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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to________
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CITADEL HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3885184
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
600 NORTH BRAND BOULEVARD 91230
GLENDALE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 551-7450
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Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes No X .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of Common
Stock, par value $.01 per share and Serial Preferred Stock, par value $.01 per
share, of Registrant outstanding as of March 15, 1995 were 6,669,924 and
1,329,114 shares, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1995 Proxy Statement, which will be filed with the
Securities and Exchange Commission in connection with the Company's 1995 Annual
Meeting of Stockholders, are incorporated by reference in Part III hereof.
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CITADEL HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1994
INDEX
PART I
PAGE
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Item 1. Business...................................................... 1
General...................................................... 1
Fidelity Investment: Status as a Savings and Loan Holding
Company...................................................... 2
The Dillon Litigation........................................ 3
D&O Litigation............................................... 3
The Bulk Sale Indemnity...................................... 4
Description of Fidelity Class B Common Stock................. 4
Tax Sharing.................................................. 6
Management................................................... 6
Citadel Loan to Former Chief Executive Officer............... 6
Item 2. Real Estate Activities........................................ 7
Real Estate Interests........................................ 7
Building Options............................................. 8
Financing of Real Estate Interests........................... 9
Item 3. Legal Proceedings............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 11
Item 6. Selected Financial Data....................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A")............................ 13
Item 8. Financial Statements and Supplementary Data................... F-1
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... II-1
PART III
Item 10. Directors and Executive Officers of the Registrant............ II-1
Item 11. Executive Compensation........................................ II-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... II-1
Item 13. Certain Relationships and Related Transactions................ II-1
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K...................................................... II-1
Signatures.................................................... III-1
i
PART I
ITEM 1: BUSINESS OF CITADEL HOLDING CORPORATION
GENERAL
Citadel Holding Corporation, a Delaware corporation ("Citadel" and
collectively with its wholly owned subsidiary, the "Company"), was incorporated
in 1983 to serve as the holding company for Fidelity Federal Bank, a Federal
Savings Bank ("Fidelity"). On August 4, 1994, Citadel and Fidelity completed
the recapitalization component of a recapitalization and restructuring
transaction (the "Restructuring"), which resulted in (i) the reduction of
Citadel's interest in Fidelity from 100% to 16.2%, (ii) the acquisition by the
Company, at bulk sale prices from Fidelity, of four Real Estate Owned
properties (the "REO Properties"), (iii) the sale by Citadel to Fidelity of its
Gateway Investment Services, Inc. ("Gateway") subsidiary for approximately $1
million, (iv) the transfer to Citadel of Fidelity's interest in certain
outstanding litigation (the "D&O Litigation"), and (v) the receipt by way of
dividend from Fidelity of options to acquire at book value two office buildings
used by Fidelity in its operations (the "Building Options"). Also in connection
with the Restructuring, Citadel agreed to indemnify Fidelity with respect to
certain environmental and structural representations and warranties made by
Fidelity to certain third party buyers in connection with bulk sales by
Fidelity made as a part of the Restructuring, up to a limit of $4 million (the
"Bulk Sale Indemnity").
As a result of the Restructuring, Citadel no longer consolidates Fidelity in
its financial statements; rather it accounts for its investment on the cost
basis. This change was effective as of January 1, 1994 for purposes of the
financial statements included elsewhere in this report, although Fidelity's
operational results through August 4, 1994 are reflected in Citadel's financial
statements. Also, as Citadel no longer has representation on the Board of
Directors of Fidelity, it no longer has direct access to information concerning
Fidelity (other than information that is generally available to Fidelity
stockholders) or any ability to assess the correctness or completeness of the
information that it is provided by Fidelity. Accordingly, information
(including without limitation financial information) included in this report
with respect to Fidelity and reported after or pertaining to periods closing
after the Restructuring have not been independently verified by Citadel.
In the Restructuring, Fidelity raised approximately $109 million of equity
through the public issuance of 21,577,141 shares of Class A and Class C Common
Stock, and sold problem assets with a net book value of $418.8 million. Citadel
incurred a loss through Autust 4, 1994, of $112 million from the operations of
Fidelity, and booked a write down as of August 4, 1994, of $52.8 million on its
Fidelity stock. The Company's residual interest in Fidelity is in the form of
Class B Common Stock, which has only limited voting rights and is subject to
certain transfer restrictions. Subject to certain limitations, upon the sale of
shares of the Fidelity Class B Common Stock, such shares automatically convert
into shares of Fidelity Class A Common Stock and have full voting and transfer
rights. Subject to certain limitations, upon the reduction of Citadel's
interest to less than 10% of the total Fidelity Common Stock of all classes
outstanding, the Class B Common Stock held by Citadel will likewise
automatically convert into Fidelity Class A Common Stock and have full voting
and transfer rights. See "Description of Fidelity Class B Common Stock" below.
The four REO Properties acquired in connection with the Restructuring were
purchased by a wholly owned subsidiary of Citadel, Citadel Realty, Inc.
("CRI"), with funding provided in the form of loans by Fidelity ($13.9 million)
and Craig Corporation ("Craig") ($6.2 million), a major Citadel stockholder.
See Item 2: "Real Estate Activities--Real Estate Interests."
At the present time, the Company is in the process of completing its
disassociation from Fidelity and working to maximize the value of its real
estate assets. Citadel has entered into an agreement with Dillon Investors,
L.P. ("Dillon Investors") pursuant to which Dillon Investors and certain
related parties (the "Dillon Parties") will purchase 30.8% of Citadel's
Fidelity Class B Common Stock on April 18, 1995. See "The Dillon Litigation"
below. Citadel is seeking alternatives to dispose of the rest of its Fidelity
Class B Common Stock and anticipates that it will have disposed of such stock
by the end of 1995. However, no
assurance can be given that Citadel will be able to dispose of such stock on
terms favorable to Citadel. Upon the disposition of its remaining interest in
Fidelity, the Company intends to review its assets and opportunities and to
make a decision as to a new business direction. Among the alternatives under
consideration are the continuation and expansion of its real estate operations,
the movement into a new line or lines of business, merger or sale of the entire
Company, and liquidation. However, as management believes that the Company has
value as a publicly traded entity with significant assets, management believes
it is unlikely that liquidation will be the selected business plan.
At December 31, 1994, the Company's principal assets were the REO Properties
and its 16.2% interest in Fidelity. Based on appraisals prepared between
October 1993, and July 1994, the REO Properties had an aggregate appraised
value of $25.6 million. See Item 2: "Real Estate Activities--Real Estate
Interests." Based on the quoted bid/ask prices for Fidelity shares on December
31, 1994 ($4.00/$4.50 per share), Citadel's interest in Fidelity would have had
a value of between $16.8 million and $18.91 million. Subsequent to December 31,
1994, Fidelity announced losses for the fourth quarter of 1994 of $14.8
million, reducing its ratio of core capital to adjusted total assets to 4.29%
and its ratio of total capital to risk weighted assets to 8.28%. At these
ratios, Fidelity's excess capital (above the minimum required to be "adequately
capitalized" under the "prompt corrective action" rules of the Office of Thrift
Supervision (the "OTS")) is $10.9 million and $6.3 million, respectively. After
consultation with its financial advisors and securities brokers, and taking
into consideration the year-end results of Fidelity and the terms of the
settlement with the Dillon Parties described below, the Company has written
down its investment in Fidelity to $13.4 million, or $3.19 per share.
FIDELITY INVESTMENT: STATUS AS A SAVINGS AND LOAN HOLDING COMPANY
Companies deemed to "control" savings associations such as Fidelity are
required to register as Savings and Loan Holding Companies and are subject to
examination and regulation by the OTS. Citadel continues to be registered as a
Savings and Loan Holding Company following the Restructuring. Citadel believed
it to be in its best interest not to seek de-registration because it was
believed that so long as the Company's holdings of Fidelity stock represented a
major portion of Citadel's assets, Citadel should not give up such regulatory
authority as it might have to exercise a controlling influence with respect to
the business and affairs of Fidelity. In addition, in light of the scope and
extent of Citadel's ongoing equity interest in Fidelity, there were questions
as to whether Citadel would be permitted to de-register before reducing its
holdings of Fidelity stock to below 10% of the total Fidelity Common Stock
outstanding. However, based upon advice given to Dillon Investors by the OTS to
the effect that the OTS would not view Dillon Investors' acquisition of
"control" of Citadel to constitute "control" by Dillon Investors of Fidelity,
Citadel has reason to believe that the OTS should conclude that Citadel does
not "control" Fidelity.
In light of the advice given to Dillon Investors and the decision by Citadel
to dispose of its Fidelity holdings prior to December 31, 1995, Citadel in
January of this year sought advice from the OTS to the effect that it is no
longer in "control" of Fidelity and that it is no longer subject to the various
regulations applicable to transactions between a savings association and a
Savings and Loan Holding Company. However, no response has yet been forthcoming
from the OTS to this request. Accordingly, at the present time, the Company
continues to structure its affairs under the assumption that it continues to be
deemed a Savings and Loan Holding Company by the OTS. Citadel believes that,
once it has reduced its holdings of Fidelity Common Stock to an amount
representing less than 10% of the outstanding Fidelity Common Stock, all
questions as to its status should be resolved in favor of its not continuing to
be a Savings and Loan Holding Company.
At the present time, the Company intends to dispose of its Fidelity Class B
Common Stock by the end of 1995, although no assurance can be given that it
will be able to dispose of all such stock on favorable terms by the end of the
year. In connection with the settlement of the litigation with the Dillon
Parties
2
discussed below, on April 10, 1995, the Company approved an agreement pursuant
to which it will sell 1,295,000 shares of its Fidelity Class B Common Stock
(30.8% of its holdings) to the Dillon Parties on April 18, 1995.
THE DILLON LITIGATION
In October and November 1994, Citadel issued to Craig 74,300 shares of its
Common Stock (the "Citadel Common Stock") and 1,329,114 shares of 3% Cumulative
Voting Convertible Preferred Stock (the "Citadel Preferred Stock"), thereby
increasing Craig's percentage voting power in Citadel from approximately 9% to
25%. The Citadel Common Stock was issued at a price of $3.85 per share, and the
Citadel Preferred Stock was issued at a price of $3.95 per share. Payment for
the Citadel Preferred Stock was in the form of cancellation of $5.25 million of
indebtedness owed to Craig under a line of credit provided to the Company by
Craig. The issuance of the Citadel Preferred Stock improved Citadel's capital
position and cash flow. The transaction was unanimously approved by those
directors independent of Craig and was determined to be fair, from a financial
point of view, by the Company's independent financial advisors. Nevertheless,
Dillon Investors, which, together with its affiliates, owned approximately 9.9%
of Citadel's Common Stock at the time, sued the Company, alleging, in essence,
that the stock issuances to Craig were approved by the directors at an unfair
price in order to entrench themselves in power in the face of an announced
proxy contest and possible consent solicitation by Dillon Investors to take
over control of the Citadel Board of Directors. Named as defendants in the suit
were Citadel, its directors and Craig. The suit sought, inter alia, recission
of the issuance of the Citadel Preferred Stock and the reinstatement of the
debt owed to Craig under the line of credit.
On April 3, 1995, Citadel signed a settlement agreement with the Dillon
Parties. The Board of Directors approved the settlement on April 10, 1995, and
the settlement and the transactions contemplated thereunder are currently
scheduled to be consummated on April 18, 1995. Although the Company and its
directors believed, upon advice of counsel, that they had good and meritorious
defenses to the Dillon Investors claims, it was determined to be in the best
interests of the Company and its stockholders to settle the litigation in light
of, among other things, the estimated costs of taking the matter to trial and
the uncertainty caused by the litigation. Pursuant to the settlement, the
Dillon Parties have agreed to purchase from Citadel 1,295,000 shares of
Fidelity Class B Common Stock. The consideration for the purchase consists of
(i) $2.22 million in cash, (ii) the surrender of 666,000 shares of Citadel
Common Stock (the "Surrendered Shares"), which constitutes the entire interest
of the Dillon Parties in Citadel, (iii) the settlement of all existing
litigation between Citadel, its directors and Craig, on the one hand, and the
Dillon Parties and the director nominees of Dillon Investors, on the other
hand, and the granting of mutual releases by Citadel, Craig and the Dillon
Parties, (iv) a covenant on the part of the Dillon Parties not to purchase or
acquire any beneficial interest in any securities of Citadel and not to engage
in any solicitation consents or proxies for a one year period subsequent to the
closing of the stock purchase, which is scheduled for April 18, 1995. Craig has
agreed with the Dillon Parties not to exercise the conversion feature of its
Citadel Preferred Stock prior to February 4, 1996 without the prior approval of
the holders of a majority of the outstanding Citadel Common Stock. In
consideration for Craig's agreement, Citadel has (a) granted Craig a two year
option to purchase the Surrendered Shares at a purchase price of $3.00 per
share and (b) agreed to reimburse Craig for its litigation costs in an amount
not to exceed $75,000.
Although no specific value was assigned by the parties to these shares, the
Company intends to assign a value of $2.81 per share to the consideration
received for such shares for accounting and income tax purposes, based upon a 2
1/8 per share market price for the Surrendered Shares.
D&O LITIGATION
In connection with the Restructuring, Fidelity also transferred to Citadel
its interest in the D&O Litigation, a lawsuit that Fidelity had filed against
the carrier of its directors' and officers' insurance policies. Citadel
ultimately received $2.5 million as final settlement of this litigation.
3
THE BULK SALE INDEMNITY
In connection with the Restructuring, Fidelity consummated bulk sales during
1994 of certain nonperforming and other problem assets to third parties.
Citadel agreed to indemnify Fidelity with respect to losses that might be
incurred by Fidelity in the event of breach by Fidelity of certain
representations and warranties made by Fidelity to such third party purchasers
in connection with the bulk sales. Citadel's liability under this indemnity is
capped at $4 million and pertains only to those representations and warranties
addressing certain environmental and structural issues.
The period for making claims under these representations and warranties has
now lapsed, with claims of approximately $3.9 million having been asserted
against Fidelity. However, Fidelity has asserted that these claims are subject
to, among other things, a cure threshold which would reduce the maximum amount
of claims to $2.8 million, and that other defenses exist which could further
reduce Fidelity's obligations under these claims. Fidelity is currently
reviewing these claims and Fidelity has informed the claimant that based upon
Fidelity's review to date, it believes the claims to be without merit. However,
as there continue to be a significant number of material issues to be resolved,
the Company has recorded deferred proceeds of $4 million on its balance sheet.
DESCRIPTION OF FIDELITY CLASS B COMMON STOCK
Under the terms of Fidelity's charter, the Fidelity Class B Common Stock has
only limited voting rights. Holders of Fidelity Class B Common Stock are
permitted to vote only (i) with respect to any amendment or modification of, or
waiver with respect to, Fidelity's charter that would adversely affect the
rights of the Fidelity Class B Common Stock (including, without limitation, any
increase or decrease in the percentage of shares of outstanding Fidelity Class
B Common Stock required to approve any such amendment, modification or waiver),
in which case any such amendment, modification or waiver will not be effective
without the prior affirmative vote of the holders of the majority of the
Fidelity Class B Common Stock at the time outstanding voting as a separate
class, (ii) on a merger or consolidation of Fidelity or a sale or exchange of
all or substantially all of the assets of Fidelity on which the holders of
Fidelity Class A Common Stock have the right to vote, in which event the
holders of Fidelity Class A Common Stock and Fidelity Class B Common Stock will
vote together as one class, (iii) together with the holders of the Fidelity
Class A Common Stock and the Fidelity Class C Common Stock, voting as a single
class, on any dissolution of Fidelity or (iv) as otherwise required by law.
The holders of Fidelity Class B Common Stock are entitled to receive
dividends pari passu with the holders of Fidelity Class A Common Stock and
Fidelity Class C Common Stock, out of funds legally available therefor, subject
to the restrictions of Fidelity's regulators and the payment of preferential
amounts of which any class of stock having preferences over the Fidelity Common
Stock is entitled. Upon liquidation, dissolution or winding up of Fidelity,
holders of the Fidelity Class B Common Stock will be entitled to share ratably
and pari passu with holders of Class A Common Stock and Class C Common Stock in
all assets remaining after the payment of all liabilities of Fidelity and of
any preferential amounts to which any class of stock having preferences over
the Common Stock is entitled.
Upon the sale or transfer of any shares of Fidelity Class B Common Stock by
Citadel to any person that is not an affiliate of Citadel, such transferred
shares will automatically be converted into shares of Fidelity Class A Common
Stock. In addition, any outstanding shares of Fidelity Class B Common Stock
will automatically be converted into shares of Fidelity Class A Common Stock at
such time as such outstanding shares represent less than 10% of the total
outstanding Common Stock of Fidelity on a fully-diluted basis. The conversion
rate for the Fidelity Class B Common Stock will be one-to-one.
Pursuant to a registration rights agreement entered into between Citadel and
Fidelity (the "Registration Rights Agreement"), Citadel and any person who
acquires shares of Fidelity Class B Common Stock or Fidelity Class A Common
Stock issuable upon conversion of the shares of Fidelity Class B Common Stock
4
(the "Registrable Securities") is entitled to certain registration rights with
respect to such shares, subject to the terms and conditions of the Registration
Rights Agreement. At any time on or before March 31, 1998, the holder or
holders or more than 50% of the Registrable Securities may require Fidelity to
register all or a portion of the Registrable Securities under OTS regulations,
subject to certain restrictions. No more than three demands may be made
pursuant to such registration rights. Furthermore, if, at any time before March
31, 1999, Fidelity proposes to register any of its Common Stock under the OTS
regulations for purposes of an offering or sale in a primary or secondary
offering, Fidelity may be required to include any or all of the Registrable
Securities as directed by the holders thereof. Subject to certain limitations,
Fidelity is required to bear all registration and selling expenses in
connection with the registration of the Registrable Securities. However, after
consultation with Fidelity, Citadel has determined that its shares of Fidelity
Class B Common Stock may be freely sold without registration under the
regulations of the OTS, and, when such shares convert to Fidelity Class A
Common Stock, such shares will cease to be eligible for the foregoing
registration rights.
The stockholders' agreement between Citadel and Fidelity (the "Citadel
Stockholders' Agreement") provides restrictions on the transfer of shares of
Fidelity Class B Common Stock. Except pursuant to the exercise of the
registration rights described above, no holder of Fidelity Class B Common Stock
may sell publicly shares of Fidelity Class B Common Stock representing more
than 5% of the total outstanding Fidelity Common Stock on a fully-diluted basis
during any 30-day period without the prior approval of the Board of Directors
of Fidelity. In addition, if shares of Fidelity Class B Common Stock
representing more than 5% of the total outstanding Common Stock of Fidelity on
a fully-diluted basis are proposed to be sold privately to any person or, if
after giving effect to such private sale, the transferee (including any of the
transferee's affiliates or any "group" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of which the transferee is a
member) would own more than 5% of the outstanding Common Stock of Fidelity on a
fully-diluted basis, then, except in connection with distributions by Citadel
of such shares to its stockholders, Fidelity will have an assignable right of
first refusal with respect to the shares of Fidelity Class B Common Stock
proposed to be sold. Upon any distribution of Fidelity Class B Common Stock by
Citadel to its stockholders, by dividend or otherwise, any Citadel stockholder
will be entitled to convert all or a portion of the shares of Fidelity Class B
Common Stock so distributed to the extent that such shares when added to all
other shares of Fidelity Class B Common Stock owned immediately prior to the
distribution by such stockholder and any shares of Fidelity Class B Common
Stock owned immediately prior to the distribution by all other members of any
"group" (as defined) of which such stockholder is a member, do not exceed five
% of all outstanding shares of Fidelity Common Stock.
In addition, for a period ending in February 1996, Fidelity has the right to
redeem, subject to the approval of the OTS and the approval of the stockholders
of Citadel, any outstanding shares of Fidelity Class B Common Stock owned by
Citadel or its affiliates (each a "Citadel Person") in excess of the number of
shares of Fidelity Common Stock held by the then largest stockholder of
Fidelity (other than Citadel). The redemption price to be paid by Fidelity
would be equal to 110% of the market price of the Fidelity Class A Common
Stock, assuming it is then listed on a national securities exchange or admitted
for quotation on the National Association of Securities Dealers Automated
Quotation System, or, if the Fidelity Class A Common Stock is not so listed or
quoted, 100% of the book value per share of all Fidelity Common Stock as of the
most recent quarterly balance sheet date; provided that no such redemption
shall be made in anticipation of any merger, consolidation, sale of all or
substantially all of Fidelity's assets, distribution (other than any ordinary
cash dividend) or any other transaction involving the receipt by holders of any
class of Fidelity Common Stock of any cash or other property. Fidelity will be
required to notify each Citadel Person holding shares of Fidelity Class B
Common Stock of its intention to exercise such right to redeem shares. After
receiving such notice, such Citadel Person will have the option to distribute
any or all of the shares of Fidelity Class B Common Stock it owns to its
stockholders, in which case Fidelity will redeem only the shares of Fidelity
Class B Common Stock, if any, not so distributed by such Citadel Person.
Citadel believes that, at the present time this redemption provision has no
practical effect because Citadel is currently not the largest
5
Fidelity stockholder. Also, Fidelity's ability to exercise such stock
redemption rights would be subject to it having adequate capital to make such
acquisition, which is unlikely given Fidelity's current capital levels.
TAX SHARING
The tax sharing agreement between Citadel and Fidelity was terminated prior
to the closing of the Restructuring on August 4, 1994 (the "Closing"). At the
Closing, Citadel and Fidelity entered into a tax disaffiliation agreement (the
"Tax Disaffiliation Agreement") that sets out each party's rights and
obligations with respect to deficiencies and refunds, if any, of federal,
state, local and foreign taxes for periods before and after the Closing, and
related matters such as the filing of tax returns and the conduct of Internal
Revenue Service and other audits. In general, under the Tax Disaffiliation
Agreement, Fidelity will be responsible for (i) all adjustments to the tax
liability of Fidelity and its subsidiaries for the periods before the Closing
relating to operations of Fidelity; (ii) any tax liability of Fidelity and its
subsidiaries for the taxable year that begins before and ends after the Closing
with respect to that part of the taxable year through the date of the Closing;
and (iii) any tax liability of Fidelity and its subsidiaries for periods after
the Closing. For this purpose, Gateway is deemed to be a subsidiary of Fidelity
at all relevant times and any liability for taxes for such period ending on or
before the Closing shall be measured by Citadel's actual liability for taxes
for such period, after applying tax benefits otherwise available to Citadel
attributable to such period. With certain exceptions, Fidelity will be entitled
to any refunds of taxes relating to its tax liabilities.
In general, Citadel will be responsible for all tax liabilities of Citadel
and its subsidiaries (other than Fidelity and its subsidiaries) for all periods
prior to disaffiliation. Citadel will be entitled to any refunds of taxes
relating to its tax liabilities.
MANAGEMENT
Steve Wesson has been appointed as President and Chief Executive Officer of
the Company. Mr. Wesson was initially retained to develop a plan for the
retention by Citadel of approximately $500 million in gross book value of the
assets ultimately sold to third parties in the bulk sales described above under
"The Bulk Sale Indemnity." From 1989 until he joined the Company in 1993, Mr.
Wesson served as CEO of Burton Property Trust Inc., the U.S. real estate
subsidiary of The Burton Group PLC. In this position he was responsible for the
restructuring and eventual disposal of Burton's assets in the U.S. Mr. Wesson
succeeds Richard M. Greenwood, who resigned from his positions with Citadel and
continues as the President and Chief Executive Officer of Fidelity. All
officers of Citadel, other than Heidi Wulfe, Senior Vice President, Controller
and Chief Accounting Officer, resigned their offices effective as of the
Closing. Ms. Wulfe resigned her positions with Citadel effective August 23,
1994. S. Craig Tompkins became the Secretary/Treasurer of Citadel in September,
1994. Mr. Tompkins is also President and a director of Craig. Prior to joining
Craig in March 1993, Mr. Tompkins was a partner in the law firm of Gibson, Dunn
& Crutcher.
CITADEL LOAN TO FORMER CHIEF EXECUTIVE OFFICER
As part of Mr. Greenwood's compensation package when he joined Citadel,
Citadel extended an interest-free loan to Mr. Greenwood in the amount of
$240,000, payable on demand. The loan was made principally to refinance a loan
extended to Mr. Greenwood by his previous employer. At the Closing, this loan
was converted into a 2-year term loan, with 9% interest accruing beginning
February 7, 1995. Accrued interest is payable monthly in arrears.
6
ITEM 2: REAL ESTATE ACTIVITIES
REAL ESTATE INTERESTS
The table below provides an overview of the REO Properties, which constituted
all of the real properties owned by the Company at December 31, 1994.
REMAINING
UNITS/SQUARE % LEASED MAJOR LEASE
ADDRESS TYPE FEET AT 12/31/94 TENANTS TERMS
- ------- ---------- ------------ ----------- -------- ---------
ARBOLEDA Office/ 178,000 99 American 1-5 Yrs
1661 Camelback Rd. Restaurant Express
Phoenix, Arizona
VESELICH Apartment 216 95 NA 6-12
3939 Veselich Ave. 176,000 months
Los Angeles, Calif.
PARTHENIA Apartment 27 70 NA 6-12
21028 Parthenia 26,000 months
Canoga Park, Calif.
WESTERN(1) Apartment 145 99 NA 6-12
23200 S. Western Ave. 98,000 months
Harbor City, Calif.
- --------
(1) This property was sold by the Company during the first quarter of 1995.
Arboleda, Phoenix
Although this property was 100% leased at December 31, 1994, American Express
Company, which occupies 58% (100,098 sq. ft.) of the property, announced that
it does not intend to renew at the expiration of the current term in February
1997. While management believes that the leasing market in Phoenix will
continue to strengthen, it is anticipated that significant capital expenditures
would be necessary to relet the American Express space and that the space may
remain vacant for some time. With the uncertainty regarding the American
Express lease and certain planning issues on an adjacent site, management
believes it to be unlikely that proceeds would be maximized by a current
disposition of the property.
Veselich, Los Angeles
While the occupancy rate of this property in the last 12 months has ranged
from 80% to 95%, the property has historically experienced considerable
turnover of tenants. This has resulted in high overhead and reduced cash flows.
Management is addressing this issue by carrying out deferred maintenance,
increasing marketing expenditures and improving diligence on prospective
tenants. It is expected that the property will be stabilized at near to full
occupancy sometime during 1995, but there can be no assurance on this point.
Parthenia, Canoga Park
Of the 27 units in this complex, 21 were significantly damaged in the January
1994 Northridge earthquake. The Company has since completed appropriate
repairs. The apartment complex remained 33% occupied during the earthquake
renovation, and occupancy had increased to 70% by December 31, 1994. It is
anticipated that it will take 6-12 months to complete the releasing of the
property although no assurance can be given that additional time will not be
needed.
Western, Harbor City
Subsequent to December 31, 1994, the Company sold the Western property for a
net price of $5.9 million and a gain of approximately $980,000. In addition, a
mortgage note payable to Fidelity of $3.7 million was assumed by the purchaser.
During the last several months prior to its sale, this property has
consistently operated at 99% occupancy with low tenant turnover.
7
BUILDING OPTIONS
As part of the Restructuring, Citadel acquired by way of dividend the
Building Options, which were assigned to CRI, its wholly owned subsidiary. The
office buildings subject to the Building Options are used by Fidelity in its
operations and are located in Glendale (the "Glendale Building") and in Sherman
Oaks (the "Sherman Oaks Building"). The aggregate exercise price of the
Building Options is $9.3 million, which is equal to the aggregate net book
value of the two buildings on the books of Fidelity as of June 30, 1994.
On February 2, 1995, the Company exercised each of the Building Options. On
March 22, 1995, the Company purchased and immediately sold the Sherman Oaks
Building for a gain of approximately $560,000. The purchase of the Glendale
Building is expected to close by May 17, 1995.
The Company expects to fund the $7.1 million exercise price to purchase the
Glendale Building through borrowing of up to $5.38 million with the balance of
the funds coming from internal sources. It is presently intended that Fidelity
will provide the necessary financing and Citadel has been informed that
Fidelity's Board of Directors has approved the principal terms of the loan.
However, Fidelity has conditioned the making of the loan on either (i) the OTS
determining that Citadel and Fidelity are not affiliates or (ii) the terms of
the loan complying with OTS regulations relating to loans to affiliates. If
neither of these conditions can be satisfied, the Company would have to seek
financing from other sources. No assurance can be given that either of the
conditions to the Fidelity loan will be satisfied or that the Company would be
able to obtain other financing. For a description of the terms of the proposed
loan from Fidelity, see Item 7: "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Business Plan, Capital
Resources and Liquidity of the Company."
The table below provides an overview of the Glendale Building:
UNITS/
SQUARE % LEASED
ADDRESS TYPE FEET AT 12/31/94 MAJOR TENANTS LEASE TERM
------- ------ ------ ----------- -------------- ----------
GLENDALE BUILDING Office 89,000 100 Fidelity: (1)
600 North Brand Blvd., Public Storage
Glendale, California
- --------
(1) For Fidelity, 10 years from Citadel's purchase of the Glendale Building;
for Public Storage, to 1996.
The Glendale Building is the headquarters building of Fidelity. Upon
completion of Citadel's purchase of the Glendale Building, scheduled for no
later than May 17, 1995 (the "Glendale Building Closing"), Citadel and Fidelity
will enter into a 10-year, full service gross lease for four of the six floors
of the Glendale Building.
The rental rate for the first five years of the lease term will be
approximately $26,600 per month (including parking) for the ground floor and
approximately $75,000 per month (including parking) for the fourth, fifth and
sixth floors. This lease will provide for annual rental increases at a rate
equal to the lower of the increase in the Consumer Price Index ("CPI") or 3%.
After the first five years of the lease term, the rental rate for the ground
floor will be adjusted to the higher of the then current market rate or the
prevailing rental rate in the fifth year of the lease and the rental rate for
the upper floors will be adjusted to the higher of the then current market rate
or $1.50 per square foot increased by the annual rental rate increase applied
during the first five years of the lease as described in the preceding
sentence. Fidelity will have the option to extend the lease of the ground floor
for two consecutive five year terms at a market rental rate and will have the
option to purchase the Glendale Building at a market rate at the expiration of
the lease term, provided that Citadel then owns the building.
Third-party appraisals on the Glendale Building indicate that the market
value of the Glendale Building could be as much as $2.75 million above the
exercise price of the Glendale Building Option, before costs the Company would
incur in connection with the exercise, which may be significant and would
include the repair
8
of earthquake damage to the parking structure. While management believes that
the Glendale Building is well situated, the value of the Glendale Building is
tied in significant part to the credit-worthiness and future prospects of
Fidelity.
FINANCING OF REAL ESTATE INTERESTS
The Company's acquisition of the REO Properties was 100% leveraged: $13.9
million was obtained in the form of conventional mortgage loans by Fidelity
against the Arboleda, Veselich and Western Avenue Properties, while the balance
was obtained through drawdowns ($6.2 million) on an $8.2 million line of credit
from Craig.
With respect to each of the Western Avenue property and the Veselich property
(two apartment complexes), Fidelity extended a 10-year loan, amortizing over 30
years, at an adjustable rate of interest tied to the one-year Treasury rate
plus approximately 3.70% per annum, with an initial interest rate of 7.25%. The
rate on the Veselich property loan is currently 7.25%. The loan relating to the
Western Avenue Property was assumed by the purchaser when the property was sold
in January, 1995. The loan secured by the Arboleda Property (an office
building) is guaranteed by Citadel (CRI is the borrower), has a seven-year
term, amortizing over 25 years, with an adjustable rate of interest tied to a
six-month LIBOR rate plus 4.5% per annum, with an initial rate of 9.25% per
annum. This rate on this loan is currently 9.25%. Fidelity did not provide
financing with respect to the Parthenia property (an apartment complex).
The remainder of the purchase price of the REO Properties was drawn on a line
of credit (the "Craig Line of Credit") provided by Craig. At the time of the
Restructuring, Craig held approximately 9% of the outstanding common stock of
Citadel. At the time of Citadel's borrowing under the Craig Line of Credit,
James J. Cotter was Chairman of each of Citadel and Craig and S. Craig Tompkins
was a director of Citadel and the President and a director of Craig.
The Craig Line of Credit was initially committed in the amount of $8.2
million, of which $6.2 million was immediately drawn down. The Craig Line of
Credit has a one year term, maturing on August 4, 1995, but can be extended an
additional six months. The Company paid a commitment fee of 2.5% at the
origination of the Craig Line of Credit, which bears interest at the prime rate
plus 3%. There is a 0.5% annual fee on the average undrawn balance under the
line.
On November 10, 1994, the Company retired $5.25 million of the Craig Line of
Credit by issuance to Craig of the Citadel Preferred Stock. The Craig Line of
Credit was reduced to $950,000, all of which is currently outstanding. For
information regarding the issuance of the Citadel Preferred Stock and rights,
privileges and preferences of the Citadel Preferred Stock, see Item 7:
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Issuance of Preferred Stock in Debt Restructuring."
ITEM 3: LEGAL PROCEEDINGS
On November 7, 1994, a stockholder, Dillon Investors, filed a lawsuit in the
Court of Chancery of the State of Delaware. The suit named as defendants the
Company, its directors and Craig, and alleged that the Citadel Preferred Stock
and the Citadel Common Stock were issued at unfair prices in order to entrench
the Board of Directors in power in the face of an announced proxy contest and
possible consent solicitation by Dillon Investors to take over control of the
Board of Directors. The suit sought recission of the issuance of the Citadel
Preferred Stock and the reinstatement of borrowings from Craig under the Craig
Line Of Credit.
On December 5, 1994, the Company filed a lawsuit in the United States
District Court for the Central District of California. The suit named as
defendants Dillon Investors, Roderick H. Dillon, Jr., and certain entities
affiliated with Dillon Investors, and alleged that the defendants had made
insufficient disclosure under Section 13 of the Securities Exchange Act of
1934, as amended.
9
On April 3, 1995, the Company, its directors, Craig, and the Dillon Parties
entered into settlement agreements to resolve the Delaware suit and the federal
suit. The settlements are expected to be consummated on April 18, 1995. See
Item 1: "Business of Citadel Holding Corporation--The Dillon Litigation."
The Company, Hecco Ventures I and James J. Cotter are defendants in a civil
action filed in 1990 by Alfred Roven in the United States District Court for
the Central District of California. The complaint alleges fraud by the Company
in a proxy solicitation relating to the Company's 1987 annual meeting of
stockholders and breach of fiduciary duty. The complaint seeks compensatory and
punitive damages in an amount alleged to exceed $40,000,000. The complaint grew
out of and was originally asserted as a counter-claim in an action brought by
the Company against Roven for illegal short-swing profits. The Company's motion
for summary judgment was granted in the spring of 1991 and all federal claims
were dismissed. However, the Court retained jurisdiction over pendent state law
claims for breach of fiduciary duty. Roven was granted summary judgment on the
short swings profits claim. Roven has now filed a motion to amend the complaint
against the Company for malicious prosecution in connection with the short
swings profit litigation. The proposed amendment names certain former
individual directors of Citadel and its counsel of record. The motion to amend
is scheduled to be heard on May 1, 1995. The Company believes that it has
meritorious defenses to these claims, and has not reserved any amounts with
respect thereto. However, costs of defense could be material, particularly
given the Company's limited cash flow and operating profits.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1994. The 1994 annual meeting of
stockholders (the "1994 Meeting") was held on January 10, 1995. At the 1994
Meeting, each of the current directors was elected to serve on the Board until
the next annual meeting and until successors are elected.
10
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Citadel's common stock is listed and quoted on the American Stock Exchange
("AMEX"). The following table sets forth the high and low closing bid prices of
the common stock of Citadel as reported by AMEX for each of the following
quarters:
HIGH LOW
------ -------
1995:
First quarter........................................... $ 3 1/8 $ 2 1/16
1994:
Fourth quarter.......................................... 4 3/16 2 1/6
Third quarter........................................... 6 3/8 3 1/2
Second quarter.......................................... 8 3 7/8
First quarter........................................... 12 1/4 4 1/4
1993:
Fourth quarter.......................................... 19 1/2 9 3/8
Third quarter........................................... 18 5/8 14 1/4
Second quarter.......................................... 21 7/8 12 5/8
First quarter........................................... 23 7/8 16
HOLDERS OF RECORD
The number of holders of record of Citadel's common stock at April 14, 1995
was 272.
DIVIDENDS
While Citadel has never declared a dividend on its common stock and has no
current plan to declare such a dividend, Citadel will review this matter on an
ongoing basis.
11
ITEM 6: SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
The tables below set forth certain historical financial data regarding the
Company. This information is derived in part from, and should be read in
conjunction with, the consolidated financial statements of the Company.
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income from real estate
operations............. $ 2,115
Net interest income af-
ter provision for
estimated loan losses.. $ 36,101 $ 79,601 $ 92,264 $ 103,611
Gains (losses) on sales
of loans, net.......... 194 1,117 2,118 (1,408)
Gains (losses) on sales
of mortgage-backed se-
curities, net.......... 1,342 8,993 (165)
Gains (losses) on sales
of investment
securities............. (54) 1 32
Other income (expense).. (35,870) (6,602) (5,616) 5,510
Administrative charge
from Fidelity.......... 916
Loss of Fidelity........ 171,964
Operating expense....... 4,060 105,341 77,911 79,446 66,527
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
income taxes........... (174,825) (103,628) (3,795) 18,314 41,053
Income tax expense (ben-
efit).................. (36,467) (5,841) 15,651 17,734
---------- ---------- ---------- ---------- ----------
Net earnings (loss)..... $ (174,825) $ (67,161) $ 2,046 $ 2,663 $ 23,319
========== ========== ========== ========== ==========
Net earnings (loss) per
share.................. $ (26.45) $ (11.56) $ 0.62 $ 0.81 $ 7.07
Average common and com-
mon equivalent shares
outstanding (1)(2)..... 6,610,280 5,809,570 3,297,812 3,297,812 3,298,140
========== ========== ========== ========== ==========
Balance Sheet Data:
Total assets.......... $ 39,912 $4,389,519 $4,698,326 $5,126,525 $5,697,664
Cash and investments.. 4,805 238,220 177,599 289,150 309,814
Total loans, net...... 3,713,383 3,991,781 4,550,848 5,085,213
Deposits.............. 3,368,643 3,457,918 3,884,707 3,967,488
Borrowings............ 14,846 734,230 908,400 871,150 1,349,166
Subordinated notes.... 60,000 60,000 60,000 60,000
Stockholders' equity.. 17,838 187,403 223,186 221,140 218,477
Stockholders' equity
per share............ 28.41 67.68 67.06 66.25
Common shares out-
standing (1)(2)...... 6,669,924 6,595,624 3,297,812 3,297,812 3,297,812
Other Data:
Real estate loans
funded............... $ 422,355 $ 435,690 $ 509,625 $1,407,522
Average interest rate
on new loans......... 6.75% 7.77% 9.07% 9.31%
Loans sold............ $ 137,870 $ 204,435 $ 282,728 $ 158,691
Nonperforming assets
to total assets...... 5.37% 4.99% 2.43% 0.850%
Number of deposit ac-
counts............... 241,093 233,037 238,187 233,546
Interest rate margin
at the end of the pe-
riod................. 2.19%(3) 2.68% 3.20% 2.33%
Interest rate margin
for the period....... 2.28%(3) 2.67% 2.54% 2.11%
Retail branch offices
(4).................. 42 43 43 44
- --------
(1) Net of treasury shares, where applicable.
(2) 1993 data includes 3,297,912 shares issued in March 1993 in connection with
a stock rights offering, which produced net proceeds to the Company of
$31.4 million.
(3) Excluding the writedowns of core deposit intangibles of $5.2 million,
interest rate margins at and for the year ended December 31, 1993, would
have been 23.2% and 2.39%.
(4) All retail branch offices are located in Southern California.
12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
RESULTS OF OPERATIONS
Prior to the Restructuring, Citadel was a financial services holding company
engaged primarily in the savings bank business through Fidelity. It conducted
virtually no operations at the holding company level. In the Restructuring,
Citadel's interest in Fidelity was reduced from 100% to 16.2% and Citadel
transferred the stock of its other subsidiary, Gateway, to Fidelity, leaving
Citadel with no historical operating business. As a result, effective January
1, 1994 Citadel ceased including the results of Fidelity in its consolidated
financial statements and began accounting for its investment in Fidelity on the
cost basis. Since the Restructuring, Citadel has been engaged primarily in the
ownership and management of commercial and residential real property.
Therefore, Citadel's results of operations for the year ended December 31, 1994
are not comparable to its results of operations for prior years.
The Company reported a loss of $174.8 million ($26.45 per share) in 1994,
comprised of (i) a $112.1 million loss from the operations of its former
subsidiary, Fidelity, through the date of the Restructuring, (ii) writedowns of
$59.9 million on the Company's investment in Fidelity at and following the
Restructuring, (iii) a $900,000 administrative charge paid to Fidelity prior to
the Restructuring and (iv) a $1.9 million loss from continuing operations.
Of the $1.9 million loss from continuing operations, $1.1 million related to
the contested proxy solicitation, litigation defense and settlement costs. See
Item 1: "Business of Citadel Holding Corporation--The Dillon Litigation." In
addition, the Company spent approximately $200,000 on deferred maintenance on
its real estate holdings.
The Company continues to make progress in the leasing of its apartment
properties. At December 31, 1994, the Parthenia property was 70% leased; in the
first quarter of 1995, the Parthenia property had achieved over 90% occupancy.
Changes made by the Company in the management of the Veselich property appear
to be stabilizing the high turnover which had caused additional operating
costs. Occupancy at the Veselich property is in the 90-95% range.
The Arboleda property has maintained full occupancy with low turnover of
tenants. However, American Express has publicly announced that it will vacate
the property at the end of its lease in February 1997. While the Phoenix office
leasing market continues to strengthen, it is anticipated that significant
capital expenditures will be necessary to re-lease this space and the space
might remain vacant for some time. See Item 2: "Real Estate Activities--Real
Estate Interests."
In addition, operating results for 1995 should be positively affected by the
sale of the Harbor City and Sherman Oaks properties.
BUSINESS PLAN, CAPITAL RESOURCES AND LIQUIDITY OF THE COMPANY
In prior periods, Citadel relied almost exclusively on cash flow from the
operations of Fidelity and Gateway for its liquidity needs. As a result of the
completion of the Restructuring on August 4, 1994, Fidelity and Gateway are no
longer subsidiaries of Citadel, and Citadel and its wholly-owned subsidiary,
CRI, no longer have the benefit of cash flow from these companies to meet the
Company's liquidity needs. Additionally, the Craig Line of Credit prohibits the
payment of certain dividends by CRI to Citadel.
The Company expects that its sources of funds in the near term will include
cash on hand ($4.8 million at December 31, 1994), cash flow from the operations
of its real estate properties, if any, and proceeds from sales of properties
(see Note 13), and the sale of Fidelity Class B Common Stock to the Dillon
Parties (see Note 13). Management is actively seeking one or more buyers for
the balance of its Fidelity Class B Common
13
Stock to provide additional funding for the Company's short and long term
capital needs. It is anticipated that Citadel will complete the disposition of
its entire interest in Fidelity by the end of 1995, although no assurance can
be given that it will be able to dispose of its entire interest on favorable
terms by the end of the year. The Company is also seeking to obtain a loan (the
"Glendale Loan") of up to $5.38 million from Fidelity to fund a portion of the
purchase price for the Glendale Building. The Glendale Loan would be a five
year mortgage, amortized over 20 years, adjusted monthly at LIBOR plus 4.5%.
The Company currently has no borrowing capacity under the Craig Line of Credit.
In the short term, uses of funds are expected to include (i) funding of the
purchase price for the Glendale Building and repair of the earthquake damage to
the parking structure thereon, (ii) operating expenses, (iii) any amounts that
may become payable under the $4 million Bulk Sale Indemnity, (iv) debt service
under the Fidelity mortgages relating to the REO Properties and (v) interest
and principal payments under the Craig Line of Credit. Management believes that
the Company's sources of funds will be sufficient to meet its cash flow
requirements for the foreseeable future provided that it is able to obtain the
Glendale Loan or alternative financing is available to finance the purchase of
the Glendale Building. However, the Glendale Loan is subject to certain
conditions. See Item 2: "Real Estate Activities--Building Options." If the
Company does not obtain the Glendale Loan, the Company would have to seek
financing from other sources. No assurance can be given that the Glendale Loan
will be obtained or that the Company would be able to obtain other financing.
If no financing is available to purchase the Glendale Building, Citadel will
have to determine whether (i) to purchase the Glendale Building, paying the
entire purchase price out of cash reserves (if then adequate for such purpose),
(ii) to refrain from consummating such purchase, or (iii) to sell the Glendale
Building Option. If Citadel elects the first alternative, Citadel may be left
with inadequate cash reserves to meet its other obligations in a timely manner
unless it is able to liquidate other assets, such as its remaining shares of
Fidelity Class B Common Stock, to meet such obligations. If Citadel elects the
second alternative, it may be deemed to be in breach of an obligation under the
Glendale Building Option. Management believes that the Glendale Building has a
value materially in excess of its purchase price based on existing and
contemplated leases, and has been offered a premium for the Glendale Building
Option.
Management is currently evaluating the assets and opportunities available to
the Company with a view to developing a new business plan. Among the
alternatives under consideration are the continuation and expansion of its real
estate operations, the movement into a new line or lines of business, merger or
sale of the entire Company, and liquidation. However, as management believes
that the Company has value as a publicly traded entity with significant assets,
management believes it is unlikely that liquidation will be the selected
business plan. No final conclusions have been reached regarding any of the
foregoing alternatives. In the near term, the Company is seeking to dispose of
its Fidelity Class B Common Stock and working to maximize the value of its
current real estate holdings.
ISSUANCE OF PREFERRED STOCK IN CRAIG DEBT RESTRUCTURING
On November 10, 1994, Citadel issued 1,329,114 shares (the "Preferred
Shares") of Citadel Preferred Stock to Craig at a price of $3.95 per share.
Payment for the Preferred Shares was made by cancellation of $5,250,000 of
indebtedness owed to Craig under the Craig Line of Credit. As part of this
transaction (the "Craig Debt Restructuring"), the Craig Line of Credit was
reduced to $950,000, all of which is currently drawn.
The conversion of the debt to equity in the Craig Debt Restructuring has
improved Citadel's cash flow by converting floating rate debt bearing an
interest rate of prime plus 3% into a fixed cumulative dividend of 3% (which is
not a liability on Citadel's balance sheet until declared), and has expanded
Citadel's equity base while reducing Citadel's leverage. It has also reduced
pressure on the Company to sell assets in order to repay short-term debt.
14
If a court of competent jurisdiction issues any ruling, judgment, injunction,
decree or order that prohibits Craig from voting the Preferred Shares at any
meeting of Citadel stockholders or pursuant to any written consent of Citadel
stockholders, in which vote or consent the Preferred Shares would otherwise be
entitled to participate, or invalidates any such vote or consent, then Craig
has the right to rescind the Craig Debt Restructuring, in which event the debt
under the Craig Line of Credit that was canceled in the Craig Debt
Restructuring would be reinstated and would bear interest as though it had been
outstanding on a continuous basis. On March 15, 1995, the effective rate of
interest on the Craig Line of Credit was 12%.
15
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993............. F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1994.......................................... F-5
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period Ended December 31, 1994............................. F-6
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1994.......................................... F-7
Notes to Consolidated Financial Statements............................... F-9
Financial Statement Schedule III--Real Estate and Accumulated
Depreciation............................................................ II-1
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Citadel Holding Corporation:
We have audited the consolidated financial statements and financial statement
schedule listed at Item 8 of Citadel Holding Corporation (the "Company"). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1994 and 1993, and the results of its consolidated operations and
cash flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles. Also in our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 15, 1995 (April 12, 1995 as to the
fourth paragraph of Note l3)
F-2
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (NOTE 1)
DECEMBER 31,
------------------
1994 1993
------- ----------
ASSETS:
Cash, federal funds sold and other cash equivalents........ $ 4,805 $ 145,961
Investment securities held for sale........................ 92,259
Mortgage-backed securities held for sale................... 91,108
Loans held for sale, at lower of cost or market............ 367,688
Loans receivable, net of allowances of $83,832 at December
31, 1993.................................................. 3,345,695
Interest receivable........................................ 23,052
Investment in FHLB stock................................... 52,151
Real estate owned, net..................................... 153,607
Premises and equipment, net................................ 49,247
Deferred tax assets........................................ 1,247
Investment in Fidelity Federal Bank--held for sale......... 13,405
Rental properties, less accumulated depreciation........... 19,858
Other receivables.......................................... 1,219
Other assets............................................... 625 67,504
------- ----------
Total...................................................... $39,912 $4,389,519
======= ==========
See notes to consolidated financial statements.
F-3
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (NOTE 1)
DECEMBER 31,
-------------------
1994 1993
------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits................................................. $3,368,643
FHLB advances............................................ 326,400
Commercial paper......................................... 304,000
Mortgage-backed notes and bonds.......................... 100,000
Other borrowings......................................... 3,830
Security deposits payable................................ $ 227
Deferred tax liabilities................................. 14,564
Accounts payable and accrued liabilities................. 3,001 24,679
Deferred proceeds from bulk sales agreement.............. 4,000
Subordinated notes....................................... 60,000
Short-time line of credit................................ 950
Mortgage notes payable................................... 13,896
------- ----------
Total liabilities....................................... 22,074 4,202,116
------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity:
Serial preferred stock, par value $.01 per share;
5,000,000 shares authorized
3% Cumulative Voting Convertible, ($3.95 or $5,250,000
stated value)- 1,329,114 shares issued and outstanding
at December 31, 1994.................................... 13
Common stock, par value $.01 per share; 10,000,000 shares
authorized, 6,669,924 and 6,595,624 shares issued and
outstanding at December 31, 1994 and 1993, respectively. 67 66
Paid in capital........................................... 65,298 60,052
Retained earnings (deficit)............................... (47,540) 127,285
------- ----------
Total stockholders' equity.............................. 17,838 187,403
------- ----------
Total................................................. $39,912 $4,389,519
======= ==========
See notes to consolidated financial statements.
F-4
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NOTE 1)
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Real Estate Operations:
Rental income................................ $ 2,070
Interest income.............................. 45
---------
2,115
Real estate operating expenses............... 1,350
Depreciation and amortization................ 276
Interest expense............................. 649
General and administrative expenses.......... 1,785
---------
Loss from Real Estate Operations.............. (1,945)
---------
Financial Services Operations:
Interest income.............................. $ 289,592 $ 370,722
Interest expense............................. 188,391 239,941
--------- ---------
Net Interest Income 101,201 130,781
Provisions for estimated loan losses (Note
18)......................................... 65,100 51,180
--------- --------- ---------
Net Interest Income after Provision for
Estimated Loan Losses........................ 36,101 79,601
--------- --------- ---------
Noninterest Income (Expense):
Loan and other fees.......................... 5,389 7,885
Gain (loss) on sales of loans, net........... 194 1,117
Fee income from investment products.......... 4,313 3,368
Fee income on deposits and other income...... 3,271 4,406
Provision for estimated real estate losses... (30,200) (17,820)
Real estate operations on specific
properties.................................. (18,643) (4,441)
Gains on sales of mortgage-backed securities
and investment securities, net.............. 1,288
Operating expenses........................... (105,341) (77,911)
--------- --------- ---------
Total noninterest expense.................. (139,729) (83,396)
--------- --------- ---------
Loss from Financial Services Operations....... (103,628) (3,795)
--------- --------- ---------
Administrative Charge from Fidelity Federal
Bank......................................... (916)
Loss of and Write-Down of Investment in
Fidelity Federal Bank........................ (171,964)
--------- --------- ---------
Loss Before Income Taxes...................... (174,825) (103,628) (3,795)
Income Tax Expense (Benefit).................. (36,467) (5,841)
--------- --------- ---------
Net Earnings (Loss)........................... $(174,825) $ (67,161) $ 2,046
========= ========= =========
Net Earnings (Loss) Per Share (After Preferred
Stock Dividend).............................. $ (26.45) $ (11.56) $ 0.62
========= ========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding........................... 6,610,280 5,809,570 3,297,812
========= ========= =========
See notes to consolidated financial statements.
F-5
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS) (NOTE 1)
THREE YEARS ENDED DECEMBER 31, 1994
------------------------------------------------------------------------
PREFERRED
STOCK COMMON STOCK
------------- -------------- TOTAL
NUMBER OF NUMBER OF PAID-IN RETAINED TREASURY STOCKHOLDER'S
SHARES PAR SHARES PAR CAPITAL EARNINGS STOCK EQUITY
--------- --- --------- --- ------- -------- -------- -------------
Balance, January 1,
1992................... 3,477,512 $35 $34,784 $192,400 $(6,079) $221,140
Retirement of treasury
stock................. (179,700) (2) (6,077) 6,079
Net earnings for 1992.. 2,046 2,046
--------- --- --------- --- ------- -------- ------- --------
Balance, December 31,
1992................... 3,297,812 33 28,707 194,446 223,186
Proceeds of rights
offering.............. 3,297,812 33 31,345 31,378
Net of loss of 1993.... (67,161) (67,161)
--------- --- --------- --- ------- -------- ------- --------
Balance, December 31,
1993................... 6,595,624 66 60,052 127,285 187,403
Issuance of common
stock................. 74,300 1 285 286
Issuance of preferred
stock, net of issuance
costs of $275......... 1,329,114 $13 4,961 4,974
Net loss of 1994....... (174,825) (174,825)
--------- --- --------- --- ------- -------- ------- --------
Balance, December 31,
1994................... 1,329,114 $13 6,669,924 $67 $65,298 $(47,540) $ $ 17,838
========= === ========= === ======= ======== ======= ========
See notes to consolidated financial statements.
F-6
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (NOTE 1)
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
CASH FLOWS--OPERATING ACTIVITIES:
Net earnings (loss).......................... $(174,825) $ (67,161) $ 2,046
Reconciliation of net earnings (loss) to net
cash from operations:
Provisions for estimated losses............. 95,300 (9,079)
Gains on sales of loans and securities...... (1,482) (1,117)
Capitalized loan origination costs.......... (2,187) (3,001)
Amortization of deferred loan items, net.... (1,163) (604)
Purchases of investment securities held for
trading.................................... (248,272)
Proceeds from sales of investment securities
held for trading........................... 248,248
Purchases of investment securities held for
sale....................................... (420,956)
Maturities of investments securities held
for sale................................... 260,838
Proceeds from sales of investment securities
held for sale.............................. 76,687
Investment securities held for sale lower of
cost or market writedown................... 2,074
Purchases of mortgage-backed securities held
for trading................................ (51,248)
Proceeds from sales of mortgage-backed
securities held for trading................ 51,277
Purchase of mortgage-backed securities held
for sale................................... (395,561)
Principal repayments of mortgage-backed
securities held for sale................... 58,865
Proceeds from sales of mortgage-backed
securities held for sale................... 463,704
Originations of loans held for sale......... (162,868) (176,220)
Proceeds from sales of loans held for sale.. 138,399 204,435
FHLB stock dividend......................... (1,640) (790)
Depreciation and amortization............... 276 23,092 9,344
Interest receivable decrease................ 4,080 9,974
Other receivable increase................... (1,219)
Other assets (increase) decrease............ (625) (49,414) 3,934
Deferred income tax expense (benefit)....... 14,491 (19,966)
Interest payable decrease................... (5,103) (5,954)
Security deposits payable increase.......... 227
Other liabilities and deferred income
increase (decrease)........................ 3,001 (16,350) (19,283)
Deferred proceeds from Bulk Sales agreement. 4,000
Other, net.................................. 72 257
Writedown of investment in Fidelity......... 59,892
Deconsolidation of Fidelity................. 111,988
--------- --------- ---------
Operating cash flows, net.................. 2,715 13,722 72,134
--------- --------- ---------
CASH FLOWS--INVESTING ACTIVITIES:
Purchases of investment securities........... (200,055) (170,539)
Maturities of investment securities.......... 226,617 137,237
Proceeds from sales of investment securities. 26,908
Purchases of mortgage-backed securities held
for investments............................. (92,502)
Principal repayments of mortgage-backed
securities held for investments............. 9,565 8,588
Proceeds from sales of mortgage-backed
securities held for investments............. 7,114
See notes to consolidated financial statements.
F-7
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS) (NOTE 1)
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- -----------
Purchase of loans.......................... $ (3,951) $ (1,675)
Loans receivable, net decrease............. 149,909 274,181
Real estate investment (additions), net.... $ (20,055)
Proceeds from sales of real estate......... 41,608 24,329
Premises and equipment (additions), net.... (6,946) (2,460)
Other, net................................. 3,275 (4,746)
--------- --------- -----------
Investing cash flows, net............... (20,055) 254,044 172,413
--------- --------- -----------
CASH FLOWS--FINANCING ACTIVITIES:
Demand deposits and passbook savings, net
increase (decrease)....................... (111,601) 86,531
Certificate accounts, net increase
(decrease)................................ 22,326 (513,320)
Proceeds from FHLB advances................ 250,000 1,223,400
Repayment of FHLB advances................. (505,000) (1,017,000)
Repayment of related party loan............
Mortgage note.............................. 13,930
Proceeds from line of credit............... 6,210
Short-term borrowings increase............. 242,830 61,800
Proceeds from issuance of common stock..... 286
Repayments of long-term borrowings......... (34) (162,000) (265,950)
Loan fee................................... (256)
Costs of issuance of preferred stock....... (275)
Proceeds from stock rights offering, net... 31,378
--------- --------- -----------
Financing cash flows, net................. 19,861 (232,067) (389,539)
Less cash and cash equivalents of Fidelity
at beginning of period................... (143,677)
--------- --------- -----------
Net increase (decrease) in cash and cash
equivalents............................. (141,156) 35,699 (144,992)
Cash and cash equivalents at beginning of
period................................... 145,961 110,262 255,254
--------- --------- -----------
Cash and cash equivalents at end of period.. $ 4,805 $ 145,961 $ 110,262
========= ========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on mortgages and line of credit.. 548
Interest on deposits, advances and other
borrowings............................... 180,861 236,953
Income taxes.............................. (679) 21,697
NONCASH TRANSACTIONS:
Conversion of line of credit to preferred
stock, net of loan costs.................. 4,974
Additions to real estate owned acquired
through foreclosure....................... 193,641 121,192
Loans originated to finance sale of real
estate acquired through foreclosure....... 51,607 11,243
Transfers from investment portfolio to
held-for-sale portfolio:
Loans receivable.......................... 325,222
Investment securities..................... 14,264
Mortgage-backed securities................ 214,310
Mortgage loans exchanged for mortgage-
backed securities......................... 114,277
Retirement of treasury stock............... 6,079
See notes to consolidated financial statements.
F-8
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1--BASIS OF PRESENTATION
On August 4, 1994 ("the Closing"), Citadel Holding Corporation ("Citadel")
completed a restructuring (together with the other transactions described
below, the "Restructuring") in which, among other things, Citadel's ownership
interest in Fidelity Federal Bank, a Federal Savings Bank ("Fidelity"), was
reduced from 100% to approximately 16%. The reduction was a result of Fidelity
issuing and selling to investors in a public offering shares of Class A and
Class C common stock. Citadel's investment in Fidelity was reclassified into
4,202,243 shares of Class B common stock of Fidelity. As a result, effective
January 1, 1994, Citadel no longer consolidates Fidelity in its financial
statements; rather it accounts for its investment on the cost basis. In
addition, several other significant events occurred in the Restructuring,
including:
a. Citadel sold to Fidelity all of the stock of Gateway Investment
Services, Inc., previously a wholly owned subsidiary of Citadel
("Gateway").
b. A newly-formed subsidiary of Citadel, Citadel Realty, Inc. ("CRI")
purchased four real properties from Fidelity for a purchase price of $19.8
million (Fidelity's book value) of which $13.9 million was financed by
Fidelity on a secured basis and the balance of which was financed by Craig
Corporation ("Craig"), a significant stockholder of Citadel, under a short-
term line of credit (Citadel and CRI are referred to herein as the
"Company").
c. Citadel received from Fidelity by way of dividend (i) one-year
transferable options (subsequently contributed to CRI) to acquire two
office buildings in Sherman Oaks and Glendale, California (the "Office
Buildings") used in the operations of Fidelity (including its headquarters
buildings) for an aggregate exercise price of $9.3 million (the "Office
Building Options"), portions of which buildings would be leased back by
Fidelity upon purchase by the Company (see Note 13), and (ii) Fidelity's
interest in a lawsuit filed against the former carrier of Fidelity's
directors' and officers' insurance policies, involving certain coverage and
indemnity issues, which resulted in Citadel collecting $2.5 million.
d. Citadel and Fidelity entered into a Stockholders' Agreement (the
"Stockholders' Agreement"), under which Citadel must reimburse Fidelity for
certain losses that may be incurred by Fidelity as a result of certain
environmental and other representations made by Fidelity in connection with
the bulk sale of loans and other assets to certain third parties in
connection with the Restructuring. Subject to a $4 million limit, the
Stockholders' Agreement requires Citadel to reimburse Fidelity for losses
incurred by Fidelity, in either repurchasing assets (sold in connection
with the bulk sale) in the event of breached representations, or curing
such breaches.
The information for the year ended December 31, 1994 presents the Company's
results of operations for the five months subsequent to the Restructuring
separate from the results of operations of Citadel (including Fidelity and
Gateway) prior to the Restructuring, which have been included in the loss of
and write-down of investment in Fidelity in the statement of operations (see
Note 4).
For the period prior to the closing of the Restructuring, administrative
expenses have been recorded consistent with previous allocations made to
Citadel by Fidelity.
Notes 1 through 13 relate to the Company on a restructured basis while Notes
14 through 27 relate to Citadel, as the holding company of Fidelity, prior to
the restructuring, with the exception of Notes 25 and 26 which relate to the
Company both prior and subsequent to the restructuring.
F-9
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2--SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal funds
sold.
Deferred Financing Cost--Costs incurred in connection with obtaining
financing are amortized over the terms of the respective loans on a straight-
line basis.
Depreciation and Amortization--Depreciation and amortization are computed
principally on the straight-line method over the estimated useful lives of the
assets which range from 27 to 39 years. Leasehold improvements are amortized
over the lives of the respective leases or the useful lives of the
improvements, whichever is shorter.
Investment in Common Stock--The Company's investment in common stock of
Fidelity is classified as "available for sale" under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115 and is reported at
fair value. Under SFAS No. 115, fluctuations in fair value are included as a
separate component of stockholders' equity. If there is a decline in fair value
judged to be other than temporary, the amount of the write down is included in
net income (loss).
Earnings (Loss) per Share--The earnings (loss) per share was computed on the
weighted average number of shares outstanding. The 3% cumulative voting
convertible preferred stock is a common stock equivalent but was anti-dilutive.
3--RENTAL PROPERTIES
Rental properties consist of the following:
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
Land ...................................................... $ 5,538
Building and improvements ................................. 14,517
-------
Total ..................................................... 20,055
Less accumulated depreciation ............................. (197)
-------
Rental properties, net .................................... $19,858
=======
Rental properties consist of three apartment buildings and one commercial
building. Subsequent to December 31, 1994, one of the apartment buildings was
sold (see Note 13).
4--INVESTMENT IN FIDELITY FEDERAL BANK
As of December 31, 1994, the investment in Fidelity consists of 4,202,243
shares of Class B Common Stock received in the Restructuring at a fair value
estimated by management to be $3.19 per share, or a total value of $13,405,000.
Such valuation was based on management's consultation with financial advisors
and securities brokers, recent operating results of Fidelity and giving effect
to the consideration to be received from the Dillion Investors, L.P. to acquire
1,295,000 shares in April 1995 (see Note 13).
Fidelity suffered losses of $14,800,000 and $128,400,000 for the fourth
quarter and year ended December 31, 1994 respectively. As of December 31, 1994,
Fidelity had stockholders' equity of $156,500,000, or $6.03 per share. Although
Fidelity met its numerous regulatory capital requirements at December 31, 1994,
Fidelity's ability to meet the prescribed capital requirements in the future is
uncertain.
F-10
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The loss of and write-down of investment in Fidelity for the year ended
December 31, 1994 consisted of the following;
(IN THOUSANDS)
--------------
Loss from operations of Fidelity through August 4, 1994 ..... $112,072
Write-down of investment in Fidelity as of the date of
Restructuring .............................................. 52,811
Write-down representing other than temporary decline in fair
value from August 5, 1994 to December 31, 1994 ............. 7,081
--------
$171,964
========
Included in the write-down of the investment in Fidelity as of the Closing
Date is the effect of the proceeds received from the settlement of the D&O
Litigation, the write-down on uncollectible loans, and the deferral of a
portion of the proceeds received from the Bulk Sale Asset agreement relating to
a sale of Fidelity loans (see Note 1). The loss from operations through August
4, 1994 was partially offset by an income tax benefit of $16,524,000.
Pursuant to a Registration Rights Agreement entered into between Fidelity and
Citadel, Citadel and any person who acquires shares of Class B Common Stock or
Class A Common Stock issuable upon conversion of the shares of Class B Common
Stock (the "Registrable Securities") will be entitled to certain registration
rights with respect to such shares. At any time before March 31, 1998, the
holder or holders of more than 50% of the Registrable Securities may require
Fidelity to register all or a portion of the Registrable Securities under OTS
regulations, subject to certain restrictions. Furthermore, if, at any time
before March 31, 1999, Fidelity proposes to register any of its Common Stock
under the OTS regulations for purposes of an offering or sale in a primary or
secondary offering, Fidelity may be required to include any or all of the
Registrable Securities as directed by the holders thereof. Subject to certain
limitations, Fidelity is required to bear all registration and selling expenses
in connection with the registration of the Registrable Securities. However,
after consultation with Fidelity, Citadel has determined that its shares of
Fidelity Class B Common Stock may be freely sold without registration under the
regulations of the OTS, and, when such shares convert to Fidelity Class A
Common Stock, such shares will cease to be eligible for the foregoing
registration rights.
The Stockholders' Agreement provides restrictions on the transfers of shares
of Class B Common Stock. Except pursuant to the exercise of registration rights
as described above, no holder of Fidelity Class B Common Stock may sell
publicly shares of Class B Common Stock representing more than 5% of the total
outstanding Fidelity Common Stock on a fully diluted basis during any 30-day
period without the prior approval of Fidelity. In addition, if shares of Class
B Common Stock representing more than 5% of the total outstanding Fidelity
Common Stock on a fully diluted basis are proposed to be sold privately to any
person or, if after giving effect to such private sale, the transferee
(including any of the transferee's affiliates or any "group" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of which the transferee
is a member) would own more than 5% of the outstanding Fidelity Common Stock on
a fully diluted basis, then except in connection with distributions by Citadel
of such shares to its stockholders, Fidelity will have an assignable right of
first refusal with respect to the shares of Class B Common Stock proposed to be
sold. Upon any distribution of Class B Common Stock by Citadel to its
stockholders, by dividend or otherwise, any Citadel stockholder shall be
entitled to convert all or a portion of the shares of Class B Common Stock so
distributed to the extent that such shares when added to all other shares of
Class B Common Stock owned immediately prior to the distribution by such
stockholder and any shares of Class B Common Stock owned immediately prior to
the distribution by all other members of any "group" (as so defined) of which
such stockholder is a member, do not exceed 5% of all outstanding shares of
Fidelity Common Stock.
In addition, for a period commencing six months after the Closing and ending
18 months after the Closing, Fidelity will have the right to redeem, subject to
the approval of the OTS and the approval of the
F-11
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stockholders of Citadel, any outstanding shares of Class B Common Stock owned
by Citadel, in excess of the number of shares of Class B Common Stock held by
the then largest stockholder of Fidelity (other than Citadel), at a redemption
price (the "Redemption Price") equal to either (a) 110% of the market price of
the Class A Common Stock, assuming it is then listed on a national securities
exchange or admitted for quotation on the NASDAQ, or (b) if the Class A Common
Stock is not so listed or quoted, 100% of the book value per share of Fidelity
Common Stock as of the most recent quarterly balance sheet date; provided that
no such redemption shall be made in anticipation of any merger, consolidation,
sale of all or substantially all of Fidelity's assets, distribution (other than
any ordinary cash dividend), or any other transaction involving the receipt by
holders of any class of Fidelity Common Stock of any cash or other property.
5--OTHER ASSETS
Other assets are summarized as follows:
(IN THOUSANDS)
--------------
Deferred financing costs................................... $256
Accumulated amortization................................... (79)
----
Deferred financing costs, net.............................. 177
Deposits................................................... 87
Prepaid expenses .......................................... 329
Other...................................................... 32
----
Total other assets......................................... $625
====
6--DEFERRED PROCEEDS FROM BULK SALES AGREEMENT
Under the Stockholders' Agreement (see Note 1), Citadel will be required to
reimburse Fidelity for certain losses incurred by Fidelity in either curing
breached representations or repurchasing assets sold under a bulk sales
agreement, subject to a $4 million aggregate limit, in the event Fidelity is
determined to have breached certain representations made in connection with
certain Bulk Sales which were part of the Restructuring. To date, claims
totaling $3.9 million have been asserted. Citadel has been informed that
Fidelity is contesting these claims. Proceeds of $4 million have been included
in the balance sheet as deferred proceeds.
7--MORTGAGE NOTES PAYABLE
Mortgage notes payable to Fidelity at December 31, 1994 are as follows:
Notes payable--principal and interest paid monthly at rates
equal to LIBOR plus 4.5% and 1-year Treasury rate plus 3.7%
maturing through 2004 ........................................ $13,896,000
===========
Aggregate future principal payments as of December 31, 1994 are as follows:
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
------------ --------------
1995 ......................................................... $ 142
1996 ......................................................... 154
1997 ......................................................... 167
1998 ......................................................... 180
1999 ......................................................... 195
Thereafter ................................................... 13,058
-------
$13,896
=======
F-12
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1994, the LIBOR interest rate was 7.75% and the 1-year
Treasury rate was 6.7%. Management believes that the carrying value of these
variable rate mortgages approximates their fair value.
8--SHORT-TERM LINE OF CREDIT
The Company has a line of credit with Craig in the amount of $950,000 all of
which has been drawn. The line of credit matures and all borrowed amounts are
due on August 5, 1995. If certain conditions are met, the maturity date may be
extended an additional six months. The Company pays interest, on all borrowed
amounts at a rate equal to prime plus 3%. A 0.5% annual fee is charged on any
undrawn balance. In connection with the restructuring, the Company borrowed
$6,200,000 on this Line of Credit. The amount was reduced to $950,000 through
the issuance of 1,329,114 shares of Preferred Stock (see Note 9). The line of
credit is guaranteed by Citadel, which guarantee is collateralized by the
common stock of CRI. The line of credit contains restrictions as to the payment
of dividends by CRI. Management believes that the carrying value of the
borrowings under the line of credit approximates its fair value. During the
year ended December 31, 1994, the average balance outstanding was $4,391,000
and the effective interest rate was 11%.
9--3% CUMULATIVE VOTING CONVERTIBLE PREFERRED STOCK
On November 10, 1994, the Company issued 1,329,114 shares of 3% Cumulative
Voting Convertible Preferred Stock ("Preferred Stock") at a stated value of
$3.95 per share. The sales price of the 1,329,114 shares sold was $5,250,000
which was paid through conversion of existing indebtedness on the Craig line of
credit (see Note 8). Dividends are payable quarterly commencing on January 15,
1995. Each share of Preferred Stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders. The Preferred Stock
is convertible at the option of the holder into common stock. The conversion
ratio is one share of Preferred Stock for a fraction of a share of common; the
numerator of which is the sum of $3.95 per share plus any accrued but unpaid
dividends, and the denominator of which is the average of the closing prices
per share of the Company's common stock, as defined ("Market Price"). If the
Market Price exceeds $5.00 per share the conversion ratio will be calculated
using $5.00.
The Company does not have the right to redeem shares of Preferred Stock prior
to November 1997. Thereafter, the Company has the right, at its sole option, to
redeem at the sum of (1) $3.95 per share, (2) any unpaid dividends, and (3) a
premium at the redemption date equal to an accrual on the Stated Value ranging
from 9% per annum during the period from November 1994 to November 1998 and
thereafter reducing over time during the period from November 1998 to November
2006 at the rate of 1% per year. If the redemption date is after November 2006,
there is no premium. The Company can redeem Preferred Stock tendered for
conversion at a price based upon the above redemption provisions if the Market
Price is below $3.00. In the event of a change of control of the Company (as
defined), the Company is required to redeem the Preferred Stock, if demanded by
the holder, at a price based upon the above provisions. Further, each holder of
Preferred Stock is entitled to a preemptive right to purchase or subscribe for
any unissued voting stock. Such preemptive rights shall allow such holder to
maintain its proportionate share of the outstanding voting stock of the
Company.
If a court prohibits Craig from voting the Preferred shares, or invalidates
any such vote, the debt under the line of credit that was cancelled would be
reinstated and would bear interest as though it had been outstanding on a
continuous basis.
10--COMMON STOCK
On January 10, 1995, the Company authorized an additional 10,000,000 shares
of $.01 par value common stock.
In 1993, Citadel granted an option to purchase 20,000 shares of common stock
at a price of $21.90 per share to one of its former executives. As of December
31, 1994, all options are exercisable.
F-13
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has agreed to grant an option to its President to purchase 33,000
shares of common stock at a price of $2.69 per share. The option has vested as
to 11,000 shares and will vest as to 11,000 shares on each of August 4, 1995
and 1996.
11--FUTURE MINIMUM RENT
The Company has operating leases, at its commercial property, with tenants
that expire at various dates through 1999 and are either subject to scheduled
fixed increases or adjustments based on the Consumer Price Index. Future
minimum rent under operating leases, excluding tenant reimbursements of certain
costs, is summarized as follows:
YEAR ENDING
DECEMBER 31 (IN THOUSANDS)
----------- --------------
1995 ...................................................... $2,049
1996 ...................................................... 1,753
1997 ...................................................... 628
1998 ...................................................... 295
1999 ...................................................... 127
------
$4,852
======
Leases related to the Company's residential properties have been excluded
from the above schedule as they are generally six months or less in length.
12--COMMITMENTS AND CONTINGENCIES
There are several legal actions and claims against the Company. Based on
advice of legal counsel management believes that the ultimate liability, if
any, which may result from any of these lawsuits will not materially affect the
financial position or results of operations of the Company (see Note 13 for the
settlement of certain litigation).
13--SUBSEQUENT EVENTS
Subsequent to December 31, 1994, the Company sold its rental property located
in Harbor City for $5.9 million in cash, net of expenses. The sale resulted in
a gain of approximately $980,000 for financial statement purposes. As a result
of the sale, $3,696,000 of its mortgage notes payable to Fidelity were assumed
by the purchaser.
On February 2, 1995, the Company exercised its office building options to
purchase the two buildings (see Note 1) and on March 22, 1995, purchased and
immediately sold the Sherman Oaks building for a gain of $560,000. The purchase
price for the Glendale Building is $7.1 million. Fidelity has given Citadel a
conditional commitment to provide $5.38 million of mortgage financing on the
Glendale Building on the following terms and conditions: a 5 year mortgage,
amortized on a 20 year basis with interest payable monthly at LIBOR plus 4.5%.
These terms have been approved by the Board of Directors of Fidelity subject to
advice from the OTS on the issues of affiliate transactions, completion of
required documentation, and the equity portion of the purchase will be funded
from internal sources. This transaction has not yet been finalized and an
extension of the closing date has been agreed to by both Citadel and Fidelity
while certain financing issues are resolved.
The Glendale building is the headquarters building of Fidelity. Upon
completion of Citadel's purchase of the Glendale building, scheduled for no
later than May 17, 1995, Citadel and Fidelity will enter into a 10-year, full
service gross lease for four of the six floors of the Glendale building. The
rental rate for the first five years of the lease term will be approximately
$26,600 per month (including parking) for the ground floor and approximately
$75,000 per month (including parking) for the fourth, fifth and sixth floors.
This lease will provide for annual rental increases at a rate equal to the
lower of the increase in the Consumer Price Index
F-14
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
("CPI") or 3%. After the first five years of the lease term, the rental rate
for the ground floor will be adjusted to the higher of the then current market
rate or the prevailing rental rate in the fifth year of the lease and the
rental rate for the upper floors will be adjusted to the higher of the then
current market rate or $1.50 per square foot increased by the annual rental
rate increase applied during the first five years of the lease as described in
the preceding sentence. Fidelity will have the option to extend the lease of
the ground floor for two consecutive five year terms at a market rental rate
and will have the option to purchase the Glendale building at a market rate at
the expiration of the lease term, provided that Citadel then owns the building.
On November 7, 1994, a stockholder, Dillon Investors, L.P. ("Dillon"), filed
a lawsuit against the Company, its directors and Craig Corporation alleging
that the 74,300 shares of Citadel Common Stock issued to Craig at $3.85 per
share in October, 1994, and the Preferred Stock were issued at unfair prices in
order to entrench the Board of Directors in power in the face of an announced
proxy contest and possible consent solicitation by Dillon to take over control
of the Board of Directors. The suit sought recission of the issuance of the
Preferred Stock and the reinstatement of borrowings from Craig under a line of
credit (see Note 8). As of April 12, 1995, the Company entered into a Stock
Exchange and Settlement Agreement with Dillon pursuant to which Dillon will
purchase from Citadel 1,295,000 shares of Fidelity Class B Common Stock in
consideration of $2.22 million in cash and the surrender of 666,000 shares of
Citadel Common Stock (the "Surrendered Shares"). Further, Craig has agreed not
to exercise the conversion feature of its Preferred Stock prior to February 4,
1996, without the prior approval of the holders of the majority of the Citadel
common shareholders. Citadel has (a) granted Craig a two year option to
purchase the Surrendered Shares at a purchase price of $3.00 per share and (b)
agreed to reimburse Craig for its litigation costs in an amount not to exceed
$75,000 which has been included in accounts payable and accrued liabilities.
As noted in Note 1, Notes 14 through 27 related to the Company, as the
holding company of Fidelity, prior to Restructuring, with the exception of
Notes 25 and 26 which relate to the Company both prior to and subsequent to the
Restructuring.
14--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRIOR TO RESTRUCTURING
Principles of Consolidation--The consolidated financial statements include
the accounts of Citadel Holding Corporation ("Citadel") and subsidiaries. Until
August 4, 1994 Citadel was the holding company of Fidelity Federal Bank, a
Federal Savings Bank ("Fidelity") and Gateway Investment Services, Inc.
("Gateway"). Unless otherwise indicated, references to the "Company" include
Citadel, Fidelity, Gateway, and all subsidiaries of Fidelity and Citadel. All
significant intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds sold are one-day periods. Fidelity is required
by the Federal Reserve System to maintain noninterest-earning cash reserves
against certain of its transaction accounts. At December 31, 1993, the required
reserves totaled $28.6 million including vault cash.
Investment Securities and Mortgage-backed Securities--U.S. Government and
agency obligations, commercial paper, mortgage-backed securities and other
corporate debt securities identified as held for investment are recorded at
cost, with any discount or premium recognized over the life of the related
security by using a methodology which approximates the interest method.
Fidelity's portfolio of mortgage-backed securities consists of pools of
mortgage loans exchanged for mortgage-backed securities and those purchased.
Securities held for investment are those securities which the Company has the
intent and ability to hold until maturity, and are carried on an amortized cost
basis. Securities to be held for indefinite periods of time, including
securities that management intends to use as part of its asset/liability
strategy, or that may be sold
F-15
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in response to changes in interest rates, changes in prepayment risk, the need
to increase regulatory capital or other similar factors, are classified as held
for sale and are carried at the lower of cost or market value. Any gains or
losses incurred on sales of securities are calculated based upon the specific
identification method. Any investment securities held for trading are carried
at market value.
Loans--Interest on loans is credited to income as earned and is accrued only
if deemed collectible. Accrued interest is fully reserved on loans over 90 days
contractually delinquent and on other loans which have developed inherent
problems prior to being 90 days delinquent. Discounts and premiums on loans are
included with loans receivable and are credited or charged to operations over
the estimated life of the related loans using the interest method. The Bank
charges fees for originating loans. Loan origination fees, net of direct costs
of originating the loan are recognized as an adjustment of the loan yield over
the life of the loan by the interest method, which results in a constant rate
of return. When a loan is sold, net loan, origination fees and direct costs are
recognized in operations. Other loan fees and charges representing service
costs for the prepayment of loans, for delinquent payments or for miscellaneous
loan services are recognized when collected. Loan commitment fees received are
deferred to the extent they exceed direct underwriting costs.
Fidelity has designated certain of its loans receivable as being held for
sale. In determining the level of loans held for sale, Fidelity considers
whether loans (a) would be sold as part of its asset/liability strategy, or (b)
may be sold in response to changes in interest rates, changes in prepayment
risk, the need to increase regulatory capital or other similar factors. Such
loans are classified as held for sale and are carried at the lower of cost or
market value.
Fidelity has sold loans which have generated gains on sale, a stream of loan
servicing revenue and cash for lending or liquidity. Sales of loans are
dependent upon various factors, including interest rate movements, investor
demand for loan products, deposit flows. the availability and attractiveness of
other sources of funds, loan demand by borrowers and liquidity and capital
requirements. Due to the volatility and unpredictability of these factors, the
volume of Fidelity's sales of loans has fluctuated. All loans sold during 1993
and 1992 were from the held for sale portfolio. Fidelity has the intent and
ability to hold all of its loans, other than those designated as held for sale,
until maturity.
Owned Real Estate--Real estate held for sale acquired in settlement of loans
generally results when property collateralizing a loan is foreclosed upon or
otherwise acquired by Fidelity in satisfaction of the loan. Real estate
acquired through foreclosure is recorded at the lower of fair value or the
recorded investment in the loan satisfied at the date of foreclosure. Fair
value is based on the amount that the Company could reasonably expect to
receive for the asset in a current sale between a willing buyer and a willing
seller, that is, other than a forced or liquidation sale. Inherent in the
computation of estimated fair value are assumptions about the length of time
the Company may have to hold the property before disposition. The holding costs
through the expected date of sale and estimated disposition costs are included
in the valuations. Real estate held for investment or development is carried at
the lower of cost or fair value. Adjustments to the carrying value of the
assets are made through valuation allowances and charge-offs, through a charge
to operations. Net cash receipts on real estate owned or on those loans
designated as in-substance foreclosures and net cash payments are recorded in
real estate operations on specific properties.
Loans meeting certain criteria are accounted for as "in-substance
foreclosures." These substantially foreclosed assets are recorded at the lower
of the loan's carrying amount or at the estimated fair value of the collateral
at the date the loan was determined to be in-substance foreclosed. These assets
are reported as "real estate owned" in addition to formally foreclosed real
estate.
Allowances for Estimated Losses on Loans and Real Estate--The Company has
established valuation allowances for estimated losses on specific loans and
real estate ("specific reserves") and for the inherent risk in the loan and
real estate portfolios which has yet to be specifically identified ("general
valuation allowances"
F-16
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or "GVA"). The internal asset review department reviews the quality and
recoverability of the Company's assets on a quarterly basis in order to
establish adequate specific reserves and general valuation allowances. The Bank
utilizes the delinquency migration and the classification methods in
determining the adequacy of its GVA. The delinquency migration method attempts
to capture the potential future losses as of a particular date associated with
a given portfolio of loans, based on the Bank's own historical migration
experience over a given period of time. Under the classification method, a
reserve factor is applied to each aggregate classification level by asset
collateral type in an effort to estimate the loss content in the portfolio. The
Bank calculates a range of loss by applying both methodologies and then applies
judgment and knowledge of particular credits, economic trends, industry
experience and other relevant factors to estimate the GVA amount. Additions to
the allowances, in the form of provisions, are reflected in current operations.
Charge-offs to the allowances are made when the loss is determined to be
significant and permanent.
Depreciation and Amortization--Depreciation and amortization are computed
principally on the straight-line method over the lives of the respective leases
or the useful lives of the improvements, whichever is shorter.
Intangible Assets--In 1993, the Company reassessed the valuation of its
intangible assets which resulted in a writedown of $14.0 million. See Note 20
for further information.
Until 1993, the excess of cost over the fair value of net assets acquired
(goodwill) in connection with the acquisition of Mariners Savings and Loan in
1978, was included in intangible assets in the statements of financial
condition and was being amortized to operations over forty years.
The cost of core deposits purchased from various financial institutions is
amortized over the average life of the deposits acquired, generally five to ten
years.
Financial Instruments--In the normal course of business, the Company enters
into off-balance sheet instruments to enhance yields and to alter its exposure
to interest rate risk. These financial include interest rate swaps and swap
option agreements and puts and calls. The differences to be paid or received on
swaps are included in interest expense as payments are made or received. The
swap options are held as trading positions during the option period and are
carried at market value and gains and losses are reflected in operations.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. Financial instruments are defined as
cash, evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument.
Much of the information used to determine fair value is highly subjective.
When applicable, readily available market information has been utilized.
However, for a significant portion of Fidelity's financial instruments, active
markets do not exist. Therefore, considerable judgment was required in
estimating fair value for certain items. The subjective factors include, among
other things, the estimated timing and amount of cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. Since the fair value is estimated as of December 31, 1993, the amounts
that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments which are contained in the notes to the
consolidated financial statements that describe each financial instrument.
F-17
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and cash equivalents: The book value amounts reported in the statement
of financial condition for cash and cash equivalents approximate the fair value
of such assets, because of the short maturity of such investments.
Investment securities and mortgage-backed securities: Estimated fair values
for investment and mortgage-backed securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
Loans: The estimated fair values of real estate loans held for sale are based
on quoted market prices. The estimated fair values of loans receivable are
based on quoted market prices, when available, or an option adjusted cash flow
valuation ("OACFV"). The OACFV includes forward interest rate simulations and
the credit quality of performing and nonperforming loans. Such valuations may
not be indicative of the value derived upon a sale of all or part of the
portfolio. The book value of accrued interest approximates its fair value.
Investment in FHLB stock: The book value reported in the statement of
financial condition for the investment in FHLB stock approximates fair value as
the stock may be sold back to the Federal Home Loan Bank at face value to the
extent that it exceeds the amount of FHLB stock which Fidelity is required to
hold.
Deposits: The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand. The fair value of fixed
rate certificates of deposits is estimated by using an OACFV analysis.
Borrowings (including FHLB Advances, other borrowings and subordinated
notes): The estimated fair value is based on an OACFV model.
Off-balance sheet instruments: The estimated fair value for Fidelity's off-
balance sheet instruments are based on quoted market prices, when available, or
an OACFV analysis.
15--INVESTMENT SECURITIES
The following maturity table shows the book value and market value of
investment securities held for sale at December 31, 1993:
BOOK MARKET
YEAR OF MATURITY VALUE VALUE
---------------- ------- -------
(IN THOUSANDS)
1994...................................................... $ 1,301 $ 1,301
1995 through 1998......................................... 90,686 90,939
1999 through 2003......................................... 272 272
------- -------
$92,259 $92,512
======= =======
Investment Securities Held for Investment--Proceeds from sales of securities
held for investment during 1993 were $26.9 million, with a resulting gain of
$1,946,000.
During 1993, the Company changes its investment strategy and as a result,
moved its entire portfolio of investment securities from the investment
portfolio to the held for sale portfolio. The Company had no outstanding
investment securities held for investment at December 31, 1993.
16--MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities Held for Trading--The Company had no outstanding
mortgage-backed securities held for trading at December 31, 1993. Proceeds from
sales of mortgage-backed securities held for trading during 1993 totaled $51.3
million. Gross gains of $54,000 were realized from those sales and are reported
in the statement of operations as a component of gains/losses on sales of
mortgage-backed securities, net.
F-18
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage-Backed Securities Held for Sale--Summarized below are mortgage-
backed securities held for sale at December 31, 1993:
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
FHLMC................................... $34,184 $ 3 $(217) $33,970
FNMA.................................... 14,853 (33) 14,820
Participation Certificates.............. 38,223 454 38,677
CMO..................................... 3,848 (17) 3,831
------- ---- ----- -------
$91,108 $457 $(267) $91,298
======= ==== ===== =======
Weighted average yield.................. 5.33%
=======
During the year ended December 31, 1993, the Company had gross gains of
$1,500,000 and gross losses of $1,000 on the sale of mortgage-backed securities
held for investment.
17--LOANS RECEIVABLE AND LOANS HELD FOR SALE
Total loans include loans receivable and loans held for sale and are
summarized as follows:
DECEMBER 31,
1993
--------------
(IN THOUSANDS)
Real estate loans:...............................................
Single family................................................... $ 792,054
Multifamily.....................................................
2 to 4 units................................................... 505,219
5 to 36 units.................................................. 1,795,374
37 units and over.............................................. 406,330
Commercial and industrial....................................... 295,761
Land............................................................ 4,828
----------
Total real estate loans......................................... 3,799,566
Other............................................................ 8,998
----------
3,808,564
----------
Less:
Undisbursed loan funds..........................................
Unearned discounts.............................................. 210
Deferred loan fees.............................................. 11,139
Allowance for estimated losses (Note 17)........................ 83,832
----------
95,181
----------
$3,713,383
==========
Included above are $56.3 million of amounts drawn under home equity lines of
credit at December 31, 1993.
F-19
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Also included above are loans held for sale, consisting of the following at
the dates indicated:
DECEMBER 31,
1993
--------------
(IN THOUSANDS)
Residential loans:
Single family................................................... $239,371
Multifamily 2 to 4 units........................................ 128,317
--------
Total loans held for sale........................................ $367,688
========
Fidelity's portfolio of mortgage loans serviced for others amounted to $888.4
million at December 31, 1993.
18--REAL ESTATE OWNED
Owned real estate consists of the following:
DECEMBER 31,
1993
--------------
(IN THOUSANDS)
Real estate held for investment or development................... $ 11,161
Real estate acquired through foreclosure......................... 131,799
In-substance foreclosed real estate.............................. 28,362
Allowance for estimated losses................................... (17,715)
--------
$153,607
========
The following summarizes the results of real estate operations:
DECEMBER 31,
------------------
1993 1992
-------- --------
(IN THOUSANDS)
Income (loss) from:
Real estate acquired for investment or development........ $ 110 $ (841)
Real estate acquired through foreclosure.................. (18,753) (3,600)
Provision for estimated losses............................ (30,200) (17,820)
-------- --------
$(48,843) $(22,261)
======== ========
19--ALLOWANCE FOR ESTIMATED LOAN AND REAL ESTATE LOSSES
The following summarizes the activity in the Company's allowance for
estimated loan and real estate losses:
OWNED
LOANS REAL ESTATE TOTAL
-------- ----------- --------
(IN THOUSANDS)
Balance at January 1, 1992...................... $ 52,374 $ 52,374
Provision for losses........................... 51,180 17,820 69,000
Transfer of general valuation allowance........ (12,400) 12,400
Charge-offs.................................... (27,350) (13,826) (41,176)
Recoveries..................................... 473 56 529
-------- ------- --------
Balance at December 31, 1992.................... 64,277 16,450 80,727
Provision for losses........................... 65,100 30,200 95,300
Charge-offs.................................... (50,504) (28,940) (79,444)
Recoveries..................................... 4,959 5 4,964
-------- ------- --------
Balance at December 31, 1993.................... $ 83,832 $17,715 $101,547
======== ======= ========
F-20
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fidelity's percentage of nonperforming assets to total assets increased to
5.37% at December 31, 1993 from 4.99% at December 1992.
20--INTANGIBLE ASSETS
In 1993, Fidelity reassessed the valuation of its intangible assets. Based
upon the results of a branch profitability analysis and an analysis of the
recoverability of its core deposit intangible assets, Fidelity wrote down the
carrying value of its core deposit intangible assets in an amount of $5.2
million (which writedown is included in interest expense). The net unamortized
balance of core deposit intangibles was $2.1 million at December 31, 1993. Also
in 1993, an analysis was performed of the recoverability of the goodwill
related to the acquisition of Mariners Savings and Loan ("Mariners") in 1978.
This analysis indicated that the expected future net earnings from the branches
or assets acquired did not support the carrying value of the goodwill. As a
result, Fidelity wrote down the remaining $8.8 million balance of goodwill
related to the Mariners acquisition (which writedown is included in operating
expense).
The amortization and writedown of core deposit intangibles, resulting from
purchases of deposits and goodwill acquired in the acquisitions of other
financial institutions for the two years ended December 31, 1993, are
summarized as follows:
DECEMBER 31,
--------------
1993 1992
------- ------
(IN THOUSANDS)
Amortization of core deposit intangibles........................ $ 4,020 $4,199
Writedown of core deposit intangibles........................... 5,192
Amortization of goodwill........................................ 470 596
Writedown of goodwill........................................... 8,776
------- ------
Total........................................................... $18,458 $4,795
======= ======
21--DEPOSITS
Deposits consist of the following:
DECEMBER 31, 1993
-------------------
TYPE OF ACCOUNT, WEIGHTED AVERAGE INTEREST RATE AMOUNT %
- ----------------------------------------------- ----------- ------
(IN THOUSANDS)
Passbook, 2.00%............................................ $ 82,168 2.4%
Checking and money market checking, 0.96%.................. 366,968 10.9
Money market passbook, 2.37%............................... 280,474 8.3
---------- -----
729,610 21.6
---------- -----
Certificates with rates of:
Under 3.00%............................................... 418,326 12.4
3.01-4.00%................................................ 1,326,449 39.4
4.01-5.00%................................................ 395,129 11.7
5.01-6.00%................................................ 137,710 4.1
6.01-7.00%................................................ 225,035 6.7
7.01-8.00%................................................ 90,280 2.7
Over 8.00%................................................ 46,104 1.4
---------- -----
2,639,033 78.4
---------- -----
$3,368,643 100.0%
========== =====
Weighted average interest rate............................. 3.59%
==========
F-21
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fidelity had noninterest-bearing checking amounts of $52.9 million at
December 31, 1993.
At December 31, 1993, certificate accounts were scheduled to mature as
follows:
YEAR OF AMOUNT
MATURITY (IN THOUSANDS)
-------- --------------
1994.......................... $2,097,475
1995.......................... 220,791
1996.......................... 91,610
1997.......................... 203,317
1998.......................... 25,488
After 1999.................... 352
----------
$2,639,033
==========
At December 31, 1993, loans totaling $98.3 million were pledged as collateral
for $5.9 million of public funds on deposit with Fidelity and potential future
deposits.
Certificates of deposits of $100,000 or more accounted for $593 million and
represented 18% of all deposits at December 31, 1993.
The Bank also utilizes brokered deposits as a short-term means of funding.
These deposits ($92,196 or 2.74% of total deposits) are obtained or placed by
or through a deposit broker and are subject to certain regulatory limitations.
The following table summarizes Fidelity's outstanding balance of brokered
deposits at the dates indicated:
The carrying amounts and the estimated fair values of deposits consisted of
the following at December 31, 1993:
BOOK VALUE FAIR VALUE
---------- ----------
(IN THOUSANDS)
Passbook, checking and money market accounts............. $ 729,610 $ 729,600
Certificates of deposit.................................. 2,639,033 2,684,100
---------- ----------
Total deposits........................................... $3,368,643 $3,413,700
========== ==========
SFAS No. 107 defines the fair value of demand deposits as the stated amount
of passbook, checking and certain money market accounts. Although SFAS No. 107
specifically prohibits including a deposit-based intangible element as part of
the fair value disclosure for deposit liabilities, it does allow supplemental
disclosure, which is unaudited. The core deposit intangible is the excess of
the fair value of demand deposits over recorded amounts and represents the
benefit of retaining these deposits for an expected period of time. Fair value
is based on a discounted cash flow analysis using Fidelity's alternative
funding costs for similar maturities and assumed retention rates for each type
of deposit. The core deposit intangible is estimated to be $63.0 million at
December 31, 1993, and is not included in the above fair values or recorded as
an asset in the balance sheet.
F-22
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22--FEDERAL HOME LOAN BANK ADVANCES
FHLB Advances are summarized as follows:
DECEMBER 31, 1993
-----------------
(IN THOUSANDS)
Balance at year-end........................................... $326,400
Average amount outstanding during the year.................... 394,591
Maximum amount outstanding at any month-end................... 496,400
Weighted average interest rate during the year................ 4.33%
Weighted average interest rate at year-end.................... 4.52%
Secured by:
FHLB stock.................................................. $ 51,951
Loans receivable (1)........................................ 900,776
--------
$952,727
========
- --------
(1) Includes pledged loans available for use under the letter of credit
securing commercial paper (available unused balance was $96 million at
December 31, 1993).
The maturities and weighted average interest rates on FHLB Advances are
summarized as follows:
DECEMBER 31, 1993
-------------------------
YEARS OF WEIGHTED AVERAGE
MATURITY AMOUNT INTEREST RATE
-------- -------- ----------------
(IN THOUSANDS)
1994........................ $ 3,700 3.32%
1995........................ 60,000 4.88
1996........................ 232,700 4.02
1997........................ 10,000 6.30
1998........................ 20,000 8.61
--------
$326,400 5.52%
========
The estimated fair value of FHLB Advances at December 31, 1993, was $328
million.
23--OTHER BORROWINGS AND SUBORDINATED NOTES
Other borrowings consist of the following:
DECEMBER 31, 1993
-----------------
YEAR OF
MATURITY
--------
(IN THOUSANDS)
Short-term borrowings:
Commercial paper........................................... 1994 $304,000
Securities sold under agreement to repurchase.............. 1994 3,830
--------
307,830
Long-term borrowings:
8 1/2% Mortgage-backed medium-term notes ("1997 MTNs")
secured by--Joint pool of mortgage loans and U.S. Treasury
notes, at cost............................................ 100,000
--------
$407,830
========
F-23
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowings other than the mortgage-backed bonds and notes are summarized as
follows:
Commercial paper:
Balance at year-end................................................. $304,000
Average amount outstanding during the year.......................... $274,620
Maximum amount outstanding at any month-end......................... $342,090
Weighted average interest rate during the year...................... 3.44%
Weighted average interest rate at year-end.......................... 3.38%
Secured by Letter of Credit from FHLB............................... $400,000
Securities sold under agreement to repurchase:
Balance at year-end................................................. $ 3,830
Average amount outstanding during the year.......................... $138,701
Maximum amount outstanding at any month-end......................... $289,885
Weighted average interest rate during the year...................... 3.23%
Weighted average interest rate at year-end.......................... 3.40%
Secured by mortgage-backed securities, at cost...................... $ 4,000
Fidelity entered into a Subordinated Loan Agreement dated as of May 15, 1990
(the "Subordinated Loan Agreement") pursuant to which $60 million in
subordinated notes (the "Notes") are outstanding, which Notes were guaranteed
by the Company. The Notes were approved by the OTS as additional regulatory
capital. The Notes were issued to institutional investors in the amount of
$60.0 million, interest payable semiannually at 11.68% per annum, and are
repayable in five equal annual installments commencing May 15, 1996.
The Subordinated Loan Agreement, among other covenants, contains a provision
requiring Fidelity to maintain a consolidated tangible net worth at least equal
to the greater of (a) $170 million plus 50% of consolidated net earnings since
January 1, 1990, or (b) 3.25% of consolidated assets.
The carrying and estimated fair value of other borrowings and subordinated
notes consisted of the following at December 31, 1993:
BOOK FAIR
VALUE VALUE
-------- --------
(IN THOUSANDS)
Commercial paper.............................................. $304,000 $304,000
1997 MTNs..................................................... 100,000 110,600
Subordinated notes............................................ 60,000 60,300
Securities sold under agreement to repurchase................. 3,830 3,800
-------- --------
$467,830 $478,700
======== ========
24--EMPLOYEE BENEFIT PLANS
Postretirement Benefits--Fidelity provided certain health and life insurance
postretirement benefits for all eligible retired employees. In connection with
the restructuring, all postretirement benefit Plans were retained by Fidelity.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" for its unfunded
postretirement health care and life insurance program. This statement requires
the cost of postretirement benefits to be accrued during the service lives of
employees. The Company's previous practice was to expense these costs on a cash
basis.
F-24
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic postretirement benefit costs for 1993 included the following
components:
AMOUNT
--------------
(IN THOUSANDS)
Service cost (benefits attributed to service
during the period).............................. $187.1
Interest cost on accumulated postretirement
benefit obligation.............................. 250.2
Amortization of transition obligation............ 156.4
------
Net periodic postretirement benefit cost......... $593.7
======
The following table sets forth the postretirement benefit liability at
December 31, 1993:
AMOUNT
--------------
(IN THOUSANDS)
Retirees........................................................ $ 1,616.7
Employees presently eligible to retire.......................... 1,115.9
Employees not yet eligible to retire............................ 974.7
---------
Total accumulated post benefit obligation ("APBO").............. 3,707.3
Unrecognized transition obligation.............................. (2,971.2)
Unrecognized cumulative loss.................................... (237.4)
---------
Net postretirement benefit liability recognized in the balance
sheet.......................................................... $ 498.7
=========
The APBO as of December 31, 1993, was determined using a 7.25% weighted-
average discount rate. The health care cost trend rates were assumed to be 9.5%
at December 31, 1993, gradually declining to 5.25% after ten years and
remaining at that level thereafter.
25--INCOME TAXES
Income tax expense benefit for the years ended December 31, 1993 and 1992 was
comprised of the following:
YEAR ENDED DECEMBER 31
------------------------
1993 1992
----------- -----------
(IN THOUSANDS)
Current income tax expense (benefit):
Federal.............................................. $ (51,033) $ 12,429
State................................................ 75 1,696
--------- --------
(50,958) 14,125
--------- --------
Deferred income tax expense (benefit):
Federal.............................................. 17,746 (15,503)
State................................................ (3,255) (4,463)
--------- --------
14,491 (19,966)
--------- --------
Total income tax benefit.............................. $ (36,467) $ (5,841)
========= ========
F-25
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation from the statutory income tax expense/benefit to the
consolidated effective income tax expense/benefit follows:
YEAR ENDED DECEMBER 31
---------------------------
1994 1993 1992
-------- -------- -------
(IN THOUSANDS)
Expected federal income tax expense (benefit)..... $(67,439) $(35,234) $(1,290)
Increases (reductions) in taxes resulting from:
Losses for which no tax benefit was recorded..... 50,915
Franchise tax expense (benefit), net of federal
income tax...................................... (4,398) (234)
Bad debt and loan loss deduction.................
Goodwill......................................... 3,108 124
Redetermination of tax........................... (4,130)
Other, net....................................... 57 (311)
-------- -------- -------
Income tax expense (benefit)...................... $(16,524) $(36,467) $(5,841)
======== ======== =======
As stated in Note 4, an income tax benefit of $16,524,000 was recorded during
the year endedDecember 31, 1994 relating to the loss from operations of
Fidelity.
F-26
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax liability/asset are as follows:
YEAR ENDED DECEMBER 31
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
FEDERAL
Deferred tax liabilities:
Loan fees and interest............................... $ 12,995
FHLB stock dividends................................. 12,066
California franchise tax............................. 2,691
Other................................................ $ 20 7,480
--------- --------
Gross deferred tax liabilities........................ 20 35,232
--------- --------
Deferred tax assets:
Option properties.................................... 350
Acquired properties.................................. 2,034
Investment in Fidelity............................... 21,580
Bulk sale indemnification............................ 1,400
California franchise tax............................. 2,393
Bad debt and loan loss deduction..................... 11,369
REO operating income................................. 2,926
Net operating loss carryforward...................... 525
Other................................................ 385 6,373
--------- --------
Gross deferred tax assets............................. 28,667 20,668
Valuation allowance................................... (28,647)
--------- --------
Deferred tax assets, net of allowance................. 20 20,668
--------- --------
Net deferred tax liability (asset).................... 14,564
--------- --------
STATE
Deferred tax liabilities:
Loan fees and interest............................... 4,245
FHLB stock dividends................................. 3,942
Other................................................ 5 2,514
--------- --------
Gross deferred tax liabilities........................ 5 10,701
--------- --------
Deferred tax assets:
Option properties.................................... 93
Acquired properties.................................. 540
Investment in Fidelity............................... 5,734
Bulk sale indemnification............................ 372
Bad debt and loan loss deduction..................... 16,187
Net operating loss carryforward...................... 94
Other................................................ 3,069
--------- --------
Gross deferred tax assets............................. 6,833 19,256
Valuation allowance................................... (6,828) (7,308)
--------- --------
Deferred tax assets, net of allowance................. 5 11,948
--------- --------
Net deferred tax liability (asset).................... $ $ (1,247)
========= ========
F-27
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1994, the Company has for income tax purposes a net
operating loss carryforward of approximately $1.5 million. These carryforwards
will expire in the year 1999 through 2004. Realization of such tax benefits is
unlikely as a result of recent history of operating losses, accordingly, a full
valuation reserve has been provided for in 1994.
In 1993, no valuation allowance was required for federal purposes. Federal
deferred tax assets would be fully realized as an offset against reversing
temporary differences which create net future tax liabilities, and/or through
loss carrybacks. Therefore, even if no future income was expected, federal
deferred tax assets would still be fully realized. However, a valuation
allowance was required for state purposes, as certain state deferred tax assets
would not be realized as an offset against reversing temporary differences
which create net future state tax liabilities.
The tax sharing agreement between Citadel and Fidelity was terminated prior
to the Closing. In connection with such termination, Citadel and Fidelity
agreed that certain amounts, estimated to be approximately $3.2 million, that
would otherwise become payable by Citadel to Fidelity under the terms of such
agreement as a result of losses recognized by Fidelity during the second
quarter of 1994, would not be payable.
Citadel and Fidelity entered into a tax disaffiliation agreement (the "Tax
Disaffiliation Agreement") which sets forth each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state, local or
foreign taxes for periods before and after the Closing and related matters such
as the filing of tax returns and the conduct of Internal Revenue Service and
other examinations.
In general, under the Tax Disaffiliation Agreement, Fidelity is responsible
for (a) all adjustments to the tax liability of Fidelity and its subsidiaries
for periods before the Closing relating to operations of Fidelity, (b) any tax
liability of Fidelity and its subsidiaries for the taxable year that begins
before and ends after the Closing in respect to that part of the taxable year
through the date of the Closing, and (c) any tax liability of Fidelity and its
subsidiaries for periods after the Closing. For this purpose, any liability for
taxes for periods ending on or before the Closing shall be measured by
Fidelity's actual liability for taxes after applying tax benefits attributable
to periods prior to the Closing otherwise available to Fidelity. With certain
exceptions, Fidelity is entitled to any refunds relating to those liabilities.
In general, Citadel is responsible for all tax liabilities of Citadel and its
subsidiaries (other than Fidelity and its subsidiaries) for all periods.
Citadel is entitled to any refunds relating to those liabilities.
F-28
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
26--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994:
Real estate income............ $ 812 $ 1,303 $ 2,115
Real estate, general and
administrative expenses...... 940 3,120 4,060
Loss of Fidelity.............. $14,757 $91,218 58,908 7,081(1) 171,964
Administrative charge from
Fidelity..................... 393 393 130 916
Net loss...................... (14,757) (92,004) (59,166) (8,898) (174,825)
Net loss per share............ (2.24) (13.95) (8.97) (1.29) (26.45)
1993:
Interest income............... $78,187 $73,679 $69,187 $68,539 $289,592
Interest expense.............. 49,397 46,748 43,767 48,479 188,391
Provision for estimated loan
losses....................... 7,500 14,500 19,500 23,600 65,100
Provision for estimated real
estate losses................ 1,000 16,000 4,000 9,200 30,200
Gains (losses) on sales of
loans, net................... 395 225 (34) (392) 194
Gains (losses) on sales of
mortgage-backed securities,
net.......................... 1,543 917 (1,118) 1,342
Gains (losses) on sales of
investment securities, net... 1,946 17 (2,017) (54)
Net earnings (loss) per share. 0.04 (2.31) (2.23) (5.66) (11.56)
- --------
(1) Due to worsening operating results of Fidelity during the fourth quarter an
additional write-down, which was deemed to be other than temporary, in the
value of Fidelity stock was recorded.
27--PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements.
CITADEL HOLDING CORPORATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1993
-----------------
(IN THOUSANDS)
ASSETS:
Cash......................................................... $ 2,284
Investment in subsidiaries................................... 182,966
Other assets................................................. 2,767
--------
$188,017
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Income tax liability........................................ $ 15
Other liabilities........................................... 599
--------
614
Total stockholders' liability................................ 187,403
--------
$188,017
========
F-29
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CITADEL HOLDING CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31
----------------
1993 1992
-------- ------
(IN THOUSANDS)
INCOME:
Dividends from subsidiaries................................. $ 1,000 $2,075
Subordinated notes interest income.......................... 538
Other income................................................ 324 55
-------- ------
1,324 2,668
EXPENSES:
Interest expense............................................
Related party loan interest expense......................... 15 408
Provision for estimated real estate losses.................. 599
Other expense............................................... 2,986 2,402
-------- ------
2,986 2,810
-------- ------
Earnings (loss) before income tax benefit.................... (1,662) (142)
Income tax benefit........................................... (861) (845)
-------- ------
Net earnings (loss) before equity in undistributed net
earnings of subsidiaries.................................... (701) 703
Equity in undistributed net earnings (loss) of subsidiaries.. (66,460) 1,343
-------- ------
Net earnings (loss).......................................... $(67,161) $2,046
======== ======
F-30
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CITADEL HOLDING CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------
1993 1992
----------- -----------
(IN THOUSANDS)
CASH FLOWS--OPERATING ACTIVITIES:
Net earnings (loss)................................. $ (67,161) $ 2,046
Purchases of investment securities held for sale... (35,001)
Maturities of investment securities held for sale.. 21,844
Sale of investment securities held for sale........ 13,239
Interest receivable decrease....................... 471
Other assets increase (decrease)................... 164 (1,032)
Equity in net (earnings) loss of subsidiaries...... 65,460 (3,418)
Deferred income taxes increase (decrease).......... 36 (816)
Other liabilities and deferred income increase (de-
crease)........................................... (1,303) 116
Other, net......................................... (82) 33
----------- -----------
Operating cash flows, net......................... (2,804) (2,600)
----------- -----------
CASH FLOWS--INVESTING ACTIVITIES:
Retirement of subordinated notes.................... 15,000
Other, net.......................................... 1,059
----------- -----------
Investing cash flows, net......................... 16,059
----------- -----------
CASH FLOWS--FINANCING ACTIVITIES:
Repayment of related party loan..................... (15,000)
Proceeds from stock rights offering................. 31,378
Capital contributions to Fidelity................... (28,000)
Dividends from subsidiaries......................... 1,000 1,000
----------- -----------
Financing cash flows, net.......................... 4,378 (14,000)
----------- -----------
Net increase (decrease) in cash and cash equiva-
lents............................................ 1,574 (541)
Cash and cash equivalents at beginning of period... 710 1,251
----------- -----------
Cash and cash equivalents at end of period......... $ 2,284 $ 710
=========== ===========
CASH FLOWS--SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest expense on borrowings..................... $ 408
Income taxes....................................... $ 75 96
Dividend of Gateway from Fidelity................... 1,075
F-31
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by this reference is the information set forth in the
sections entitled "ELECTION OF DIRECTORS" and "MANAGEMENT" contained in the
Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders (the "1995 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by this reference is the information set forth in the
section entitled "EXECUTIVE COMPENSATION" contained in the 1995 Proxy Statement
to be filed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by this reference is the information set forth in the
sections entitled "ELECTION OF DIRECTORS" and "PRINCIPAL HOLDERS OF CITADEL
COMMON STOCK" contained in the 1995 Proxy Statement to be filed.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by this reference is the information set forth in the
section entitled "RELATED PARTY TRANSACTIONS" contained in the 1995 Proxy
Statement to be filed.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
DESCRIPTION PAGE NO.
----------- --------
Independent Auditor's Report........................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993........ F-3
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended December 31, 1994................................. F-5
Consolidated Statements of Stockholders' Equity for Each of the
Three Years in the Period Ended December 31, 1994.................. F-6
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended December 31, 1994................................. F-7
Notes to Consolidated Financial Statements.......................... F-9
(A)(2) FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule III--Real Estate and Accumulated
Depreciation....................................................... II-1
(B) REPORTS ON FORM 8-K............................................. II-1
(i) The Company filed a Report on Form 8-K on October 20, 1994, reporting on
Item 7, "Financial Statements and Exhibits."
(ii) The Company filed a Report on Form 8-K on October 25, 1994, reporting on
Item 7, "Financial Statements and Exhibits."
(iii) The Company filed a Report on Form 8-K on November 14, 1994, reporting
on Item 5, "Other Events," and Item 7, "Financial Statements and Exhibits."
II-1
(C) EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Certificate of Amendment of Restated Certificate of Incorporation of
Citadel Holding Corporation (filed herewith)
3.2 Restated By-laws of Citadel Holding Corporation (filed as Exhibit 3.2
to the Company's Form 10-K for the year ended December 31, 1988, and
incorporated herein by reference)
4.1 Certificate of Designation of the 3% Cumulative Voting Convertible
Preferred Stock of Citadel Holding Corporation (filed as Exhibit 3 to
the Company's Report on Form 8-K, filed on November 14, 1994, and
incorporated herein by reference)
10.1 Form of Investor Purchase Agreement between Fidelity Federal Bank and
the investors (filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994, and incorporated
herein by reference)
10.2 Settlement Agreement between Fidelity Federal Bank, Citadel Holding
Corporation and certain lenders, dated as of June 3, 1994 (the "Letter
Agreement") (filed as Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994, and incorporated
herein by reference)
10.3 Amendment No. 1 to the Letter Agreement, dated as of June 30, 1994
(filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.4 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994 (filed
as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.5 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994 (filed
as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.6 Mutual Release, dated as of August 4, 1994, between Fidelity Federal
Bank, Citadel Holding Corporation and certain lenders (filed as
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.7 Mutual Release between Fidelity Federal Bank, Citadel Holding
Corporation, and The Chase Manhattan Bank, N.A., dated June 17, 1994
(filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.8 Loan and REO Purchase Agreement (Primary), dated as of July 13, 1994,
between Fidelity Federal Bank and Colony Capital, Inc. (filed as
Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.9 Deposit Escrow Agreement, dated as of July 13, 1994, among Colony
Capital, Inc., Fidelity Federal Bank, and Morgan Guaranty Trust
Company of New York (filed as Exhibit 10.9 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
10.10 Real Estate Purchase Agreement, dated as of August 3, 1994, between
Fidelity Federal Bank and Citadel Realty, Inc. (filed as Exhibit 10.10
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.11 Loan and REO Purchase Agreement (Secondary), dated as of July 12,
1994, between Fidelity Federal Bank and EMC Mortgage Corporation
(filed as Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.12 Deposit Escrow Agreement, dated as of July 13, 1994, between EMC
Mortgage Corporation, Fidelity Federal Bank, and Morgan Guaranty Trust
Company of New York (filed as Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
II-2
EXHIBIT
NO. DESCRIPTION
------- -----------
10.13 Loan and REO Purchase Agreement (Secondary), dated as of July 21,
1994, between Fidelity Federal Bank and Internationale Nederlanden
(US) Capital Corporation, Farallon Capital Partners, L.P., Tinicum
Partners, L.P. and Essex Management Corporation (filed as Exhibit
10.13 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, and incorporated herein by reference)
10.14 Deposit Escrow Agreement, dated as of July 21, 1994, between Fidelity
Federal Bank and Internationale Nederlanden (US) Capital Corporation,
Farallon Capital Partners, L.P., Tinicum Partners, L.P., Essex
Management Corporation, and Morgan Guaranty Trust Company of New York
(filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.15 Purchase of Assets and Liability Assumption Agreement by and between
Home Savings of America, FSB and Fidelity Federal Bank, FSB, dated as
of July 19, 1994 (filed as Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
10.16 Credit Agreement among Citadel Realty, Inc., Citadel Holding
Corporation and Craig Corporation, dated as of August 2, 1994 (filed
as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference)
10.17 Promissory Note, dated as of August 2, 1994, by Citadel Realty, Inc.
in favor of Craig Corporation (filed as Exhibit 10.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
10.18 Guaranty, dated as of August 2, 1994, by Citadel Holding Corporation
in favor of Craig Corporation (filed as Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
10.19 Pledge Agreement, dated as of August 2, 1994, between Citadel Holding
Corporation and Craig Corporation (filed as Exhibit 10.19 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, and incorporated herein by reference)
10.20 Promissory Note, dated August 3, 1994, by Citadel Realty, Inc., in
favor of Fidelity Federal Bank (filed as Exhibit 10.20 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, and incorporated herein by reference)
10.21 Promissory Note, dated July 28, 1994, by Citadel Realty, Inc. in favor
of Fidelity Federal Bank (filed as Exhibit 10.21 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
10.22 Guaranty Agreement, dated August 3, 1994, by Citadel Holding
Corporation, in favor of Fidelity Federal Bank (filed as Exhibit 10.22
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.23 Unsecured Environmental Indemnity Agreement dated as of August 3,
1994, by Citadel Realty, Inc., in favor of Fidelity Federal Bank
(filed as Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.24 Unsecured Environmental Indemnity Agreement dated as of July 28, 1994,
by Citadel Realty, Inc. in favor of Fidelity Federal Bank (filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.25 Registration Rights Agreement dated as of June 30, 1994, between
Fidelity Federal Bank, Citadel Holding Corporation and certain holders
of Class C Common Stock of Fidelity Federal Bank (filed as Exhibit
10.25 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, and incorporated herein by reference)
II-3
EXHIBIT
NO. DESCRIPTION
------- -----------
10.26 Stockholders Agreement, dated as of June 30, 1994, between Citadel
Holding Corporation and Fidelity Federal Bank (filed as Exhibit 10.26
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.27 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and
between Citadel Holding Corporation and Fidelity Federal Bank (filed
as Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference)
10.28 Option Agreement, dated as of August 4, 1994, by and between Fidelity
Federal Bank and Citadel Holding Corporation (filed as Exhibit 10.28
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.29 Assignment of Option Agreement, dated as of August 4, 1994, by and
between Citadel Holding Corporation and Citadel Realty, Inc. (filed as
Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.30 Amendment No. 2 to Executive Employment Agreement, dated as of August
4, 1994, between Richard M. Greenwood and Fidelity Federal Bank (filed
as Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference)
10.31 Amended and Restated Term Note, dated October 29, 1992, by Richard M.
Greenwood in favor of Citadel Holding Corporation (filed as Exhibit
10.31 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, and incorporated herein by reference)
10.32 Letter Agreement dated August 4, 1994, between Richard M. Greenwood
and Citadel Holding Corporation (filed as Exhibit 10.32 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, and incorporated herein by reference)
10.33 Amended and Restated Charter S of Fidelity Federal Bank (filed as
Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.34 Amended Service Agreement between Fidelity Federal Bank and Citadel
Holding Corporation dated as of August 1, 1994 (filed as Exhibit 10.34
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.35 Placement Agency Agreement, dated July 12, 1994 between J.P. Morgan
Securities Inc., Fidelity Federal Bank and Citadel Holding Corporation
(filed as Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.36 Side letter, dated August 3, 1994, between Fidelity Federal Bank and
Citadel Realty, Inc. (filed as Exhibit 10.36 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and
incorporated herein by reference)
10.37 Stock Exchange and Settlement Agreement, dated April 3, 1995, by and
among Citadel Holding Corporation, Dillon Investors, L.P., a Delaware
partnership, Roderick H. Dillon, Jr., an inidividual, Roderick H.
Dillon, Jr. Foundation, an Ohio trust, and Roderick H. Dillon, Jr.--
IRA (filed as Exhibit 10.1 to the Company's Report on Form 8-K, filed
on April 4, 1995, and incorporated herein by reference)
10.38 Stock Purchase Agreement, dated October 21, 1994, by and between
Citadel Holding Corporation and Craig Corporation, a Delaware
corporation (filed as Exhibit 2 to the Company's Report on Form 8-K,
filed on October 25, 1994, and incorporated herein by reference)
II-4
EXHIBIT
NO. DESCRIPTION
------- -----------
10.39 Preferred Stock Purchase Agreement, dated November 10, 1994, by and
between Citadel Holding Corporation and Craig Corporation, a Delaware
corporation (filed as Exhibit 2 to the Company's Report on Form 8-K,
filed on November 14, 1994, and incorporated herein by reference)
10.40 Conversion Deferral, Warrant and Reimbursement Agreement, dated as of
April 11, 1995, by and between Citadel Holding Corporation and Craig
Corporation, a Delaware corporation (filed herewith)
10.41 Employment Agreement between Citadel Holding Corporation and Steve
Wesson (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994, and incorporated
herein by reference)
21 Subsidiaries of the Company (filed herewith)
27 Financial Data Schedule (filed herewith)
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Citadel Holding Corporation
/s/ Steve Wesson
By __________________________________
Steve Wesson
President and Chief
Executive Officer
Date: April 17, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ James J. Cotter Chairman of the Board and April 17, 1995
- ------------------------------------ Director
James J. Cotter
/s/ Steve Wesson President, Chief Executive April 17, 1995
- ------------------------------------ Officer and Director
Steve Wesson
/s/ S. Craig Tompkins Principal Accounting Officer April 17, 1995
- ------------------------------------ and Director
S. Craig Tompkins
III-1