-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mb7N1Xn17cRbes0WCWOghawtM2lHM4pccmNmk9IRFQ9vPgv4t5Jg3Ku3sARyJUOb jLtgl1G+8hSsonIDruA+eA== 0000950129-03-005659.txt : 20031114 0000950129-03-005659.hdr.sgml : 20031114 20031114090609 ACCESSION NUMBER: 0000950129-03-005659 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK UNITED CORP LITIGATION CONTINGENT PAYMENTS RIGHTS TRUST CENTRAL INDEX KEY: 0001127777 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-32301 FILM NUMBER: 031000468 BUSINESS ADDRESS: STREET 1: C/O BANK UNITED CORP STREET 2: 3200 SOUTHWEST FREEWAY CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7135436962 10-Q 1 h10551e10vq.txt BANK UNITED CORP.LITIGATION CONTINGENT PAYMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------------- ------------------- Commission File Number 0-32301 Bank United Corp. Litigation Contingent Payment Rights Trust ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 76-6168223 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3200 Southwest Freeway, Suite 1001 Houston, Texas 77027 -------------- ----- (Address of principal executive offices) (Zip code) (713) 543-6958 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 11, 2003, there were 38,824,734 Contingent Payment Rights Certificates (no par value) outstanding. -1- BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
September 30, 2003 (unaudited) December 31, 2002 ------------------ ----------------- ASSETS Cash (note 1) $ 312 $ 631 Accounts receivable (note 2) 3 15 Prepaid expenses 6 1 ------------------ ----------------- Total assets $ 321 $ 647 ================== ================= LIABILITIES AND CERTIFICATEHOLDERS' DEFICIT Expense fund advances (note 4) $ 5,349 $ 4,534 Other liabilities (notes 4 and 7) 625 437 ------------------ ----------------- Total liabilities 5,974 4,971 Certificateholders' deficit (note 5) Certificates, no par value, 38,919,884 authorized, 38,823,339 issued and outstanding in 2003 and 38,716,528 in 2002 - - Accumulated deficit (5,653) (4,324) ------------------ ----------------- Total certificateholders' deficit (5,653) (4,324) ------------------ ----------------- Total liabilities and certificateholders' deficit $ 321 $ 647 ================== =================
See accompanying notes to financial statements. -2- BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data)
Three months ended Three months ended Nine months ended Nine months ended September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 ------------------ ------------------ ------------------ ------------------ REVENUE Interest income on bank account $ - $ 1 $ - $ 4 ------------------ ------------------ ------------------ ------------------ EXPENSES Litigation trustee fees (note 3) (250) (250) (750) (750) Insurance - - - (29) Licenses, permits and filing fees (4) (4) (11) (11) Legal expense (note 2) (10) (106) (186) (798) Accounting and auditing fees (21) (21) (59) (65) Trust administration fees (6) (6) (18) (18) Financial printing expense (2) (2) (6) (4) Interest expense (note 4) (93) (64) (253) (159) Office and other (17) (12) (46) (44) ------------------ ------------------ ------------------ ------------------ (403) (465) (1,329) (1,878) ------------------ ------------------ ------------------ ------------------ NET LOSS $ (403) $ (464) $ (1,329) $ (1,874) ================== ================== ================== ================== NET LOSS PER CERTIFICATE $ (0.01) $ (0.01) $ (0.03) $ (0.05) ================== ================== ================== ==================
See accompanying notes to financial statements. -3- BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST STATEMENTS OF CHANGES IN CERTIFICATEHOLDERS' DEFICIT (unaudited) (dollars in thousands)
Number of Accumulated Certificateholders' Certificates Certificates Deficit Deficit -------------- ------------ --------------- ------------------- Balance at December 31, 2001 36,485,346 $ - $ (1,936) $ (1,936) Shares issued 2,226,875 - - - Net loss - - (1,874) (1,874) -------------- ------------ --------------- ------------------- Balance at September 30, 2002 38,712,221 $ - $ (3,810) $ (3,810) ============== ============ =============== =================== Balance at December 31, 2002 38,716,528 $ - $ (4,324) $ (4,324) Shares issued 106,811 - - - Net loss - - (1,329) (1,329) -------------- ------------ --------------- ------------------- Balance at September 30, 2003 38,823,339 $ - $ (5,653) $ (5,653) ============== ============ =============== ===================
See accompanying notes to financial statements. -4- BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Nine months ended Nine months ended September 30, 2003 September 30, 2002 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,329) $ (1,874) ------------------ ------------------ Adjustments to reconcile net loss to cash used in operating activities Decrease (increase) in other assets 7 31 (Decrease) increase in other liabilities 188 (43) ------------------ ------------------ Total adjustments 195 (12) ------------------ ------------------ Net cash used in operating activities (1,134) (1,886) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Expense fund advances 815 1,523 ------------------ ------------------ Net decrease in cash (319) (363) CASH AT BEGINNING OF PERIOD 631 903 ------------------ ------------------ CASH AT END OF PERIOD $ 312 $ 540 ================== ==================
See accompanying notes to financial statements. -5- BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST Notes to Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF PRESENTATION The Bank United Corp. Litigation Contingent Payment Rights Trust (the "CPR Trust") is a statutory business trust created under Delaware law on November 2, 2000. Bank United Corp. created the CPR Trust in connection with its merger with Washington Mutual, Inc., which was completed on February 9, 2001. The assets of the CPR Trust consist primarily of the right to receive a portion of any proceeds received by Washington Mutual, Inc. and Washington Mutual Bank, FA (as successors to Bank United Corp. and Bank United) in any judgment or settlement of the forbearance litigation (the "Litigation") against the United States described below in note 2. The unaudited financial statements of the CPR Trust included herein reflect all adjustments, consisting only of recurring normal adjustments, which are, in the opinion of the Litigation Trustees, necessary to present fairly the results for the interim period indicated. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results of operations to be expected for the remainder of the year. These financial statements should be read in conjunction with the financial statements and notes thereto included in the CPR Trust's annual report on Form 10-K for the year ended December 31, 2002 and its quarterly reports on Form 10-Q for the three months ended March 31, 2003 and the three and six months ended June 30, 2003. CASH Cash balances are held in noninterest earning accounts at Washington Mutual Bank. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the CPR Trust's financial instruments are carried at fair value or amounts approximating fair value due to the relative short-term to maturity. 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 accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. -6- NET LOSS PER CERTIFICATE The net loss per certificate was calculated by dividing the net loss by the weighted average number of certificates outstanding (38,822,921 and 38,771,948 average certificates outstanding for the three and nine months ended September 30, 2003, and 37,599,230 and 36,861,241 average certificates outstanding for the three and nine months ended September 30, 2002). The only potentially dilutive effect, if the CPR Trust had earnings, would result from the exercise of the remaining outstanding stock options. However, because the CPR Trust incurred a net loss, no dilutive effect was considered in the net loss per certificate calculation. FEDERAL INCOME TAXES The CPR Trust is treated as a grantor trust for federal income tax purposes. A grantor trust is not a separate taxable entity. Income resulting from payments received by the CPR Trust is required to be reported for federal income tax purposes by certificateholders. The Washington Mutual, Inc. consolidated group will recognize expenses incurred by the CPR Trust for federal income tax purposes. Therefore, no effect has been provided for federal income taxes. 2. THE LITIGATION On July 25, 1995, Bank United Corp., Bank United, and their then affiliate, Hyperion Partners L.P., filed suit against the United States in the U.S. Court of Federal Claims for failure of the United States to adhere to its agreement to waive or forbear from enforcing certain regulatory provisions concerning capital requirements, liquidity requirements, accounting requirements, and other matters. The plaintiffs sought damages in excess of $550 million. The government argued that the damages to plaintiffs as a result of the breach, if any, were speculative and approached zero. In March 1999, the U.S. Court of Federal Claims granted Bank United Corp.'s motion for summary judgment on the issue of liability, holding the United States liable for all claims. In August 1999, the court denied a motion for summary judgment filed by the United States on the issue of lost profit damages. The case proceeded to trial on the amount of damages in September 1999, and the taking of evidence by the court concluded in October 1999. The parties submitted post-trial briefs followed by closing argument in February 2000. In October 2001, the court ruled that the plaintiffs are not entitled to any lost profits, but are entitled to recover mitigation costs of $8,826,783 and costs. In January 2002, the plaintiffs filed motions with the court asking it to (i) amend certain findings in its October 29, 2001 opinion and amend the judgment of January 8, 2002, (ii) reopen the record to receive additional documentary evidence, and (iii) reopen the record to admit additional evidence omitted from the trial record. In February and March 2002, the plaintiffs filed their Bill of Costs, seeking $437,978 in costs from the government. -7- In February 2002, the federal government filed its opposition to the January 2002 motions filed by the plaintiffs. The government opposed the plaintiffs' motions in their entirety, as well as the Bill of Costs. The U.S. Court of Federal Claims has not yet ruled on the Bill of Costs and there is no deadline for it to do so. On April 16, 2002, the court heard oral arguments on the January 2002 motions. Following oral arguments, the court denied plaintiffs' motions in their entirety. On June 14, 2002, the plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit, appealing any and all rulings, orders, and judgments rendered by the court to date against the plaintiffs. These adverse rulings include the October 29, 2001 ruling that the plaintiffs were not entitled to any lost profits damages and the April 16, 2002 denial of certain motions made by the plaintiffs. On June 26, 2002, the government filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit, appealing the final judgment of the U.S. Court of Federal Claims, including (1) the court's granting summary judgment for the plaintiffs on the issue of liability against the government, (2) the court's refusal to deny modification of that decision, and (3) the court's October 29, 2001 decision. On August 19, 2002, the plaintiffs (or appellants) filed their opening brief with the U.S. Court of Appeals for the Federal Circuit. On September 30, 2002, the federal government (or defendant - cross appellant) filed its opening brief with the U.S. Court of Appeals for the Federal Circuit. On November 12, 2002, the plaintiffs (or appellants) filed a combined (a) reply brief on their appeal and (b) an opposing brief on the federal government's (defendant-cross appellant's) cross appeal with the U.S. Court of Appeals for the Federal Circuit. On November 27, 2002, the federal government (defendant-cross appellant) filed a reply brief on its cross appeal with the U.S. Court of Appeals for the Federal Circuit. In appellate court briefs, the government stated that it was not challenging the trial court's award to plaintiffs of $4,884,283, the cost of mitigating the breach of the subordinated debt provision of the parties' contract. Oral argument took place on May 7, 2003 before a panel of judges of the U.S. Court of Appeals for the Federal Circuit comprised of Chief Judge Haldane R. Mayer, Judge Sharon Prost, and Judge Timothy B. Dyk. The case was submitted for decision following oral argument. On May 19, 2003, the plaintiffs (or appellants) filed a Motion for Leave to File a Post-Argument Clarification and their Post-Argument Clarification. The U.S. Court of Appeals for the Federal Circuit denied the motion by order dated May 28, 2003. No reasons were given for the denial. -8- On September 22, 2003, the appeals court rendered its decision on the appeals. In a nonprecedential opinion, written by Judge Prost, the trial court decision was affirmed-in-part and reversed-in-part. In summary, the appeals court affirmed the trial court's rulings except for granting that part of defendant's cross appeal seeking reduction of the award to plaintiffs by $3,942,500. Thus, plaintiff's damages award has been reduced from $8,826,783 to $4,884,283. On November 5, 2003, the plaintiffs' filed a Petition for Rehearing (the "Petition") in the Appeals Court, seeking a rehearing by the panel and a rehearing by the full Appeals Court sitting en banc. Plaintiffs have sought a rehearing on that part of the Appeals Court decision regarding the amount of expectancy damages they are entitled to as a result of their mitigation efforts. Plaintiffs did not seek a rehearing of the Appeals Court's decision denying plaintiffs' lost profits and cost of substitute capital claims. The Appeals Court, either by the original or an en banc panel, may either grant or deny the Petition and may or may not ask the government to file a response to the Petition, and if the Appeals Court does so, it may thereafter grant or deny the Petition. There are no time requirements or limits on the Appeals Court's actions. There can be no assurance as to the amount, if any, and type of damages that Washington Mutual, Inc. or Washington Mutual Bank, FA (as successors to Bank United Corp. and Bank United) may ultimately recover after all appeal efforts have been exhausted and a decision concerning the Bill of Costs has been rendered. Further, it is impossible to predict the total amount of any recovery available to be paid to the CPR certificateholders because any recovery in the Litigation could be less than the fees, costs, interest, taxes, and tax benefits associated with that recovery. The amount owed by the CPR Trust to Washington Mutual, Inc. at September 30, 2003 for expense fund advances exceeds the $4,884,283 award. If the Litigation were to terminate because of a decision by the appeals court to deny plaintiffs' petition for rehearing and a decision by the CPR Trust not to file a Writ of Certiorari ("Writ") to the Supreme Court of the United States of America, there would be no recovery to the CPR certificateholders because the eighty five percent (85%) share to the CPR Trust of the total recovery awarded by the appeals court (plus the amount of the Bill of Costs if it were awarded in full to plaintiffs) is less than the amount that would be owed by the CPR Trust to Washington Mutual, Inc. Similarly, there would be no recovery to the CPR certificateholders if the CPR Trust decided to file a Writ and the Supreme Court denied it. In summary, as has always been the case ever since the CPR certificates were first registered and issued, it is possible that there will be no recovery to the CPR certificateholders in the Litigation and that the CPR Certificates may be worthless. The terms of the July 1996 recovery agreement entered into by Bank United Corp., Bank United, and Hyperion Partners L.P., entitle Washington Mutual, Inc. and Washington Mutual Bank, FA, as successors to Bank United Corp. and Bank United, respectively, to 85% of any recovery in connection with the Litigation. Hyperion Partners L.P. is entitled to the remaining 15%. -9- The recovery agreement further provides for Hyperion Partners L.P. to share in 15% of the expenses of the Litigation (primarily attorney fees and costs). At September 30, 2003 and December 31, 2002, the CPR Trust had an outstanding receivable from Hyperion Partners L.P. totalling $2,670 and $15,340, which was current as to its payment terms. 3. LITIGATION TRUSTEE FEES The CPR Trust and the Litigation are managed by the two Litigation Trustees who have knowledge of the facts underlying the Litigation and who have previously served as general counsel to Bank United Corp. or its predecessor entities. In turn, the two Litigation Trustees each receive a $500,000 fee per year, for a term of three years, to be paid in quarterly installments. In addition, each of the Litigation Trustees received 291,899 CPR Certificates upon the formation of the CPR Trust. The Litigation Trustees have now been paid all of their quarterly installments. If either of the Litigation Trustees were to resign his position prior to the termination of the Litigation, he would forfeit the 291,899 CPR certificates awarded to him. Neither of the Litigation Trustees has any current intention to resign his position as a Litigation Trustee. 4. EXPENSE FUND ADVANCES The CPR Trust has no revenues. The CPR Trust's only source of funding for payment of expenses and operations is Washington Mutual, Inc.'s obligation under the Commitment Agreement, dated as of February 8, 2001, by and among Bank United Corp. (which subsequently became Washington Mutual, Inc.), the CPR Trust, and the Payment Trust (the "Commitment Agreement"). Washington Mutual, Inc. is obligated to advance amounts to pay expenses of the CPR Trust, including expenses of the Litigation, fees and expenses of the Litigation Trustees, and all administrative expenses. The maximum amount that Washington Mutual, Inc. is obligated to pay is $10 million, unless additional court proceedings are necessary, in which case Washington Mutual, Inc. is obligated to pay an additional $3 million. Advances funded by Washington Mutual, Inc. will be reimbursed to Washington Mutual, Inc. from any proceeds of the Litigation, before the payment of any amounts to the holders of CPR Certificates. Based on discussions with counsel to the Litigation and certain other factors, the Litigation Trustees believe that there are sufficient funds available to the CPR Trust from Washington Mutual, Inc. to permit the trust to fund its portion of the Litigation expenses, as well as administrative and other expenses of the trust. The expense fund advances accrue interest payable to Washington Mutual, Inc. at varying rates of interest. Outstanding advance balances up to $5 million accrue interest at 7% per annum, advance balances exceeding $5 million but less than $10 million accrue interest at 10% per annum, and advance balances exceeding $10 million accrue interest at 15% per annum. Interest expense of $92,881 and $253,380 was incurred during the three and nine months ended September 30, 2003, and $63,525 and $158,960 was incurred during the three and nine months ended September 30, 2002. Outstanding advance balances owed to Washington Mutual, Inc. exceeded $5 million during the three months ended September 30, 2003, and such balances in excess of $5 million are accruing interest at 10% per annum. Interest is not due to Washington Mutual, Inc. until there is a recovery, if any, in the Litigation. -10- The CPR Trust may issue additional CPR Certificates to raise funds to pay expenses and is authorized to borrow additional funds for the purpose of funding its expenses, subject to certain limitations. If the CPR Trust accrues expenses in excess of the Washington Mutual, Inc. funding obligations, such amounts will be deducted from the amounts payable to the holders of CPR Certificates. 5. CERTIFICATEHOLDERS' DEFICIT At September 30, 2003 and December 31, 2002, the certificateholders' deficit consists of the accumulated deficit from the operations of the CPR Trust. The CPR Certificates have no stated or par value for financial statement purposes. In connection with the Washington Mutual, Inc. merger, Bank United Corp. also undertook a legal reorganization (the "Reorganization"), whereby each share of Bank United Corp. common stock outstanding immediately prior to the Reorganization was converted into one new share of Bank United Corp. common stock and the right to receive one CPR Certificate. Similarly, options to purchase Bank United Corp. common stock outstanding at that time, as well as the Bank United Corp. 8% Corporate Premium Income Equity Securities (which subsequently became the Washington Mutual, Inc. 8% Corporate Premium Income Equity Securities or WM PIES) outstanding at that time were adjusted proportionately for purposes of receiving the appropriate number of CPR Certificates. In addition, an aggregate of 583,798 additional CPR Certificates were authorized to be issued to the Litigation Trustees. At September 30, 2003, 38,823,339 CPR Certificates had been issued and were outstanding as follows: 32,743,371 CPR Certificates in respect of shares of Bank United Corp. common stock outstanding upon the Reorganization, 3,270,187 CPR Certificates in respect of Bank United Corp. stock options outstanding upon Reorganization, 2,225,983 CPR Certificates in respect of the WM PIES and 583,798 CPR Certificates issued to the Litigation Trustees. At September 30, 2003, 95,581 CPR Certificates had not been issued relating to unexercised Bank United Corp. stock options. 6. PAYMENT TO CERTIFICATEHOLDERS Any proceeds received by Washington Mutual, Inc. or Washington Mutual Bank, FA from the Litigation will be reduced for certain reimbursable items and increased for certain tax benefits realized by Washington Mutual, Inc., as described in the CPR Trust prospectus, prior to remitting the balance to the Bank United Corp. Payment Rights Trust and ultimately, subject to certain adjustments, to the CPR Trust. Within 60 days of receipt of the proceeds, the CPR Trust shall pay the certificateholders the payment amount, which consists of the proceeds from the payment trust less the amount held back to pay any of its accrued but unpaid expenses. In addition, the amount payable to the certificateholders may be reduced by $1.0 million or such greater amount as the Litigation Trustees reasonably determine to be necessary to pay all additional expenses and claims of the CPR Trust that may arise subsequent to this payment and to satisfy the CPR Trust's indemnification obligations. Any retained amounts will be retained for a period of one year or longer as reasonably determined -11- by the Litigation Trustees. The CPR Trust will pay any remaining portion of the retained amounts to the certificateholders within 90 days of the expiration of the applicable retention period. Each CPR Certificate will entitle the holder to receive a fraction (equal to one divided by the total number of CPR Certificates outstanding) of the total amount payable to CPR certificateholders. 7. OTHER LIABILITIES At September 30, 2003, other liabilities is principally comprised of various accrued expenses including, interest costs, accounting and auditing fees, and legal fees. -12- ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The CPR Trust is a statutory business trust created under Delaware law on November 2, 2000. Bank United Corp. created the CPR Trust in connection with its merger, which was completed on February 9, 2001, with and into Washington Mutual, Inc. The assets of the CPR Trust consist primarily of the right to receive a portion of any proceeds received by Washington Mutual, Inc. (as successor to Bank United Corp.) and by Washington Mutual Bank, FA (as successor to Bank United) in any judgment or settlement in the forbearance litigation (the "Litigation") against the United States described below under "The Litigation". The Registration Statement on Form S-4 with respect to the CPR Certificates referred to in this document was filed by the CPR Trust with, and declared effective by, the Securities and Exchange Commission (the "SEC") on January 9, 2001 (SEC File Number 333-49302) (the "Prospectus"). The CPR Trust has no business operations. The CPR Trust exists to manage the prosecution of the Litigation and to take certain related actions. Because of the nature of the CPR Trust pursuant to the Declaration of Trust creating the CPR Trust, there are no employees, no board of directors, and no board audit committee. The two Litigation Trustees manage the Litigation and, together with the institutional trustee, Wachovia Bank, N.A., perform certain trust functions. The financial statements of the CPR Trust are prepared by an independent contract accountant with the assistance of the Litigation Trustees, and the financial statements are audited by the independent accounting firm of KPMG LLP. The Litigation Trustees are responsible for establishing and maintaining disclosure controls and procedures and internal controls. As a result of a reorganization, which was effected by means of a merger of Bank United Corp. with and into one of its wholly owned subsidiaries (the "Reorganization"), each share of Bank United Corp. common stock outstanding immediately prior to the Reorganization was converted into one new share of Bank United Corp. common stock and the right to receive one CPR Certificate, and appropriate and proportionate adjustments were made to options to purchase shares of Bank United Corp. common stock outstanding at that time and to Bank United Corp. 8% Corporate Premium Income Equity Securities (which subsequently became the Washington Mutual, Inc. 8% Corporate Premium Income Equity Securities or WM PIES) outstanding at that time. In addition, an aggregate of 583,798 additional CPR Certificates were authorized to be issued to the Litigation Trustees. The Reorganization occurred immediately prior to the merger with Washington Mutual, Inc. At September 30, 2003, 38,823,339 CPR Certificates had been issued and were outstanding as follows: 32,743,371 CPR Certificates in respect of shares of Bank United Corp. common stock outstanding upon the Reorganization, 3,270,187 CPR Certificates in respect of Bank United Corp. stock options outstanding upon Reorganization, 2,225,983 CPR Certificates in respect of the WM PIES and 583,798 CPR Certificates issued to the Litigation Trustees. At September 30, 2003, 95,581 CPR Certificates had not been issued relating to unexercised Bank United Corp. stock options. -13- Bank United Corp. also created the Bank United Corp. Payment Rights Trust (the "Payment Trust") in connection with the Washington Mutual, Inc. merger to manage the payment of any proceeds from Washington Mutual, Inc. to the CPR Trust. The Payment Trust will receive the applicable portion of any recovery in the Litigation from Washington Mutual, Inc. The Payment Trust will make payments to the CPR Trust from time to time following the receipt of any recovery amount, after certain adjustments described in the Prospectus. The payment rights of the trusts are governed by the Declaration of Trust of the CPR Trust, the Declaration of Trust of the Payment Trust and the Commitment Agreement, dated as of February 8, 2001, by and among Bank United Corp. (which subsequently became Washington Mutual, Inc.), the CPR Trust, and the Payment Trust (the "Commitment Agreement"). Under the Commitment Agreement, Washington Mutual, Inc. is obligated to pay to the Payment Trust from time to time an amount equal to the Commitment Amount plus interest less taxes on that interest. The "Commitment Amount" is equal to: - - all cash and non-cash proceeds actually received by Washington Mutual, Inc. and its affiliates under a final, nonappealable judgment or a final settlement of the Litigation, - - less reimbursements to Washington Mutual, Inc., - - plus any tax benefits to Washington Mutual, Inc., based on assumptions specified in the Commitment Agreement as to the deductibility of expenses. The reimbursements that Washington Mutual, Inc. may subtract from the Litigation proceeds are as follows: - - amounts paid by Washington Mutual, Inc. to the expense fund described below, plus interest, - - Washington Mutual, Inc.'s income tax liability resulting from the receipt of the Litigation proceeds, based on assumptions specified in the Commitment Agreement as to the taxability of such proceeds, - - damages actually suffered by Washington Mutual, Inc. and related parties as a result of any matter whatsoever brought by the holders of the CPR Certificates in their capacity as holders or any matter brought by another party relating to the trusts, the CPR Certificates and their distribution, the Litigation and any actions taken by the Litigation Trustees relating to the trusts other than any damages arising from Washington Mutual, Inc.'s breach of the Commitment Agreement, failure to deliver CPR Certificates when due or failure to deposit trust expenses advanced to the trusts, - - interest on any cash payment of taxes if proceeds are included in income of Washington Mutual, Inc. or Washington Mutual Bank, FA for federal income tax purposes in a taxable year prior to the year such proceeds are received in cash, - - any indemnification amounts provided to the Litigation Trustees under their Litigation Trustee Agreements, and - - expenses reasonably incurred by Washington Mutual, Inc. in connection with the liquidation of any non-cash proceeds. -14- The Payment Trust will pay any amounts it receives from Washington Mutual, Inc. promptly to the CPR Trust after deducting any amounts withdrawn by Washington Mutual, Inc. to cover taxes arising solely from its ownership of the Payment Trust. The amount that the Payment Trust forwards to the CPR Trust will be increased by any after tax interest earned on the Commitment Amount. Following receipt of any amounts from the Payment Trust, the CPR Trust will pay such amounts to the holders of CPR Certificates: - - reduced by the amount of any accrued but unpaid expenses payable by the CPR Trust, and - - increased by the amount of any interest or income received by the CPR Trust on the amount received from the Payment Trust. In addition, the amount payable to CPR certificateholders will be reduced by the retained amount, which is $1.0 million or such greater amount as the Litigation Trustees reasonably determine to be necessary to cover all expenses and claims of the CPR Trust that may be incurred or arise after amounts payable under the Commitment Agreement have been paid in full and to satisfy the trust's indemnification obligations. The retained amount will be retained for a period of one year or longer as reasonably determined by the Litigation Trustees. The CPR Trust will invest the retained amount in certain designated types of investments until the expiration of the retained amount period, subject to use of those funds to pay trust expenses. Each CPR Certificate will entitle the holder to receive a fraction (equal to one divided by the total number of CPR Certificates outstanding) of the total amount payable to the holders of the CPR Certificates. By way of example only, the following illustrates the payment that would be made to the holders of CPR Certificates assuming (1) three separate damage recovery scenarios (i. an award of $4,884,283, the amount determined by the appeals court in its September 22, 2003, decision, ii. an award of $8,826,783, the amount of the trial court's judgment in favor of plaintiffs entered on January 8, 2002, and iii. an award of $170.9 million, the total amount of the court's judgment plus additional amounts that plaintiffs sought pursuant to their motions for amended findings and judgment and their Bill of Costs, which is the sole damages claim remaining in the Litigation), (2) a Washington Mutual, Inc. tax rate of 38.84%, (3) expense reimbursements to Washington Mutual, Inc. of $5.349 million as of September 30, 2003, and (4) interest in the amount of $562,863 payable as of September 30, 2003, to Washington Mutual, Inc. on the $5.349 million of expense advances, calculated in accordance with terms provided in the Commitment Agreement. The CPR Trust cannot make any assurances as to the possible recovery, if any, in the Litigation. Further, with respect to Scenario Three below, the CPR Trust notes that the appeals court would have to grant plaintiff's petition for rehearing, that there would, in all probability, be further proceedings in the trial court, that the amount of expense reimbursements and interest payable thereon would increase, and that the final award (following further probable appeals), if any, may be less than the amount sought by plaintiffs. -15-
SCENARIO SCENARIO SCENARIO EXAMPLE ONE TWO THREE - ------- ------------- ------------- ------------- Assumed damage recovery $ 4,884,283 $ 8,826,783 $ 170,946,805 ============= ============= ============= Portion of damage recovery payable to Washington Mutual, Inc. (85% of total recovery) $ 4,151,641 $ 7,502,766 $ 145,304,784 Assumed taxes (1,612,497) (2,914,074) (56,436,378) ------------- ------------- ------------- Proceeds less assumed taxes 2,539,144 4,588,692 88,868,406 Reimbursement of expenses to Washington Mutual, Inc. (5,348,610) (5,348,610) (5,348,610) Interest on advances from Washington Mutual, Inc. (562,863) (562,863) (562,863) ------------- ------------- ------------- Net proceeds (shortfall) $ (3,372,329) $ (1,322,781) $ 82,956,933 Maximum number of CPR Certificates authorized and issuable pursuant to the Reorganization 38,919,884 38,919,884 38,919,884 ------------- ------------- ------------- Illustrative range of proceeds per CPR Certificate $ (0.09) $ (0.03) $ 2.13 ------------- ------------- -------------
As discussed in Item 2. The Litigation (see above), on September 22, 2003, the appeals court reduced the plaintiffs' award from $8,826,783 to $4,884,283. The amount owed by the CPR Trust to Washington Mutual, Inc. at September 30, 2003 for expense fund advances exceeds the $4,884,283 award. If the Litigation were to terminate because of a decision by the appeals court to deny plaintiffs' petition for rehearing and a decision by the CPR Trust not to file a Writ of Certiorari ("Writ") to the Supreme Court of the United States of America, there would be no recovery to the CPR certificateholders because the eighty five percent (85%) share to the CPR Trust of the total recovery awarded by the appeals court (plus the amount of the Bill of Costs if it were awarded in full to plaintiffs) is less than the amount that would be owed by the CPR Trust to Washington Mutual, Inc. Similarly, there would be no recovery to the CPR certificateholders if the CPR Trust decided to file a Writ and the Supreme Court denied it. In summary, as has always been the case ever since the CPR certificates were first registered and issued, it is possible that there will be no recovery to the CPR certificateholders in the Litigation and that the CPR Certificates may be worthless. SHARE OF LITIGATION PROCEEDS. Bank United Corp., Bank United, and Hyperion Partners L.P. are the plaintiffs in the Litigation. At the time the lawsuit was filed, Hyperion Partners L.P. was an affiliate of Bank United Corp. and Bank United. The terms of the July -16- 1996 recovery agreement entered into by Bank United Corp., Bank United, and Hyperion Partners L.P., entitle Washington Mutual, Inc. and Washington Mutual Bank, FA, as successors to Bank United Corp. and Bank United, respectively, to 85% of any recovery in connection with the Litigation. Hyperion Partners L.P. is entitled to the remaining 15%. The recovery agreement further provides for Hyperion Partners L.P. to share in 15% of the expenses of the Litigation (primarily attorney fees and costs). CERTAIN TAX MATTERS. The Reorganization and the merger with Washington Mutual, Inc. were each structured to qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. However, receipt of the CPR Certificates by the former Bank United Corp. stockholders was treated as additional, taxable merger consideration to the stockholder for tax purposes in an amount equal to the fair market value of the CPR Certificates as of February 9, 2001. The Litigation Trustees believe that the fair market value on that date was $0.35 based on the average of the high and low trading prices of the CPR Certificates on the over-the-counter market on that date. The tax information returns provided to the Internal Revenue Service and the holders of CPR Certificates reflected this valuation. Receipt of CPR Certificates by holders of Bank United Corp. stock options and 8% Corporate Premium Income Equity Securities (which subsequently became the Washington Mutual, Inc. 8% Corporate Premium Income Equity Securities or WM PIES) will be taxable based on the fair market value of the CPR Certificates at the time of receipt. CPR certificateholders are urged to consult with their tax advisor. TAX RETURNS The CPR Trust is treated as a grantor trust for federal income tax purposes. Income resulting from payment received by the CPR Trust is required to be reported for federal income tax purposes by certificateholders. The CPR Trust is required to file Form 1041, U.S. Income Tax Return for Estates and Trusts, and provide the grantors with an information statement reporting their portion of the Trust's income/loss. EXPENSES. Under the Commitment Agreement, at the request of the CPR Trust or the Payment Trust, Washington Mutual, Inc. must provide the trusts with funds to pay their expenses. The maximum aggregate amount that Washington Mutual, Inc. is obligated to pay for the life of the trusts is $10 million, unless the Litigation is pursued through additional trial court proceedings and appeals, in which case Washington Mutual, Inc. will be obligated to pay those additional expenses subject to a maximum obligation of $13 million. The Commitment Agreement requires each of the trusts, immediately prior to its termination, to refund to Washington Mutual, Inc. any amount provided to it in the expense fund but not used, provided that each of the trusts may retain a reasonable reserve of funds to pay for termination expenses. As of September 30, 2003, $5.349 million had been advanced to the CPR Trust. Based on discussions with counsel to the Litigation and certain factors, including the fact that the Litigation commenced almost eight years ago and has involved extensive motion practice, discovery by the United States, and a trial on damages, the Litigation Trustees currently expect that there are sufficient funds available to the CPR Trust and the Payment Trust from Washington Mutual, Inc. to permit the trusts to fund their portion of the Litigation expenses, as well as the administrative and other expenses of the trusts. -17- The CPR Trust may issue CPR Certificates to raise funds to pay expenses. The CPR Trust is also authorized to borrow additional funds for the sole purpose of funding its expenses, subject to certain limitations. If the CPR Trust accrues expenses in excess of Washington Mutual, Inc.'s. funding obligations, it will deduct the amount of those expenses from the amount payable to the holders of CPR Certificates. An office is maintained at 3200 Southwest Freeway, Suite 1001, Houston, Texas 77027, on behalf of the CPR Trust for the purpose of pursuing the Litigation and administering other duties under the declarations of trust for the CPR Trust and the Payment Trust. THE LITIGATION GENERAL. The following description of the Litigation does not purport to be a full or complete description of the legal or 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 connection with the relevant litigation, opinions, and law. As a result of Bank United Corp.'s original acquisition of certain of the assets and liabilities of United Savings Association of Texas in 1988, the Federal Home Loan Bank Board approved a forbearance letter issued on February 15, 1989. Under the terms of the forbearance letter, the Federal Savings and Loan Insurance Corporation agreed to waive or forbear from enforcing certain regulatory provisions concerning capital requirements, liquidity requirements, accounting requirements and other matters. After the enactment of the Financial Institutions Reform Recovery and Enforcement Act of 1989 (the "Act" or "FIRREA"), the Office of Thrift Supervision took the position that the capital standards set forth in the Act applied to all savings institutions, including those institutions that had been operating under previously granted capital and accounting forbearances, and that the Act eliminated those forbearances. On July 25, 1995, Bank United Corp., Bank United and their then affiliate, Hyperion Partners L.P., filed suit against the United States in the U.S. Court of Federal Claims for alleged failures of the United States to abide by a capital forbearance that would have allowed Bank United to operate for ten years under negotiated capital levels lower than the levels required by the then existing regulations or successor regulations, to abide by its commitment to allow Bank United to count $110 million of subordinated debt as regulatory capital for all purposes and to abide by an accounting goodwill treatment that would have allowed Bank United to count the $30.7 million difference between Federal Savings and Loan Insurance Corporation payment obligations to Bank United and the discounted present value of future payments as capital for regulatory purposes and to amortize that amount over a period of twenty five years. The plaintiffs seek damages in excess of $550 million. The government argued that the damages to plaintiffs as a result of the breach, if any, were speculative and approached zero. In July 1996, Bank United Corp. and Bank United entered into a recovery agreement with Hyperion Partners L.P. acknowledging the relative value among the parties of claims in the pending Litigation. The agreement confirms that Bank United Corp. and Bank United are entitled to receive 85% of the amount, if any, recovered as a result of any settlement of or a judgment on these claims and that Hyperion Partners L.P. is entitled to receive 15% of this amount. The plaintiffs are -18- obligated to continue to cooperate in good faith and to use their best efforts to maximize the total amount, if any, that they may recover. Pursuant to the agreement, Hyperion Partners L.P. shares in the expenses of the Litigation in the same proportion as it shares in any recovery in the Litigation, although Hyperion Partners L.P. does not share in any expenses relating to the CPR Trust, the Payment Trust, the CPR Certificates or the operation or administration thereof. In March 1999, the U.S. Court of Federal Claims granted the plaintiffs' motion for summary judgment on the issue of liability and held that the United States was liable. On August 5, 1999, the court denied a motion for summary judgment filed by the United States in which the United States asserted that the plaintiffs' claims for lost profits damages were too speculative to permit recovery. The case proceeded to trial on the amount of damages on September 13, 1999. The evidentiary phase of the damages case ended on October 21, 1999. The parties submitted post-trial briefs followed by closing argument on February 7, 2000. In April 2001, the court issued two procedural orders in the Litigation. On April 6, the court ordered publication of the March 1999 opinion granting summary judgment to Bank United Corp. and Bank United on the issue of liability. Because of an apparent oversight, the opinion had not been published earlier. On April 17, 2001 the court granted the government's unopposed motion for leave to file the opinion issued by the Court of Appeals for the Federal Circuit in California Federal Bank vs. United States (discussed below) as supplemental authority in the Litigation. In an Opinion and Order dated October 29, 2001, the court rejected plaintiffs' lost profits claims and plaintiffs' model for calculating the cost of substitute capital. The court held that plaintiffs fully mitigated the government's breach and that the plaintiffs were entitled to damages totaling $8,826,783 for the cost of mitigating the breach. The amount awarded included $4,884,283 for the cost of mitigating the breach of the subordinated debt provision of the parties' contract and $3,942,500 of transaction costs (comprised of commissions and fees) paid when Bank United issued 3,420,000 shares of preferred stock at a dividend rate of 10.12 percent to obtain $85,500,000 of equity capital in December 1992. The court also ruled that plaintiffs further mitigated the government's breach by various other infusions of capital into Bank United, including a $4,200,000 infusion in 1990, a $15,000,000 infusion later in 1990, and a $16,138,988 infusion in 1991, totaling $35,338,988. In connection with those infusions, the court held that the plaintiffs would have been entitled to any proven costs incurred in connection with these mitigation infusions of capital, but stated that no evidence of costs related to such additional infusions was presented. Finally, the court awarded costs to plaintiffs. The court entered judgment in the case on January 8, 2002, consistent with its previously issued Opinion and Order. On January 23, 2002, the plaintiffs filed motions with the court asking it to (i) amend certain findings in its October 29, 2001 opinion and amend the judgment of January 8, 2002, (ii) reopen the record to receive additional documentary evidence, and (iii) reopen the record to admit additional evidence omitted from the trial record. The plaintiffs' motions alleged that the court's findings and judgment did not take into account undisputed evidence in the -19- trial record relating to the costs of the mitigation found by the court. The plaintiffs alleged that the trial record contained evidence of the dividends paid to investors through March 1999 on the $85,500,000 of preferred stock Bank United issued in 1992, the $35,338,988 infused by plaintiffs into Bank United as common equity capital in 1990 and 1991, and the return plaintiffs should have made on that capital. The motions also requested the court to amend its findings and judgment to incorporate the additional proven costs of the mitigation found by the court. Specifically, the plaintiffs alleged that they submitted evidence that they paid $54,126,972 in dividends on the 1992 preferred stock through March 31, 1999 and that they infused $35,338,988 into Bank United as common equity capital. In addition, the plaintiffs alleged that the trial record included evidence that plaintiffs were entitled to at least a 20 percent return on the $35,338,988 investment. Plaintiffs sought to reopen the trial record because Bank United continued to pay dividends on the 1992 preferred stock from March 31, 1999 through the end of 2000. Most of those dividends were paid after the trial, but before the date of the court's opinion. Plaintiffs alleged that the record should be reopened to allow proof of those dividend payments and that the court's amended findings and judgment should incorporate them as well. The government opposed the plaintiffs' motions in their entirety. In appellate court briefs, the government stated that it was not challenging the trial court's award to plaintiffs of $4,884,283, the cost of mitigating the breach of the subordinated debt provision of the parties' contract. On February 7, 2002, and March 7, 2002, plaintiffs submitted their Bill of Costs, seeking $437,978 in costs from the government. On February 21, 2002, the government filed an opposition to the plaintiffs' Bill of Costs, requesting the court to deny plaintiffs any award of costs. The Bill of Costs and opposition are pending before the court, and it is unknown (i) whether the court will request further briefing or oral argument on the Bill of Costs, (ii) when the court will decide the Bill of Costs, and (iii) what amount of costs, if any, the court will award to plaintiffs. The rules of the Court of Federal Claims do not impose any deadline on the court for ruling on the Bill of Costs. On April 16, 2002, the court heard oral arguments on the January 23, 2002 motions. Following oral arguments, the court denied plaintiffs' motions in their entirety. On June 14, 2002, the plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit, appealing any and all rulings, orders, and judgments rendered by the court to date against the plaintiffs. These adverse rulings include the October 29, 2001 ruling that the plaintiffs were not entitled to any lost profits damages and the April 16, 2002 denial of certain motions made by the plaintiffs. On June 19, 2002, the case was docketed by the U.S. Court of Appeals for the Federal Circuit. On June 26, 2002, the government filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit, appealing the final judgment of the U.S. Court of Federal Claims, including (1) the court's granting summary judgment for the plaintiffs on the issue of -20- liability against the government, (2) the court's refusal to deny modification of that decision, and (3) the court's October 29, 2001 decision. On August 19, 2002, the plaintiffs (or appellants) filed their opening brief with the U.S. Court of Appeals for the Federal Circuit. On September 30, 2002, the federal government (or defendant - cross appellant) filed its opening brief with the U.S. Court of Appeals for the Federal Circuit. On November 12, 2002, the plaintiffs (or appellants) filed a combined (a) reply brief on their appeal and (b) an opposing brief on the federal government's (defendant-cross appellant's) cross appeal with the U.S. Court of Appeals for the Federal Circuit. On November 27, 2002, the federal government (defendant-cross appellant) filed its reply brief on its cross appeal with the U.S. Court of Appeals for the Federal Circuit. In appellate court briefs, the government stated that it was not challenging the trial court's award to plaintiffs of $4,884,283, the cost of mitigating the breach of the subordinated debt provision of the parties' contract. Oral argument took place on May 7, 2003 before a panel of judges of the U.S. Court of Appeals for the Federal Circuit comprised of Chief Judge Haldane R. Mayer, Judge Sharon Prost, and Judge Timothy B. Dyk. On May 19, 2003, the plaintiffs (or appellants) filed a Motion for Leave to File a Post-Argument Clarification and their Post-Argument Clarification. The U.S. Court of Appeals for the Federal Circuit denied the motion by order dated May 28, 2003. No reasons were given for the denial. On September 22, 2003, the appeals court rendered its decision on the appeals. In a nonprecedential opinion, written by Judge Prost, the trial court decision was affirmed-in-part and reversed-in-part. In summary, the appeals court affirmed the trial court's rulings except for granting that part of defendant's cross appeal seeking reduction of the award to plaintiffs by $3,942,500. Thus, plaintiff's damages award has been reduced from $8,826,783 to $4,884,283. On November 5, 2003, the plaintiffs' filed a Petition for Rehearing (the "Petition") in the Appeals Court, seeking a rehearing by the panel and a rehearing by the full Appeals Court sitting en banc. Plaintiffs have sought a rehearing on that part of the Appeals Court decision regarding the amount of expectancy damages they are entitled to as a result of their mitigation efforts. Plaintiffs did not seek a rehearing of the Appeals Court's decision denying plaintiffs' lost profits and cost of substitute capital claims. The Appeals Court, either by the original or an en banc panel, may either grant or deny the Petition and may or may not ask the government to file a response to the Petition, and if the Appeals Court does so, it may thereafter grant or deny the Petition. There are no time requirements or limits on the Appeals Court's actions. -21- RELATED CASES. The Litigation is one of a number of cases filed against the United States in the U.S. Court of Federal Claims involving acquisitions of failed savings institutions and alleging that changes in regulatory capital calculation and capital regulations brought about by the Financial Institutions Reform Recovery and Enforcement Act constitute a breach of the contract between the acquiring institution and the federal government. Each of these cases presents facts that are specific to the parties to the litigation, and the plaintiffs in these cases allege diverse legal theories of damages. Several cases have been tried and most of those have reached the appellate court. The United States Court of Appeals for the Federal Circuit, which hears appeals from the United States Court of Federal Claims, has decided Bank United v. United States, Glendale Federal Bank v. United States, California Federal Bank v. United States, Bluebonnet Savings Bank v. United States, Glass v. United States, Landmark Land Company v. United States, Coast Federal Bank v. United States, Castle v. United States, and LaSalle Talman Federal Bank v. United States. In Glendale, the Court of Appeals reversed the trial court's award of restitution damages and remanded the case for determination of Glendale's reliance damages. On remand, the trial court reaffirmed the previous award of $381 million in reliance damages, but denied further damages to plaintiffs. The government has appealed and Glendale has cross appealed. Bank United did not seek reliance or restitution damages. Bank United sought to recover lost profits, or, in the alternative, the cost of raising new capital as a substitute for the promises breached by the government. In California Federal, the Court of Federal Claims granted summary judgment in favor of the United States on California Federal's lost profits claim. The Court of Appeals reversed and remanded the case for a trial on lost profits. In addition, the Court of Appeals affirmed the trial court's fact finding that California Federal's cost of replacing capital was limited to the transaction costs of replacing the goodwill phased out by FIRREA. Petitions for rehearing of California Federal were denied by the Court of Appeals and petitions for writ of certiorari to the U.S. Supreme Court by both parties were denied. The trial on lost profits concluded in late October 2002 and the court found that California Federal failed to prove lost profits. California Federal has appealed the trial court's decision to the Court of Appeals, and the government has cross-appealed. The Bluebonnet plaintiffs sought damages for additional borrowing costs caused by FIRREA. They did not seek lost profits. The Court of Federal Claims awarded plaintiffs no damages, because it found that they had not proved damages with reasonable certainty. The Court of Appeals affirmed in part and reversed in part. It found that some of the plaintiffs' additional borrowing costs were proved with reasonable certainty. The parties sought rehearing, which was denied. On remand from the Court of Appeals, the Court of Federal Claims awarded $136,075,000 to the Bluebonnet plaintiffs, a sum it believed was mandated and the Court of Appeals vacated the lower court's judgment and remanded the case for the Court of Federal Claims to determine the proper damages after further proceedings. Bluebonnet has sought rehearing from the Federal Circuit. -22- In Glass, the Court of Appeals reversed the lower court's award of restitution and damages on procedural grounds that are not at issue in the Litigation. It held that shareholders of the thrift, as third party beneficiaries, and the FDIC did not have standing to pursue their claims against the United States. The shareholders and FDIC filed petitions for rehearing, which were denied. On remand, the Court of Federal Claims denied plaintiffs direct claims and plaintiffs appealed. The Court of Appeals affirmed on a procedural ground and this case is concluded. In Landmark, the lower court awarded $21.4 million in restitution, the amount of plaintiffs' initial investment in the thrift. It denied Landmark's claim for reliance damages on the ground that they were not foreseeable. The Court of Appeals affirmed. The FDIC and Landmark sought rehearing, which was denied. This case is concluded. In Coast, the trial court, on motion for summary judgment, ruled that a $299 million capital credit granted Coast had to be amortized. This ruling foreclosed significant damages and Coast appealed. The Court of Appeals reversed in October 2002, holding that the capital credit did not have to be amortized, and remanded to the Court of Federal Claims for a determination of Coast's damages. The Court of Appeals subsequently granted rehearing en banc of the panel's decision. The en banc court reversed the panel, holding that the goodwill did not have to be amortized. The en banc court vacated the panel opinion and reinstated the judgment of the trial court. The case is concluded. In Castle, the Court of Federal Claims awarded plaintiffs $15.1 million in restitution damages and rejected Castle's Fifth Amendment takings claim. The Court of Appeals reversed, holding that the contract documents did not require plaintiffs to contribute the $15.1 million to recapitalize the acquired thrift, that plaintiffs voluntarily contributed the $15.1, and that therefore they could not recover it as damages under a restitution theory. The Court affirmed the trial court holding on the takings theory. Castle's petition for rehearing in the Court of Appeals was denied, and the Supreme Court of the United States denied certiorari. This case is concluded. In LaSalleTalman, the Court of Federal Claims awarded $5,000,000 in expenses related to the thrift's acquisition by an outside investor that was made necessary by the breach, but rejected further relief because it found that the thrift was better off in the years after the acquisition than the thrift would have been absent the breach, in part because of the beneficial effect on the thrift of significant additional capital infusions made by the investor after the initial acquisition that mitigated the breach. The Court of Appeals affirmed in part, but reversed and remanded for a calculation of damages based on the difference between the thrift's projected profits absent the breach and the thrift's post-breach profits, excluding the effect of the additional infusions that occurred after the breach was mitigated. The government's petition for rehearing in the Court of Appeals was denied and the case has been remanded for further proceedings in the trial court. Discovery is proceeding and the case is set for trial in April 2004. In Suess, the plaintiffs sought lost profits and restitution damages. The Court of Federal Claims rejected the lost profits claim on the ground that it was too speculative, -23- because plaintiffs had failed to prove the profits the thrift would have made but for the breach. The court rejected the restitution claim as barred by the Court of Appeals decision in Glendale. The court fashioned its own damages award of $35 million, which was the market value of the thrift's stock the day before the FIRREA breach. Both sides have sought reconsideration. DAMAGES. Each savings institution affected by the Financial Institutions Reform Recovery and Enforcement Act and the applicable capital calculations and capital regulations addressed the resulting reduction in its regulatory capital in its own fashion based on the unique facts and circumstances faced by the institution. Accordingly, the extent and amount of any damages awarded to the institutions that have brought actions against the United States is expected to be fact specific. Even if plaintiffs in similar cases are successful in securing damage awards, there may not be any damage recovery in the Litigation. At the trial in the U.S. Court of Federal Claims, plaintiffs offered evidence in support of three alternative damages models. The first model calculated the plaintiffs' lost profits damages from the government's three breaches of contract relating to capital levels, subordinated debt, and goodwill. The damages calculated totaled $553,291,000. A second model calculated lost profits damages arising solely from the breach of the subordinated debt promise, which totaled $96,085,000. The third model calculated what the cost of raising substitute capital in 1989 to repair the government's three breaches would have been, which was calculated to be $117,227,000. In addition to any recovery under the alternative models, the plaintiffs sought recovery of $4,884,283 in out-of-pocket costs caused by the government's breach of the subordinated debt promise. In appellate court briefs, the government stated that it was not challenging the trial court's award to plaintiffs of that $4,884,283. As noted above, the court rejected plaintiffs' lost profits claims and plaintiffs' model for calculating the cost of substitute capital. The court held that plaintiffs fully mitigated the government's breach and that the plaintiffs were entitled to damages totaling $8,826,783 for the cost of mitigating the breach. Plaintiffs filed post trial motions seeking to amend the findings and judgment of the court and sought an additional amount of mitigation damages exceeding $160,000,000. The court denied those motions. The appeals court recently reduced the damages originally awarded to the plaintiff's from $8,826,783 to $4,884,283. On November 5, 2003, the plaintiffs' filed a Petition for Rehearing (the "Petition") in the Appeals Court, seeking a rehearing by the panel and a rehearing by the full Appeals Court sitting en banc. Plaintiffs have sought a rehearing on that part of the Appeals Court decision regarding the amount of expectancy damages they are entitled to as a result of their mitigation efforts. Plaintiffs did not seek a rehearing of the Appeals Court's decision denying plaintiffs' lost profits and cost of substitute capital claims. The Appeals Court, either by the original or an en banc panel, may either grant or deny the Petition and may or may not ask the government to file a response to the Petition, and if the Appeals Court does so, it may thereafter grant or deny the Petition. There are no time requirements or limits on the Appeals Court's actions. Until such time as all appeal efforts have been exhausted and a final determination has been rendered concerning the Bill of Costs, it is impossible to predict the total amount of any recovery -24- available to be paid to the CPR certificateholders because any recovery in the Litigation could be less than the fees, costs, interest, taxes and tax benefits associated with that recovery. Finally, as noted above, it is possible there will be no recovery in the Litigation. Legal expense, which is primarily comprised of third party attorney fees and costs, totaled $9,710 and $186,031 for the three and nine months ended September 30, 2003, and $106,005 and $797,631 for the three and nine months ended September 30, 2002, respectively. The decrease in legal expense is a result of more activity in the Litigation during the previous periods relating to the appeals trial, the post trial motions, the Bill of Costs, the appellate briefing, and related time and disbursements. MANAGEMENT OF THE LITIGATION GENERAL. The Litigation Trustees are Salvatore A. Ranieri, a former director of Bank United Corp. and the former General Counsel of Bank United Corp.'s predecessor entities, and Jonathon K. Heffron, the former Executive Vice President, Chief Operating Officer and General Counsel of Bank United Corp. and Bank United. Messrs. Ranieri and Heffron both have knowledge of the facts underlying the Litigation. Mr. Ranieri is also the General Counsel of Hyperion Partners L.P. and he wholly owns and controls a general partner of the general partner of Hyperion Partners L.P. Messrs. Ranieri and Heffron have been involved in the prosecution of the Litigation to date. Under the Declaration of Trust for the CPR Trust and the Litigation Trustee Agreements, the Litigation Trustees have the sole and exclusive right to instruct Washington Mutual, Inc. with respect to all decisions regarding the prosecution of the Litigation. This right includes the right to direct Washington Mutual, Inc. to dismiss, settle, or cease prosecuting the Litigation and to control other aspects of the Litigation, such as hiring, firing, and supervising legal counsel. However, the Litigation Trustees may not cause Washington Mutual, Inc. or Washington Mutual Bank, FA to enter into any settlement agreement or other ruling or agreement as part of the resolution of the Litigation or a related Internal Revenue Service ruling if the agreement imposes any liability or obligation on Washington Mutual, Inc. or any of its affiliates or adversely affects or restricts the conduct of its business or adversely affects its tax posture with respect to other matters, other than a standard settlement release relating only to the Litigation or other related claims that the plaintiffs could have brought immediately prior to the Washington Mutual, Inc. merger. Prior to the completion of the Washington Mutual, Inc. merger, Bank United Corp. established an advisory committee for the CPR Trust composed of certain then current directors of Bank United Corp. The members of the advisory committee are Lewis S. Ranieri, former Chairman of the Board of Directors of Bank United Corp., Barry C. Burkholder, a former director and the former Chief Executive Officer and President of Bank United Corp., and Michael Stevens, a former director of Bank United Corp. Pursuant to the Declaration of Trust of the CPR Trust, the Litigation Trustees are entitled to consult with the advisory committee. The Litigation Trustees have not had any consultations with the advisory committee. The Litigation Trustee agreements provide for compensation by the CPR Trust for each Litigation Trustee, during the term of his service as a Litigation Trustee, at a rate of $500,000 per year for three years. If, however, the Litigation is terminated in less than three years, the remainder of the fees that would be paid over the three-year period will be -25- accelerated upon final resolution of the Litigation and receipt by Washington Mutual, Inc. or any of its affiliates of the proceeds of the Litigation. The Litigation Trustees are also entitled to reimbursement of all reasonable out-of-pocket expenses. In addition, as an incentive to the Litigation Trustees, each of the Litigation Trustees received 291,899 CPR Certificates, representing 0.75% of the total number of CPR Certificates issuable in the Reorganization. As of the date hereof, Messrs. Heffron and Ranieri beneficially own 516,241 and 727,899 CPR Certificates, respectively. The Litigation Trustees have now been paid all of their quarterly installments. In addition, each of the Litigation Trustees received 291,899 CPR Certificates upon the formation of the CPR Trust. If either of the Litigation Trustees were to resign his position prior to the termination of the Litigation, he would forfeit the 291,899 CPR certificates awarded to him. Neither of the Litigation Trustees has any current intention to resign his position as a Litigation Trustee. AUTHORITY. The Declaration of Trust for the CPR Trust provides that the Litigation Trustees may adopt their own rules and procedures, but may act only with the approval of both Litigation Trustees or the sole remaining Litigation Trustee then in office. If the number of Litigation Trustees is increased above two, then approval of the Litigation Trustees requires the affirmative vote of a majority of the Litigation Trustees then in office. The Litigation Trustees may, in their discretion, delegate to one or more of the Litigation Trustees the authority to act on behalf of the Litigation Trustees except regarding the retention or dismissal of counsel for Washington Mutual, Inc. or the Litigation Trustees or the approval of a settlement or dismissal of the Litigation. INSTITUTIONAL TRUSTEE. The institutional trustee is Wachovia Bank, N.A. (successor to First Union Trust Company, National Association). Wachovia Bank, N.A. also serves as the paying agent, the transfer agent, and the certificate registrar for the Trust. In these capacities the institutional trustee will, among other things, establish necessary bank accounts on behalf of the Trust, distribute the payment amount, if any, and other amounts to certificateholders, authenticate CPR certificates, resolve certificateholder transfer and other issues, and ensure the preservation of the Trust's valid existence under the laws of Delaware. -26- SUMMARY FINANCIAL INFORMATION The CPR Trust has no revenues. The CPR Trust's only source of funding for payment of expenses and operations is Washington Mutual, Inc.'s obligation to fund expenses under the Commitment Agreement. The following is a statement that details the expense activities for the nine months ended September 30, 2003, as well as the cash balance available to cover accrued but unpaid expenses (dollars in thousands):
Nine months ended September 30, 2003 ------------------ (unaudited) Cash balance at December 31, 2002 $ 631 Deposits by WAMU during the period 815 ------------------ 1,446 Disbursements through period end Litigation trustee fees (750) Licenses, permits and filing fees (15) Legal (212) Accounting and auditing fees (80) Trust administration fees (21) Office and other (56) ------------------ Total disbursements through period end (1,134) ------------------ Cash or expense fund advances not used at period end 312 Accrued expenses at period end, excluding interest costs Legal (18) Accounting and auditing fees (34) Financial printing (4) Office and other (6) ------------------ Total (62) ------------------ Cash held at September 30, 2003 available for future expenses $ 250 ==================
Interest expense of $253,380 was accrued in other liabilities during the nine months ended September 30, 2003, for interest payable to Washington Mutual, Inc. on expense fund advances, at an interest rate provided for under the terms of the Commitment Agreement. Payment of such accrued interest payable is contingent upon receipt of the Commitment Amount. 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 -27- issued and existing CPR certificateholders are not given the opportunity to purchase, or do not purchase a pro rata amount in such issuance, such certificateholders' indirect interest in the litigation payment amount will be diluted. The CPR Trust is 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) 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). FORWARD-LOOKING INFORMATION Statements and financial discussion and analysis by the Litigation Trustees contained throughout this Form 10Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. For further information regarding these risks and uncertainties, see "Risk Factors" in the Prospectus filed by the CPR Trust with, and declared effective by, the SEC on January 9, 2001 (SEC File Number 333-49302). CERTIFICATEHOLDER INQUIRIES Certificateholder inquiries, including requests for the following: (i) change of address; (ii) replacement of lost stock certificates; (iii) certificate 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: Wachovia Bank, N.A. Corporate Trust Equity Services 1525 West. W.T. Harris Blvd., 3C3 Charlotte, North Carolina 28288-1153 ITEM 3. NOT APPLICABLE ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Litigation Trustees have reviewed and evaluated the effectiveness of the disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing of this quarterly report. Based on that evaluation, the Litigation Trustees have concluded that the current disclosure controls and procedures are effective in timely providing them with material information relating to the CPR Trust required to be disclosed in the reports filed or submitted under the Exchange Act. Changes in Internal Controls There have not been any significant changes in the internal controls or in other factors -28- that could significantly affect these controls subsequent to the date of their evaluation. The Litigation Trustees are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken. PART II OTHER INFORMATION ITEM 1 . LEGAL PROCEEDINGS The Registrant has no litigation currently pending. For a discussion of the litigation in which the CPR Trust has an interest, see Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - The Litigation. ITEMS 2 THROUGH 5 are not applicable or the answers are negative. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Jonathon K. Heffron. 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Salvatore A. Ranieri. 32.1 Certification of Periodic Report by Litigation Trustee Jonathon K. Heffron. 32.2 Certification of Periodic Report by Litigation Trustee Salvatore A. Ranieri. (b) Reports on Form 8-K During the quarter for which this report is filed, the following reports on Form 8-K were filed by the registrant: 1. September 23, 2003, Item 5, Other Events. Press release regarding certain matters, including the September 22, 2003 opinion of the U.S. Court of Appeals for the Federal Circuit affirming-in-part and reversing-in-part the trial court's rulings, resulting among other things in a reduction in the plaintiff's damages award from $8,826,783 to $4,884,283. -29- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANK UNITED CORP. LITIGATION CONTINGENT PAYMENT RIGHTS TRUST By: /s/ Jonathon K. Heffron --------------------------- Name: Jonathon K. Heffron Title: Litigation Trustee By: /s/ Salvatore A. Ranieri --------------------------- Name: Salvatore A. Ranieri Title: Litigation Trustee Dated: November 14, 2003 -30- INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Jonathon K. Heffron. 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Salvatore A. Ranieri. 32.1 Certification of Periodic Report by Litigation Trustee Jonathon K. Heffron. 32.2 Certification of Periodic Report by Litigation Trustee Salvatore A. Ranieri.
-31- EX-31.1 3 h10551exv31w1.txt CERT.OF JONATHON K. HEFFRON PURSUANT TO SEC. 302 EXHIBIT 31.1 I, Jonathon K. Heffron, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bank United Corp. Litigation Contingent Payment Rights Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2003 By: /s/ Jonathon K. Heffron ----------------------- Name: Jonathon K. Heffron Title: Litigation Trustee -32- EX-31.2 4 h10551exv31w2.txt CERT.OF SALVATORE A. RANIERI PURSUANT TO SEC. 302 EXHIBIT 31.2 I, Salvatore A. Ranieri, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bank United Corp. Litigation Contingent Payment Rights Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2003 By: /s/ Salvatore A. Ranieri ------------------------ Name: Salvatore A. Ranieri Title: Litigation Trustee -33- EX-32.1 5 h10551exv32w1.txt CERT.OF JONATHON K. HEFFRON PURSUANT TO SEC. 906 EXHIBIT 32.1 CERTIFICATION OF PERIODIC REPORT I, Jonathon K. Heffron of Bank United Corp. Litigation Contingent Payment Rights Trust (the "CPR Trust"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the CPR Trust for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the CPR Trust. Dated: November 14, 2003 /s/ Jonathon K. Heffron - ----------------------- Jonathon K. Heffron Litigation Trustee -34- EX-32.2 6 h10551exv32w2.txt CERT.OF SALVATORE A. RANIERI PURSUANT TO SEC. 906 EXHIBIT 32.2 CERTIFICATION OF PERIODIC REPORT I, Salvatore A. Ranieri of Bank United Corp. Litigation Contingent Payment Rights Trust (the "CPR Trust"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the CPR Trust for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the CPR Trust. Dated: November 14, 2003 /s/ Salvatore A. Ranieri - ------------------------- Salvatore A. Ranieri Litigation Trustee -35- -----END PRIVACY-ENHANCED MESSAGE-----