Stockholders Vote on Directors : Valley Federal Struggle Continues

Dan E. Nelms, new president of Valley Federal Savings & Loan, stood on stage in the Roof Gardens room of the Sheraton Universal Hotel, 20 stories above Universal City, hosting his first annual stockholders’ meeting.

But the event was hardly an enjoyable milestone in Nelms’ career. Nelms, elected president a month ago, spent most of the meeting looking utterly frustrated. Throughout the 45-minute meeting, he was peppered with questions from stockholders in the crowd of 150 people, yet he was forbidden from giving detailed answers.

That was because Valley Federal’s lawyers, minutes before the meeting started last week, sued Hecco Ventures, an investment partnership that is one of the S&L;’s biggest--and most disgruntled--stockholders. And with Hecco’s people sitting three rows in front of Nelms’ podium, Valley Federal’s lawyers told Nelms to limit his answers.

Finally, as Hecco’s lawyers continued asking him questions, Nelms abruptly adjourned the meeting with a curt “thank you� and walked briskly to a nearby elevator without saying another word.

Welcome to the ongoing struggle by Hecco and others to seize control of Van Nuys-based Valley Federal.

The S&L;, one of the biggest based in the San Fernando Valley with $3.3 billion in assets and 47 offices, has been fighting the takeover threat since November, and the battle’s outcome still remains in doubt.

The main purpose of the annual meeting was to allow Valley Federal’s stockholders to elect three directors to the 10-member board. Among the seven nominees are James J. Cotter, a Hecco general partner, and two other Hecco representatives. Results of the voting had not been announced as of late Monday.

Valley Federal alleged in its lawsuit that the Hecco nominees were ineligible, and therefore any votes for them were invalid. Hecco, not surprisingly, disagreed, and so a court likely will have to decide the issue.

A truce might be possible, however. David Fleming, Valley Federal’s outside counsel, said in a telephone interview that he and Hecco’s lawyers “are sitting down and talking about our differences. That isn’t to say there will be a settlement, but we’re talking about it.� Valley Federal also has periodically talked to other S&Ls; about a possible merger, but nothing has materialized.

Nelms was not the only one choosing his words carefully. Cotter made a brief speech in which he complained that Valley Federal “management has not done its job,� then told the crowd that because of the lawsuit, he too had to “refrain from answering any questions that you may have.�

By limiting their comments, Nelms and Cotter might protect themselves from saying anything that would damage their cases in court. But the silence also prevented Valley Federal’s other stockholders from hearing an open debate between Valley Federal and its dissident investors.

Hecco wants Valley Federal sold in order to increase the value of its Valley Federal stock. Hecco also is an ally and major stockholder of Citadel Holding Corp., the Glendale-based parent of Fidelity Federal Savings & Loan, which has been trying to acquire Valley Federal since November.

Citadel Holding has obtained options and commitments to buy 39.2% of Valley Federal’s stock from certain stockholders--including Hecco--and has pressed Valley Federal to accept a complete buyout ever since. At one point, on Jan. 14, Citadel offered $18.50 a share, or $107.3 million, and said it might pay more.

Citadel’s Efforts Rebuffed

But Valley Federal, whose common stock closed at $15.25 a share in over-the-counter trading Monday, has rebuffed Citadel’s efforts.

In addition, Citadel can’t buy Valley Federal, or even 39% of its stock, until it first gets permission from the Federal Home Loan Bank Board, which regulates the nation’s S&Ls.; Citadel’s application is pending.

With Citadel’s bid stalled, Hecco--which owns 9.9% of Valley Federal--nominated Cotter, lawyer Bruce D. Varner and accountant Stanley H. Karp to fill this year’s three openings on Valley Federal’s board of directors. If elected, the Hecco nominees’ mission is to find a buyer for the S&L;, whether it be Citadel or another party.

The three Valley Federal nominees running for reelection to the S&L;’s board are John S. Fuller, Robert M. Neiman and Martin J. Zaninovich. None are Valley Federal executives.

To further confuse things, Andrew Pilara Jr., a money manager from Moraga, Calif., stood up at the meeting and announced that he was running to be a Valley Federal director. Pilara said that in this election, he has the power to vote 1.39 million common shares, or 24% of Valley Federal’s 5.8 million total shares. Pilara’s nomination, which caught even Hecco off guard, stands a good chance of succeeding because he voted all those shares for himself.

“I want to go on the board so I can make a more informed decision� regarding the company’s direction, Pilara said after the meeting.

Valley Federal’s suit alleged that Hecco, in its proxy materials for the directors’ election, failed to mention that on April 19, the FHLBB found Citadel’s application to buy Valley Federal deficient because it did not include information about Hecco, which owns 9.6% of Citadel’s stock, and some of Hecco’s associates.

In other words, Valley Federal contends that Hecco’s nominees can’t be elected because they didn’t give stockholders all the facts, a charge that Hecco denied.

Hecco, meanwhile, also introduced a resolution at the meeting that calls for Valley Federal to set up a committee of Valley Federal’s outside directors--which, of course, would include Hecco’s nominees and/or Pilara, if they are elected--to solicit and evaluate buyout offers for Valley Federal.

Nelms did not even want to hear about the resolution. The proposal “improperly arrogates the management function vested in the board� and therefore “is not a proper matter to be voted upon by shareholders,� he said.

Hecco lawyer Brent A. Whittlesey was flabbergasted. “The meeting was an abrogation of all principles of shareholder democracy,� he said in a telephone interview later.

So all the stockholders left the meeting not knowing whether the makeup of Valley Federal’s board will change or not. But as the meeting ended, the S&L; confirmed one thing: Its financial performance continues to weaken. And that gives more ammunition to its opponents.

Valley Federal, whose earnings fell 3% in 1987, announced that its first-quarter 1988 profit tumbled 68% from a year earlier to $1.39 million, or 19 cents a share, from $4.35 million, or 70 cents a share.

A major reason for the drop was that the amount of interest Valley Federal paid for deposits in the quarter outstripped the interest it earned on loans. The S&L;’s loan-interest income is too low largely because, last year, Valley Federal wrote many new adjustable-rate mortgages that are still paying the low, introductory “teaser� rates common to such loans.

Valley Federal said that as those loan rates begin to adjust upward to match current market rates during 1988, its profitability should improve.