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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 22, 1996
Washington Mutual, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Washington
- -------------------------------------------------------------------------------
0-25188 91-1653725
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Commission File Number IRS Identification No.
1201 Third Avenue, Seattle, Washington 98101
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Address of Principal Executive Office Postal Code
206-461-2000
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Registrant's telephone number including area code
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 21, 1996, the Company entered into an Agreement of Merger with
Keystone Holdings, Inc. ("Keystone"), Keystone's sole shareholder and certain
of Keystone's wholly-owned subsidiaries (including American Savings Bank, F.A.
("ASB")), whereby Keystone would be merged with and into the Company. A
summary of the transaction is included in the press release issued to announce
the transaction which is included herein as Exhibit 7(c).1.
Forward-Looking Statements; Factors to Consider
Exhibit 7(c).4 includes forward-looking statements regarding each of
Keystone, ASB, certain of Keystone's other subsidiaries and the Company and the
combined company following the merger. Set forth below are factors which may
cause actual results of operations to vary materially from the forward-looking
statements contained therein.
Economic Conditions and Real Estate Risk. The Company's lending
operations are concentrated primarily in Washington and Oregon and ASB's
lending operations are concentrated in California. As a result, the financial
condition and results of operations of the combined company will be subject to
general economic conditions
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and, particularly, the conditions in the single-family or multi-family
residential real estate markets prevailing in those three states. In addition,
in an economic downturn, there tends to be a run-off in deposits as well as
lower sales and increased redemptions of mutual funds. If economic conditions
in those states worsen or if the market for residential real estate in
particular declines, the combined company 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 on which the
forward-looking statements are based.
The California economy and its real estate market 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 loss provisions
improved from earlier periods. The forward-looking statements regarding ASB's
results of operations assume that the California economy and real estate market
will continue the trend of improvement. A worsening of current economic
conditions or a significant decline in real estate values in California could
cause actual results to vary materially from the forward-looking statements.
Interest Rate Risk. Each of the Company 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 those of investments, deposits and borrowings, are affected
by market interest rates. Generally, the Company 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; even though its loan portfolio
consists primarily of adjustable-rate mortgages ("ARMs"), the adjustments in
the interest rates on the ARMs tend to lag changes in ASB's cost of funds. To
the extent that interest rates generally are increasing during the period to
which the forward-looking statements apply, the combined company's actual
interest rate spread, and thus net income, may be materially less than set
forth in the forward-looking statements.
Operational Issues; Management. ASB's assets and deposits are of
comparable size to the Company's, and ASB operates primarily in the State of
California, where the Company 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 which
could adversely affect the results of operations of the combined company. The
forward-looking statements utilize ASB's internal estimates of growth and
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results of operations and generally make no provisions for any possible
negative effects of the merger. In addition, the forward-looking statements
estimate certain cost savings from the consolidation of operations which may
not materialize or which may be delayed as a result of difficulties in
consolidating operations. To the extent that events differ from the
assumptions, actual results of operations may vary materially from the
forward-looking statements.
The ability of the combined company to operate efficiently, at least in
the short term, will be enhanced by the ability to retain existing management
personnel. If the Company 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, and may negatively affect the
predicted cost savings.
The forward-looking statements assume that the deposit base of both the
Company and ASB will remain substantially intact during the period of the
merger and will grow at historical rates following the merger. To the extent
that the change in ownership of ASB or other factors result in either a
temporary or long-term loss of deposits, actual results of operations may vary
materially from the forward-looking information presented.
Ability to Refinance Debt. The forward-looking statements assume that
certain existing indebtedness and preferred equity of certain Keystone
subsidiaries will be refinanced at lower interest rates and/or repaid following
the merger. 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 costs may be materially higher than anticipated
by the forward-looking statements.
Competition. The Company and ASB both face significant competition in
their respective markets. The Company has limited operating experience in
California. California has a much larger population with more large financial
institution competitors than the states in which the Company currently
operates. Many 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 the combined company to achieve the financial goals reflected in
the forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Keystone Holdings, Inc. for the years
ended December 31, 1993, 1994 and 1995
Consent of KPMG Peat Marwick LLP, independent auditors
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(c) 1. Press Release dated July 22, 1996
2. Agreement of Merger dated July 21, 1996 among
Washington Mutual, Inc., Keystone Holdings, Inc.
and certain Keystone affiliates
3. Warrant Exchange Agreement dated July 21, 1996 among
FSLIC Resolution Fund, Washington Mutual, Inc.,
Keystone Holdings, Inc. and certain Keystone affiliates
4. Text of presentation to investment analysts at a
meeting on July 22, 1996 and copies of slides
accompanying such presentation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WASHINGTON MUTUAL, INC.
Date: July 22, 1996 By: /s/ Craig E. Tall
---------------------------
Craig E. Tall
Executive Vice President
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
7(a) Financial Statements of Keystone Holdings, Inc. for the years
ended December 31, 1993, 1994 and 1995
Consent of KPMG Peat Marwick LLP, independent auditors
7(c).1 Press Release dated July 22, 1996
7(c).2 Agreement of Merger dated July 21, 1996 among
Washington Mutual, Inc., Keystone Holdings, Inc.
and certain Keystone affiliates
7(c).3 Warrant Exchange Agreement dated July 21, 1996 among
FSLIC Resolution Fund, Washington Mutual, Inc.,
Keystone Holdings, Inc. and certain Keystone affiliates
7(c).4 Text of presentation to investment analysts at a
meeting on July 22, 1996 and copies of slides
accompanying such presentation
<PAGE> 1
EXHIBIT 7(a)
KEYSTONE HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 1995, 1994 AND 1993
<PAGE> 2
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report..............................................2
Consolidated Balance Sheets...............................................3
Consolidated Statements of Earnings.......................................4
Consolidated Statements of Stockholder's Equity...........................5
Consolidated Statements of Cash Flows.....................................6
Notes to Consolidated Financial Statements................................8
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KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, CA 90017
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.
/s/ KPMG Peat Marwick LLP
January 26, 1996
<PAGE> 4
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Dollars in Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
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
============ ============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<CAPTION> 1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
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 ................................ 16,419 (2,814) 4,327
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 ............................................... 4,380 726 29,484
Net Expense of Foreclosed Properties ................................... (18,032) (13,390) (12,951)
Net Servicing Income ................................................... 18,696 14,038 7,229
Other Income and Expense ............................................... 743 52 3,339
----------- ----------- -----------
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
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<CAPTION> Unrealized
Gain (Loss) 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 Gain 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 loss on Available-
for-Sale Securities ........ -- -- 139,528 -- 139,528
--------- --------- --------- --------- ---------
Balance at December 31, 1995 ... $ 1 $ 30,419 $ 110,367 $ 527,772 $ 668,559
========= ========= ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<CAPTION> 1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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 21,781 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 ......................................... (20,799) 2,104 (29,709)
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) (12,668) 53,189
----------- ----------- -----------
Total Adjustments ..................................................... 408,287 470,326 111,936
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................. 493,089 520,650 194,193
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real Estate Receivables:
Originated ............................................................. (3,939,384) (4,491,645) (2,955,578)
Principal Payments on Real Estate Receivables .......................... 744,400 840,432 1,014,252
Mortgage-Backed Securities:
Purchased .............................................................. (58,123) (544,377) (10,000)
Purchased and Securitized Mortgage-Backed Securities, Available-for-Sale (115,154) (127,862) (284,314)
Proceeds from Sale of Mortgage-Backed Securities, Available-for-Sale ... 159,751 76,259 222,140
Principal Payments on Mortgage-Backed Securities ....................... 443,820 469,740 285,315
Consumer Receivables Originated or Collected, net change ................. 3,698 16,023 3,735
Federal Home Loan Bank Stock, net change ................................. (36,962) (16,457) (16,840)
New West Note, Payments Received ......................................... 1,682,040 1,569,018 1,569,018
Premises and Equipment, Purchased and Disposed ........................... (60,298) (17,777) (7,936)
Purchase of Investment Securities ........................................ (1,055,853) (765,132) (311,208)
Proceeds from Maturities of Investment Securities ........................ 707,064 608,644 371,509
Proceeds from Sales of Investment Securities, Available-for-Sale ......... 294,123 22,117 39,992
Foreclosed Properties, Net Sales Proceeds ................................ 125,889 168,141 151,513
Cash Proceeds from Disposition of Credit Card Receivables ................ -- 166,315 --
Mortgage Servicing Rights, Net Change .................................... (45,298) (4,120) --
Other, net ............................................................... (196) 5,333 (5,492)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................... (1,150,492) (2,025,348) 66,106
----------- ----------- -----------
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<CAPTION> 1995 1994 1993
----------- ------------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, net ............................... 189,540 (552,151) (618,033)
Federal Home Loan Bank Advances ..................... 612,971 (1,146,297) (49,157)
Reverse Repurchase Agreements, net change ........... 33,782 2,948,064 534,842
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 1,258,703 (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>
<TABLE>
Disclosures of Cash Flow Information
<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
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE> 9
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. The Company does
not record any equity in the earnings or losses of New West nor does it
consolidate the accounts of New West in its 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.
8
<PAGE> 10
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies (continued)
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.
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.
9
<PAGE> 11
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies (continued)
Receivables (continued)
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 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.
10
<PAGE> 12
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies (continued)
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.
11
<PAGE> 13
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies (continued)
Purchased and Originated Servicing (continued)
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
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.
12
<PAGE> 14
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies (continued)
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
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.
13
<PAGE> 15
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies (continued)
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.
14
<PAGE> 16
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3: Investment Securities
The following table summarizes 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,
(in thousands):
<TABLE>
<CAPTION> 1995 1994
---------------------------------------------- -----------------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ------ ---------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities .................... $ 29 $-- $ -- $ 29 $ 23 $ 1 $ -- $ 24
Time Deposits ................. 700 -- -- 700 1,000 -- -- 1,000
Foreign Securities ............ 100 -- (5) 95 100 -- (6) 94
Money Market
Investments and
Commercial Paper .............. 115,899 -- (2) 115,897 85,891 -- (7) 85,884
-------- --- -------- -------- -------- -------- -------- --------
Total ....................... $116,728 $-- $ (7) $116,721 $ 87,014 $ 1 $ (13) $87,002
======== === ======== ======== ======== ======== ======== ========
</TABLE>
The following table summarizes 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 1994
-------------------------------------------------- -------------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------------- ----- ------ -------- -------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debentures .............. $164,972 $407 $ - $165,379 $ 90,021 $ - $(2,447) $ 87,574
Callable Step Bond ...... - - - - 50,000 - (1,625) 48,375
-------- ------ ------ ------------ --------- ------ --------- --------
Total ................. $164,972 $407 $ - $165,379 $140,021 $ - $(4,072) $135,949
======== ==== ===== ======== ======== ===== ======== ========
</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.
15
<PAGE> 17
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3: Investment Securities (continued)
The following table summarizes by contractual maturity the recorded value and
fair value of investment securities at December 31, 1995 (in thousands):
<TABLE>
<CAPTION> Amortized Fair
Contractual Maturity Cost Value
<S> <C> <C>
One year or less $116,628 $116,626
After one year through five years 165,022 165,427
After five years through ten years 50 47
-------- --------
Total $281,700 $282,100
======== ========
</TABLE>
Actual maturities may differ from those shown as issuers have the right to call
or prepay certain obligations.
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 $424,051 $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.
16
<PAGE> 18
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
---------------------------------------------------- ----------------------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
FHLMC .................. $ -- $ -- $ -- $ -- $ 591,960 $ -- $ (6,932) $ 585,028
FNMA ................... 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 ................... 2,872,005 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>
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 $159,278 $73,450 $120,238
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.
17
<PAGE> 19
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
----------- ------------
<S> <C> <C>
REAL ESTATE RECEIVABLES:
Single-Family
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%
============ ============
- ----------
(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 $3.6 billion,
mortgage-backed securities of $4.2 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.
</TABLE>
18
<PAGE> 20
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5: Receivables (continued)
The Company primarily lends to customers located throughout California. The
following table summarizes the 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
------------ ------------ ------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-Family
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 and
Land .................................... 14,952 52,035 23,166 11,595 149,373 108,416 359,537
Equity .................................. 3 27 1,788 55 85 44,164 46,122
----------- ----------- ----------- ----------- ----------- ----------- -----------
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.
19
<PAGE> 21
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5: Receivables (continued)
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
-------- --------
<S> <C> <C>
Nonaccrual Receivables and Recourse Obligations(1)(2)
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%
(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.
</TABLE>
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 multi-family and commercial loans less than 90 days
delinquent in
20
<PAGE> 22
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5: Receivables (continued)
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.
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
<S> <C> <C> <C>
Nonaccrual Loans:
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 allowance ................................... 34,879 -- 34,879
------- ------- -------
48,350 2,756 45,594
------- ------- -------
Other Impaired Loans:
With specific allowances ...................................... 10,065 2,804 7,261
Without specific allowance ................................... 6,419 -- 6,419
------- ------- -------
16,484 2,804 13,680
------- ------- -------
Total Impaired Loans ....................................... $69,379 $ 5,718 $63,661
======= ======= =======
</TABLE>
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.
21
<PAGE> 23
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5: Receivables (continued)
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 $12.6 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 $0.9 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 nonaccrual loans to total impaired loans at
December 31, (dollars in thousands):
<TABLE>
<CAPTION> 1995
<S> <C>
Nonaccrual Loans $144,095
Homogenous 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
----------------------------------- -------------------------------- --------------------------------
Loans MBS Total Loans MBS Total Loans MBS Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, ............. $ 95,789 $ 16,701 $ 112,490 $ 113,672 $ 12,075 $ 125,747 $ 114,427 $ 7,110 $ 121,537
Provision for Credit
Losses ............... 52,720 11,117 63,837 91,874 9,735 101,609 116,427 7,076 123,503
Charge Offs:
Single-Family ........ (44,941) -- (44,941) (85,604) -- (85,604) (91,440) -- (91,440)
Multi-Family ......... (22,784) -- (22,784) (17,374) -- (17,374) (10,127) -- (10,127)
Commercial ........... (5,362) -- (5,362) (1,963) -- (1,963) (3,008) -- (3,008)
Other ................ (1,510) -- (1,510) (5,084) -- (5,084) (13,971) -- (13,971)
MBS .................. -- (9,761) (9,761) -- (5,507) (5,507) -- (2,111) (2,111)
--------- --------- --------- --------- --------- --------- --------- ---------
(74,597) (9,761) (84,358) (110,025) (5,507) (115,532) (118,546) (2,111) (120,657)
Earthquake ........... (3,743) -- (3,743) (5,145) -- (5,145) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total Charge-Offs .. (78,340) (9,761) (88,101) (115,170) (5,507) (120,677) (118,546) (2,111) (120,657)
Recoveries ............. 4,961 -- 4,961 2,733 -- 2,733 -- -- --
Other .................. (615) (616) (1,231) 2,680 398 3,078 1,364 -- 1,364
--------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, ........... $ 74,515 $ 17,441 $ 91,956 $ 95,789 $ 16,701 $ 112,490 $ 113,672 $ 12,075 $ 125,747
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
22
<PAGE> 24
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>
23
<PAGE> 25
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8: New West Note (continued)
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 FSLIC Resolution Fund assistance to New West.
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>
24
<PAGE> 26
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10: Foreclosed Properties (continued)
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>
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 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.
25
<PAGE> 27
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11: Mortgage Servicing Rights (continued)
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>
26
<PAGE> 28
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
<S> <C> <C> <C> <C>
Demand and Savings Deposits
Money Market Demand .................................. $ 1,425,243 1.50 % $ 1,585,308 1.84 %
Money Market Savings ................................. 1,661,762 4.27 1,063,064 2.77
Passbook ............................................. 632,885 2.01 564,298 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>
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
---------- ---------- ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
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.
27
<PAGE> 29
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12: Deposits (continued)
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 $3.6 billion and $597.0 million,
respectively. At December 31, 1994, FHLB stock of $123.0 million and receivables
with aggregate principal balances of $3.0 billion 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>
28
<PAGE> 30
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13: Federal Home Loan Bank Advances (continued)
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
========== ========== ========== ========== ========== ==========
(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.
</TABLE>
29
<PAGE> 31
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14: Reverse Repurchase Agreements (continued)
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> Weighted Collateral
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
(1) Recorded value includes accrued interest at December 31, 1995.
</TABLE>
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>
30
<PAGE> 32
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15: Other Borrowed Money (continued)
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 was 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.
31
<PAGE> 33
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15: Other Borrowed Money (continued)
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.
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.
32
<PAGE> 34
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16: Employee Benefit and Compensation Plans (continued)
Pension Plan (continued)
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
<S> <C>
Actuarial Present Value of Benefit Obligation
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>
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>
33
<PAGE> 35
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16: Employee Benefit and Compensation Plans (continued)
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.
34
<PAGE> 36
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 annualizing 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.
35
<PAGE> 37
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17: Federal and State Income Taxes (continued)
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.
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>
36
<PAGE> 38
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17: Federal and State Income Taxes (continued)
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>
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.
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.
37
<PAGE> 39
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17: Federal and State Income Taxes (continued)
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>
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.
38
<PAGE> 40
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
39
<PAGE> 41
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19: Minority Interest (continued)
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: Stockholders' 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.
40
<PAGE> 42
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20: Stockholders' Equity (continued)
Dividend Restrictions and Capital Levels (continued)
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 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
41
<PAGE> 43
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20: Stockholders' Equity (continued)
Dividend Restrictions and Capital Levels (continued)
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 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.
42
<PAGE> 44
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21: Interest Rate Risk Management (continued)
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>
Term to Maturity
<CAPTION> Notional Fair Weighted Average Rate In Years
Amount Value Commences Receive Pay Original Remaining
----------- ------------ ------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995
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
Notional Fair Weighted Average Rate In Years
Amount Value Commences Receive Pay Original Remaining
---------- ---------- ----------- ------------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994
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>
43
<PAGE> 45
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21: Interest Rate Risk Management (continued)
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.
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>
44
<PAGE> 46
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21: Interest Rate Risk Management (continued)
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.
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>
45
<PAGE> 47
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22: Fair Value of Financial Instruments (continued)
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.
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.
46
<PAGE> 48
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22: Fair Value of Financial Instruments (continued)
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.
47
<PAGE> 49
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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.
48
<PAGE> 50
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23: Commitments and Contingencies (continued)
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
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.
49
<PAGE> 51
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
50
<PAGE> 52
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24: Significant Event (continued)
Restructuring (continued)
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 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.
51
<PAGE> 53
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
52
<PAGE> 54
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 any 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.
53
<PAGE> 55
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):
<TABLE>
CONDENSED BALANCE SHEETS:
<CAPTION> December 31,
1995 1994
<S> <C> <C>
Assets:
Cash and cash equivalents ................................... $ 59 $ 34
Investment securities ....................................... 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>
<TABLE>
CONDENSED STATEMENTS OF EARNINGS:
<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>
54
<PAGE> 56
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 28: Parent Company Financial Information (continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS:
<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 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>
55
<PAGE> 57
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>
56
<PAGE> 58
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 29: Significant Subsidiary Financial Information (continued)
<TABLE>
<CAPTION> 1995 1994 1993
-------------- -------------- -------------
<C> <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 ................ 16,419 (2,814) 4,327
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 ......................... 4,380 726 6,923
Net Expense of Foreclosed Properties ................... (18,032) (13,390) (12,951)
Net Servicing Income ................................... 18,696 14,038 7,229
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>
57
<PAGE> 59
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 12,322 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 ........................................................ (20,799) 2,104 (11,209)
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 Sales 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) (39,025) 59,401
----------- ----------- -----------
Total Adjustments ................................................................... 377,118 453,716 153,409
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................... 525,640 562,920 268,042
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real Estate Receivables:
Originated .......................................................................... (3,939,384) (4,491,645) (2,955,578)
Principal Payments on Real Estate Receivables ....................................... 744,400 840,432 1,014,252
Mortgage-Backed Securities:
Purchased ........................................................................... (58,132) (544,377) (10,000)
Purchased and Securitized Mortgage-Backed Securities, Available-for-Sale ............ (115,154) (127,862) (284,314)
Proceeds from Sale of Mortgage-Backed Securities, Available-for-Sale ................ 159,751 76,259 222,140
Principal Payments on Mortgage-Backed Securities .................................... 443,820 469,740 285,315
Consumer Receivables Originated or Collected, Net Change .............................. 3,698 16,023 3,735
Purchase of Investment Securities ..................................................... (889,954) (441,538) (53,129)
Proceeds from Maturities of Investment Securities ..................................... 609,250 250,969 56,752
Proceeds from Sales of Investment Securities, Available-for-Sale ...................... 294,123 22,117 39,992
Federal Home Loan Bank Stock, Net Change .............................................. (36,962) (16,457) (16,840)
New West Note, Net Payments Received .................................................. 1,682,040 1,569,018 1,569,018
Premises and Equipment, Purchased and Disposed ........................................ (60,298) (17,777) (7,764)
Foreclosed Properties, Net Sales Proceeds ............................................. 125,889 168,141 151,513
Mortgage Servicing Rights, Net Change ................................................. (45,298) (4,120) 508
Cash Proceeds from Disposition of Credit Card Receivables ............................. -- 166,315 --
Other, Net ............................................................................ (121) (12,116) (5,980)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................................. (1,082,332) (2,076,878) 9,620
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, Net ................................................................. 189,540 (552,151) (618,033)
Federal Home Loan Bank Advances, Net Change ........................................... 612,971 (1,146,297) (49,157)
Reserve Repurchase Agreements, Net Change ............................................. 33,782 2,948,064 534,842
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 1,268,165 (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>
58
<PAGE> 60
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 29: Significant Subsidiary Financial Information (continued)
<TABLE>
Disclosures of Cash Flow Information
<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>
59
<PAGE> 61
CONSENT OF INDEPENDENT AUDITORS
<PAGE> 62
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Keystone Holdings, Inc.
We consent to the use of our report dated January 26, 1996, with
respect to the consolidated balance sheets of Keystone Holdings, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended, December 31, 1995, which report appears
in the Form 8-K of Washington Mutual, Inc. dated July 22, 1996.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Los Angeles, California
July 22, 1996
<PAGE> 1
EXHIBIT 7(c).1
Investor Contact: JoAnn DeGrande July 22, 1996
(206) 461-3186 FOR IMMEDIATE RELEASE
WASHINGTON MUTUAL TO ACQUIRE
AMERICAN SAVINGS BANK THROUGH MERGER,
CREATING WEST COAST BANKING POWERHOUSE
SEATTLE - In a move that would position it among the top West
Coast banking institutions and represent a major market expansion into
California, Seattle-based Washington Mutual, Inc. (Nasdaq: WAMU)
today announced the signing of an agreement to acquire through an all
stock merger Keystone Holdings, Inc. and its American Savings Bank
subsidiary of Irvine, Calif.
The combination of Washington Mutual and American would create
a banking powerhouse with more than $42 billion in assets, $23 billion
of deposits and 500 offices in seven Western states. Based on
Friday's closing price of $30 1/8 per share for Washington Mutual
common stock, the company would have a market capitalization exceeding
$3.5 billion, a figure that would place it at the top of the savings
industry.
Based on assets, the combined organization would be the
nation's 24th-largest banking company. Washington Mutual will
continue to be headquartered in Seattle.
"This is a landmark day for Washington Mutual and for our
industry," said Kerry Killinger, the company's chairman, president and
chief executive officer, who will continue in his current position
following the transaction. "Through this combination, we are creating
one of the leading consumer financial services companies in the West,
benefiting customers, employees and our communities. We anticipate
that the transaction will be immediately accretive to earnings per
share and should greatly accelerate our ability to reach the
aggressive financial targets we've established for ourselves. We also
believe it will greatly improve prospects for creating long-term
shareholder value."
One of Washington Mutual's banking subsidiaries, Washington
Mutual Bank, currently is the No. 1 residential mortgage originator in
the states of Washington and Oregon and is a leading depository in
both states. Washington Mutual also has offices in Utah, Idaho and
Montana.
<PAGE> 2
WAMU -- 2
American Savings Bank is California's No. 2 residential
mortgage originator. It will retain the American Savings Bank name in
all its markets after the transaction is completed.
TERMS OF TRANSACTION
Under the terms of the agreement, Washington Mutual will issue
48 million shares of common stock in a transaction accounted for as a
pooling of interests. Of this total, 40 million shares will initially
be distributed to investors in the partnership that owns Keystone and
to the FDIC, as manager of the FSLIC Resolution Fund, which, under a
separate warrant exchange agreement, will receive Washington Mutual
common stock in exchange for the interest it currently holds. The
FDIC has maintained a stake in a Keystone subsidiary that has owned
American since the bank was recapitalized in 1988. Of these initial
shares, the investors will receive 26 million shares of the
consideration in a tax-free exchange, while the FDIC will receive 14
million shares.
Based on Friday's closing price, the initial share issuance
would be valued at approximately $1.2 billion.
The other 8 million shares of common stock will be issued and
placed in escrow. The distribution of these escrow shares will depend
on the outcome of a lawsuit filed by Keystone and certain affiliates
against the federal government. The lawsuit challenges the
government's decision to disallow certain regulatory forbearances that
were negotiated at the time the investors acquired American. Cash
proceeds from any judgment or settlement would be paid directly to
Washington Mutual. The company would then release shares from the
escrow to the investors and the FDIC, based on the amount of the
recovery, net of taxes and certain litigation and escrow expenses. If
no judgment or settlement is obtained, the shares will be retired.
Also as part of the financial terms of the agreement,
Washington Mutual will assume approximately $365 million of
outstanding senior and subordinated debt and $80 million of
outstanding preferred stock of the companies that own American.
Pretax restructuring charges are anticipated to amount to $118
million. In addition, Washington Mutual will make a one-time, pretax
provision of $125 million to loan loss reserves to conform with the
company's existing reserving methodology. In all,
-More-
<PAGE> 3
WAMU -- 3
pretax restructuring and other transaction-related charges are
anticipated to amount to $243 million ($200 million after-tax).
FDIC EXPECTED TO SELL SHARES; KEYSTONE INVESTORS TO REMAIN
ONGOING SHAREHOLDERS
It is anticipated that, working with Washington Mutual, the
FDIC will sell its initial shares in a public offering shortly
following the close of the transaction.
The investors would initially hold approximately 22 percent of
Washington Mutual's outstanding common stock after the transaction.
These investors include Robert M. Bass, who would initially hold
approximately 8 percent of Washington Mutual's outstanding common
stock as a result of his direct ownership interest in the partnership.
The agreement also provides for two people, mutually agreed
upon by both Washington Mutual and Bass, to be invited to join
Washington Mutual's current board of directors. "We are very pleased
that Robert Bass and the other primary Keystone investors have
expressed their interest in becoming long-term shareholders in our
company," Killinger said. "They share our philosophy of creating
long-term shareholder value through the execution of the company's
strategic plan."
BUSINESS COMBINATION: A STRATEGIC "FIT"
"American's operations will provide our company with an
immediate statewide presence in California, as well as an opportunity
to offer American's customers an expanded line of products and
services," Killinger said. "This combination, along with aggressive
marketing efforts, provides terrific prospects for successful
execution of our consumer banking strategy in California."
As of June 30, American operated 158 branches and 61 loan
offices in California, as well as a new loan office in Phoenix, Ariz.
These locations will complement Washington Mutual's 248 financial
centers and 23 loan centers in Washington, Oregon, Idaho, Utah and
Montana. Washington Mutual also operates 46 commercial banking
offices in Washington and Oregon.
American would also add more than 581,000 new households to
Washington Mutual's base, bringing the total number of households
served by the company to over 1.3 million.
In California, Washington Mutual will enter a state with a
population more than three times the size of Washington and Oregon
combined. After several recessionary
-More-
<PAGE> 4
WAMU -- 4
years in the early 1990s, the California economy has posted gains in
both employment and personal income in 1994 and 1995.
"California offers a large, urban-based population and a good
economic mix of high tech, entertainment, trade, tourism and
agriculture," said Killinger. "Our consumer banking strategy,
highlighted by aggressive promotion of checking accounts and
subsequent cross-selling of consumer loans and other products and
services, has proven very successful in markets with similar
characteristics."
Killinger noted that American's balance sheet composition is
an excellent fit with Washington Mutual's.
American's loan and investment portfolios, consisting
primarily of adjustable-rate mortgages and mortgage-backed securities,
will complement Washington Mutual's portfolio, he said, and will
accelerate the company's efforts to reduce its interest rate risk.
At June 30, 1996, American's nonperforming assets were 1.08
percent as a percentage of total assets. Based on June 30 figures,
the combined companies' nonperforming assets to total assets ratio
would be 0.77 percent, comfortably within Washington Mutual's
corporate goal of 1 percent or less, Killinger said. After the $125
million provision, reserves as a percentage of nonperforming loans
would be 169.5 percent.
"Carefully managing asset quality and maintaining strong
reserves will continue to be a top priority for our company in the
years ahead," Killinger said.
BRANCH CLOSURES NOT ANTICIPATED; COMMON OPERATING PLATFORM TO BE
INTRODUCED
Following the transaction, American Savings Bank will become a
wholly owned subsidiary of Washington Mutual, Inc. and will continue
using the American name in its markets. Branch and loan center
closures are not anticipated as a result of the combination, and
American will also maintain its administrative offices in Irvine and
Stockton, Calif.
Although consolidation of certain head-office functions is
expected, Killinger said it is not possible at this time to determine
the number of positions that will be affected. "We anticipate that
over the next two years, the majority of our projected expense
reductions will be achieved by converting American's operating
platform and back-office
-More-
<PAGE> 5
WAMU -- 5
systems to those of Washington Mutual. These consolidations will not
have a material effect on overall employment."
Most of American's nearly 3,000 employees will be offered
positions after the transaction is completed. A severance package
will be made available to eligible employees whose positions are
consolidated.
"American has a strong and experienced management team that
has helped elevate the bank to the No. 2 position in California's
residential mortgage market," Killinger said. "Our goals are to
expand American's mortgage lending and consumer banking presence in
California, continue to improve on operating efficiencies and position
it for growth through potential acquisitions. Our future management
group in California will be structured to achieve these goals in the
most timely manner, and American's current management team will be
well represented."
Killinger said the new management structure would be announced
prior to closing.
ANTOCI TO RETIRE, CONTINUE ON AS ADVISOR
Mario Antoci, American's chairman and CEO, announced that he
will retire upon the close of the transaction. Antoci, who has been
cited nationally for his contributions to lending to low- to
moderate-income and minority neighborhoods in California, will
continue to be involved in CRA and community development issues as an
advisor to Killinger.
"The highlight of my career has been helping to build American
into the premier organization it is today," Antoci said. "And this
union with Washington Mutual moves American into yet another new era,
one offering many exciting opportunities.
"Today's announcement is positive news for our employees,
customers and our California communities. As part of a larger
organization, most of our employees will find that they have even
greater career opportunities than before. Our customers will enjoy
Washington Mutual's expanded line of products and services without any
disruption in service. And American will be able to continue meeting
the credit needs of all its communities -- particularly those in our
central cities -- in the same excellent manner in which we've done for
many years."
"Both Washington Mutual and American have earned top CRA
ratings and enthusiastically support lending to markets that have been
traditionally under-served,"
-More-
<PAGE> 6
WAMU -- 6
Killinger added. "We are extremely pleased that Mario will be
continuing on as an advisor on CRA and community development issues.
His experience and counsel will be a tremendous asset as our companies
continue their leadership role in meeting the credit needs of all our
communities."
A LOOK TO THE FUTURE
"The agreement with American represents further progress in
our mission to be the premier financial services company in the West,"
Killinger said. "We will continue to adhere to the strategies that
are part of the strategic plan that we introduced last year."
"These strategies include strengthening our consumer banking
franchise throughout the West; further diversifying our business mix
by increasing our commercial banking operations; decreasing our
sensitivity to movements in interest rates; improving the margins of
our core businesses; keeping a watchful eye on expenses; operating
even more efficiently; and maintaining strong asset quality."
The agreement for merger has been approved by the boards of
directors of both companies as well as Keystone's shareholder. The
warrant exchange agreement has also been approved by the FDIC. The
transaction requires the approvals of federal regulators and of
holders of two-thirds of Washington Mutual's outstanding capital
stock. Pending these approvals, Washington Mutual expects that the
transaction will be completed by year-end 1996, with the conversion of
American's business systems to follow within six months.
American Savings Bank, based in Irvine, Calif., had more than
$20 billion in assets at June 30, 1996. It operates 158 branches and
61 loan offices throughout California. The bank also operates one
loan office in Arizona.
With a history dating back to 1889, Washington Mutual, Inc. is
a diversified financial services company focusing on families and
small- to mid-size businesses. At June 30, 1996, Washington Mutual
and its subsidiaries had assets of $22.3 billion and operated more
than 300 offices in Washington, Oregon, Idaho, Utah and Montana. The
company's subsidiaries provide consumer and commercial banking,
full-service securities brokerage, mutual fund management and
insurance underwriting.
###
-More-
<PAGE> 7
WAMU -- 7
Editor's Note: Kerry Killinger and Mario Antoci will participate in a
telephone conference call for reporters at 1 p.m. Eastern Daylight
Time on Monday, July 22. To participate in the conference, please
call 1-800-732-1388 by 12:50 p.m. EDT.
Satellite coordinates -- need input from Abernathy.
Washington Mutual's press releases are available at no charge through
PR Newswire's Company News On Call fax services. For a menu of
Washington Mutual press releases or to retrieve a specific release,
call 1-800-758-5804, extension 959552. On the internet, press
releases may be accessed at
http://www.prnewswire.com/cnoc/exec/menu?959552.
-More-
<PAGE> 8
WASHINGTON MUTUAL, INC./KEYSTONE HOLDINGS, INC.
AT-A-GLANCE
JUNE 30, 1996 FIGURES (ALL DOLLAR FIGURES IN MILLIONS, EXCEPT PER SHARE PRICES).
FINANCIAL RATIOS REFLECT YEAR-TO-DATE FIGURES.
<TABLE>
<CAPTION>
WAMU KEYSTONE PRO FORMA
<S> <C> <C> <C>
Total Assets $22,323 $20,481 $42,165(1)
Total Deposits $11,027 $12,729 $23,756
Total Loans $13,800 $12,836 $26,511
Net Income (Second Qtr.) $61.4 $34.3 $95.7
Net Income (First Half) $120.9 $74.5 $195.4
Return on Assets 1.09% 0.74% 0.94%
Return on Common Equity 15.22% 15.93% 17.76%(1)
Nonperforming Assets $103.2 $219.9 $323.1
Nonperforming Assets/Assets .46% 1.07% 0.77%
Reserves $144.2 $90.0 $359.3(2)
Reserves/Nonperforming Loans 189.5% 66.3% 169.5%(2)
Stockholders' Equity/Assets 7.38% 3.08% 5.28%(1)
Book Value Per Share $19.73 ---- $17.96(1)
Closing Stock Price Per Share $30.125(3) --- ---
Shares Outstanding 77.5(4) --- 117.5
Market Capitalization $2,316 --- $3,525(5)
Branch Locations 248 158 406
Loan Offices 23 62 85
Commercial Bank Offices 46 --- 46
Total Banking Offices 317 220 537
Households Served (000's) 769 581 1.3
Employees 4.932 2.972 7,904
</TABLE>
- ----------------------------------
(1) Reflects anticipated, capital, restructuring and other transaction-related
adjustments
(2) Includes one-time, pretax provision of $125 million
(3) Friday, July 19, closing price
(4) Fully diluted shares
(5) Assumes initial 40 million share issuance at Friday's closing price
<PAGE> 1
AGREEMENT FOR MERGER
among
WASHINGTON MUTUAL, INC.,
KEYSTONE HOLDINGS PARTNERS, L.P.,
KEYSTONE HOLDINGS, INC.,
NEW AMERICAN HOLDINGS, INC.,
NEW AMERICAN CAPITAL, INC.,
N.A. CAPITAL HOLDINGS, INC.
and
AMERICAN SAVINGS BANK, F.A.
DATED AS OF
JULY 21, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
----
1. Table of Definitions ............................................................. 1
2. Merger ............................................................................ 12
2.1 Merger of Keystone Holdings and WMI .............................. 12
2.2 Conversion of Keystone Holdings Common Stock ..................... 12
2.3 Litigation Escrow ................................................ 13
2.4 WMI Shareholder Approval.......................................... 17
2.5 Issuance of WMI Stock and Registration Rights .................... 18
2.6 Accounting Treatment ............................................. 18
3. Effective Time; Closing .......................................................... 19
4. Representations and Warranties of Keystone Entities ............................... 19
4.1 Organization, Power, Good Standing, Etc. ......................... 19
4.2 Subsidiaries ..................................................... 21
4.3 Capitalization.................................................... 23
4.4 Loan Portfolio ................................................... 25
4.5 Reports .......................................................... 28
4.6 Authority ........................................................ 29
4.7 No Violation ..................................................... 30
4.8 Consents and Approvals ........................................... 31
4.9 Financial Statements ............................................. 31
4.10 Brokerage ....................................................... 32
4.11 Absence of Certain Changes or Events ............................ 32
4.12 Litigation, Etc. ................................................ 32
4.13 Taxes, Payments in Lieu of Taxes and Tax Returns ................ 32
4.14 Employees; Employee Benefit Plans ............................... 34
4.15 Compliance With Applicable Law .................................. 38
4.16 Contracts and Agreements ........................................ 38
4.17 Affiliate Transactions .......................................... 38
4.18 Title to Property ............................................... 40
4.19 Patents, Trademarks, Etc. ....................................... 41
4.20 Insurance ....................................................... 42
4.21 Powers of Attorney .............................................. 42
4.22 Community Reinvestment Act Compliance ........................... 42
4.23 Agreements with the FRF ......................................... 42
4.24 Agreements with Bank Regulators ................................. 43
4.25 Regulatory Approvals ............................................ 43
</TABLE>
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<TABLE>
<S> <C>
4.26 Rights Agreement ................................................ 43
4.27 AREG Matters .................................................... 43
4.28 Investment Intent ............................................... 44
5. Representations and Warranties of WMI ............................................. 44
5.1 Organization, Power, Good Standing, Etc. ......................... 44
5.2 Subsidiaries ..................................................... 45
5.3 Capitalization ................................................... 45
5.4 Reports .......................................................... 46
5.5 Authority ........................................................ 46
5.6 No Violation ..................................................... 46
5.7 Consents and Approvals ........................................... 47
5.8 Financial Statements ............................................. 47
5.9 Brokerage ........................................................ 48
5.10 Absence of Material Adverse Change .............................. 48
5.11 Litigation ...................................................... 48
5.12 Compliance With Applicable Law .................................. 48
5.13 CRA Compliance .................................................. 49
5.14 Agreements With Bank Regulators ................................. 49
5.15 Regulatory Approvals ............................................ 49
5.16 Tax Matters ..................................................... 49
5.17 WMI Rights Agreement ............................................ 50
6. Covenants of the Keystone Entities ................................................ 50
6.1 Conduct of the Business of Keystone Entities ..................... 50
6.2 No Solicitation .................................................. 53
6.3 Access to Properties and Records ................................. 53
6.4 Assignment of Contract Rights .................................... 53
6.5 Amendment to Environmental Policy ................................ 54
6.6 FRF Agreements ................................................... 54
6.7 New West ......................................................... 54
6.8 Payment of Notes and Preferred Stock ............................. 54
6.9 Tax Return and Section 9 Report Amendments ....................... 54
6.10 Employees, Employee Benefit Plans ............................... 55
6.11 Assets of KH Partners ........................................... 56
6.12 New West Dissolution ............................................ 56
6.13 Waiver of Notice ................................................ 57
7. Covenants of the WM Entities ...................................................... 57
7.1 Conduct of Business of WM Entities ............................... 57
7.2 Approval of WMI Stockholders ..................................... 58
7.3 Employees; Employee Benefit Plans ................................ 58
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
7.4 WMI Board of Directors ........................................... 59
7.5 Tax Reorganization Matters ....................................... 60
7.6 Access to Information/Updated Due Diligence ...................... 61
7.7 Indemnification and Insurance .................................... 61
8. Mutual Covenants of the Parties ................................................... 62
8.1 Current Information .............................................. 62
8.2 Reports .......................................................... 62
8.3 Regulatory Matters ............................................... 63
8.4 Further Assurances ............................................... 63
8.5 Disclosure Supplements ........................................... 64
8.6 Confidentiality .................................................. 64
8.7 Public Announcements ............................................. 65
8.8 Management Consultation Meetings ................................. 65
8.9 Failure to Fulfill Conditions .................................... 65
9. Closing Conditions ................................................................ 66
9.1 Conditions to Each Party's Obligations Under This Agreement ...... 66
9.2 Conditions to the Obligations of the WM entities under
this Agreement ................................................. 67
9.3 Conditions to the Obligations of KH Partners and the Keystone
Entities Under This Agreement .................................. 70
10. Termination, Amendment and Waiver ................................................ 71
10.1 Termination ..................................................... 72
10.2 Effect of Termination ........................................... 73
10.3 Amendment, Extension and Waiver ................................. 73
11. Miscellaneous .................................................................... 73
11.1 Expenses ........................................................ 73
11.2 Survival ........................................................ 74
11.3 Notices ......................................................... 74
11.4 Parties in Interest ............................................. 75
11.5 Entire Agreement ................................................ 75
11.6 Counterparts .................................................... 76
11.7 Governing Law ................................................... 76
11.8 Headings ........................................................ 76
</TABLE>
iii
<PAGE> 5
EXHIBITS
Exhibit A Plan of Merger
Exhibit B Ecrow Agreement
Exhibit C Form of "Affiliate" Letter
Exhibit D Press Release
<PAGE> 6
SCHEDULES
Disclosure Schedule 4.2(a) Subsidiaries and Investment Entities
Disclosure Schedule 4.2(b) Certain Options with Respect to American
Savings Bank Capital Stock
Disclosure Schedule 4.4(c) Certain Loans Not Secured Primarily by Valid
and Perfected First Lien (as of March 31,
1996)
Disclosure Schedule 4.4(d) Certain Loans (as of March 31, 1996)
Disclosure Schedule 4.4(e) Certain Past Due Loans (as of March 31, 1996)
Disclosure Schedule 4.4(f) Exceptions to Section 4.4(f) Representations
Disclosure Schedule 4.4(g) Loans Sold with Repurchase Obligations (as
of March 31, 1996)
Disclosure Schedule 4.4(h) Certain Loan Participations Purchased (as of
March 31, 1996)
Disclosure Schedule 4.4(i)(a) Loans to Executive Officers of American
Savings Bank
Disclosure Schedule 4.4(i)(c) Loans to Affiliates of American Savings
Bank Not Complying with Applicable Federal
Laws and Regulations
Disclosure Schedule 4.4(k) Loans Acquired from the Receiver in the
1988 Acquisition with Environmental Problems
Relating to Real Property Securing such
Loans(as of March 31, 1996)
Disclosure Schedule 4.4(m) Outstanding Commitments, Letters of Credit,
and Unfunded Agreements to Lend (as of
March 31, 1996)
Disclosure Schedule 4.7(a) Violations, Breaches, Defaults, Terminations,
Accelerations, Conflicts, Liens, Security
Interests, Charges or Other Encumbrances
Resulting From Execution of Agreement or
Consummation
Disclosure Schedule 4.7(b) Violations, Breaches, Defaults, Terminations,
Accelerations, Conflicts, Liens, Security
Interests, Charges or Other Encumbrances
Resulting From Liquidations and/or the Bank
Merger
Disclosure Schedule 4.10 Certain Fees
Disclosure Schedule 4.12 Material Litigation and Claims (as of
June 30, 1996)
Disclosure Schedule 4.13 Taxes, Payments in lieu of taxes and tax
return.
Disclosure Schedule 4.14(a)(i) Employment/Consulting Arrangements
Disclosure Schedule 4.14(a)(ii) Benefit Plans Resulting in Payments
Disclosure Schedule 4.14(b) Highly Compensated Employees
Disclosure Schedule 4.14(c) Material Employee Related Litigation and
Claims
<PAGE> 7
Disclosure Schedule 4.14(e) Exceptions to Section 4.14(e) Representations
Disclosure Schedule 4.14(e)(i) Benefit Plans
Disclosure Schedule 4.14(f) Individual Change of Control Agreements
Disclosure Schedule 4.16(i) Material Contracts
Disclosure Schedule 4.16(ii) Non-compete Agreements
Disclosure Schedule 4.17 Affiliate Transactions
Disclosure Schedule 4.18(a) Interests in Real Property
Disclosure Schedule 4.18(b) Environmental Matters
Disclosure Schedule 4.18(c) Encumbrances of Personal Property
Disclosure Schedule 4.19 Agreements Relating to American Savings
Bank Trademarks, Service Marks or Trade Names
Disclosure Schedule 4.20 Insurance
Disclosure Schedule 4.22 Noncompliance with Community Reinvestment Act
of 1977
Disclosure Schedule 4.23 FRF Agreements; Consents
Disclosure Schedule 4.24 Other Agreements With Or Orders of Regulators
Disclosure Schedule 5.2 Subsidiaries
Disclosure Schedule 5.3 Capitalization
Disclosure Schedule 5.4 Reports
Disclosure Schedule 5.10 Absence of Material Adverse Change
Disclosure Schedule 5.11 Litigation
Disclosure Schedule 5.12(b) Compliance
Disclosure Schedule 6.1(a) 1996 Business Plan
2
<PAGE> 8
EXHIBIT 7(c).2
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
<PAGE> 9
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 Deferred Compensation Plan" shall have
the meaning specified in Section 7.3(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.
"American Savings Bank Preferred Stock" shall have the meaning
specified in Section 4.3(e) hereof.
"American Savings Bank SERP" 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
2
<PAGE> 10
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.
"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
3
<PAGE> 11
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; 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.
4
<PAGE> 12
"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.
5
<PAGE> 13
"Initial Shares" shall have the meaning specified in Section
2.2(c) hereof.
"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.
6
<PAGE> 14
"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.
"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
7
<PAGE> 15
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.
"OTS" shall mean the Office of Thrift Supervision.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
8
<PAGE> 16
"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.
9
<PAGE> 17
"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.
"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 specified
in Section 9.2(m).
"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
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<PAGE> 18
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.
"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.
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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
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<PAGE> 20
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 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 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
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<PAGE> 21
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 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 Agent.
(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
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<PAGE> 22
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
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<PAGE> 24
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.
(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.
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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 Annex 1 on 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
affiliates specified on Annex 1. 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
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<PAGE> 26
Stock shall be issued. KH Partners 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 indorse 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
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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 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
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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
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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 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
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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.
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
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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
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of any shares of American 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.
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(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.
(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.
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(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
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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 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
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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 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
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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
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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
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
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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.
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
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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:
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(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 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.
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(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.
(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
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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
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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 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;
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(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
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
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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
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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 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.
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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 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.
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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.
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(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.
(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 HM 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
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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.
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.
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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
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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 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
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"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 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.
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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, 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
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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 by Keystone Holdings, directly or indirectly, to KH Partners
or the partners thereof other than (A) as set forth in the preceeding 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'
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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;
(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.
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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 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
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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
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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 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.
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(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 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:
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(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 employees of an WM Entity or any WMI
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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.
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(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.
(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.
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(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 appropriate
substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
7.7 Indemnification and Insurance.
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(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.
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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 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
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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).
(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
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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
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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.
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
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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.
(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
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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
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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.
(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 Exhibit D), all Persons listed on Exhibit D 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
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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 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.
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(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.
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(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.
(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
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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.
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.
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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
Gibson, Dunn & Crutcher
One Montgomery Street, Telesis Tower
San Francisco, CA 94104-4505
Attn: Todd H. Baker
Telecopy Number: (415) 986-5309
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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), second sentence of Section 3, Section 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.
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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 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 Vice President
--------------------------
KEYSTONE HOLDINGS, INC.
By:/s/ Ray L. Pinson
------------------------------------
Its Senior Vice President
--------------------------------
NEW AMERICAN HOLDINGS INC.
By:/s/ Ray L. Pinson
------------------------------------
Its Senior Vice President
--------------------------------
NEW AMERICAN CAPITAL, INC.
By:/s/ Ray L. Pinson
------------------------------------
Its Senior Vice President
--------------------------------
N.A. CAPITAL HOLDINGS, INC.
By:/s/ Ray L. Pinson
------------------------------------
Its Senior Vice President
--------------------------------
AMERICAN SAVINGS BANK, F.A.
By:/s/ Mario J. Antoci
------------------------------------
Its Chief Executive Officer
--------------------------------
<PAGE> 83
EXHIBIT A
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.
<PAGE> 84
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 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.
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<PAGE> 85
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.
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
3
<PAGE> 86
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
------------------------------------
FA961970.040/7+
4
<PAGE> 87
EXHIBIT B
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 charged 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.
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<PAGE> 88
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 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.
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<PAGE> 89
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 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
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<PAGE> 90
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 Distributon 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,
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<PAGE> 91
(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 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
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<PAGE> 92
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.
(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.
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<PAGE> 93
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
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
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<PAGE> 94
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.
(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'
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<PAGE> 95
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.
-9-
<PAGE> 96
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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<PAGE> 97
EXHIBIT 1
PROMISSORY NOTE
$____________________ (U.S.) [Insert Location of Escrow
Agent's Office] [Insert Date
of Note]
FOR VALUE RECEIVED, the undersigned ("Borrower") hereby
promises to pay to the order of ________________________ as Escrow Agent (the
"Escrow Agent") under that certain Escrow Agreement dated __________________
(the "Escrow Agreement") among the Escrow Agent, Washington Mutual, Inc.,
Keystone Holdings Partners, L.P. and the Federal Deposit Insurance Corporation,
as manager of the FSLIC Resolution Fund, at the Escrow Agent's office at
_________________________________________, or at such other place as the holder
of this Note (hereinafter, "Holder") may from time to time designate in
writing, the sum of $__________________, in lawful money of the United States,
together with interest thereon at a variable rate as set forth below. Interest
for each full calendar quarter during the term of this Note shall be calculated
on the basis of a 360-day year of four 90-day quarters. Interest for any
partial calendar quarter at the beginning or end of the term of this Note shall
be calculated on the basis of a 365 or 366-day year and the actual number of
days in that quarter.
Section 1. Interest Rate.
This Note shall bear interest at a variable rate, adjusted as
of the first day of each calendar quarter, equal to the greater of: (i) the
Applicable Federal Rate and (ii) the Investment Rate. "Applicable Federal
Rate" shall mean a per annum rate equal to the applicable Federal rate as set
forth in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended,
or any successor provision. "Investment Rate" shall mean a per annum rate of
interest equal to the per annum rate of return on the investment of the cash
portion of the Escrow Fund for the immediately preceding calendar quarter as
calculated by the Escrow Agent.
Section 2. Interest Payments.
Beginning on [insert the last day of the calendar quarter in
which the date of the Note occurs] and on the last day of each and every
calendar quarter thereafter throughout the term of this Note, Borrower shall
make quarterly payments to Holder of all accrued and unpaid interest.
Section 3. Maturity.
Unless sooner repaid by Borrower, the entire unpaid principal
amount plus all accrued but unpaid interest, and all other amounts owing
hereunder shall be due and payable in full on the Maturity Date.
-11-
<PAGE> 98
As used herein, "Maturity Date" shall mean the earlier to
occur of (i) the day which is seven days following notice given by the Escrow
Agent as provided in Section __ of the Escrow Agreement or (ii) the Escrow
Expiration Date.
Section 4. Default; Remedies.
If the payment of any amount payable hereunder is not made
within ten days of when due, then, at the option of Holder, the entire
indebtedness evidenced hereby shall become immediately due and payable and all
such amounts, including all accrued but unpaid interest, shall thereafter bear
interest at a variable rate, adjusted at the time at which the rate would
otherwise have been adjusted pursuant to Section 1, of five percent (5%) per
annum above the rate hereunder that would have been applicable from time to
time had there been no default (the "Default Rate") until such default is
cured. Failure to exercise this option shall not waive the right to exercise
the same in the event of any subsequent default. In the event of such default
the undersigned promise to pay all collection expenses, including reasonable
attorneys' fees incurred with or without suit and on appeal. Interest at the
Default Rate shall commence to accrue upon default under this Note, including
the failure to pay this Note on the Maturity Date.
Section 5. Consent to Jurisdiction; Waiver of Immunities.
Borrower hereby irrevocably submits to the jurisdiction of any
state or federal court sitting in Seattle, Washington, in any action or
proceeding brought to enforce or otherwise arising out of or relating to this
Note and hereby waives any objection to venue in any such court, and waives any
claim that such forum is an inconvenient forum. Borrower agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing herein shall impair the right of Holder to bring any
action or proceeding against Borrower, or any of its property, in the courts of
any other jurisdiction.
Section 6. Late Charge.
If any amount payable hereunder is paid more than ten (10)
days after the due date thereof, Borrower promises to pay a late charge of five
percent (5%) of the delinquent amount as liquidated damages for the extra
expense of handling past due payments.
Section 7. Miscellaneous.
(a) Every person or entity at any time liable for the
payment of the indebtedness evidenced hereby waives presentment for payment,
demand and notice of nonpayment of this Note. Every such person or entity
further hereby consents to any extension of the time of payment hereof or other
modification of the terms of payment of this Note, the release of all or any
part of the security herefor or the release of any party liable for the payment
of the indebtedness evidenced hereby at any time and from time to time at the
request of anyone now or hereafter liable therefor. Any such extension or
release may be made without notice to any of such persons or entities and
without discharging their liability.
-12-
<PAGE> 99
(b) Each person or entity who signs this Note is jointly
and severally liable for the full repayment of the entire indebtedness
evidenced hereby.
(c) The headings to the various sections have been
inserted for convenience of reference only and do not define, limit, modify, or
expand the express provisions of this Note.
(d) This Note is made with the reference to and is to be
construed in accordance with the laws of the state of New York.
DATED as of the day and year first above written.
[BORROWER'S SIGNATURE]
FA961940.002/19+
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<PAGE> 100
EXHIBIT C
[OMITTED]
<PAGE> 101
EXHIBIT D
Investor Contact: JoAnn DeGrande July 22, 1996
(206) 461-3186 FOR IMMEDIATE RELEASE
WASHINGTON MUTUAL TO ACQUIRE
AMERICAN SAVINGS BANK THROUGH MERGER,
CREATING WEST COAST BANKING POWERHOUSE
SEATTLE - In a move that would position it among the top West
Coast banking institutions and represent a major market expansion into
California, Seattle-based Washington Mutual, Inc. (Nasdaq: WAMU)
today announced the signing of an agreement to acquire through an all
stock merger Keystone Holdings, Inc. and its American Savings Bank
subsidiary of Irvine, Calif.
The combination of Washington Mutual and American would create
a banking powerhouse with more than $42 billion in assets, $23 billion
of deposits and 500 offices in seven Western states. Based on
Friday's closing price of $30 1/8 per share for Washington Mutual
common stock, the company would have a market capitalization exceeding
$3.5 billion, a figure that would place it at the top of the savings
industry.
Based on assets, the combined organization would be the
nation's 24th-largest banking company. Washington Mutual will
continue to be headquartered in Seattle.
"This is a landmark day for Washington Mutual and for our
industry," said Kerry Killinger, the company's chairman, president and
chief executive officer, who will continue in his current position
following the transaction. "Through this combination, we are creating
one of the leading consumer financial services companies in the West,
benefiting customers, employees and our communities. We anticipate
that the transaction will be immediately accretive to earnings per
share and should greatly accelerate our ability to reach the
aggressive financial targets we've established for ourselves. We also
believe it will greatly improve prospects for creating long-term
shareholder value."
One of Washington Mutual's banking subsidiaries, Washington
Mutual Bank, currently is the No. 1 residential mortgage originator in
the states of Washington and Oregon and is a leading depository in
both states. Washington Mutual also has offices in Utah, Idaho and
Montana.
<PAGE> 102
WAMU -- 2
American Savings Bank is California's No. 2 residential
mortgage originator. It will retain the American Savings Bank name in
all its markets after the transaction is completed.
TERMS OF TRANSACTION
Under the terms of the agreement, Washington Mutual will issue
48 million shares of common stock in a transaction accounted for as a
pooling of interests. Of this total, 40 million shares will initially
be distributed to investors in the partnership that owns Keystone and
to the FDIC, as manager of the FSLIC Resolution Fund, which, under a
separate warrant exchange agreement, will receive Washington Mutual
common stock in exchange for the interest it currently holds. The
FDIC has maintained a stake in a Keystone subsidiary that has owned
American since the bank was recapitalized in 1988. Of these initial
shares, the investors will receive 26 million shares of the
consideration in a tax-free exchange, while the FDIC will receive 14
million shares.
Based on Friday's closing price, the initial share issuance
would be valued at approximately $1.2 billion.
The other 8 million shares of common stock will be issued and
placed in escrow. The distribution of these escrow shares will depend
on the outcome of a lawsuit filed by Keystone and certain affiliates
against the federal government. The lawsuit challenges the
government's decision to disallow certain regulatory forbearances that
were negotiated at the time the investors acquired American. Cash
proceeds from any judgment or settlement would be paid directly to
Washington Mutual. The company would then release shares from the
escrow to the investors and the FDIC, based on the amount of the
recovery, net of taxes and certain litigation and escrow expenses. If
no judgment or settlement is obtained, the shares will be retired.
Also as part of the financial terms of the agreement,
Washington Mutual will assume approximately $365 million of
outstanding senior and subordinated debt and $80 million of
outstanding preferred stock of the companies that own American.
Pretax restructuring charges are anticipated to amount to $118
million. In addition, Washington Mutual will make a one-time, pretax
provision of $125 million to loan loss reserves to conform with the
company's existing reserving methodology. In all,
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<PAGE> 103
WAMU -- 3
pretax restructuring and other transaction-related charges are
anticipated to amount to $243 million ($200 million after-tax).
FDIC EXPECTED TO SELL SHARES; KEYSTONE INVESTORS TO REMAIN
ONGOING SHAREHOLDERS
It is anticipated that, working with Washington Mutual, the
FDIC will sell its initial shares in a public offering shortly
following the close of the transaction.
The investors would initially hold approximately 22 percent of
Washington Mutual's outstanding common stock after the transaction.
These investors include Robert M. Bass, who would initially hold
approximately 8 percent of Washington Mutual's outstanding common
stock as a result of his direct ownership interest in the partnership.
The agreement also provides for two people, mutually agreed
upon by both Washington Mutual and Bass, to be invited to join
Washington Mutual's current board of directors. "We are very pleased
that Robert Bass and the other primary Keystone investors have
expressed their interest in becoming long-term shareholders in our
company," Killinger said. "They share our philosophy of creating
long-term shareholder value through the execution of the company's
strategic plan."
BUSINESS COMBINATION: A STRATEGIC "FIT"
"American's operations will provide our company with an
immediate statewide presence in California, as well as an opportunity
to offer American's customers an expanded line of products and
services," Killinger said. "This combination, along with aggressive
marketing efforts, provides terrific prospects for successful
execution of our consumer banking strategy in California."
As of June 30, American operated 158 branches and 61 loan
offices in California, as well as a new loan office in Phoenix, Ariz.
These locations will complement Washington Mutual's 248 financial
centers and 23 loan centers in Washington, Oregon, Idaho, Utah and
Montana. Washington Mutual also operates 46 commercial banking
offices in Washington and Oregon.
American would also add more than 581,000 new households to
Washington Mutual's base, bringing the total number of households
served by the company to over 1.3 million.
In California, Washington Mutual will enter a state with a
population more than three times the size of Washington and Oregon
combined. After several recessionary
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<PAGE> 104
WAMU -- 4
years in the early 1990s, the California economy has posted gains in
both employment and personal income in 1994 and 1995.
"California offers a large, urban-based population and a good
economic mix of high tech, entertainment, trade, tourism and
agriculture," said Killinger. "Our consumer banking strategy,
highlighted by aggressive promotion of checking accounts and
subsequent cross-selling of consumer loans and other products and
services, has proven very successful in markets with similar
characteristics."
Killinger noted that American's balance sheet composition is
an excellent fit with Washington Mutual's.
American's loan and investment portfolios, consisting
primarily of adjustable-rate mortgages and mortgage-backed securities,
will complement Washington Mutual's portfolio, he said, and will
accelerate the company's efforts to reduce its interest rate risk.
At June 30, 1996, American's nonperforming assets were 1.08
percent as a percentage of total assets. Based on June 30 figures,
the combined companies' nonperforming assets to total assets ratio
would be 0.77 percent, comfortably within Washington Mutual's
corporate goal of 1 percent or less, Killinger said. After the $125
million provision, reserves as a percentage of nonperforming loans
would be 169.5 percent.
"Carefully managing asset quality and maintaining strong
reserves will continue to be a top priority for our company in the
years ahead," Killinger said.
BRANCH CLOSURES NOT ANTICIPATED; COMMON OPERATING PLATFORM TO BE
INTRODUCED
Following the transaction, American Savings Bank will become a
wholly owned subsidiary of Washington Mutual, Inc. and will continue
using the American name in its markets. Branch and loan center
closures are not anticipated as a result of the combination, and
American will also maintain its administrative offices in Irvine and
Stockton, Calif.
Although consolidation of certain head-office functions is
expected, Killinger said it is not possible at this time to determine
the number of positions that will be affected. "We anticipate that
over the next two years, the majority of our projected expense
reductions will be achieved by converting American's operating
platform and back-office
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<PAGE> 105
WAMU -- 5
systems to those of Washington Mutual. These consolidations will not
have a material effect on overall employment."
Most of American's nearly 3,000 employees will be offered
positions after the transaction is completed. A severance package
will be made available to eligible employees whose positions are
consolidated.
"American has a strong and experienced management team that
has helped elevate the bank to the No. 2 position in California's
residential mortgage market," Killinger said. "Our goals are to
expand American's mortgage lending and consumer banking presence in
California, continue to improve on operating efficiencies and position
it for growth through potential acquisitions. Our future management
group in California will be structured to achieve these goals in the
most timely manner, and American's current management team will be
well represented."
Killinger said the new management structure would be announced
prior to closing.
ANTOCI TO RETIRE, CONTINUE ON AS ADVISOR
Mario Antoci, American's chairman and CEO, announced that he
will retire upon the close of the transaction. Antoci, who has been
cited nationally for his contributions to lending to low- to
moderate-income and minority neighborhoods in California, will
continue to be involved in CRA and community development issues as an
advisor to Killinger.
"The highlight of my career has been helping to build American
into the premier organization it is today," Antoci said. "And this
union with Washington Mutual moves American into yet another new era,
one offering many exciting opportunities.
"Today's announcement is positive news for our employees,
customers and our California communities. As part of a larger
organization, most of our employees will find that they have even
greater career opportunities than before. Our customers will enjoy
Washington Mutual's expanded line of products and services without any
disruption in service. And American will be able to continue meeting
the credit needs of all its communities -- particularly those in our
central cities -- in the same excellent manner in which we've done for
many years."
"Both Washington Mutual and American have earned top CRA
ratings and enthusiastically support lending to markets that have been
traditionally under-served,"
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<PAGE> 106
WAMU -- 6
Killinger added. "We are extremely pleased that Mario will be
continuing on as an advisor on CRA and community development issues.
His experience and counsel will be a tremendous asset as our companies
continue their leadership role in meeting the credit needs of all our
communities."
A LOOK TO THE FUTURE
"The agreement with American represents further progress in
our mission to be the premier financial services company in the West,"
Killinger said. "We will continue to adhere to the strategies that
are part of the strategic plan that we introduced last year."
"These strategies include strengthening our consumer banking
franchise throughout the West; further diversifying our business mix
by increasing our commercial banking operations; decreasing our
sensitivity to movements in interest rates; improving the margins of
our core businesses; keeping a watchful eye on expenses; operating
even more efficiently; and maintaining strong asset quality."
The agreement for merger has been approved by the boards of
directors of both companies as well as Keystone's shareholder. The
warrant exchange agreement has also been approved by the FDIC. The
transaction requires the approvals of federal regulators and of
holders of two-thirds of Washington Mutual's outstanding capital
stock. Pending these approvals, Washington Mutual expects that the
transaction will be completed by year-end 1996, with the conversion of
American's business systems to follow within six months.
American Savings Bank, based in Irvine, Calif., had more than
$20 billion in assets at June 30, 1996. It operates 158 branches and
61 loan offices throughout California. The bank also operates one
loan office in Arizona.
With a history dating back to 1889, Washington Mutual, Inc. is
a diversified financial services company focusing on families and
small- to mid-size businesses. At June 30, 1996, Washington Mutual
and its subsidiaries had assets of $22.3 billion and operated more
than 300 offices in Washington, Oregon, Idaho, Utah and Montana. The
company's subsidiaries provide consumer and commercial banking,
full-service securities brokerage, mutual fund management and
insurance underwriting.
###
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<PAGE> 107
WAMU -- 7
Editor's Note: Kerry Killinger and Mario Antoci will participate in a
telephone conference call for reporters at 1 p.m. Eastern Daylight
Time on Monday, July 22. To participate in the conference, please
call 1-800-732-1388 by 12:50 p.m. EDT.
Satellite coordinates -- need input from Abernathy.
Washington Mutual's press releases are available at no charge through
PR Newswire's Company News On Call fax services. For a menu of
Washington Mutual press releases or to retrieve a specific release,
call 1-800-758-5804, extension 959552. On the internet, press
releases may be accessed at
http://www.prnewswire.com/cnoc/exec/menu?959552.
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<PAGE> 108
WASHINGTON MUTUAL, INC./KEYSTONE HOLDINGS, INC.
AT-A-GLANCE
JUNE 30, 1996 FIGURES (ALL DOLLAR FIGURES IN MILLIONS, EXCEPT PER SHARE PRICES).
FINANCIAL RATIOS REFLECT YEAR-TO-DATE FIGURES.
<TABLE>
<CAPTION>
WAMU KEYSTONE PRO FORMA
<S> <C> <C> <C>
Total Assets $22,323 $20,481 $42,165(1)
Total Deposits $11,027 $12,729 $23,756
Total Loans $13,800 $12,836 $26,511
Net Income (Second Qtr.) $61.4 $34.3 $95.7
Net Income (First Half) $120.9 $74.5 $195.4
Return on Assets 1.09% 0.74% 0.94%
Return on Common Equity 15.22% 15.93% 17.76%(1)
Nonperforming Assets $103.2 $219.9 $323.1
Nonperforming Assets/Assets .46% 1.07% 0.77%
Reserves $144.2 $90.0 $359.3(2)
Reserves/Nonperforming Loans 189.5% 66.3% 169.5%(2)
Stockholders' Equity/Assets 7.38% 3.08% 5.28%(1)
Book Value Per Share $19.73 ---- $17.96(1)
Closing Stock Price Per Share $30.125(3) --- ---
Shares Outstanding 77.5(4) --- 117.5
Market Capitalization $2,316 --- $3,525(5)
Branch Locations 248 158 406
Loan Offices 23 62 85
Commercial Bank Offices 46 --- 46
Total Banking Offices 317 220 537
Households Served (000's) 769 581 1.3
Employees 4.932 2.972 7,904
</TABLE>
- ----------------------------------
(1) Reflects anticipated, capital, restructuring and other transaction-related
adjustments
(2) Includes one-time, pretax provision of $125 million
(3) Friday, July 19, closing price
(4) Fully diluted shares
(5) Assumes initial 40 million share issuance at Friday's closing price
<PAGE> 1
EXHIBIT 7(c).3
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;
<PAGE> 2
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");
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
- 2 -
<PAGE> 3
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
(ii) 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").
Section 1.02. Satisfaction of Securityholders Agreement. Each of
the Keystone Entities, the Investors and the FDIC
- 3 -
<PAGE> 4
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
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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 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
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<PAGE> 6
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. Notwithstanding any other provision of this Agreement
to the contrary, if an Adjustment Event (as defined in the Merger Agreement)
shall have occured, then the Keystone Initial Shares (as defined in the Merger
Agreement) shall be reduced to 25,883,333, subject to Section 1.05, 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.
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<PAGE> 7
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. 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
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<PAGE> 8
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.
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<PAGE> 9
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 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
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<PAGE> 10
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.
(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
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<PAGE> 11
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
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<PAGE> 12
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:
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.
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<PAGE> 13
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 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 (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
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<PAGE> 14
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 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
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<PAGE> 15
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).
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
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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
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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).
(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.
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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
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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 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).
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<PAGE> 20
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:
(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.
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(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
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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 and the FRF
Litigation Shares shall have been delivered to the Litigation Escrow (as
defined in the Merger Agreement).
(j) 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 principals 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 occured.
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.
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<PAGE> 23
(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 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
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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
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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).
(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
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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
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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 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
- 27 -
<PAGE> 28
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.
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
- 28 -
<PAGE> 29
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
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
- 29 -
<PAGE> 30
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]
- 30 -
<PAGE> 31
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:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
KEYSTONE HOLDINGS, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
NEW AMERICAN HOLDINGS, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
NEW AMERICAN CAPITAL, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
N.A. CAPITAL HOLDINGS, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE> 32
AMERICAN SAVINGS BANK, F.A.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
NEW WEST FEDERAL SAVINGS AND LOAN
ASSOCIATION
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
FEDERAL DEPOSIT INSURANCE
CORPORATION, as manager of the
FSLIC Resolution Fund
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
INVESTORS:
KEYSTONE HOLDINGS PARTNERS, L.P.
By: K.H. Group Management, Inc.,
its General Partner
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE> 33
K.H. GROUP MANAGEMENT, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
______________, 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.
Pursuant to Special Durable Powers
of Attorney, copies of which are
attached hereto.
<PAGE> 34
SCHEDULE 2.07
None
<PAGE> 1
EXHIBIT 7(c).4
WASHINGTON MUTUAL, INC.
[LOGO] ACQUISITION THROUGH MERGER OF [LOGO]
KEYSTONE HOLDINGS, INC., INDIRECT PARENT OF
AMERICAN SAVINGS BANK
JULY 22, 1996
<PAGE> 2
INTRODUCTION
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This presentation contains estimates of future operating results for 1996, 1997
and 1998 for both Washington Mutual Inc., Keystone Holdings Inc. and American
Savings Bank on a stand-alone and pro forma combined basis and estimates of
financial condition and cost savings on a combined basis. These estimates
constitute forward-looking statements (within the meaning of the Private
Securities Litigation Reform Act of 1995), which involve significant risks and
uncertainties. Actual results may differ materially from the results discussed
in these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in WAMU's Current Report on
Form 8-K dated July 22, 1996, as filed with the Securities and Exchange
Commission, to which report reference is hereby made.
[LOGO] WASHINGTON MUTUAL 2 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 3
TRANSACTION RATIONALE
Financially Attractive
- Double digit EPS accretion
- Reduces interest rate sensitivity
- Accelerates achievement of 5-year financial goals
Compelling Strategic Fit
- Unique balance sheet fit
- Creates West Coast powerhouse franchise
- Platform for future growth
Creates Shareholder Value
- Increased levels of profitability
- Meaningfully accelerates EPS growth
- Possible P/E multiple expansion
[LOGO] WASHINGTON MUTUAL 3 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 4
TRANSACTION SUMMARY
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
Initial Transaction Value: $1.20 billion (@ $30 WAMU Price)(1)(2)
Consideration:
Initial: 40 million WAMU shares
FIRREA-Related Litigation Contingency: Up to 8.0 million additional shares distributed from escrow
based upon after-tax proceeds, if any, received after
expenses.
Caps and Collars: None
Initial Secondary Offering: Approximately 15 million shares to be offered in broadly
distributed underwriting following the closing.
Accounting: Pooling of interests/Tax free exchange
Targeted Closing Date: 4th Quarter 1996
Pro Forma Ownership (Rounded): Shares/Percent(2)
-----------------
Current WAMU Shareholders: 77mm/66%
Keystone Partners: 26mm/22%
FSLIC Resolution Fund (FRF): 14mm/12%
Board Composition: Board increases from 13 by 2
New director nominees to be mutually agreed upon
</TABLE>
- --------
(1) Upon receipt of maximum litigation proceeds by combined
companies, transaction value would equal $1.44 billion (at $30 per WAMU
share) if all 8.0 million escrow shares were released.
(2) Based on initial exchange of 40 million shares.
[LOGO] WASHINGTON MUTUAL 4 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 5
TRANSACTION PRICING
===============================================================================
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
AVERAGE OF
KEYSTONE COMPARABLE WAMU TRADING
HOLDINGS TRANSACTIONS(2) MULTIPLES
--------------------------------------------------------------------------
<S> <C> <C> <C>
Initial Value:(1) $1.20 billion -- --
Initial Value to:
1996E EPS 11.0x(3) 15.7x(4) 9.8x(5)
1997E EPS 8.3(3) 14.6(4) 8.8(5)
1998E EPS 7.3(3) N.A. 8.0(5)
Book Value 1.54x 1.50x 1.52x
Tangible Book Value 1.54 1.57 1.68
Implied Deposit Premium 3.30% 7.73% --
--------------------------------------------------------------------------
</TABLE>
(1) Based on WAMU share price of $30.00 per share, assuming no distribution
of escrow shares.
(2) Based on 27 thrift deals announced since 1/1/95 with acquisition value
greater than $100 million.
(3) Based upon Keystone management's projected earnings, tax-effected at
pro forma effective tax rate of 40%. See "Special Note" on page 2.
(4) Excludes from average, P/E multiples greater than 30.0x.
(5) Based on I/B/E/S estimate for 1996 and 1997. 1998 estimate based on
1997 estimate and earnings growth rate of 11%. See "Special Note" on
page 2.
[LOGO] WASHINGTON MUTUAL 5 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 6
PRO FORMA OVERVIEW
===============================================================================
<TABLE>
<CAPTION>
(Data as of June 30, 1996; Dollars in Millions)
--------------------------------------------------------------------------
WAMU PRO FORMA
--------------------------------------------------------------------------
<S> <C> <C>
Assets $22,323 $42,165
Deposits 11,027 23,756
Market Capitalization 2,322 3,522(1)
Total Equity/Assets 7.38% 5.28%
Households Served (000s) 769 1,350
Offices 317 537
</TABLE>
--------------------------------------------------------------------------
(1) Based on 40 million shares at $30 per share; at 48 million shares at
$30 per share, pro forma market capitalization would be $3,765 million.
[LOGO] WASHINGTON MUTUAL 6 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 7
ORGANIZATIONAL & OPERATIONAL ISSUES
===============================================================================
- Will continue to use the American Savings name in California
- Will be a first-tier subsidiary of Washington Mutual, Inc.
- Key American Savings managers to remain in place
- Combine back office, retain ASB distribution network
- WAMU's broader product line to be delivered through ASB
- Expect to convert systems within six months of closing
[LOGO] WASHINGTON MUTUAL 7 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 8
=============================================================================
OVERVIEW OF AMERICAN SAVINGS
=============================================================================
<PAGE> 9
OVERVIEW OF AMERICAN SAVINGS
==============================================================================
- Acquired by Robert M. Bass and other investors in 1988 with
Government assistance; FRF retained a warrant interest
- One of CA's largest franchises with $20.4 billion in assets
- 158 branches with $12.7 billion in deposits
- Statewide franchise with concentration around San Francisco and Los
Angeles
- Second largest single family mortgage originator in California
- Profitability and credit quality ratios compare favorably to CA
peers
[LOGO] WASHINGTON MUTUAL 9 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 10
OVERVIEW OF AMERICAN SAVINGS
=============================================================================
<TABLE>
<CAPTION>
(Dollars in Millions)
-------------------------------------------------------------------------
ACTUAL ASB PROJECTED(2)
------------------ ----------------------
1995 1996 YTD(1) 1996 1997 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $407 $248 $490 $514 $549
Provision for Loan Losses (64) (31) (67) (42) (43)
Other Income 90 42 80 91 96
Expenses (272) (138) (260) (268) (276)
----- ----- ----- ----- -----
Pre-Tax Income $161 $121 $243 $295 $326
After-Tax Income(3) $97 $73 $146 $178 $196
NIM 2.20% 2.63% 2.58% 2.61% 2.68%
Efficiency Ratio 51.20 44.90 45.60 44.30 42.80
ROAA(3) 0.50 0.74 0.74 0.86 0.92
Average Assets $19,271 $19,745 $19,811 $20,658 $21,342
</TABLE>
---------------------------------------------------------------------------
(1) Data for the six months ended June 30, 1996.
(2) 1996, 1997 and 1998 results are estimated and constitute
forward-looking information. See "Special Note" on page 2.
(3) Assumes a pro forma tax rate of 40%.
[LOGO] WASHINGTON MUTUAL 10 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 11
THE CALIFORNIA ECONOMY
- --------------------------------------------------------------------------------
- Key economic indicators point to a recovery
+ Improving job growth and declining unemployment
+ Personal income growth
+ Improving real estate sales and pricing trends
- - Largest state economy with a fragmented banking market
+ Sixth largest economy in the world
+ More fragmented than Washington and Oregon
- - Market share opportunities
[LOGO] WASHINGTON MUTUAL 11 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 12
- --------------------------------------------------------------------------------
FINANCIAL OVERVIEW
- -------------------------------------------------------------------------------
<PAGE> 13
FINANCIAL OVERVIEW
- -------------------------------------------------------------------------------
- Returns meet or exceed WAMU's requirements for accretion and IRR:
+ Immediately accretive, with double digit accretion by 1997
+ Maintains solid capital levels and capital flexibility
+ Non-performers, loss reserve coverage within WAMU's target levels,
after closing charges
+ Reduces WAMU's interest rate sensitivity
+ Accelerates achievement of WAMU's 5-year plan
[LOGO] WASHINGTON MUTUAL 13 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 14
CREATES DOUBLE DIGIT ACCRETION
(Dollars in Millions; Except Per Share Amounts)
<TABLE>
<CAPTION>
1996(1) 1997 1998
<S> <C> <C> <C>
WAMU I/B/E/S Estimated Net Income(2) $247 $274 $297
ASB Planned Net Income(3) 171 (4) 178 196
Keystone Adjustments(5) (37) (33) (32)
----- ----- -----
Acquired Net Income $134 $145 $164
Net Interest Income Pickup(5) - 12 39
Net Cost Savings(6) - 15 30
Retirement of Holding Co. Financings(7) - 12 17
---- ---- ----
Pro Forma Net Income $381 $458 $547
STAND ALONE EPS(2) $3.06 $3.39 $3.76
ESTIMATED COMBINED EPS(8) 3.16 3.75 4.50
ACCRETION 3.3% 10.6% 19.6%
</TABLE>
- ------------------------
(1) Excludes anticipated transaction charge. Pro forma EPS including
transaction charges is $1.46.
(2) Net income before preferred dividends. Based on I/B/E/S estimate for
1996 and 1997. 1996 estimate based on 1997 estimate and earnings growth
rate of 11%. These estimates for 1996, 1997 and 1998 constitute
forward-looking statements. See "Special Note" on page 2.
(3) Based on ASB business plan; tax-effected at 40% in 1997 and 1998.
(4) Based upon expected taxes paid at a 29% effective tax rate. At a 40%
pro forma tax rate, net income would be $146 million.
(5) Represents financing cost of ASB's holding co. debt and preferred
stock.
(6) See pages 15 and 16 for further detail.
(7) Estimated after-tax benefits of retiring ASB's holding co. debt and
preferred stock.
(8) Based on 117.5 million pro forma shares outstanding in 1996, 119.5
million in 1997 and 121.0 million in 1998.
[LOGO] WASHINGTON MUTUAL 14 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 15
NET INTEREST INCOME PICKUP
(Dollars in Millions)
<TABLE>
<CAPTION>
1997(1) 1998(1)
<S> <C> <C>
ASB's Forecasted SFR Loan Originations $5,188 $5,688
ARMs Held per ASB Plan (2,874) (2,924)
Fixed-rate Originations Sold (900) (1,000)
------- -------
Originations Available for Portfolio $1,414 $1,764
Cumulative 1,414 3,178
Average Cumulative Increase in Portfolio 700 2,300
Incremental Pre-Tax Earnings (at) 250 bp(2) spread 20 64
Incremental After-Tax Earnings 12 39
</TABLE>
- -------------------------
(1) These estimates constitute forward-looking statements. See "Special
Note" on page 2.
(2) Earnings pickup due to additional leverage made possible through
capital retention related to change in dividend policy and cost savings.
[LOGO] WASHINGTON MUTUAL 15 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 16
COST SAVINGS ESTIMATES
<TABLE>
<CAPTION>
(Dollars in Millions)
1997(1) 1998(1)
-------------------- --------------------
% of ASB % of ASB
PRE-TAX OPERATING EXPENSE AMOUNT OP. EXP.(2) AMOUNT OP. EXP(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Expenses $20 28% $38 53%
Lending Operations 4 8 10 17
Retail Operations 1 0 2 1
--- ---
Total Cost Savings $25 10% $50 20%
After-Tax Cost Savings $15 $30
</TABLE>
- ---------------------
(1) These estimates constitute forward-looking statements. See "Special
Note" on page 2.
(2) Based on total of all expenses except interest, taxes and loss
provision.
[LOGO] WASHINGTON MUTUAL 16 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 17
TRANSACTION CHARGES DETAIL
<TABLE>
<CAPTION>
(Dollars in Millions)
<S> <C>
Additional Loan Loss Reserves $125
Severance & Management Payments 40
Holdings Company Debt Call Premiums 15
Other Charges 63
-----
Total Charges $243
Tax Effect(1) (43)
-----
Net Charges $200
</TABLE>
- ------------
(1) Includes negative adjustment of approximately $50 million to ASB's
deferred tax asset resulting from the change in ownership.
[LOGO] WASHINGTON MUTUAL 17 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 18
PRO FORMA ASSET QUALITY
<TABLE>
<CAPTION>
(Data as of June 30, 1996; Dollars in Millions)
WAMU KEYSTONE ADJ. PRO FORMA
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonperforming Loans (NPLs) $ 76 $136 - $212
REO 27 84 - 111
---- ---- ----
Nonperforming Assets (NPAs) $103 $220 $323
Loan Loss Reserves (LLR) $144 $ 90 $125 $359
NPAs/Assets 0.46% 1.08% 0.77%
Reserves/NPLs 189.5 66.3 169.5
</TABLE>
[LOGO] WASHINGTON MUTUAL 18 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 19
PRO FORMA CAPITAL BASE
- --------------------------------------------------------------------------------
(Data as of June 30, 1996; Dollars in Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
WAMU KEYSTONE ADJ. PRO FORMA
<S> <C> <C> <C> <C>
Preferred Equity $ 118 $ 80 $ (80)(1) $ 118
Convertible Preferred Equity(2) 132 -- -- 132
Common Equity 1,397 777(3) (200)(4) 1,974
------ ---- ----- ------
Total Equity $1,647 $861 $(280) $2,228(5)
Book Value Per Share $19.73 -- -- $17.96
Tangible Book Value Per Share 17.83 -- -- 16.66
Tangible Equity/Assets(6) 6.76% 4.19% -- 4.95%
Common Equity/Assets(6) 6.85 3.81 -- 5.00
Total Equity/Assets 7.38 4.20 -- 5.28
- ----------------------------------------------------------------------------------
</TABLE>
(1) Reflects retirement of New American Capital preferred stock at close.
(2) WAMU Series D convertible preferred is convertible to common at year-end
1996.
(3) Includes minority interest attributable to FRF Warrants.
(4) Reflects transaction charge of $200 million.
(5) A 78 basis point SAIF assessment would reduce pro forma total equity by an
estimated $91 million after tax, with a corresponding reduction in annual
deposit insurance premiums of approximately $27 million.
(6) Includes convertible preferred.
[LOGO] WASHINGTON MUTUAL 19 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 20
PRO FORMA EARNING ASSET MIX
- --------------------------------------------------------------------------------
(Pro Forma Combined Data as of June 30, 1996; Dollars in Millions)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT %
- -------------------------------------------------------------------------------
<S> <C> <C>
MBS & Investment Securities $13,626 34%
Residential Loans 19,972 49
Multi-family 2,435 6
Commercial Real Estate 1,347 3
Consumer 2,846 7
Commercial Business 270 1
-------
Total Interest Earning Assets $40,496 100%
=======
- --------------------------------------------------------------------------------
</TABLE>
[LOGO] WASHINGTON MUTUAL 20 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 21
PRO FORMA LIABILITY MIX
================================================================================
<TABLE>
<CAPTION>
(Pro Forma Combined Data as of June 30, 1996; Dollars in Millions)
-----------------------------------------------------------------------
AMOUNT %
-----------------------------------------------------------------------
<S> <C> <C>
Deposits
Checking and Savings $ 8,073 20%
Time 15,683 39
-------
Total(1) 23,756 59
Annuities 866 2
Borrowings 14,732 37
Other Liabilities 583 2
-------
Total Liabilities $39,937 100%
=======
</TABLE>
-----------------------------------------------------------------------
(1) Includes $4.5 billion of BIF deposits.
[LOGO] WASHINGTON MUTUAL 21 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 22
BALANCE SHEET OPPORTUNITIES
==============================================================================
<TABLE>
<CAPTION>
(Pro Forma Combined Data as of or for the Six Months Ended
June 30, 1996; Dollars in Millions)
----------------------------------------------------------------------
RETAIL COMMERCIAL WHOLESALE
BANKING BANKING BANKING TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Assets $32,030 $2,729(1) $7,406 $42,165
% 75% 7% 18% 100%
Capital Assigned $1,563 $300 $361 $2,224
NIM 3.13% 4.92% 1.20% 2.95%
</TABLE>
----------------------------------------------------------------------
(1) Includes $1,702 million in commercial real estate loans and $1,027
million in commercial bank assets.
[LOGO] WASHINGTON MUTUAL 22 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 23
REDUCES INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------
(Data as of June 30, 1996)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WAMU ASB PRO FORMA
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Gap (9.5)% 7.0% (1.6)%
COFI ARMs/Assets 2 % 84% 41 %
Other ARMs/Assets 40 2 22
---- --- ----
Total ARMs/Assets 42 % 86% 63 %
Deposits/Assets 49 % 62% 56 %
- -------------------------------------------------------------------------------
</TABLE>
[LOGO] WASHINGTON MUTUAL 23 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 24
ACCELERATES ACHIEVEMENT OF 5-YEAR GOALS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STAND ALONE PRO FORMA
5-YEAR GOAL 6/30/96 GOAL 6/30/96(1)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
ROCE 15.2% 18% 17.8%
ROAA 1.09 1.20 0.94
Efficiency Ratio 53 <50 48
One Year Gap (9.5) <(10.0) (1.6)
NPAs/Assets 0.46 <1.00 0.77
Reserves/NPLs 189 >100 170
Equity/Assets 7.38 >6.00 5.28
- ------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Assumes 100% cost savings; after transaction charges.
[LOGO] WASHINGTON MUTUAL 24 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 25
SUMMARY FINANCIAL IMPACT
________________________
* Approximate 3.3% deposit premium
* Immediately accretive to EPS
* Maintains solid capital levels
* Increases deposit funding/improves flexibility
* Reduces interest rate sensitivity
* Accelerates achievement of 5-year financial goals
[LOGO] WASHINGTON MUTUAL 25 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 26
________________________
COMPELLING STRATEGIC FIT
________________________
<PAGE> 27
COMPELLING STRATEGIC FIT
________________________
* Unique balance sheet fit
* Ability to retain ASB's excess loan originations
* Effective deployment of WAMU's excess capital
* Creates a West Coast powerhouse franchise
* Leading mortgage origination/servicing capability
* Significant market share in attractive markets
* Platform for future growth
* Acquisition opportunities
* Leveraging ASB's franchise
[LOGO] WASHINGTON MUTUAL 27 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 28
UNIQUE BALANCE SHEET FIT
* ASB's ARM production capability
* Leverages WAMU's excess capital
* Blend of COFI and Treasury ARMs
* Reduces impact of WAMU's fixed-rate portfolios
* Less reliance on wholesale funding
[LOGO] WASHINGTON MUTUAL 28 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 29
CREATES WEST COAST POWERHOUSE
Map of Western United States showing locations of Washington Mutual's
and American Savings' consumer branches, loan production centers and commercial
bank branches in the states of Washington, Oregon, California, Arizona, Utah,
Idaho and Montana. The Washington Mutual branches are primarily clustered
around Seattle, Portland and Salt Lake City and the American Savings branches
are primarily clustered around San Francisco and Los Angeles.
[LOGO] WASHINGTON MUTUAL 29 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 30
CREATES WEST COAST POWERHOUSE
-----------------------------
(Data as of December 31, 1995; Dollars in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------------------------
STATE DEPOSITS MARKET SHARE(1)
------------------------------------------------------------
Washington $ 8,218 18%
Oregon 2,811 9
California 13,005 4
-------
Total West Coast States $24,034 5
Other 277 -
-------
Total $24,311 5%
========
</TABLE>
-------------------------------------------------------
(1) Pro Forma all pending acquisitions.
[LOGO] WASHINGTON MUTUAL 30 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 31
LEADING LOAN ORIGINATION CAPABILITY
- --------------------------------------------------------------------------------
(Data for the Year Ended December 31, 1995; Dollars in Millions)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SFR
STATE ORIGINATIONS RANK
- -------------------------------------------------------------------------------
<S> <C> <C>
Washington $ 1,796 1
Oregon 1,024 1
California 4,690 2
Other 124 -
------
Total Originations $ 7,634 -
Total Servicing for Others $22,931 -
- -------------------------------------------------------------------------------
</TABLE>
[LOGO] WASHINGTON MUTUAL 31 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 32
LEADING SFR ORIGINATION MARKET SHARE
- --------------------------------------------------------------------------------
Bar graph showing the three leading banks by market share of single
family residential originations in each of Washington, Oregon and California
for the first quarter of 1996. In Washington, Washington Mutual's market share
is 14%, Norwest's is 6% and BankAmerica's is 5%. In Oregon, Washington
Mutual's market share is 9%, and each of Norwest's and BankAmerica's is 5%. In
California, BankAmerica's market share is 7%, Washington Mutual's is 4% (on a
proforma combined basis with American Savings) and Countrywide's is 3%.
[LOGO] WASHINGTON MUTUAL 32 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 33
CONTINUED GROWTH THROUGH ACQUISITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SIZE RANGE(1) CALIFORNIA WASHINGTON OREGON UTAH
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANKS
$2B-$10B 3 0 0 2
$0.5B-$2B 17 2 0 0
$0.1B-$0.5B 84 20 10 7
--- --- --- ---
Total Banks 104 22 10 9
THRIFTS
$5B-$15B 4 0 0 0
$2B-$5B 4 1 0 0
$0.5B-$2B 16 4 1 0
--- --- --- ---
Total Thrifts 24 5 1 0
TOTAL THRIFTS AND BANKS 128 27 11 9
=== === === ===
</TABLE>
- -------------------------------------------------------------------------------
(1) Based upon total deposits. Reflects independent entities headquartered in
the state. Pro forma all pending acquisitions.
[LOGO] WASHINGTON MUTUAL 33 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 34
LEVERAGING ASB'S FRANCHISE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LOAN PRODUCTS DEPOSIT PRODUCTS ASSET ACCUMULATION
- --------------------------------------------------------------------------------
<S> <C> <C>
Home Equity Loans Checking Accounts Mutual Funds
Auto Loans Money Market Accounts Annuities
Unsecured Personal Loans
</TABLE>
[LOGO] WASHINGTON MUTUAL 34 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 35
- -----------------------------------------------------------------------
CREATES SHAREHOLDER VALUE
- -----------------------------------------------------------------------
<PAGE> 36
CREATES SHAREHOLDER VALUE
- --------------------------------------------------------------------------------
+ Return on equity estimated to be in line with high performing
bank peers
+ EPS growth estimated to be significantly above peers
+ WAMU as an investment opportunity
- Possible P/E multiple expansion
- $3.5 billion market capitalization
[LOGO] WASHINGTON MUTUAL 36 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 37
PROFITABILITY STATISTICS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ESTIMATED
COMBINED BANK THRIFT
YTD 1996(1) AVERAGE(2) AVERAGE(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ROAE 17.8% 17.8% 10.6%
ROAA 0.94 1.42 0.68
Efficiency Ratio 48 57 50
Equity/Assets 5.28 8.20 6.35
Market Price to:
1997E EPS(4) 8.0x 10.0x 9.0x
1998E EPS(4) 6.7 9.1 8.2
Tangible Book Value 1.80 2.41 1.36
</TABLE>
(1) Based on estimated combined first half 1996 annualized data and assuming
100% cost savings and completion of transaction charges.
(2) Includes BAC, WFC, USBC, FSCO, ZION, CMA and BOAT. Data for the quarter
ended March 31, 1996.
(3) Includes AHM, GWF and GDW. Data for the quarter ended March 31, 1996.
(4) Based upon I/B/E/S projected information for bank and thrift average.
Source: SNL Securities
[LOGO] WASHINGTON MUTUAL 37 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 38
MEANINGFULLY ENHANCES EPS GROWTH
--------------------------------
Bar graph showing actual earnings per share for Washington Mutual for
1995 of $2.59 and projected earnings per share for Washington Mutual (on a
proforma combined basis with American Savings) for 1996 through 1998 of $3.16,
$3.75 and $4.50, respectively.
[LOGO] WASHINGTON MUTUAL 38 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 39
UNIQUE INVESTMENT OPPORTUNITY
-----------------------------
[CHART]
Graph showing first quarter 1996 return on equity versus stock price
divided by tangible book value for 10 financial institutions, plus Washington
Mutual stand alone and on a proforma combined basis with American Savings. The
Washington Mutual return on equity is for the first half of 1996.
[LOGO] WASHINGTON MUTUAL 39 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 40
UNIQUE INVESTMENT OPPORTUNITY
-----------------------------
[CHART]
Graph showing first quarter 1996 return on equity versus stock price
divided by 1997 estimated earnings per share for 10 financial institutions,
plus Washington Mutual stand alone and on a proforma combined basis with
American Savings. The Washington Mutual return on equity is for the first half
of 1996.
[LOGO] WASHINGTON MUTUAL 40 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 41
CONCLUSION
- --------------------------------------------------------------------------------
Financially Attractive
+ Double digit EPS accretion
+ Reduces interest rate sensitivity
+ Accelerates achievement of 5-year financial goals
Compelling Strategic Fit
+ Unique balance sheet fit
+ Creates West Coast powerhouse franchise
+ Platform for future growth
Creates Shareholder Value
+ Increased levels of profitability
+ Meaningfully enhances EPS growth
+ Possible P/E multiple expansion
[LOGO] WASHINGTON MUTUAL 41 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 42
- -----------------------------------------------------------------------
APPENDIX TO INVESTOR PRESENTATION
- -----------------------------------------------------------------------
<PAGE> 43
ASB HISTORICAL BALANCE SHEET ITEMS
- ----------------------------------
<TABLE>
<CAPTION>
(Dollars in Millions)
- --------------------------------------------------------------------------------------------------------
AT DECEMBER 31, AT JUNE 30,
---------------------------------------------------------
1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $16,919.5 $17,273.3 $17,289.4 $18,536.8 $19,607.9 $20,367.4
Total Loans 8,439.5 9,630.9 9,808.1 12,643.6 11,175.0 12,835.8
MBS 1,304.2 1,629.6 2,995.4 3,027.5 6,952.0 6,331.7
Deposits 13,973.7 13,985.7 13,367.6 12,815.5 13,005.0 12,729.0
Total Borrowings 1,973.4 2,077.8 2,580.5 4,433.2 5,027.4 6,130.0
Stockholders' Equity 719.4 906.9 999.0 1,014.1 1,239.0 1,180.4
Loans Originated $ 3,022.8 $ 4,393.7 $ 3,845.1 $ 4,738.0 $ 4,690.0 $ 2,791.4
Loans Serviced for Others 9,237.5 8,613.0 9,121.7 13,455.5 16,204.2 15,774.5
Nonperforming Assets 268.7 388.1 409.9 337.9 244.1 219.9
NPAs/Total Assets 1.59% 2.25% 2.37% 1.82% 1.25% 1.08%
Reserves/NPAs 27.7 31.3 30.7 33.3 37.7 41.0
Tangible Capital 4.19% 4.68% 5.27% 5.18% 5.39% 5.41%
Core Capital 4.25 4.75 5.33 5.22 5.41 5.42
Total Risk-based Capital 12.77 12.12 12.24 10.84 10.12 10.74
KHI Stockholders' Equity(1) $ 617.0 $ 669.7 $ 759.9 $ 737.6 $ 961.6 $ 860.9
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes minority interest attributable to the government warrant and $80
million in preferred equity.
[LOGO] WASHINGTON MUTUAL 43 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 44
ASB HISTORICAL INCOME STATEMENT
- --------------------------------------------------------------------------------
(Dollars in Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INTEREST INCOME $ 529.5 $ 534.4 $ 450.7 $ 379.5 $ 406.4 $ 181.8 $ 248.1
Provision for Loan Losses (63.6) (143.7) (123.5) (101.6) (63.8) (34.5) (31.0)
Other Income 85.9 85.4 70.6 102.3 90.4 47.4 41.7
Expenses (286.5) (278.5) (271.6) (270.1) (272.2) (138.4) (137.5)
------- ------- ------- ------- ------- ------- -------
Pre-Tax Income 265.3 197.6 126.2 110.1 160.8 56.3 121.3
Income Taxes (84.1) (32.8) (11.6) (0.9) (12.3) 5.5 (27.7)
------- ------- ------- ------- ------- ------- -------
Income Before Extraordinary Item 181.2 164.8 114.6 109.2 148.5 61.8 93.6
Extraordinary Item (Net of Tax) -- 87.7 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income $ 181.2 $ 252.5 $ 114.6 $ 109.2 $ 148.5 $ 61.8 $ 93.6
======= ======= ======= ======= ======= ======= =======
ROAA 1.07% 1.45% 0.67% 0.63% 0.77% 0.65% 0.95%
ROAE 25.29 32.65 12.05 10.81 13.22 11.34 15.39
Efficiency Ratio 46.3 43.3 49.6 53.3 51.2 56.7 44.9
Net Interest Margin 3.23 3.18 2.73 2.28 2.20 1.97 2.63
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
[LOGO] WASHINGTON MUTUAL 44 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 45
ASB HISTORICAL INCOME STATEMENT -- ROAA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME STATEMENT AS A PERCENTAGE OF AVERAGE ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income 3.13% 3.07% 2.63% 2.19% 2.11% 1.90% 2.51%
Provision for Loan Losses (0.38) (0.82) (0.72) (0.59) (0.34) (0.36) (0.31)
Other Income 0.51 0.50 0.42 0.59 0.47 0.41 0.35
Operating Expenses (1.69) (1.61) (1.59) (1.55) (1.41) (1.36) (1.32)
------- ------- ------- ------- ------- ------- -------
Pre-Tax Income 1.57 1.14 0.74 0.64 0.83 0.59 1.23
Income Taxes (0.50) (0.19) (0.07) (0.01) (0.06) 0.06 (0.28)
------- ------- ------- ------- ------- ------- -------
Income Before Extraordinary Item 1.07 0.95 0.67 0.63 0.77 0.65 0.95
Extraordinary Item (Net of Tax) -- 0.50 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income 1.07% 1.45% 0.67% 0.63% 0.77% 0.65% 0.95%
======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
[LOGO] WASHINGTON MUTUAL 45 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 46
ASB 1995/1996 QUARTERLY EARNINGS
- --------------------------------------------------------------------------------
(Dollars in Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996
-------------------------------------- ------------------
Q1 Q2 Q3 Q4 Q1 Q2
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 305.5 $ 330.6 $ 346.3 $ 353.7 $ 346.3 $ 354.8
Interest Expense (220.4) (234.4) (238.5) (236.4) (225.2) (227.8)
------- ------- ------- ------- ------- -------
Net Interest Income 85.1 96.2 107.8 117.3 121.1 127.0
Provision for Loan Losses (18.9) (15.6) (14.6) (14.7) (15.9) (15.1)
Other Income 29.3 18.7 18.0 24.5 20.2 21.4
Expenses (67.4) (71.0) (66.3) (67.5) (68.3) (69.1)
------- ------- ------- ------- ------- -------
Pre-Tax Income 28.1 28.3 44.9 59.6 57.1 64.2
Income Taxes 6.0 (0.7) (5.0) (12.7) (14.5) (13.2)
------- ------- ------- ------- ------- -------
Net Income $ 34.1 $ 27.6 $ 39.9 $ 46.9 $ 42.6 $ 51.0
======= ======= ======= ======= ======= =======
ROAA 0.72% 0.57% 0.82% 0.97% 0.88% 1.02%
ROAE 13.2 9.7 13.9 16.1 13.7 16.9
Efficiency Ratio 54.4 57.4 50.0 43.0 45.7 44.2
Net Interest Margin 1.87 2.08 2.32 2.54 2.62 2.64
- ----------------------------------------------------------------------------------------
</TABLE>
[LOGO] WASHINGTON MUTUAL 46 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 47
ASB NONPERFORMING ASSET TRENDS
- --------------------------------------------------------------------------------
(Dollars in Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------- AT JUNE 30,
1992 1993 1994 1995 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NPLs $243.6 $259.0 $219.3 $144.1 $135.8
NPAs 388.1 409.9 337.9 244.1 219.9
NPAs/Assets 2.25% 2.37% 1.82% 1.25% 1.08%
Reserves $121.5 $125.7 $112.5 $ 92.0 $ 90.0
Reserves/NPLs 49.9% 48.5% 51.3% 63.8% 66.3%
Reserves/NPAs 31.3 30.7 33.3 37.7 41.0
- ----------------------------------------------------------------------------------
</TABLE>
[LOGO] WASHINGTON MUTUAL 47 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 48
ASB VINTAGE ANALYSIS
- --------------------------------------------------------------------------------
+ The quality of assets originated has improved steadily since 1990
- 1994 and 1995 vintages are demonstrating lower delinquencies than the
1993 vintage
- As earlier vintages roll off the portfolio, aggregate losses will continue
to decline
Graph depicting, for American Savings' loans originated for
each of the years 1989 through 1994, the percentage delinquent and cumulative
REO for up to 26 quarters after loan origination. The graph includes a base
target (at quarters 12 through 26) of approximately five percent. The graph
generally shows the highest delinquency rates / REO for loans originated in
1990 and 1991 (approximately 19% and 12%, respectively) and the lowest for
1992, 1993 and 1994 (less than 5%).
[LOGO] WASHINGTON MUTUAL 48 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 49
PRO FORMA CLOSING BALANCE SHEET
- --------------------------------------------------------------------------------
(Dollars in Millions; Data as of June 30, 1996)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WAMU KHI ADJUSTMENTS PRO FORMA
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash & Cash Equivalents $ 304 $ 144 $ 0 $ 448
MBS & Investments 7,406 6,740 (520) 13,626
Total Loans 13,944 12,926 0 26,870
Loan Loss Reserves (144) (90) (125) (359)
Other Assets 813 761 6 1,580
------- ------- ------ -------
Total Assets $22,323 $20,481 $ (639) $42,165
======= ======= ====== =======
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits $11,027 $12,729 $ 0 $23,756
Annuities 866 0 0 866
Borrowings 8,602 6,495 (365) 14,732
Other Liabilities 181 396 6 583
------- ------- ------ -------
Total Liabilities 20,676 19,620 (359) 39,941
Preferred Equity 118 80 (80) 118
Common Equity 1,529(1) 777 (200) 2,106(1)
------- ------- ------ -------
Total Equity 1,647 857 (280) 2,228
------- ------- ------ -------
Total Liabilities & Equity $22,323 $20,481 $ (639) $42,165
======= ======= ====== =======
</TABLE>
- ------------------------------------------------------------------------------
(1) Includes WAMU Series D convertible preferred.
[LOGO] WASHINGTON MUTUAL 49 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 50
PRO FORMA ASSET COMPOSITION
- --------------------------------------------------------------------------------
(Dollars in Millions; Data as of June 30, 1996)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WAMU KHI ADJUSTMENTS PRO FORMA
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $ 304 1% $ 144 1% $ 0 $ 448 1%
MBS & Investments 7,406 33 6,740 33 (520) 13,626 32
Loans:
1-4 Family 8,928 40 11,044 54 0 19,972 47
Multi-Family 984 4 1,451 7 0 2,435 6
Commercial Real Estate(1) 1,001 4 346 1 0 1,347 3
Consumer:
Home Equity 1,622 7 44 0 0 1,666 4
Others 324 2 41 0 0 365 1
-------- ------- ----- ------
Total Consumer 1,946 9 85 0 0 2,031 5
Manufactured Housing 815 4 0 0 0 815 2
Commercial Business 270 1 0 0 0 270 1
Loan Loss Reserves (144) (1) (90) 0 (125) (359) (0)
-------- ------- ----- ------
Total Loans 13,800 62 12,836 62 (125) 26,551 63
Other Assets 813 4 761 4 6 1,580 4
-------- ------- ----- ------
Total Assets $22,323 100% $20,481 100% $(639) $42,165 100%
======== ======= ===== =======
</TABLE>
- ------------------------------------------------------------------------------
(1) Includes construction loans.
[LOGO] WASHINGTON MUTUAL 50 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 51
PRO FORMA DEPOSIT/LIABILITY COMPOSITION
- --------------------------------------------------------------------------------
(Dollars in Millions; Data as of June 30, 1996)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WAMU KHI ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Checking $ 1,451 7% $ 862 4% $ 0 $ 2,313 6%
Savings 963 5 780 4 0 1,743 6
Money Market 3,197 15 820 4 0 4,017 10
Time 5,416 26 10,267 53 0 15,683 39
------- ------- ----- -------
Total Deposits 11,027 53 12,729 65 0 23,756 61
Annuities 866 4 0 0 0 866 2
Borrowings 8,602 42 6,495 33 (365) 14,733 35
Other Liabilities 181 1 396 2 6 587 2
------- ------- ----- -------
Total Liabilities $20,676 100% $19,620 100% $(359) $39,937 100%
======= ======= ===== =======
</TABLE>
- ------------------------------------------------------------------------------
[LOGO] WASHINGTON MUTUAL 51 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 52
COFI VS. 1-YEAR T-BILL YIELD MOVING AVERAGE
- --------------------------------------------------------------------------------
Line graph showing, for each of the Cost of Funds Index (11th District)
and the 1-Year Treasury Bill, the moving average yield from June 1989 through
January 1996. Each average yield decreases from approximately 9% at June 1989
to approximately 3.5% at November 1993 and then increases to 5% at January 1996.
[LOGO] WASHINGTON MUTUAL 52 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 53
WEST COAST MARKET LEADERSHIP
- --------------------------------------------------------------------------------
Bar graphs showing the five financial institutions with the greatest
market share in each of Washington, Oregon and California for single-family
residential first mortgages (as of March 31, 1996) and Retail deposits (as of
December 31, 1995). In Washington for single-family residential first
mortgages, Washington Mutual's market share is 14%, Norwest's is 6%,
BankAmerica's is 5%, Mellon's is 3% and Washington Federal's and Countrywide's
are each 2%. In Oregon for single-family residential first mortgages,
Washington Mutual's market share is 9%, each of Norwest's and BankAmerica's is
5%, Mellon's is 4% and each of Fleet Mortgage's and Premier's is 3%. In
California for single-family residential first mortgages, BankAmerica's market
share is 7%, American Savings' is 4%, and each of Chase's, Norwest's and Home
Savings' is 3%.
In Washington for retail deposits, BankAmerica's market share is 19%,
Washington Mutual's is 18%, Key Bank's is 14%, U.S. Bank's is 9% and First
Interstate Bank (Wells Fargo) is 6%. In Oregon for retail deposits, U.S. Bank's
market share is 31%, First Interstate Bank's (Wells Fargo) is 16%,
BankAmerica's is 14%, Washington Mutual's is 9% and Key Bank's is 9%. In
California for retail deposits, BankAmerica's market share is 21%, Wells
Fargo's (including First Interstate) is 17%, AHM's is 7%, Great Western Bank's
is 6%, American Saving's is 4% and UBNK's is 3%.
[LOGO] WASHINGTON MUTUAL 53 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 54
THE CALIFORNIA ECONOMY IS IMPROVING
- --------------------------------------------------------------------------------
Three bar graphs show changes reflecting the state of the California
economy. The first graph shows a comparison of the percentage change in
employment in California versus the rate for the United States for the years
1991 through 1995. This graph generally shows increases in U.S. employment
throughout the periods while California shows increases in employment only in
1994 and 1995. The second graph shows the change in personal income in
California for the years 1992 through 1996 and projected for 1997. This graph
generally shows increased personal incomes for each period of 2%-4% with the
exception of 1993 in which a slight decrease occurs. The third graph shows the
changes in residential real estate prices in each of Los Angeles, Sacramento,
Riverside/San Bernardino, San Diego and San Francisco in California for the
years 1991 through 1995 and projected for 1996. This graph generally shows
decreasing home prices in 1991-1993 and increasing prices in 1994, 1995 and
1996 (projected).
[LOGO] WASHINGTON MUTUAL 54 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 55
LAWSUIT ESCROW
- --------------------------------------------------------------------------------
+ A CASH SETTLEMENT FROM PURSUING THE GOVERNMENT LAWSUIT MAY OCCUR; IF/WHEN IT
IS RECEIVED, UP TO 8 MILLION ADDITIONAL SHARES WILL BE RELEASED FROM ESCROW
- Shares will be released based on the after-tax proceeds received by WAMU,
net of WAMU's expenses
- In determining the number of shares to be released from escrow in the
future, the shares will be valued at the WAMU average trading price
established just prior to the close of the merger
- Since the maximum number of shares is 8 million, if the WAMU price at
closing is $30.00, the first $240 million of distributable proceeds (in
this example) will be applied to the release of shares. Any excess is
retained by WAMU
- --------------------------------------------------------------------------------
ACCOUNTING TREATMENT FOR ESCROWED SHARES PRIOR TO LAWSUIT SETTLEMENT(1)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
ASSUMED FUTURE WAMU SHARE PRICE $30.00 $35.00 $40.00 $45.00
- ----------------------------------------------------------------------------------
Theoretical After tax Cash Proceeds
to WAMU(2) 240.0 240.0 240.0 240.0
Escrow Shares (Maximum Issuable) 8.0MM 8.0MM 8.0MM 8.0MM
Equivalent Shares at Future Stock Price(3) 8.00 6.86 6.00 5.33
Estimated Additional Shares(4) 0.00 1.14 2.00 2.67
Share Dilution(5) 0.0% 1.0% 1.7% 2.3%
</TABLE>
- --------------------------------------------------------------------------------
(1) Assumes closing WAMU share price of $30.00. Assumes a 40% tax rate.
(2) Equals after-tax, after-expense proceeds that result in the release of all
8.0 million shares; actual cash received could vary; any excess retained
by WAMU.
(3) Equals Theoretical Cash Proceeds to WAMU divided by Assumed Future WAMU
Share Price.
(4) If future share price is below average price (in this example, $30),
additional shares will be 0.0 under the Treasury Stock Method.
(5) Based on 117.5 million pro forma fully diluted shares outstanding.
[LOGO] WASHINGTON MUTUAL 55 AMERICAN SAVINGS [LOGO] BANK
<PAGE> 56
DRAFT OF 7/19/96
REFER TO SLIDE #2: INTRODUCTION AND SPECIAL NOTE (Allow time to read)
SLIDE #3: TRANSACTION RATIONALE
Good morning and thank you for coming to hear about what we believe to be a
terrific transaction for Washington Mutual's shareholders.
As you'll hear me say throughout the course of this presentation, we are
terribly excited about the prospects of this transaction for three main reasons,
namely:
First and foremost, the transaction is financially attractive in that we
anticipate it will be immediately accretive, with accretion of nearly 20%
in 1998. The transaction will also reduce WAMU's interest rate sensitivity
and risk profile while accelerating our ability to achieve the 5-year
goals which we have set out over the course of prior investor
presentations.
Second, this transaction represents a tremendous strategic fit for WAMU in
that both entities have highly complementary balance sheets and franchises.
The expansion of WAMU's franchise to California will also provide us with
additional avenues for growth; be they through subsequent acquisitions or
through the realization of internal growth opportunities. Together, our two
institutions will create a West Coast powerhouse, with many unique
characteristics.
Lastly, I think you'll see that this transaction creates significant
shareholder value. The transaction meets all of the financial parameters
which we have established in terms of EPS accretion, IRRs and the like and
meaningfully enhances our growth prospects. While I think we were already
undervalued on a stand alone basis, I think you'll agree that we are
especially so on a pro forma basis.
SLIDE #4: TRANSACTION SUMMARY
Going through the highlights of the transaction:
We will initially be issuing 40MM shares to the sellers which, based on our
current market value of $30.125/share represents a transaction value of
approximately $1.2 billion. There is a FIRREA-related lawsuit pending. Our
agreement provides that we could release up to 8 million additional shares,
based on the after-tax proceeds of the lawsuit being received by WAMU. Of
course, certain expenses would be subtracted before calculating the number of
shares to be delivered in this situation.
I should point out that "Keystone" is the name of American Savings Bank's
holding company. The investors who own Keystone are organized as Keystone
Partners.
The transaction will be accounted for as a pooling of interests and be tax free
to Keystone Partners. We will be asking our shareholders to approve the
transaction, and we expect to receive all the regulatory approvals necessary
and close the transaction by the end of this year.
Pro forma for the transaction, Keystone Partners will initially receive 26
million shares, or approximately 22% of WAMU pro forma, and the FDIC will
initially receive 14 million shares, or approximately 12% of WAMU pro forma
<PAGE> 57
We expect the FDIC to take advantage of the planned secondary offering which we
will describe in a moment, but Bob Bass, who owns about half of the Keystone
position, has told us that he intends to remain as a shareholder.
There are no caps or collars in the transaction and, as ASB is a private
company, we would expect little to no arbitrage activity in conjunction with the
transaction.
I should take a moment to say how happy we are at WAMU to have such well known
and savvy investors as those involved with Keystone Partners becoming major
shareholders of our company. Bob is here with us today and will make a brief
statement at the conclusion of this presentation. Let me just state at this
point that while there are no shareholder agreements in place for this
transaction, Bob is extremely excited about the prospects of the shareholders
of WAMU over the foreseeable future. As you see on the slide, we will work
with Bob to nominate two mutually agreeable Directors to our Board. Going
forward, this will be subject to his retaining a certain ownership percentage
in the company. I look forward to working with Bob and the new Directors in
creating shareholder value through executing the plans which we will outline
for you today.
There will be a public secondary offering soon after closing of the
transaction. All shareholders will have registration and piggy-back rights and
we'd expect the FRF some small non-affiliated holders to reoffer their shares.
As I mentioned, Bob has told us he plans to hold the shares he receives, but
this offering will be an important source of liquidity to some of the other
shareholders, most notably the FRF.
SLIDE #5: TRANSACTION PRICING
As I mentioned at the beginning, this transaction is very attractive from a
financial perspective. I think you begin to see why on this chart, which shows
the multiples. Not only do they compare favorably to similar transactions in the
California marketplace, but the current and forward earnings multiples provide
earnings accretion to WAMU on day one, even were we not to achieve any
synergies. As you'll see, we hope to do considerably better than that and our
ability to extract synergies should result in some very meaningful accretion
levels going forward.
SLIDE #6: PRO FORMA OVERVIEW
Before going much further with the financial consequences of the transaction,
let me step back and give you a birds eye view of the pro forma franchise:
The pro forma entity will have over $42 billion in total assets, making it the
24th largest depository institution in the U.S. We will be funded by close to
$24 billion in customer deposits and have a market cap of close to $3.5 billion,
the largest of any U.S. savings bank.
<PAGE> 58
We will continue to have "well-capitalized" ratios and would have had a book
value per share of $17.96 at June 30, 1996 and a tangible book value per share
of $16.69.
We will serve more than 1.3MM households and have more than 500 offices.
SLIDE #7: ORGANIZATIONAL AND OPERATIONAL ISSUES
One last slide before telling you a little bit more about ASB and the financial
impact of the merger.
We intend to continue to operate under the American Savings Bank name in
California. American will become a separate first tier subsidiary of our
holding company. But we will merge ASB's back office with our banking
subsidiaries at Washington Mutual, so we will achieve the cost and operating
benefits of utilizing a common platform.
In order to ensure as smooth an integration process as possible and the
continued growth of the franchise going forward, we will be retaining a number
of ASB's key managers. While it will take a few months to develop a detailed
operating plan, our general plan will be to aggressively introduce Washington
Mutual's consumer banking products and approaches throughout ASB's branch
system. We expect to expand ASB's already strong loan origination capabilities,
which may be used to replace some of WAMU's lower yielding mortgage backed
securities with these floating rate loans. We expect to drive the necessary
cost savings and convert to a common operating platform for the consumer
banking operating within six months of closing the transaction.
SLIDE #9: OVERVIEW OF AMERICAN SAVINGS
Now let me give you a little background on American and I think you'll see why
Washington Mutual is excited about the combination of our organizations. In
1988, the Robert M. Bass Group formed a partnership to acquire the failed
savings and loan subsidiary of Financial Corporation of America in an
FDIC-assisted transaction. As a result of the transaction, the FDIC retained a
warrant position in American. Since 1988, American's management team has
dramatically improved its franchise to become the 6th largest depository
institution in California with $20.4 billion in assets and $12.7 billion in
customer deposits. American has a strong retail branch network with 158 offices
with concentrations in the San Francisco and Los Angeles markets and is ranked
as the #2 residential mortgage originator in the state, 2nd only to
BankAmerica. Today, American is a solid financial performer with strong
profitability and prospects.
SLIDE #10 OVERVIEW OF AMERICAN SAVINGS
We have spent a considerable amount of time with American's management team to
understand their business and financial strategy, including their management
forecast shown here. This forecast has been used as the basis for certain pro
forma estimates later in this presentation. American's 1996 first half results
reflect its earnings momentum resulting from improved asset quality and
stabilized interest rates. We are particularly pleased with their improved net
interest margin, which is already ahead of plan in 1996.
<PAGE> 59
SLIDE #11 THE CALIFORNIA ECONOMY
We believe that from an economic perspective the acquisition of American is
well-timed. Key California indicators point to a recovery, including job growth,
unemployment and personal income. Housing market trends have also turned
positive. The California banking market is attractive to us for both its size
and its fragmentation. This fragmentation provides market share opportunities
for us, either through acquisition or internal growth.
SLIDE #13: FINANCIAL OVERVIEW
This transaction either meets or exceeds our internal requirements for accretion
and IRR and results in a more advantageous transaction than had we dedicated a
similar amount of capital to a share repurchase program.
As I mentioned, after the closing charges, we expect the transaction to be
immediately accretive, even with no cost savings, and to be nearly 20%
accretive once those savings are fully realized.
The transaction has been conservatively structured. Our capital position
remains strong. Our asset quality and reserving levels are good and our cost
savings estimates are conservative.
Finally, I'll go through how the transaction reduces WAMU's interest rate
sensitivity, while accelerating our ability to reach most of our 5 year goals.
SLIDE #14: CREATES DOUBLE DIGIT ACCRETION
Here is how the combination of the two companies may result in long term double
digit earnings accretion for WAMU's shareholders. For illustrative purposes, we
have utilized IBES estimates for all WAMU projections. We aren't commenting on
the accuracy of the IBES estimates, but are using them for an illustration,
since they're publicly available.
As you can see in the column entitled "1996", ASB's current earnings run rate
for 1996 plus the IBES estimate would result in 3.3% accretion, even before the
realization of any cost savings or synergies.
Taking a look at the components of the income statement which result in this
level of accretion, you will see ASB's projected net income reduced by the
actual holding company interest expense. The sum of these two lines represents
the acquired net income.
The next line item reflects the earnings pickup from our ability to retain more
of American's loan originations as a result of higher capital retention than was
assumed in American's business plan. This will be detailed for you in a minute.
Net cost savings, shown here as totaling $30MM on an after tax basis in 1998,
will also be detailed shortly.
As you will see on the next line, we plan on retiring certain of Keystone's
financings in the first quarter of 1997, which includes $80 million of 17.25%
preferred and $365 million of other high cost debt. The figure shown here
reflects the net add back of the existing expense, less our interest cost of
retiring the debt. You should note that these synergies are automatic and
require no consolidation and/or operational moves on our part.
Please note that our calculations do not take into account any revenue
enhancements from expanding ASB's product offerings to match WAMU's. Nor have we
included potential
<PAGE> 60
enhancements from replacing WAMU's lower yielding mortgage backed securities
with higher yielding adjustable rate loans.
When you put it all together, you can see why we expect the deal to be
immediately accretive before any of the incremental cost savings are taken into
account and why we expect it to be about 20% accretive to WAMU shareholders in
the long run.
SLIDE #15: NET INTEREST INCOME PICKUP
American currently generates more ARMs than its capital allows it to retain.
Using the capital generated by synergies resulting from the merger as well as
incremental capital from reducing Keystone's dividend to our current payment of
about 30% of earnings allows us to retain these excess originations.
These originations earn an incremental spread of 250 basis points pre-tax. As
the slide shows, by 1998 we expect to be able to increase the pro forma ARM
portfolio by $3.2 billion, which is expected to produce $39 million in
incremental after-tax net income.
SLIDE #16: COST SAVINGS ESTIMATES
We are projecting cost savings equal to 20% of American's non-interest expenses,
which will be fully realized within the second year of combined operations. We
believe these estimates to be conservative and frankly below what we have
delivered in other market extension transactions. Not surprisingly, most of the
savings come from corporate expenses. On the retail side, we expect modest cost
savings to be offset by the additional expenses necessary to expand American's
product offerings to that of WAMU. No branch closings are expected at this time.
Reflecting what we believe are conservative assumptions, no revenue enhancements
have been included in these projections, despite assuming additional costs to
broaden American's product lines. As I mentioned earlier, we anticipate being
able to convert ASB's systems within 6 months of closing and expect to be able
to fully recognize these projected cost savings by 1998.
SLIDE #17: TRANSACTION CHARGE DETAIL
We are estimating an upfront charge of about $200MM after-tax, with the detail
shown here. As you can see, approximately one half of this charge comes from an
additional loan loss reserve. There are many valid processes for establishing
the appropriate reserve levels. Ours tends to emphasize the relationship of the
loss reserve to non-performing loans. This charge brings this transaction to our
standard, with some allowance for estimation error.
The other changes relate to severance, call premiums for the retirement of
Keystone's debt and preferred, transaction costs related to this deal, paying
off past management incentive programs and charges for canceling service and
other contracts.
<PAGE> 61
SLIDE #18: PRO FORMA ASSET QUALITY
American's asset quality ratios are much better than its California peers. As
you will also see in the Appendices we have provided, American's asset quality
ratios have also been improving over recent periods (page 47). With an
additional $125 million in reserves, the pro forma asset quality ratios will
remain well within our 5-year targets, with bank's NPAs/Assets of 0.77% versus
our target of [less than] 1%.
SLIDE #19: PRO FORMA CAPITAL BASE
This slide provides the detail of the pro forma holding company capital ratios.
The combination allows WAMU to deploy excess capital strategically while
maintaining capital levels in excess of well-capitalized benchmarks.
We also have considerable capital flexibility.
SLIDE #20: PRO FORMA EARNING ASSET MIX
The combined company will have a conservative and well-diversified asset mix.
We'll be the dominant West Coast home lender, and we expect to significantly
reduce interest rate risk in the process; I have slides illustrating both of
these points.
SLIDE #21: PRO FORMA LIABILITY COMPOSITION
The transaction more than doubles WAMU's deposits to $24 billion. However, our
present deposit mix is less dependent on CDs than American's and we expect them
over time to develop a greater proportion of checking, savings and money-market
balances from their customer base.
SLIDE #22: BALANCE SHEET OPPORTUNITIES
Pro forma for this transaction, 18% of our balance sheet will consist of
wholesale banking assets and liabilities. This component of the balance sheet
utilizes approximately $360 million of capital at spreads that are below our
retail and commercial banking spreads. This additional $360 million leaves WAMU
with ample flexibility to pursue additional acquisitions and increase the retail
and commercial banking components of the balance sheet as opportunities arise.
Our pro forma numbers do not, however, make any allowance for the redeployment
of the excess capital and any better use of it would obviously be additive to
our pro forma EPS.
SLIDE #23: REDUCES INTEREST RATE SENSITIVITY
One of our 1995 five year goals, which we introduced last year, is to reduce
our one year gap from 20% to below 10% by the year 2000. We've moved there on
our own. This acquisition increases adjustable rate assets from 42% of assets
to 63%. Retail deposit funding also increases from 49% of assets to 56%. These
changes significantly reduce WAMU's interest rate risk, while still enhancing
profitability.
SLIDE #24: ACCELERATES ACHIEVEMENT OF 5-YEAR GOALS
As I've said repeatedly today and at prior presentations, our management team is
highly focused on achieving the 5 year goals set forth previously and shown on
this slide. This slide reflects June 30, 1996 results, assuming the cost savings
and capital restructuring had been
<PAGE> 62
completed. It does not reflect what we expect to be improved operating
performance at American, nor the improvements in WAMU performance that is
projected by IBES.
As you can see, the acquisition accelerates the achievement of many of our
5-year goals, notably so as it pertains to the return on common equity, which
improves to 17.8% and operating efficiency which falls to 48%. Although ROE and
EPS growth are our primary targets, we note that pro forma ROA remains below
plan, although we would anticipate being able to reach the 1.20% ROA target by
1999 and possibly as early as 1998.
SLIDE #25: SUMMARY FINANCIAL IMPACT
In summary, the high points as I see them with respect to the financials are as
follows:
- - About a 3.3% deposit premium for a major deposit franchise and even
factoring in all of the restructuring charges - about 4.4%, at closing.
- - The transaction is immediately accretive even before any synergies are
achieved
- - Thirdly, the accretion levels are based on consistently conservative
assumptions.
- - Lastly, the transaction continues to leave WAMU conservatively capitalized
while reducing interest rate risk and allowing the company to accelerate
the achievement of its 5-year financial goals.
SLIDE #27: COMPELLING STRATEGIC FIT
Turning to the strategic fit between the two entities, I think it is fair to say
that as we reviewed potential combinations, there was not a one that had as
apparent and compelling a strategic fit as we found in ASB.
Our balance sheets complement one another beautifully, as we bring a
considerable amount of excess capital and liquidity to the table which can be
deployed to take full advantage of ASB's excess origination capabilities and
solid retail funding base.
The franchises themselves are highly complementary both from a geographic and
business perspective. You'll see our market share numbers in a minute and see
that we will truly be unique in terms of our presence and distribution
capabilities on the West Coast.
Lastly, ASB provides WAMU with a unique platform for further growth, whether
this be through acquisition opportunities or through leveraging ASB's franchise
in much the same way that we have leveraged WAMU's franchise to date.
SLIDE #28: UNIQUE BALANCE SHEET FIT
As we've highlighted, the balance sheet fit between our respective organizations
is unique and very strong.
ASB's strong ARM generation matches well with WAMU's ability to portfolio the
excess originations. The combination also leverages our excess capital
strategically, while providing returns better than those available on an
equivalent stock buy back.
On the asset side, we will be mixing WAMU's ARM portfolio, which consists
primarily of Treasury-indexed ARMs, with American's portfolio which is primarily
COFI-indexed.
<PAGE> 63
Furthermore, 85% of American's assets are adjustable rate, which offsets the
impact of our primarily fixed rate portfolio.
On the liability side, American's higher component of retail funding reduces our
overall reliance on wholesale funding.
SLIDE #29: CREATES WEST COAST POWERHOUSE
As the map shows, American's California franchise, when combined with ours,
gives us a compelling West Coast franchise currently serving more than 1.3
million households. Focusing on California, you can see that American's
franchise is well balanced between the North and South, with concentrations in
San Francisco and Los Angeles. Pro forma, WAMU will have a statewide franchise
that we expect to be able to build upon in the years to come.
SLIDE #30: CREATES WEST COAST POWERHOUSE
As you see, we will have a very significant deposit position on the West Coast.
SLIDE #31: LEADING LOAN ORIGINATION CAPABILITY
Loan origination volumes are equally compelling, with more than $7.5 billion in
combined loan originations in 1995 and the leading single family mortgage market
share in Washington and Oregon and the number two position in California.
Both companies have large loan servicing portfolios and have efficient
operations. We have not factored a consolidation into our pro-formas as we want
to see how great potential savings might be. The point is that there is a large
and stable fee income source.
SLIDE #32: LEADING SFR ORIGINATION MARKET SHARE
As I just mentioned, our market share in single family lending is very strong.
In California, American's loan originations exceeded more recognizable
institutions including Home, Great Western and Countrywide, while in our
existing markets we have been able to establish the leading market share, ahead
of both Norwest and BankAmerica.
SLIDE #33: CONTINUED GROWTH THROUGH ACQUISITIONS
American provides a framework for additional growth through acquisitions. For
illustration purposes, we have shown the number of mid-sized independent
institutions in our major markets. As you can see, the entry into California
provides the opportunity to acquire significantly more franchises, as the number
of independent California franchises is more than twice those available in the
rest of our markets. As I think we have shown over the years, we have exercised
considerable financial discipline when undertaking acquisitions. We will
continue to exercise the strictest discipline in analyzing opportunities going
forward.
Combining with American gives us the potential for great cost savings with any
future in-market acquisitions, and maintains our competitive ability vis-a-vis
other acquirors.
<PAGE> 64
SLIDE #34: LEVERAGING ASB'S FRANCHISE
We plan to leverage American's franchise much like we have leveraged our own.
With our infrastructure and systems in place, as well as additional costs
budgeted into our forecasts, we plan to expand American's share of its
customers' wallet though the expansion of retail products, such as those shown
here.
Some of you may see some risk of a step backward into the thrift industry. We
disagree for two essential reasons. First, American has already begun to move
toward retail products like these. Our experience should help accelerate that
move. Secondly, this marketplace is ripe for our product set, based on research
we've done with the California consumer. We expect the consolidation of the
major California banks will give American many new customer acquisitions. So
this is truly like adding fuel to the momentum we've been building.
As I said earlier, revenue generation from sales of these products has not been
incorporated in the analysis we have set forth in this presentation, although
the costs associated with introducing these products have been taken into
account.
Some may also question if American represents a departure from our strategy of
building a separately branded, super regional community-based commercial bank to
complement our consumer bank. Let me emphasize that we remain very committed to
this strategy. We intend to devote even more capital and resources to our
commercial banks than we have in the past. And American only heightens our
interest in finding suitable commercial banking acquisitions in California as
well as in our existing 5 state market area.
SLIDE #36: CREATES SHAREHOLDER VALUE
As I mentioned to you at the beginning, I believe this transaction to be
demonstrably additive to shareholder value.
Our pro forma return on common equity will be the best in our industry and it
will also be in line with high performing commercial banks, which we believe is
the peer group to which we should be compared. We've shown you there is a basis
for strong EPS growth. Also, our operating efficiency will be very good by any
standard.
Lastly, we hope this transaction will give you yet another reason to view us as
a unique investment opportunity. In the ten years ending last December, we have
provided our common shareholders with a 27.1% compounded annual total return,
nearly double the S&P 500 and better than all major west coast banks and
thrifts.
I'll come back to P/E ratios in a minute.
SLIDE #37: PROFITABILITY STATISTICS
This slide shows our pro forma ROE, ROA and efficiency ratio statistics as of
mid-year 1996 had we been combined with ASB and achieved all the synergies which
we have talked about today.
As you can see, our ROE statistic is right on top of the bank peer group average
and considerably ahead of the thrifts. From an ROA perspective, we would
continue to be below where we want to be, although I would remind you that these
numbers are based on first half
<PAGE> 65
1996 results and that both WAMU and ASB are making significant progress on
improving that number on a stand alone basis. As I mentioned, we believe this
transaction will accelerate our ability to eventually reach our 5 year goal of a
1.20% ROA.
As you can see just below those numbers, our price to earnings multiples are
significantly below those of either peer group.
SLIDE #38: MEANINGFULLY ENHANCES EPS GROWTH
On this slide, you see that using the IBES-based approach I described earlier,
EPS growth over the next three years would grow at a compounded annual rate of
20% vs the current consensus of around 13%. I'd remind you that this is before
any possible deployment of additional excess capital.
SLIDE #39 & 40: UNIQUE INVESTMENT OPPORTUNITY
As you can see on both this and the next slide, a recent trend in bank and
thrift stocks is the increasingly apparent correlation between valuations and
reported returns on equity. Measured either by price to book (this slide) or
price to earnings (next slide), WAMU has been trading below the regression line,
I believe because of investor concerns over interest rate risk.
As we have discussed, pro forma for this transaction we have significantly
reduced interest rate risk while generating double digit EPS accretion without
significantly diluting tangible book value per share. The gap between WAMU's
valuations and the two regression lines is pretty significant. This is
especially so when you add the meaningful improvement in our interest rate risk
profile.
SLIDE #41: CONCLUSION
In summary, allow me to reiterate how excited we are about the prospects of this
combination. This transaction is unique in that it is both extremely financially
attractive while being compelling strategically. This combination not only
creates shareholder value today, but also continues to position WAMU as a unique
investment opportunity.
Thank you for you time. Mario Antoci from American and Bob Bass from
Keystone/Bass Group will make short presentations, after which time I will
attempt to answer any questions you might have.
