designated address, or, (c) in the case of
facsimile transmission, when received and telephonically confirmed. All notices
shall be addressed as follows or to such other address as may be hereafter
designated in writing by the respective parties hereto:
The Company: Marc R. Kittner
Senior Vice President
Washington Mutual, Inc.
1201 Third Avenue, Suite 1500
Seattle, WA 98101
with copies to: Todd H. Baker, Esq.
Gibson, Dunn & Crutcher
One Montgomery Street, Telesis Tower
San Francisco, CA 94104-4505
Fay L. Chapman, Esq.
Foster Pepper & Shefelman
1111 Third Avenue, Suite 3400
Seattle, WA 98101
The Securities Holders: Keystone Holdings Partners, L.P.
201 Main Street, 23rd Floor
Fort Worth, TX 76102
Attn: Ray L Pinson
Federal Deposit Insurance Corporation
801 17th Street, N.W.
Washington, D.C. 20434-0111
Attn: Director, Division of Resolutions
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with copies to: Legal Division
Federal Deposit Insurance Corporation
1717 H Street, N.W., Room H-10025
Washington, D.C. 20434-00001
Attn: David M. Gearin, Senior Counsel
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attn: Michael L. Ryan
Kelly, Hart & Hallman
201 Main Street, Suite 2500
Fort Worth, TX 76102
Attn: Billy J. Ellis
Dewey Ballantine
1775 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: John K. Hughes
Telecopy (202) 862-1093
10.2 Amendments and Waivers. The Securities Holders of not less than
75% of the Registrable Common and Registrable Litigation Shares held or
beneficially owned by Securities Holders at any point in time and the Company
may from time to time enter into written amendments, supplements or
modifications to this Agreement for the purpose of adding any provisions hereto
or changing in any manner the rights of the Securities Holders or the Company
hereunder, and the Securities Holders of no less than 75% of the Registrable
Common and Registrable Litigation Shares held or beneficially owned by
Securities Holders at any time may execute a written instrument waiving, on such
terms and conditions as may be specified therein, any of the requirements of
this Agreement which are solely for the benefit of the Securities Holders and
where such waiver does not adversely affect the interests of the Company;
provided, however, that no such waiver and no such amendment, supplement or
modification shall (i) adversely affect the rights of a Securities Holder under
Section 2, 3, 4 or 5 hereof or (ii) amend, modify or waive any provision of
Section 6 or this subsection 10.2, in each case without the written consent of
each Securities Holder. Any such waiver and any such amendment, modification or
supplement shall apply equally to each of the Securities Holders and the
Company.
10.3 Termination. This Agreement and the respective obligations and
agreements of the parties hereto, except as otherwise expressly provided herein,
shall terminate on the Termination Date.
10.4 Survival of Representations and Warranties. Except as they may by
their terms relate to an earlier date, all representations and warranties made
hereunder and in any document, certificate or statement delivered pursuant
hereto or in connection herewith shall survive the execution and delivery of
this Agreement and the termination of any or all of the provisions of this
Agreement.
10.5 Headings. The descriptive headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
10.6 Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all of such
counterparts shall together one and the same agreement.
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10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CHOICE
OF LAW PROVISIONS.
10.8 Adjustment of Shares. Each reference to a number of shares of
Common Stock in this Agreement shall be adjusted proportionately to reflect any
stock dividend, subdivision, split or reverse split or the like affected with
respect to all outstanding shares of Common Stock.
10.9 No Inconsistent Agreements. The Company will not on or after the
date of this Agreement enter into, and is not presently a party to, any
agreement with respect to its securities which is inconsistent with the rights
granted to the Securities Holders in this Agreement or otherwise conflicts with
the provisions hereof. The rights granted to the Securities Holders pursuant to
this Agreement shall be superior to, and take precedence over, any similar
rights granted to any other Person by the Company subsequent to the date hereof.
10.10 Severability. Any provisions of this Agreement prohibited or
rendered unenforceable by any applicable law of any jurisdiction shall as to
such jurisdiction be ineffective to the extent of such prohibition or
unenforceability, without invalidating the remaining provisions hereof, any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
10.11 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns to each of the
parties hereunder as otherwise provided herein.
10.12 Entire Agreement. This Agreement constitutes the entire agreement
and understanding of the parties hereto in respect of the matters referred to
herein and supersedes all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof.
10.13 Result if No Merger. Notwithstanding any provision of this
Agreement, or any rights that the Initial Securities Holders may have hereunder,
if the Closing does not occur for any reason, this Agreement shall be
terminated, shall be deemed null and void ab initio, and the Company shall have
no obligations or liabilities whatsoever to any Person under any of the terms of
this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WASHINGTON MUTUAL, INC.
By /s/ Craig E. Tall
------------------------------------
Name: Craig E. Tall
----------------------------------
Title: Executive Vice President
---------------------------------
KEYSTONE HOLDINGS PARTNERS, L.P.
By: KH Group Management, Inc., Its General Partner
By /s/ Ray L.Pinson
------------------------------------
Name: Ray L. Pinson
----------------------------------
Title: Vice President
---------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION, AS
MANAGER OF THE FSLIC RESOLUTION FUND
By /s/ James A. Meyer
------------------------------------
Name: James a. Meyer
----------------------------------
Title: Assistant Director
---------------------------------
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APPENDIX G
OPINION OF CS FIRST BOSTON CORPORATION
November 12, 1996
Board of Directors
Washington Mutual, Inc.
1201 Third Avenue
Seattle, WA 98101
Dear Sirs:
You have asked us to advise you with respect to the fairness to Washington
Mutual, Inc. ("Washington Mutual" or the "Acquiror") from a financial point of
view of the consideration to be paid by Washington Mutual pursuant to the terms
of the Acquisition Agreement, dated as of July 21, 1996 (the "Acquisition
Agreement"), by and among Keystone Holdings, Inc. (the "Company"), various of
its subsidiaries and other affiliates, and Washington Mutual. The Acquisition
Agreement provides for the merger (the "Merger") of the Company with and into
the Acquiror, pursuant to which, among other things, the outstanding shares of
common stock of the Company and the Warrants held by the FSLIC Resolution Fund
(the "Warrantholder") in N.A. Capital Holdings, a subsidiary of the Company,
will be converted into 40.0 million shares of common stock, no par value, of the
Acquiror ("WAMU Common Stock"). In addition, up to 8.0 million of additional
shares of WAMU Common Stock (the "Litigation Shares"), valued at the average
closing price of WAMU Common Stock during the ten days prior to the third
trading day before closing of the Acquisition, will be placed in escrow and
released to the stockholders of the Company and the Warrantholder if an
equivalent amount of Net Case Proceeds (as defined in the Acquisition Agreement)
are received by the Acquiror in connection with Case No. 92-782C filed on
December 28, 1992 in the United States Court of Federal Claims (the "Case").
In arriving at our opinion, we have reviewed certain publicly available business
and financial information relating to the Company and the Acquiror, as well as
the Acquisition Agreement. We have also reviewed certain other information,
including financial forecasts, provided to us by the Company and the Acquiror,
and have met with the Company's and the Acquiror's managements to discuss the
business and prospects of the Company and the Acquiror.
We have also considered certain financial data for other publicly held companies
in businesses similar to those of the Company and the Acquiror and we have
considered the financial terms of certain other business combinations which have
recently been effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
which we deemed relevant. We have also relied upon the views of the Company's
and the Acquiror's managements concerning the business, operational and
strategic benefits and implications of the Merger, including financial forecasts
provided to us by the Company and the Acquiror relating to the synergistic
values and operating cost savings expected to be achieved through the
combination of the operations of the Company and the Acquiror.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts referred to above, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the Company's and the Acquiror's managements as to the future
financial performance of the Company and the Acquiror. In addition, we have not
made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company and the
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Acquiror, nor have we been furnished with any such evaluations or appraisals.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated ont he date hereof. We are not
expressing any opinion as to what the value of the WAMU common stock actually
will be when issued to the Company's stockholders and the Warrantholder pursuant
to the Merger or the prices at which such securities will trade subsequent to
the Merger. We are not experts in legal matters and, accordingly, solely for
purposes of this opinion we have assumed, with your consent, that the Litigation
Shares will be deposited into escrow at the Closing Date and that all of such
shares will ultimately be issued to the stockholders of the Company and the
Warrantholder. In making such assumptions we are not, however, expressing any
view as to the outcome of the Case.
We have acted as financial advisor to Washington Mutual in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger.
In the ordinary course of our business, CS First Boston and its affiliates may
actively trade the debt and equity securities of both the Company and the
Acquiror for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Washington Mutual in connection with its consideration of the
Merger and is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other document
used in connection with the offering or sale of securities, nor shall this
letter be used for any other purposes, without CS First Boston's prior written
consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the consideration to be paid by the Acquiror in the Merger is fair to
the Acquiror from a financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
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APPENDIX H
CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
23B.13.010 DEFINITIONS. As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
23B.13.020 RIGHT TO DISSENT. (1) A shareholder is entitled to dissent
from, and obtain payment of the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled to
vote on the merger, or (ii) if the corporation is a subsidiary that is merged
with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a share
if the fractional share so created is to be acquired for cash under RCW
23B.06.040; or
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(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
23B.13.200 NOTICE OF DISSENTERS' RIGHTS. (1) If proposed corporate
action creating dissenters' rights under RCW 23B.13.020 is submitted to a vote
at a shareholders' meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW
23B.13.020 is taken without a vote of shareholders, the corporation, within ten
days after [the] effective date of such corporate action, shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT. (1) If proposed
corporate action creating dissenters' rights under RCW 23B.13.020 is submitted
to a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights must (a) deliver to the corporation before the vote is taken
written notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effected, and (b) not vote such
shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1) of this section is not entitled to payment for the shareholder's shares
under this chapter.
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23B.13.220 DISSENTERS' NOTICE. (1) If proposed corporate action
creating dissenters' rights under RCW 23B.13.020 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the
effective date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days after
the date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230 DUTY TO DEMAND PAYMENT. (1) A shareholder sent a dissenters'
notice described in RCW 23B.13.220 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to RCW 23B.13.220(2)(c), and
deposit the shareholder's certificates in accordance with the terms of the
notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
23B.13.240 SHARE RESTRICTIONS. (1) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is effected or the restriction is
released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
23B.13.250 PAYMENT. (1) Except as provided in RCW 23B.13.270, within
thirty days of the later of the effective date of the proposed corporate action,
or the date the payment demand is received, the corporation shall pay each
dissenter who complied with RCW 23B.13.230 the amount the corporation estimates
to be the fair value of the shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
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(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
23B.13.260 FAILURE TO TAKE ACTION. (1) If the corporation does not
effect the proposed action within sixty days after the date set for demanding
payment and depositing share certificates, the corporation shall return the
deposited certificates and release any transfer restrictions imposed on
uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
23B.13.270 AFTER-ACQUIRED SHARES. (1) A corporation may elect to
withhold payment required by RCW 23B.13.250 from a dissenter unless the
dissenter was the beneficial owner of the shares before the date set forth in
the dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest due,
and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.150 or
offered under RCW 23B.13.170 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
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23B.13.300 COURT ACTION. (1) If a demand for payment under RCW
23B.13.280 remains unsettled, the corporation shall commence a proceeding within
sixty days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the superior court
of the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled, parties to the proceeding as in
an action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to
judgment (a) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to withhold
payment under RCW 23B.13.270.
23B.13.310 COURT COSTS AND COUNSEL FEES. (1) The court in a proceeding
commenced under RCW 23B.13.300 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against the corporation, except that
the court may assess the costs against all or some of the dissenters, in amounts
the court finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under RCW
23B.13.280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
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court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Washington Mutual, Inc.:
We have audited the accompanying restated consolidated statements of financial
position of Washington Mutual, Inc. and subsidiaries (the Company) as of
December 31, 1995 and 1994, and the related restated consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The restated
consolidated financial statements give retroactive effect to the merger of
Washington Mutual, Inc. and Western Bank, which has been accounted for as a
pooling of interests as described in Note 2 to the restated consolidated
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Washington Mutual,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, on January 1, 1994.
Deloitte & Touche LLP
Seattle, Washington
October 15, 1996
<PAGE> 294
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Keystone Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Keystone
Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, stockholder's equity and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keystone Holdings,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 26, 1996, except as to Note 27
to the consolidated financial statements,
which is as of February 8, 1996
