ITEM 1. BUSINESS
The information required by this Item is set forth under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - General."
ITEM 2.
ITEM 2. PROPERTIES
The Coast Federal Litigation Contingent Payment Rights Trust (the "CPR Trust") leases an office at 136 South Oak Knoll Avenue, Suite 320, Pasadena, California 91101. See Note (H) to the Consolidated Financial Statements included in Part II, Item 8 hereof.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The CPR Trust is not a party to any legal proceedings. For a discussion of Coast Federal Bank, FSB v. The United States, which is the Litigation to which the Registrant's CPR Certificates relate, see Part II, Item 7. "Management's D iscussion and Analysis of Financial Condition and Results of Operations - The Litigation."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The CPR Certificates trade on the NASDAQ Stock Market under the symbol CCPRZ. The following table indicates certain quarterly information with respect to the CPR Certificates' trading prices.
2000 1999 ------------ ------------ High Low High Low ----- ----- ----- ----- First Quarter $2.13 $1.28 $8.25 $5.38 Second Quarter 1.78 1.25 7.25 0.88 Third Quarter 1.94 1.25 1.81 0.94 Fourth Quarter 2.03 1.34 1.69 0.69
As of February 16, 2001, there were approximately 2,972 beneficial owners of the CPR Certificates. No dividends were declared or paid on the CPR Certificates in 2000. For a description of the CPR Certificates, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - General."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary Financial Information."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Registration Statement on Form S-1 with respect to the CPR Certificates referred to herein filed by Coast Savings Financial, Inc. ("Coast") with, and declared effective by, the Securities and Exchange Commission (the "SEC") on January 13, 1998 (SEC File Number 333-44155).
GENERAL
The Coast Federal Litigation Contingent Payment Rights Trust (the "CPR Trust") is a statutory business trust created under Delaware law on January 8, 1998. The CPR Trust was created by Coast in connection with its merger, effected on February 13, 1998 (the "Merger"), with and into H. F. Ahmanson & Co. ("Ahmanson"), for the purpose of holding the Commitment Agreement entered into by Ahmanson and the CPR Trust, dated as of February 13, 1998 (the Commitment"). The Commitment represents Ahmanson's obligation to pay to the CPR Trust an amount equal to any net after-tax proceeds, as more particularly defined in the CPR Trust Agreement referred to below (the "Commitment Amount"), that may be received by Coast's wholly-owned subsidiary, Coast Federal Bank, FSB ("Coast Federal") (or its successor), from Coast Federal's regulatory capital litigation claims against the United States government in the case entitled Coast Federal Bank, FSB v. United States, No. 92-466C (Cl. Ct. filed July 9, 1992) (the "Litigation"). Subsequent to the merger, Ahmanson merged Coast Federal with and into Ahmanson's wholly-owned subsidiary, Home Savings of America, FSB ("Home Savings"), with Home Savings being the successor institution. Ahmanson merged into Washington Mutual, Inc. ("WAMU") on October 3, 1998, and Home Savings was thereafter merged into WAMU's wholly-owned subsidiary, Washington Mutual Bank, F.A. ("Washington Mutual").
The governing instrument of the CPR Trust is the Amended and Restated Declaration of Trust, dated as of February 13, 1998 (the "CPR Trust Agreement"), entered into among Coast, the Litigation Trustees, Bankers Trust Company (the "Institutional Trustee") and Bankers Trust (Delaware) (the "Delaware Trustee"). Pursuant to the CPR Trust Agreement, the four senior executives of Coast with knowledge of the facts underlying the Litigation were appointed as "Litigation Trustees" of the CPR Trust, and were given full authority to make all decisions on behalf of Coast Federal (and its successors) with respect to the prosecution and resolution of the Litigation.
The assets of the CPR Trust consist solely of the Commitment and the right to draw on amounts in the Expense Fund for purposes of funding expenses of the CPR Trust, including expenses of the Litigation, fees and expenses of the Litigation Trustees and all administrative expenses. Under the CPR Trust Agreement, Ahmanson agreed to provide the sum of $19,884,294 (which is equal to $20 million less expenses related to the Litigation incurred by Coast Federal between September 1, 1997 and February 13, 1998) (the "Expense Fund") to fund the Litigation and other expenses of the CPR Trust, which amount is to be reimbursed to Ahmanson from any proceeds of the Litigation, including any amounts received in settlement of the Litigation, prior to the payment of any amounts to holders of the Contingent Payment Rights Certificates (the "CPR Certificates"). The
Expense Fund is on deposit in a non-interest bearing demand deposit account in the name of the CPR Trust at Washington Mutual.
Within 60 days of the receipt of any Commitment Amount, the CPR Trust is required under the CPR Trust Agreement to pay such amounts (other than $10 million or such greater amount as the Litigation Trustees reasonably determine may be reasonably likely to be required to pay additional expenses or to satisfy the CPR Trust's indemnification obligations (the "Retained Amount")) less the amount of any accrued but unpaid expenses payable by the CPR Trust but not covered by the Expense Fund, to the holders of the CPR Certificates as of a record date to be set by the Litigation Trustees. The Retained Amount will be retained for a period of two years, or such longer period as the Litigation Trustees reasonably determine may be required.
THE LITIGATION
The following description of the Litigation does not purport to be a complete description of the legal and factual issues presented, the court opinions rendered or the relevant law, and the description is in all respects qualified by reference to the documents filed in the Litigation, such opinions and the relevant law.
On July 9, 1992, Coast Federal commenced litigation entitled Coast Federal Bank, Federal Savings Bank v. United States, Civil Action Number 92-466C, against the United States in the U.S. Claims Court (now the U.S. Court of Federal Claims, hereinafter, the "Claims Court") alleging that the United States is in breach of a contract with Coast Federal and has unlawfully taken Coast Federal's property without just compensation or due process of law in violation of the U.S. Constitution.
As further described below, Coast Federal's claims arose from changes with respect to the rules for computing Coast Federal's regulatory capital that were mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and certain regulations promulgated thereunder.
On April 10, 1987, Coast Federal acquired substantially all of the assets and liabilities of Central Savings and Loan Association ("Central") from the Federal Savings and Loan Insurance Corporation (the "FSLIC") in a supervisory transaction (the "Acquisition") that Coast Federal alleges was induced and arranged by the FSLIC and the Federal Home Loan Bank Board ("FHLBB"). As part of the Acquisition, Coast Federal entered into a contract with the FSLIC (the "Assistance Agreement") under which the FSLIC made a cash contribution to Coast Federal in the amount of $298.3 million (the "Capital Credit"). In the Litigation, Coast Federal alleges that the Assistance Agreement and certain resolutions and a forbearance letter issued by the FHLBB in connection with the Assistance Agreement each expressly provided that the Capital Credit was to be treated as a permanent addition to Coast Federal's regulatory capital. Coast Federal further alleges that such treatment of the Capital Credit for regulatory capital purposes was essential to inducing Coast Federal to consummate the Acquisition.
Pursuant to FIRREA, which became effective on August 9, 1989, the FSLIC and the FHLBB were eliminated and were replaced as the regulators of federally insured savings institutions by the Office of Thrift Supervision (the "OTS"). In regulations implementing FIRREA (the "Capital Regulations") and subsequent actions, the OTS took the position that the Capital Credit should be classified as supervisory goodwill, as defined in the Capital Regulations, which action
resulted in an immediate exclusion of the Capital Credit from one of the three measures of Coast Federal's regulatory capital, and effected a five-year phase- out of the Capital Credit from such inclusion in the other two measures. Coast Federal alleges that FIRREA and the Capital Regulations constituted a breach by the United States of its contractual commitment regarding the regulatory capital treatment of the Capital Credit and an unlawful taking of Coast Federal's property rights in the Capital Credit. Coast Federal seeks damages for this breach of the contract by the United States.
SIMILAR LITIGATION
The Litigation is one of a number of cases filed against the federal government in the Claims Court involving acquisitions of failed or distressed_savings institutions and alleging that the changes in regulatory capital calculations brought about by FIRREA and the Capital Regulations constitute a breach of the contract between the acquiring party and the federal government. For purposes of the administration of such claims, the Claims Court bifurcated the trial proceedings in the first three of such cases to be heard by it (Winstar Corporation, et al. v. United States, Docket No. 90-8C; Statesman Savings Holding Corp., et al. v. United States, Docket No. 90-773C (the "Statesman Case"); and Glendale Federal Bank v. United States, Docket No. 90-772C (the "Glendale Case")(which cases are collectively referred to herein as the "Related Cases"). In July 1992, the Claims Court ruled in favor of the plaintiffs in the Related Cases on the initial question of liability, finding in each case that the plaintiff had a contract as alleged with the federal government and that the federal government is in breach of that contract as a result of the enactment of FIRREA and the issuance of the Capital Regulations thereunder. The decision of the Claims Court on liability was appealed by the federal government. After extended appellate proceedings, culminating in an appeal to the Supreme Court, the Supreme Court ruled in favor of the plaintiffs in the Related Cases in United States v. Winstar Corp., et al., 518 U.S. 839 (1996) (the "Winstar Case").
LIABILITY
The Claims Court stayed proceedings in each of the other cases against the federal government, including the Litigation, pending the outcome of the liability phase of the Related Cases. After the Supreme Court's decision in the Winstar Case in July of 1996, the stay was lifted and Coast reinstated its motion for partial summary judgment as to the federal government's liability, which motion had been pending since March of 1993. On February 20, 1998, the United States filed its response to Coast Federal's motion. In its response, the Government stated that "at this point, entry of an order regarding the Government's liability would be appropriate. We believe that such an order should reflect the Government's concession that a contract existed with respect to Coast's claim for a capital credit to its net worth, and that the Government acted inconsistently with the contract." On March 23, 1998, Judge Smith entered an order in the Litigation granting Coast Federal's motion for partial summary judgment as to liability with respect to Coast Federal's claim for a capital credit to its net worth.
PROCEEDINGS LEADING TO TRIAL
To manage the numerous cases against the federal government involving the calculation of regulatory capital as a result of the adoption of FIRREA (all such cases being referred to herein as the "Regulatory Capital Cases"), twelve of such cases were designated as priority cases (the "Priority Cases") that
would be the first cases to go to trial following the trial on damages in the Glendale Case. The Litigation was included among the first group of thirty cases (the "First Group of Thirty Cases") scheduled to go to trial following the completion of trial in the Priority Cases.
Case specific fact discovery for the First Group of Thirty Cases, including the Litigation, was substantially completed by_July 31, 1999. As of May 1, 2000, expert witness discovery had been completed by Coast and the government, concluding the discovery phase of the Litigation.
Pursuant to an Order dated July 31, 2000, the Litigation was reassigned from now Senior Judge Smith to Judge Emily C. Hewitt.
On August 23, 2000, the government filed with the Claims Court a motion seeking summary judgment denying the damage claims asserted by Coast Federal. The government sought a summary judgment holding that (i) Coast Federal's expectancy damages claims are too remote, speculative, uncertain and unforeseeable as a matter of law, (ii) Coast Federal is barred from recovering expectancy damages in any event because it failed to mitigate its damages, and (iii) Coast Federal has overstated the amount of contractual regulatory capital taken from it as a result of FIRREA because such capital was effectively required under generally accepted accounting principles to be amortized over a period no greater than 12.7 years and was not a permanent addition to Coast Federal's regulatory capital. On September 13, 2000, Coast Federal filed an opposition and cross- motion for partial summary judgment with the Claims Court that asked the Claims Court to reject the government's motion for summary judgment and requested that the Claims Court enter partial summary judgment for Coast Federal that (i) the capital credit received by Coast Federal was a permanent addition to Coast Federal's regulatory capital, and (ii) the damages suffered by Coast Federal from the government's breach of contract were foreseeable.
In an order dated December 28, 2000 (the "Order"), Judge Hewitt issued a ruling on the government's motion and Coast Federal's cross-motion for summary judgment. The Order held in part for the government, ruling that (i) Coast Federal's capital credit in the amount of $299 million was not a permanent addition to Coast Federal's regulatory capital and was to have been amortized over a period of 12.7 years, and (ii) Coast Federal may not claim increased deposit costs as "wounded bank" damages. The Order also held in part for Coast Federal, ruling that (i) Coast Federal's expectancy damages were not unforeseeable, and (ii) Coast Federal is not barred from recovering expectancy damages because of a failure to mitigate.
On January 16, 2001, the government filed a motion for reconsideration and clarification of the Order. The government requested (i) a final ruling from Judge Hewitt that the "level yield" method of amortization governed the amortization of Coast Federal's capital credit, (ii) reconsideration of Judge Hewitt's denial of summary judgment concerning Coast Federal's lost profits claims in light of the Judge's other rulings and analysis, and (iii) reconsideration of the Order's forseeability holding because it was based upon alleged mistakes of fact and errors of law. By a ruling dated February 5, 2001, Judge Hewitt denied the government's motion for reconsideration.
On January 17, 2001, Coast Federal filed a motion with Judge Hewitt requesting that Judge Hewitt certify for interlocutory appeal that portion of her Order that granted partial summary judgment to the government as to the duration of Coast Federal's capital credit. Coast Federal seeks to appeal Judge Hewitt's conclusion that Coast Federal's capital credit did not constitute a permanent
credit to its regulatory capital as well as Judge Hewitt's subsequent determination that the capital credit is required to be amortized over 12.7 years rather than 25 years. Coast Federal's motion also requested that all proceedings in the Litigation be stayed pending resolution of the requested appeal. By a ruling dated February 6, 2001, Judge Hewitt granted Coast Federal's motion and also stayed all proceedings in the Litigation in the Claims Court.
On February 16, 2001, Coast Federal filed a petition with the United States Court of Appeals for the Federal Circuit (the "Court of Appeals") to hear Coast Federal's appeal of the Order (the "Appeal"), and on February 26, 2001, the government filed an opposition to the petition. The Trust is unable to predict the date by which the Court of Appeals will rule on the petition. If the Court of Appeals grants the petition, the Litigation will proceed before the Court of Appeals until the Appeal's resolution. If the Court of Appeals denies the petition, the Litigation will return to the Claims Court and will proceed toward trial on the issue of damages.
DAMAGES
Each savings institution affected by FIRREA's and the Capital Regulations' limitation on the inclusion in regulatory capital of supervisory goodwill or FSLIC capital contributions reacted to the resulting reduction in its regulatory capital in an individual fashion dictated by the unique facts and circumstances faced by the institution. Accordingly, the extent and amount of damages awarded to each institution that has brought an action against the federal government is expected to be dependent on the specific facts in each case.
Plaintiffs in the Regulatory Capital Cases have tended to pursue recoveries based on one or more of three alternative theories: (1) expectation damages, (2) restitution, and (3) reliance damages. It is impractical to provide a full description of the elements of each of those alternative theories or recovery. However, the following descriptions are provided for purposes of communicating a basic understanding of these legal theories.
Expectation damages are generally intended to place the injured party in as good a position as it would have been in if the contract had been fully performed. Such damages may include the loss of any monetary benefits that the injured party would have received in the absence of the breach plus any other losses caused by the breach, less any costs or losses avoided by the injured party as a direct result of the breach.
Restitution generally involves restoration to the injured party of any benefits conferred by it on the breaching party. The injured party's restitution interest is ordinarily measured by the reasonable value of the benefits conferred by its performance of the contract on the breaching party, reduced by any benefits received by the injured party through the breaching party's partial performance.
Reliance damages are generally intended to restore the injured party to the position it would have been in if the contract had not been made. Reliance damages are generally measured by any expenditures made by the injured party in the course of performance of the contract or as a result of entering into the contract.
The plaintiff has the burden of proving the amounts of its damages, or the value of its performance as a basis for restitution, by a preponderance of the evidence.
On September 29, 1999, Coast Federal filed the reports of its expert witnesses with the Claims Court. The reports describe the amounts and methods of calculation of the damages which the experts believe Coast Federal suffered as a result of the government's breach. Coast Federal's principal expectation damages analysis as set forth in the experts' reports calculated the damages to be not less than $1.397 billion. This expectation damages analysis included calculations of damages for lost profits, for the cost of replacing the Capital Credit going forward, for the cost of capital raised by Coast, and for increased operating costs (such as increased deposit costs, OTS assessments, and deposit insurance premiums) caused by the government's breach. An alternative expectation damages analysis set forth in the experts' reports calculated the damages to be $782.1 million, based solely upon the cost of replacing the Capital Credit in past and future periods. No calculations for either restitution or reliance damages were included in the reports. The expert reports are attached as exhibits to a filing made on September 29, 1999, on behalf of Coast Federal with the Claims Court in Washington, D.C.
On January 27, 2000, the government submitted its own experts' reports on damages in response to the conclusions set forth in the reports of Coast Federal's experts. The government's experts' reports were filed with the Claims Court on August 23, 2000, as exhibits to the government's motion for summary judgment on damages. The government's experts' reports in general opined that the damages Coast Federal seeks from the government are too speculative to permit a recovery. In addition, the government's experts' reports opined that the capital credit received by Coast in connection with its acquisition of Central was in essence required by generally accepted accounting principles to be amortized over a period of approximately 12.7 years.
As discussed above under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Proceedings Leading to Trial," on December 28, 2000, Judge Hewitt issued her Order with respect to the government's motion and Coast Federal's cross-motion for summary judgment. In the Order, Judge Hewitt largely accepted the government's contention with respect to the capital credit in ruling that the capital credit was not a permanent addition to Coast Federal's regulatory capital and was required to be amortized over 12.7 years. If upheld on eventual appeal, this ruling by Judge Hewitt in the Order significantly reduces the possibility that any monetary recovery to Coast Federal will be sufficient to provide a payment by the CPR Trust to certificateholders. Judge Hewitt's ruling, if upheld on appeal, would also greatly reduce the damages amounts that Coast Federal will likely be able to seek in the Litigation as compared with the damages amounts set forth in Coast Federal's expert witness reports previously filed with the Claims Court.
There can be no assurance that Coast Federal will obtain any monetary or other recovery in the Litigation. As discussed below under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Damages Rulings in Other Cases," no judge in any of the Winstar related cases which have gone to trial has made an award for lost profits damages, which is one of the primary theories of damages for which Coast Federal is currently seeking a recovery.
DAMAGES RULINGS IN OTHER CASES
The United States has argued in the Glendale Case and in the Priority Cases that have gone to trial that some or all of the damages alleged by the plaintiffs in those cases are too speculative to permit a recovery. Trial in the damages phase of the Statesman Case commenced in May 1998, but the government and the plaintiffs in that case reached a settlement prior to completion of the trial. Trial of the damages phase of the Glendale case concluded in September 1998. The plaintiff in the Glendale Case sought damages based on various damage theories and ranging from approximately $800 million to $2 billion depending upon the theory used. On April 9, 1999, the judge in the Glendale Case awarded the plaintiff $909 million in restitution damages and for increased operating costs (which the judge characterized as non-overlapping reliance damages), based on that judge's evaluation of the evidence and analysis of the legal arguments presented in the Glendale Case. The government appealed the damages ruling in the Glendale Case, and on February 16, 2001, the United States Court of Appeals for the Federal Circuit issued a ruling vacating the trial court's damage award on the theory of restitution and remanded the case to the trial court for a determination of total pre- and post-breach reliance damages suffered by the plaintiff.
The damages phase of the first of the Priority Cases to go to trial on the issue of damages, California Federal Bank v. the United States, Docket No. 92-138C (the "CalFed Case"), concluded in February 1999. The plaintiff in the CalFed Case sought damages of between $725 million and $1.642 billion based on damage theories similar to those presented by the plaintiff in the Glendale case. On April 16, 1999, the judge in the CalFed Case awarded the plaintiff approximately $23 million in transaction costs under a cost of replacement capital theory, based on that judge's evaluation of the evidence and analysis of the legal arguments presented in the CalFed Case. A decision in another Priority Case, LaSalle Talman Bank, F.S.B. v. the United States, Docket No. 92-652C (the "LaSalle Talman Case"), was filed on September 30, 1999. The plaintiff in the LaSalle Talman Case sought damages of between $858.8 million and $1.197 billion based on various damages theories. The judge in the LaSalle Talman Case awarded plaintiffs approximately $5 million in reliance damages, based on that judge's evaluation of the evidence and analysis of the legal arguments presented in that case. A decision in a third Priority Case, Landmark Land Company, Inc. v. United States, Docket No. 95-502C (the "Landmark Case"), was filed on March 3, 2000. The plaintiffs in the Landmark Case sought damages of between $1.042 billion and $1.432 billion based on various combined damages theories of both the private plaintiff and the FDIC. The judge in the Landmark Case, who was the same judge who had presided in the CalFed Case, awarded the private plaintiff and the FDIC a total of approximately $39.2 million in restitution and reliance damages, based on that judge's evaluation of the evidence and analysis of the legal arguments presented in the Landmark Case. A decision in a fourth Priority Case, Bluebonnet Savings Bank v. United States, Docket No. 95-532C (the "Blubonnet Case"), was filed on July 6, 2000. The plaintiffs in the Bluebonnet Case sought approximately $175.9 million in expectation damages. The judge in the Bluebonnet Case awarded no damages to the plaintiffs based on that judge's evaluation of the evidence and analysis of the legal arguments presented in the Bluebonnet Case. A decision in a fifth Priority Case, Bobby J. Glass, et al. v. United States, Docket No. 92-428C (the "Glass Case"), was filed on July 21, 2000. The private plaintiffs in the Glass Case sought approximately $8.4 million and the FDIC as plaintiff sought approximately $2.5 million, both based on a combination of damages theories. The judge in the Glass Case awarded $3.972 million in damages to the private plaintiffs and $2.1 million to the FDIC based
on that judge's evaluation of the evidence and analysis of the legal arguments presented in the Glass Case.
The courts in the Glendale Case, the CalFed Case, the LaSalle Talman Case, the Landmark Case, the Bluebonnet Case and the Glass Case declined to award damages under some or all of the plaintiffs' damage theories. No judge in any of the cases has made an award for lost profits damages, which is one of the primary theories of expectation damages for which Coast is currently seeking a recovery. In addition, no judge in any of the cases has made a significant award of damages for the cost of replacing capital (other than damages related to transaction costs), for which Coast is also currently seeking a recovery. Further, in only one of the seven cases in which a judgment has been entered after a trial on damages , Glendale Federal Bank v. United States, Claims Court Docket No. 90-772C (the "Glendale Case"), has an award been granted that is in excess of $40 million.
It is likely that rulings in other Priority Cases will occur before trial of Coast Federal's damage claims is completed. Appeals of the judgments in the CalFed Case and the LaSalle Talman Case have been filed with the Court of Appeals for the Federal Circuit, and appeals of other Priority Cases are likely. Any decisions reached by the Court of Appeals in those cases could affect Coast Federal's damages claims. For these and other reasons, there can be no assurance as to the type or amount, if any, of damages that Coast Federal may recover. Without limiting the generality of the foregoing, there can be no assurance that Coast Federal will obtain any monetary or other recovery in the Litigation.
MANAGEMENT OF THE LITIGATION
The Litigation Trustees are Ray Martin, Robert L. Hunt II, Norman H. Raiden and James F. Barritt, who at the time of the Merger were the four senior Coast executives with knowledge of the facts underlying the Litigation. Mr. Martin, Mr. Hunt and Mr. Barritt were officers of Coast and Coast Federal both at the time of the agreement with the federal government to treat certain amounts as a permanent addition to Coast Federal's regulatory capital in connection with Coast Federal's acquisition of Central, and also at the time of the alleged breach of this agreement by the federal government, which gave rise to the claims underlying the Litigation. Mr. Martin, Mr. Hunt and Mr. Barritt, together with Mr. Raiden (who joined Coast soon after the alleged breach of the agreement by the federal government), had been involved in the prosecution of the Litigation prior to the Merger.
Pursuant to the CPR Trust Agreement, the Litigation Trustees have the sole and exclusive right to instruct Coast Federal and its successors with respect to the prosecution of the Litigation. This includes all decisions as to retention, dismissal, terms of engagement of existing or new counsel, whose retention may involve fees that are partly contingent, and other advisors. The CPR Trust Agreement also provides that the Litigation Trustees have the right, in their sole discretion, to instruct Coast Federal and its successors to dismiss, settle, or cease prosecution of the Litigation at any time and on any terms; Ahmanson, including any successor, is required by the CPR Trust Agreement to cause Coast Federal and its successors to follow such instructions from the Litigation Trustees unless such instructions are unreasonable.
The Litigation Trustees have entered into a letter agreement, dated February 13, 1998 (the "Letter Agreement"), with the law firm which has prosecuted the Litigation to date, Cooper, Carvin & Rosenthal, PLLC (the "Firm"), in which the Firm agrees that it will not bill Coast Federal or the CPR Trust for any fees
incurred subsequent to September 1, 1997, in excess of $7,650,000 (the "Cap"). In addition, up to $2 million of the Cap, i.e., any amounts over $5,650,000, will only be payable to the Firm out of the Commitment Amount, if any, when received by the CPR Trust from Ahmanson. In consideration of such limitations on the Firm's customary charges for professional services, the Letter Agreement provides that the CPR Trust will pay to the Firm, in addition to the Cap, a contingent incentive fee in the amount of one percent (1%) of the Commitment Amount, provided that no such incentive fee shall be payable in the event (1) that both Charles J. Cooper and Steven S. Rosenthal shall cease to be partners of the Firm prior to a final decision, including appeals, or other final resolution of the Litigation, or (2) that either Mr. Cooper or Mr. Rosenthal shall cease to be a partner of the Firm prior to a final decision, including any appeals, or other final resolution of the Litigation, other than by death, disability, or appointment to federal office. As of December 31, 2000, the amount remaining to be paid to the Firm under the Cap (less the $2 million payable out of the Commitment Amount) was approximately $0.7 million.
The CPR Trust Agreement provides that as compensation the CPR Trust will pay each Litigation Trustee, during the term of his service as a Litigation Trustee, fees of $400,000 per year for five years (except that if the Litigation is sooner terminated, the remainder of such fees (but in no event with respect to a period longer than the remainder of such year plus two additional years) will be accelerated upon final resolution of the Litigation and receipt by Ahmanson of the Litigation Proceeds), plus reimbursement of all reasonable out-of-pocket expenses. If the services of the Litigation Trustees continue to be necessary after the initial five-year period or such receipt of Litigation Proceeds, the Litigation Trustees shall be entitled to a fee of $200 per hour until termination of the CPR Trust. Pursuant to the CPR Trust Agreement, each Litigation Trustee may, but is not obligated to, defer all or part of his compensation until 30 days after the earliest to occur of (i) the date on which he elected to defer such compensation, (ii) the date he ceases to be a Litigation Trustee, and (iii) the date of the receipt of the Commitment Amount in full by the CPR Trust. Any Litigation Trustee electing to so defer will receive the compensation he would have received plus an amount, calculated on a monthly basis during the period of deferral (and included in the amount deferred), equal to the product of the monthly balance of the amount deferred and an annual rate equal to the Reference Rate, as defined in the CPR Trust Agreement, plus 250 basis points. For the year ending December 31, 2001, Mr. Barritt made no deferral election and Mr. Martin, Mr. Hunt and Mr. Raiden elected to defer one-half of their 2001 compensation.
SUMMARY FINANCIAL INFORMATION
The CPR Trust has no revenues. The Expense Fund is the CPR Trust's only source of funding for the payment of the expenses of its operations. The amounts in the Expense Fund will be applied to a variety of expenses, including the costs of prosecuting the Litigation (including the fees and expenses of counsel, experts, support staff and consultants), compensation of the Institutional Trustee, the Delaware Trustee and the Litigation Trustees, the CPR Trust's indemnification obligations, liability insurance for the CPR Trust's indemnification obligations and any liabilities of the Litigation Trustees. To the extent that Coast Federal and its successors must engage in protracted litigation, such fees and expenses may increase significantly, and there can be no assurance that the Expense Fund will be sufficient to cover such fees and expenses.
Following is a statement that details the activity in the Expense Fund, and expenses that have been accrued but not yet paid for the years ended December 31, 2000 and 1999, as well as the balance of the Expense Fund that was available to cover future expenses as of December 31, 2000 and 1999.
In addition, $2,149,240 and $745,002 of expense was accrued through December 31, 2000 and 1999, respectively, for interest payable to Ahmanson or its successor on disbursements from the Expense Fund. Payment of such accrued interest payable is contingent upon receipt of sufficient Litigation Proceeds.
The CPR Trust may issue additional CPR Certificates that represent pro rata interests in the assets of the CPR Trust in order to pay expenses. However, it may not be possible to obtain purchasers of the additional CPR Certificates and there is no assurance that the terms of any such purchases would be reasonable. In the event additional CPR Certificates are issued and existing CPR Certificate holders are not given the opportunity to purchase, or do not purchase, a pro rata amount in such issuance, such CPR Certificate holders' indirect interest in the Payment Amount will be diluted. The CPR Trust will be authorized to borrow additional funds for the sole purpose of funding expenses of the CPR Trust, but only if such borrowings represent debt of the CPR Trust (and not ownership interests therein) for federal income tax purposes. Furthermore, it may not be possible for the CPR Trust to borrow funds and, if it is able to borrow funds, there can be no assurance as to the terms upon which such borrowings may be available.
CERTIFICATEHOLDER INQUIRIES
Certificateholder inquiries, including requests for the following: (i) change of address; (ii) replacement of lost stock certificates; (iii) Common Stock name registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on Form 10-K; and (vii) information regarding stockholdings, should be directed to:
Bankers Trust Company Four Albany Street, MS5041 New York, New York 10006
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Trustees Coast Federal Litigation Contingent Payment Rights Trust:
We have audited the accompanying statements of financial condition of Coast Federal Litigation Contingent Payment Rights Trust (the "CPR Trust") as of December 31, 2000 and 1999, and the related statements of operations, changes in certificateholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the CPR Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the CPR Trust as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Los Angeles, California February 15, 2001
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Statement of Financial Condition
See accompanying notes to financial statements.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Statement of Operations
See accompanying notes to financial statements.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Statement of Changes in Certificateholders' Equity
See accompanying notes to financial statements.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Statement of Cash Flows
See accompanying notes to financial statements.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Notes to Financial Statements December 31, 2000
(A) Summary of Significant Accounting Policies
Principles of Presentation
The Coast Federal Litigation Contingent Payment Rights Trust (the "CPR Trust") is a statutory business trust created under Delaware law on January 8, 1998. The CPR Trust was created by Coast in connection with its merger, effected on February 13, 1998 (the "Merger"), with and into H. F. Ahmanson & Co. ("Ahmanson"), for the purpose of holding the Commitment Agreement entered into by Ahmanson and the CPR Trust, dated as of February 13, 1998 (the "Commitment"). The Commitment represents Ahmanson's obligation to pay to the CPR Trust an amount equal to any net after-tax proceeds, as more particularly defined in the CPR Trust Agreement referred to below (the "Commitment Amount"), that may be received by Coast's wholly-owned subsidiary, Coast Federal Bank, FSB ("Coast Federal") (or its successor), from Coast Federal's regulatory capital litigation claims against the United States government in the case entitled Coast Federal Bank, FSB v. United States, No. 92-466C (Cl. Ct. filed July 9, 1992) (the "Litigation"). Subsequent to the Merger, Ahmanson merged Coast Federal with and into Ahmanson's wholly-owned subsidiary, Home Savings of America, FSB ("Home Savings"), with Home Savings being the successor institution. Ahmanson merged into Washington Mutual, Inc. ("WAMU") on October 3, 1998 and Home Savings was thereafter merged into WAMU's wholly-owned subsidiary Washington Mutual Bank, F.A. ("Washington Mutual").
The governing instrument of the CPR Trust is the Amended and Restated Declaration of Trust, dated as of February 13, 1998 (the "CPR Trust Agreement"), entered into among Coast, the Litigation Trustees, Bankers Trust Company (the "Institutional Trustee") and Bankers Trust (Delaware) (the "Delaware Trustee"). Pursuant to the CPR Trust Agreement, the four senior executives of Coast with knowledge of the facts underlying the Litigation were appointed as "Litigation Trustees" of the CPR Trust, and were given full authority to make all decisions on behalf of Coast Federal (and its successors) with respect to the prosecution and resolution of the Litigation.
The assets of the CPR Trust consist solely of the Commitment and the right to draw on amounts in the Expense Fund for purposes of funding expenses of the CPR Trust, including expenses of the Litigation, fees and expenses of the Litigation Trustees and all administrative expenses. Under the CPR Trust Agreement, Ahmanson agreed to provide the sum of $19,884,294 (which is equal to $20 million less expenses related to the Litigation incurred by Coast Federal between September 1, 1997 and February 13, 1998) (the "Expense Fund") to fund the Litigation and other expenses of the CPR Trust, which amount is to be reimbursed to Ahmanson from any proceeds of the Litigation, including any amounts received in settlement of the Litigation, prior to the payment of any amounts to holders of the Contingent Payment Rights Certificates (the "CPR Certificates"). The Expense Fund is on deposit in a non-interest bearing demand deposit account in the name of the CPR Trust at Washington Mutual.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Notes to Financial Statements (Continued) December 31, 2000
Within 60 days of the receipt of any Commitment Amount, the CPR Trust is required under the CPR Agreement to pay such amounts (other than $10 million or such greater amount as the Litigation Trustees reasonably determine may be reasonably likely to be required to pay additional expenses or to satisfy the CPR Trust's indemnification obligations (the "Retained Amount")) less the amount of any accrued but unpaid expenses payable by the CPR Trust but not covered by the Expense Fund, to the holders of the CPR Certificates as of a record date to be set by the Litigation Trustees. The Retained Amount will be retained for a period of two years, or such longer period as the Litigation Trustees reasonably determine may be required.
Cash
For purposes of reporting cash flows, cash includes the balance of the Expense Fund described above.
Fair Value of Financial Instruments
Substantially all of the CPR Trust's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash, are carried at their fair value or contracted amounts, which approximate fair value due to the relatively short term to maturity. Similarly, liabilities, including accounts payable, are carried at amounts approximating fair value.
Use of Estimates
The Litigation Trustees have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of expenses in order to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(B) Other Assets
Other assets, as reported in the accompanying Statement of Financial Condition, consists primarily of a prepaid insurance premium, having an unamortized balance of $434,458 as of December 31, 2000, which covers the operations of the CPR Trust for the life of the CPR Trust. The initial premium totaled $1,002,596 and is being expensed over five years beginning in February 1998.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Notes to Financial Statements (Continued) December 31, 2000
(C) Expense Fund
The initial deposit into the Expense Fund (as described above) was determined as follows:
Initial provision by Ahmanson $20,000,000 Pre-acquisition expenditures(1) by Coast Federal (76,759) Pre-acquisition expenditures(1) paid by CPR Trust (38,947) ----------- Initial deposit into the Expense Fund $19,884,294 ===========
(1) Pre-acquisition expenditures include Litigation expenses which were incurred prior to the Merger, whether paid by Coast Federal or the CPR Trust.
The CPR Trust Agreement provides that interest on disbursements from the Expense Fund be paid by the CPR Trust out of the Commitment Amount, and that such interest shall be equal to the Reference Rate, as defined in the CPR Trust Agreement, plus 250 basis points, compounded quarterly.
(D) Other Liabilities
Other liabilities, as reported in the accompanying Statement of Financial Condition, consisted of the following as of the dates indicated.
December 31, ----------------------- 2000 1999 ---------- ---------- Accrued interest on deferred Litigation Trustee Fees(1) $ 360,487 $ 153,115 Accrued interest on Expense Fund disbursements(2) 2,149,240 745,002 Accrued expenses(3) 577,670 608,000 ---------- ---------- $3,087,397 $1,506,117 ========== ==========
(1) See Note F of Notes to Financial Statements. (2) See Note C of Notes to Financial Statements. (3) Include accrued legal, audit, expert witness, Litigation Trustee, and trust administration fees.
(E) Certificateholders' Equity
Certificateholders' equity consists solely of the accumulated deficit generated from the operations of the CPR Trust. The CPR Trust Certificates have no stated or par value for financial statement purposes.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Notes to Financial Statements (Continued) December 31, 2000
(F) Litigation Trustee Fees
The CPR Trust Agreement provides that as compensation the CPR Trust will pay each Litigation Trustee, during the term of his service as a Litigation Trustee, fees of $400,000 per year for five years (except that if the Litigation is sooner terminated, the remainder of such fees (but in no event with respect to a period longer than the remainder of such year plus two additional years) will be accelerated upon final resolution of the Litigation and receipt by Ahmanson of the Litigation Proceeds), plus reimbursement of all reasonable out-of-pocket expenses. If the services of the Litigation Trustees continue to be necessary after the initial five-year period or such receipt of Litigation Proceeds, the Litigation Trustees shall be entitled to a fee of $200 per hour until termination of the CPR Trust. Pursuant to the CPR Trust Agreement, each Litigation Trustee may, but is not obligated to, defer all or part of his compensation until 30 days after the earliest to occur of (i) the date on which he elected to defer such compensation, (ii) the date he ceases to be a Litigation Trustee, and (iii) the date of the receipt of the Commitment Amount in full by the CPR Trust. Any Litigation Trustee electing to so defer will receive the compensation he would have received plus an amount, calculated on a monthly basis during the period of deferral (and included in the amount deferred), equal to the product of the monthly balance of the amount deferred and an annual rate equal to the Reference Rate, as defined in the CPR Trust Agreement, plus 250 basis points. For the year ending December 31, 2000, Messrs. Martin and Raiden elected to defer one-half of their 2000 compensation; for the year ending December 31, 1999, Messrs. Martin, Hunt and Raiden elected to defer one-half of their 1999 compensation; and for the period February 13, 1998 (commencement of operations) through December 31, 1998, each Litigation Trustee elected to defer one-half of his 1998 compensation.
(G) Contingent Liabilities
The CPR Trust has no legal actions pending against it.
(H) Leases
The CPR Trust has entered into an operating lease agreement for office space expiring in February 2003. Future minimum lease payments for the operating lease as of December 31, 2000, were as follows:
Year ending December 31,
2001 51,600 2002 51,600 2003 8,600 -------- $111,800 ========
The CPR Trust incurred lease expenses of $51,600, $51,600 and $45,580 for the years ended December 31, 2000 and 1999, and the period February 13, 1998 (commencement of operations) through December 31, 1998, respectively.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Notes to Financial Statements (Continued) December 31, 2000
(I) Selected Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly statements of operations for the years ended December 31, 2000 and 1999, and the period February 13, 1998 (commencement of operations) through December 31, 1998.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Litigation Trustees is set forth under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management of the Litigation."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning compensation of the Litigation Trustees is set forth under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management of the Litigation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is no holder of CPR Certificates known to the Trust to be the beneficial owner of more than five percent of the outstanding CPR Certificates.
Following is a table which indicates as of March 6, 2001, the amount and percent of beneficial ownership of the CPR Certificates for each Litigation Trustee and all Litigation Trustees as a group. Each individual has sole voting and sole investment power with respect to the number of CPR Certificates set forth opposite his name.
Name of Beneficial Number of Owner or Number of Certificates Persons in Group (1) Beneficially Owned - -------------------- ------------------
Ray Martin 135,375
Robert L. Hunt II 276,353
Norman H. Raiden 14,772
James F. Barritt 17,561
Four Litigation Trustees as a Group 444,061
________________
(1) Each of the Litigation Trustees owns less than 1% of the outstanding CPR Certificates except for Mr. Hunt who owns 1.3%. The four Litigation Trustees as a group own 2.1% of the outstanding CPR Certificates.
Pursuant to the CPR Trust Agreement, each of the Litigation Trustees is obligated, as a condition of his continuation as a Litigation Trustee, to retain not less than 50% of the CPR Certificates held by him as of the date of the Merger, February 13, 1998, until the Litigation Proceeds are received by Ahmanson or its successor. Transfers by a Litigation Trustee to his family members or to any trust created for the benefit of his family shall be included in such 50% calculation for so long as those transferees retain the CPR
Certificates. As of February 13, 1998, Mr. Martin held 135,375 CPR Certificates, Mr. Hunt held 76,353 CPR Certificates, Mr. Raiden held 42,772 CPR Certificates, and Mr. Barritt held 17,561 CPR Certificates. As of March 3, 2000, the only Trustee to have transferred any CPR Certificates is Mr. Raiden, who transferred 28,000 CPR Certificates to family members in December of 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Index to Financial Statements:
None.
2. Index to Financial Statements Schedules:
None.
3. Exhibits
4.1 Form of Amended and Restated Declaration of Trust of Coast Federal Litigation Contingent Payment Rights Trust dated February 13, 1998(incorporated by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated February 19, 1998).
10.1 Form of Commitment entered into between the registrant and H.F. Ahmanson & Company (incorporated by reference to Exhibit 10.1 to the registrant's Registration Statement on Form S-4).
10.2 Contingent Fee Agreement with Cooper, Carvin & Rosenthal,LLP dated February 13, 1998 (incorporated by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the period ending March 31, 1998).
Exhibits, except as otherwise indicated above, are filed herewith.
(b) Form 8-K
During the quarter ended December 31, 2000, the following reports on Form 8-K were filed by the registrant:
1. October 3, 2000, Item 5, Other Events. Press release regarding date of oral argument on government motion for summary judgment on damages and Coast Federal's opposition and cross-motion for partial summary judgment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March 2001.
COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS TRUST
By: /s/ Ray Martin -------------- Ray Martin Litigation Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 27th day of March 2001.
/s/ Ray Martin - -------------- Ray Martin Litigation Trustee
/s/ Robert L. Hunt II - --------------------- Robert L. Hunt II Litigation Trustee
/s/ Norman H. Raiden - -------------------- Norman H. Raiden Litigation Trustee
/s/ James F. Barritt - -------------------- James F. Barritt Litigation Trustee