SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
DOWNEY FINANCIAL CORP.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
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(2) Aggregate number of securities to which transaction applies:
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calculated and state how it was determined):
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
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(4) Date Filed:
DOWNEY FINANCIAL CORP.
3501 JAMBOREE ROAD
NEWPORT BEACH, CA 92660
(949) 854-0300
March 17, 2003
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 23, 2003
10:00 A.M.
IRVINE MARRIOTT HOTEL
18000 VON KARMAN AVENUE
IRVINE, CALIFORNIA
Dear Friend and Shareholder:
The Board of Directors and officers of Downey Financial Corp. ("Downey")
are pleased to extend to you a cordial invitation to attend Downey's Annual
Meeting of Shareholders at the time and place shown above to:
1. Elect three Class 2 Directors for terms of three years each;
2. Ratify the appointment of KPMG LLP as auditors for the year 2003; and
3. Transact such other business as may properly come before the Annual
Meeting and any adjournments thereof.
The Board of Directors has selected February 28, 2003 as the record date
for the Annual Meeting. Only those shareholders of record at the close of
business on that date will be entitled to notice of and to vote at the Annual
Meeting or any adjournments thereof. Information about the matters on which
shareholders will act is included in the attached Proxy Statement. Downey's
directors and executive officers will be available at the meeting to meet with
shareholders.
Your vote is important regardless of the number of shares you own. Whether
or not you expect to attend the meeting, we ask that you PLEASE SIGN AND RETURN
THE ENCLOSED PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. Thank you in
advance for your cooperation.
We look forward to seeing you at the meeting.
Sincerely yours,
/s/ MAURICE L. McALISTER /s/ CHERYL E. OLSON
MAURICE L. McALISTER CHERYL E. OLSON
Chairman of the Board Vice Chairman of the Board
/S/ DANIEL D. ROSENTHAL
DANIEL D. ROSENTHAL
President and Chief Executive Officer
TABLE OF CONTENTS
PAGE
------
Proxy Statement .......................................................... 1
Record Date and Voting of Shares ......................................... 1
Voting and Revocation of Proxies ......................................... 1
Solicitation of Proxies .................................................. 1
Proposal 1. Election of Directors ....................................... 2
o Information Concerning Nominees and Directors ........................ 2
o Nominees for Election at this Meeting, as Class 2 Directors,
to Terms Expiring in 2006 ........................................... 3
o Class 3 Directors Whose Present Terms Continue until 2004 ............ 3
o Class 1 Directors Whose Present Terms Continue until 2005 ............ 3-4
o Retired Director ..................................................... 4
Board Committees and Meeting Attendance .................................. 5-7
Director Independence .................................................... 8-9
Security Ownership of Directors and Executive Officers ................... 10
Executive Officers ....................................................... 11-13
Audit Committee Report ................................................... 14
o Audit Philosophy ..................................................... 14
o Fees ................................................................. 15
Proposal 2. Ratify the Appointment of Auditors .......................... 15
Compensation Committee Report ............................................ 16
o Compensation Philosophy .............................................. 16
o 2002 Compensation Programs ........................................... 16-18
Compensation ............................................................. 19
o Executive Compensation ............................................... 19
o Option/SAR Grants in Last Fiscal Year ................................ 19
o Option Exercises and Holdings ........................................ 20
o Director Compensation ................................................ 20-21
Performance Graph ........................................................ 22
Certain Relationships and Related Transactions ........................... 23
o Transactions with Management and Certain Business Relationships ...... 23
o Loans to Management and Directors .................................... 23
Security Ownership of Certain Beneficial Owners .......................... 24
o Principal Shareholders ............................................... 24
o Equity Compensation Plan Information ................................. 25
Section 16(a) Beneficial Ownership Reporting Compliance .................. 25
Proposals of Shareholders ................................................ 25
Annual Report to Shareholders ............................................ 25-26
Other Business ........................................................... 26
o Presented by Management .............................................. 26
o Presented by Shareholders ............................................ 26
i
DOWNEY FINANCIAL CORP.
3501 JAMBOREE ROAD
NEWPORT BEACH, CALIFORNIA 92660
PROXY STATEMENT
This proxy statement ("Proxy Statement") and the accompanying proxy card
are furnished in connection with the solicitation of proxies by the Board of
Directors (the "Board") for use at the Annual Meeting of Shareholders of Downey
Financial Corp., a Delaware corporation ("Downey"), to be held at 10:00 a.m.,
local time, on Wednesday, April 23, 2003, at the Irvine Marriott Hotel, 18000
Von Karman Avenue, Irvine, California 92612, and any adjournments thereof (the
"Annual Meeting"). Certain of the information provided in this Proxy Statement
relates to Downey Savings and Loan Association, F.A. and any predecessor entity
(the "Bank"), a wholly owned subsidiary of Downey. This Proxy Statement and the
accompanying form of proxy are being mailed to shareholders on or about March
17, 2003. The mailing address of the principal office of Downey is 3501 Jamboree
Road, Newport Beach, California 92660. Downey's telephone number is (949)
854-0300.
RECORD DATE AND VOTING OF SHARES
On February 28, 2003, the record date for determining the shareholders
entitled to notice of and to vote at the Annual Meeting, 27,928,722 shares of
Downey's common stock ("Common Stock") were outstanding. A majority of the
shares entitled to vote will constitute a quorum at the Annual Meeting. The
three director nominees receiving the highest number of affirmative votes at the
Annual Meeting will be elected. Abstentions and broker non-votes are counted for
purposes of determining a quorum, but are not considered as having voted for
purposes of determining the outcome of a vote.
VOTING AND REVOCATION OF PROXIES
All shares represented by a properly executed proxy will be voted in
accordance with the directions on such proxy. If no directions are specified,
such shares will be voted FOR the election of the Board's nominees for directors
presented under Proposal 1 and FOR the ratification of KPMG LLP as auditors for
the year 2003 presented under Proposal 2. If for any reason one or more of the
nominees should be unable or refuse to serve as a director (an event which the
Board of Directors does not anticipate), the persons named in the enclosed
proxy, in their discretion, will vote for substitute nominees of the Board of
Directors unless otherwise instructed. If any other matters are properly
presented to the Annual Meeting for action (including any proposal to adjourn
the Annual Meeting), the persons named in such proxy and acting thereunder will
vote in accordance with their best judgment on such matters.
Any shareholder may revoke his or her proxy at any time before it is voted
by filing with the Corporate Secretary of Downey a written instrument revoking
it or by filing a duly executed proxy bearing a later date. The execution of the
enclosed proxy will not affect the right of a shareholder to vote in person if
such shareholder should decide to attend the Annual Meeting and desires to vote
in person.
SOLICITATION OF PROXIES
Downey will bear the cost of soliciting proxies. Directors and officers of
Downey and directors, officers and employees of the Bank may solicit proxies
personally, by mail, telephone, telecopier or other electronic transmission.
Such directors, officers or employees will receive no compensation for their
solicitation services other than their regular salaries, but may be reimbursed
for out-of-pocket expenses. Downey will request record holders of shares
beneficially owned by others to forward this Proxy Statement and related
materials to the beneficial owners of such shares and will reimburse such record
holders for their reasonable expenses incurred in doing so.
1
PROPOSAL 1. ELECTION OF DIRECTORS
The directors of Downey are divided into three classes, as nearly equal in
number as possible, with one class to be elected annually. The members of each
class are elected for terms of three years and until their successors are
elected and qualified, with one of the three classes of directors being elected
each year. Article III, Section 3.2 of Downey's Bylaws provides that the Board
of Directors shall be composed of not less than seven nor more than nine
members, the exact number to be fixed by the Board.
Accordingly, at this Annual Meeting, three Class 2 Directors are to be
elected to serve three-year terms and until their respective successors are
elected and qualified. The following persons have been nominated by the Board of
Directors to serve as directors:
For election as Class 2 Directors to hold office until the 2006 Annual
Meeting of Shareholders, and until their successors are duly elected and
qualified: Cheryl E. Olson, Lester C. Smull and Michael B. Abrahams.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
EACH OF THE NOMINEES.
INFORMATION CONCERNING NOMINEES AND DIRECTORS
Certain information concerning each nominee for director and each current
director is set forth below. For information regarding ownership of Downey
Common Stock by nominees and directors of Downey, see "Security Ownership of
Directors and Executive Officers" below. There are no arrangements or
understandings between any director, or any nominee, or any other person
pursuant to which such director or nominee is or was nominated to serve as
director.
The following table sets forth certain information concerning (i) the three
nominees standing for election to the Board of Directors at the Annual Meeting,
and (ii) all other directors whose terms as directors will continue after the
Annual Meeting.
Director of Year
Age At Downey Term
Name February 28, 2003 Position(s) Currently Held Since (1) Expires
------------------------------------------------------------------------------------------------
NOMINEES FOR ELECTION
Cheryl E. Olson ........... 46 Director/Vice Chairman 1994 2003
Lester C. Smull ........... 70 Director 1994 2003
Michael B. Abrahams ....... 50 Director 1999 2003
CONTINUING DIRECTORS
Dr. Paul Kouri ............ 81 Director 1994 2004
Brent McQuarrie ........... 51 Director 1994 2004
James H. Hunter ........... 44 Director 2002 2004
Gerald E. Finnell ......... 63 Director 2003 2005
Maurice L. McAlister ...... 77 Director/Chairman 1994 2005
Daniel D. Rosenthal ....... 50 Director, President and 1998 2005
Chief Executive Officer
------------------------------------------------------------------------------------------------
(1) Downey was organized on October 21, 1994. Prior thereto, each of the
directors was a director of the Bank except for Daniel D. Rosenthal,
Michael B. Abrahams and James H. Hunter.
2
NOMINEES FOR ELECTION AT THIS MEETING, AS CLASS 2 DIRECTORS, TO TERMS EXPIRING
IN 2006
Cheryl E. Olson - Mrs. Olson is the Vice Chairman of the Boards of Downey
and the Bank. Mrs. Olson has served as a director of the Bank since 1987. Mrs.
Olson is actively involved in a variety of real estate development, management
and consultant activities. Mrs. Olson also serves on the Board of Directors of
Arrow Records, Inc. Mrs. Olson is the daughter of Maurice L. McAlister, Chairman
of the Board of both Downey and the Bank.
Lester C. Smull - Mr. Smull is a director of Downey and the Bank and has
served as a director since 1994. In 1970, Mr. Smull founded Business Properties
Development Company ("Business Properties"), a real estate development company
with offices in Irvine, California and Phoenix, Arizona. Business Properties'
activities consist of the development, construction and management of commercial
shopping centers, office and industrial buildings throughout California and
Arizona, in addition to land acquisition, planning, design, property management,
marketing and asset management services. Mr. Smull is also a licensed general
contractor and operates Business Properties Construction Company.
Michael B. Abrahams - Mr. Abrahams has served as a director of Downey and
the Bank since 1999. Mr. Abrahams is a Managing Director at Hoefer & Arnett,
Inc., a San Francisco based investment banking firm specializing in financial
institutions. Mr. Abrahams was a senior research analyst for Sutro & Co. from
1996 to 1999 and a Senior Vice President, Investment Banking with Oppenheimer &
Co., Inc. from 1991 to 1996. In addition to serving as a research analyst at
Bateman Eichler, Hill Richards from 1988 to 1991 and Johnston, Lemon & Co. in
Washington, DC from 1986 to 1988, Mr. Abrahams was a policy analyst in the
Executive Office of the President, Office of Management and Budget, Washington,
DC from 1981 to 1986.
CLASS 3 DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 2004
Dr. Paul Kouri - Dr. Kouri is a director of Downey and the Bank. Dr. Kouri
has served as a director of the Bank since 1959. Dr. Kouri also is actively
involved in a variety of real estate development and management activities. Dr.
Kouri is a retired physician having practiced for more than 45 years.
Brent McQuarrie - Mr. McQuarrie is a director of Downey and the Bank. Mr.
McQuarrie has served as a director of the Bank since 1987. Mr. McQuarrie's
principal occupation for more than the past five years has been President and
director of Legacy Realty and Investment Corp., a Utah real estate and
development company, formerly known as Seven Peaks Development.
James H. Hunter - Mr. Hunter became a director of Downey and the Bank on
July 8, 2002. Mr. Hunter's principal occupation for the past several years has
been Executive Vice President of Planning and Acquisition for The Corky McMillin
Companies, a San Diego based residential real estate developer. Mr. Hunter has
been with The Corky McMillin Companies since 1990, following nine years with
Exxon Co., U.S.A. where he held various engineering, management and supervisory
positions associated with oil and gas exploration and production, and was
involved in several major acquisitions.
CLASS 1 DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 2005
Gerald E. Finnell - Mr. Finnell is a director of Downey and the Bank. Mr.
Finnell became a director on February 26, 2003 and replaced Sam Yellen as the
Chairman of the Audit Committee. Mr. Finnell was an audit partner with KPMG LLP
from 1962 to 1995, served as a director of KPMG LLP from 1987 to 1994, was
Chairman of the Board and a member of the Audit and Compensation Committees of
BlueStone Holding Corp. (formerly HealthStar Corp.) from 1997 to 1999 and was a
director and a member of the Audit and Finance Committees of Westminster
Capital, Inc. from 1997 to 1999.
3
Maurice L. McAlister - Mr. McAlister is the Chairman of the Board of
Directors of both Downey and the Bank and was a co-founder of the Bank together
with the other co-founder, the late Gerald H. McQuarrie. Mr. McAlister served as
President of the Bank from 1957 until his retirement in September 1991. In
addition, Mr. McAlister is a director and President of McAlister Investments,
Inc., an affiliate of Downey.
Daniel D. Rosenthal - Mr. Rosenthal is the President and Chief Executive
Officer of Downey and the Bank. Mr. Rosenthal joined the Bank in 1975, was
appointed a director of DSL Service Company, a subsidiary of the Bank, in 1991
and was appointed as DSL Service Company's Acting President in 1993. Mr.
Rosenthal was named President of DSL Service Company in 1994 and was Senior Vice
President and Director of Major Loans of the Bank. During 1998, Mr. Rosenthal
served as the Chief Operating Officer of the Bank and was appointed to the
Boards of Directors of Downey and the Bank and assumed his current position in
November 1998.
RETIRED DIRECTOR
Former director Sam Yellen retired in February 2003. Mr. Yellen served as a
director from 1992 and was the Chairman of the Audit Committee of the Board.
4
BOARD COMMITTEES AND MEETING ATTENDANCE
Currently, Downey has five Board Committees: Audit, Compensation,
Executive, Nominating and Corporate Governance, and Independent Director
Criteria. Membership in the committees, as of the record date of February 28,
2003, is as follows:
NOMINATING
AUDIT* COMPENSATION AND CORPORATE GOVERNANCE*
----- ------------ -------------------------
Gerald E. Finnell, Chair Michael B. Abrahams, Chair Cheryl E. Olson, Chair
Michael B. Abrahams Cheryl E. Olson Maurice L. McAlister
Dr. Paul Kouri Lester C. Smull Daniel D. Rosenthal
Brent McQuarrie
INDEPENDENT
EXECUTIVE DIRECTOR CRITERIA*
--------- ------------------
Maurice L. McAlister, Chair James H. Hunter
Cheryl E. Olson Michael B. Abrahams
Brent McQuarrie Dr. Paul Kouri
Daniel D. Rosenthal
* Former director Sam Yellen served on these committees until his retirement on
February 26, 2003, after which Gerald E. Finnell became a director and Chair of
the Audit Committee.
AUDIT COMMITTEE SEVEN MEETINGS IN 2002
o Responsible for recommending to the Board the engagement of Downey's
and the Bank's independent accountants and assuring their independence
and objectivity;
o Reviews the scope of the audit plans of the independent accountants
and the internal auditors;
o Oversees Downey's and the Bank's policies pertaining to the
effectiveness of internal controls, financial reporting, compliance
and risk management;
o Reviews the objectivity, effectiveness and resources of the internal
audit and internal asset review functions which report directly to the
Audit Committee;
o Reviews non-audit services to be performed by the independent
accountants;
o Reviews the appropriateness of fees for audit and non-audit services
performed by the independent accountants; and
o Composed of "independent" members as defined in the New York Stock
Exchange ("NYSE") listing standards.
COMPENSATION COMMITTEE TWO MEETINGS IN 2002
o Establishes the overall compensation and benefits policies for Downey
and the Bank;
o Reviews and recommends to the Board, the salary and incentive
compensation for the President and Chief Executive Officer;
o Reviews and approves the salaries and incentive compensation for all
other executive and senior officers of Downey and the Bank; and
o Reviews and approves the short-term and long-term incentive
compensation programs, including individual performance goals.
5
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE THREE MEETINGS IN 2002
Reviews and makes recommendations to the Board regarding:
o Oversight of Board activities related to corporate governance and
organization structure;
o Qualifications for director candidates;
o Candidates for election and re-election to the Board;
o Candidates for the position of Chairman of the Board, and President
and Chief Executive Officer; and
o The performance of the President and Chief Executive Officer, in
conjunction with the Compensation Committee.
EXECUTIVE COMMITTEE ONE MEETING IN 2002
o Exercises the powers of the Board when the Board is not in session,
except for the authority to approve the declaration of dividends and
except as may otherwise be limited or restricted under applicable
Delaware law or under Downey's Certificate of Incorporation or Bylaws.
INDEPENDENT DIRECTOR CRITERIA COMMITTEE FIVE MEETINGS IN 2002
o Established in September 2002, in response to Sarbanes-Oxley Act
signed into law on July 20, 2002;
o Reviews the criteria for director independence established by NYSE,
NASDAQ and other public companies;
o Recommends director independence criteria for Downey directors; and
o Recommends to entire Board whether each Downey director qualifies as
independent (then entire Board votes on director independence).
Nominations of individuals for election to the Board of Downey at an annual
meeting of shareholders may be made by any shareholder of Downey entitled to
vote for the election of directors at such annual meeting who complies with the
notice procedures set forth in Downey's Bylaws.
To be timely, a shareholder's notice shall be delivered to or received at
Downey's principal executive offices not less than 20 days prior to the meeting;
provided, however, that if Downey gives shareholders less than 30 days' notice
of the date of the meeting (which notice must be accompanied by a proxy or
information statement which identifies the nominees of the Board), notice by the
shareholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed. Such shareholder's notice shall set forth as to each
person whom the shareholder proposes to nominate for election or re-election as
a director (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, and (iii)
such person's written consent to serving as a director, if elected; and as to
the shareholder giving the notice (i) the name and address of such shareholder,
and (ii) the class and number of shares of Downey which are owned of record by
such shareholder. At the request of the Board, any person nominated by the Board
for election as a director shall furnish to the Secretary of Downey the
information required to be set forth in a shareholder's notice of nomination
which pertains to the nominee together with the required written consents.
Ballots bearing the names of all persons nominated by the Nominating Committee
and by shareholders shall be provided for use at the annual meeting. If the
Nominating Committee fails or refuses to act at least 20 days prior to the
annual meeting, nominations for directors may be made at the annual meeting by
any shareholder entitled to vote and shall be voted upon.
6
No person shall be elected as a director of Downey unless nominated in
accordance with the procedures set forth in this section.
Actions taken by any of the foregoing committees are reported to the Board,
usually at its next meeting.
During 2002, the Board met 12 times for regular meetings. All directors
attended at least 75% of the aggregate meetings held during 2002 by the Board
and the committees of the Board on which they serve. Directors meet their
responsibilities not only by attending Board and committee meetings, but also
through communication with the Chairman, Vice Chairman, President and Chief
Executive Officer and other members of management on matters affecting Downey
and the Bank.
7
DIRECTOR INDEPENDENCE
Under new listing standards proposed by the NYSE, the Board may be required
to consist of a majority of independent directors and certain committees of the
Board will be required to consist solely of independent directors. During the
fourth quarter of 2002, the Board undertook a review of director independence in
light of more stringent standards for independence set forth in the proposed
NYSE listing standards. In September 2002 the Board established a new standing
committee - the Independent Director Criteria Committee ("IDCC"). Director
Hunter is the chairman of the IDCC; Directors Abrahams, Kouri and Yellen were
named as the other three members. (Director Yellen retired from the Board in
February 2003.) The IDCC met five times (from October 30, 2002 through December
13, 2002), considered the new laws and numerous articles and publications on
director independence and considered the commercial, banking, business and
familial relationships, among others, between each director and Downey.
Independence from management was a primary focus, consistent with the proposed
NYSE listing standards. The IDCC also recommended, and the Board approved, the
adoption of a categorical standard for director independence of 2% of Downey's
capital. Thus, any director who has any type of business relationship with
Downey exceeding the 2% of capital threshold (whether loans from Downey or other
types of business), either directly or through a company in which that director
is materially involved, is deemed not independent.
In determining the 2% of capital threshold, the IDCC considered the NASDAQ
independence criteria, which includes a per se finding of non-independence as to
any director who is a partner, controlling shareholder or executive officer of a
company which made or received payments that exceed 5% of the company's annual
gross revenues or $200,000, whichever is more, in the current year or any of the
past three years. The 2% of capital threshold compares favorably with the NASDAQ
criteria in two ways. First, since Downey is a financial institution, a
threshold based upon capital is more appropriate than a threshold based upon
revenues. Second, the IDCC's 2% threshold is more conservative than the NASDAQ's
5% threshold; for example, as of December 31, 2002, 2% of Downey's capital was
approximately $16.5 million as compared to 5% of Downey's revenue for the year
ending December 31, 2002 of approximately $35.0 million.
Based upon the IDCC's analysis and recommendations, the Board determined at
the November 2002 meeting that six directors (Abrahams, Kouri, McAlister,
McQuarrie, Olson and Yellen) were independent and three directors (Hunter,
Rosenthal and Smull) were not independent. The Board also determined that Mr.
Finnell, who replaced former director Yellen as Chair of the Audit Committee,
qualifies as independent. Thus, the Board as currently comprised would satisfy
the proposed NYSE independence requirement. Below is more detail as to the
determination of each director's independence. The IDCC shall continue to meet
and analyze independence issues as proposed rules from both the NYSE and the SEC
are made final and published.
DIRECTORS ABRAHAMS AND KOURI
Each director's only compensation from Downey is director's fees; none has
ever been an officer or employee of Downey or its subsidiaries; and each has
little or no business, banking or other relationships with Downey. Director
Kouri did receive a $260,000 loan from Downey in December 2000 which is secured
by his shares of Downey stock. The loan is current and the Board determined that
this loan did not change its independence findings.
DIRECTOR FINNELL
Mr. Finnell's only compensation from Downey is director's fees. He has
never been an officer or employee of Downey or its subsidiaries; and he has
little or no business, banking or other relationships with Downey.
8
DIRECTOR MCALISTER
Mr. McAlister has substantial relationships with Downey, owns a substantial
amount of Downey's common stock and receives substantial fixed, nondiscretionary
compensation (beyond director's fees) under the Founder Retirement Agreement, as
noted in this Proxy Statement. However, since the primary independence emphasis
under the proposed NYSE Rules is on independence from management, the Board
concluded that Mr. McAlister qualifies as independent because Mr. McAlister is
not (and never has been) beholden to the management team which succeeded him and
the compensation he receives from Downey is fixed and nondiscretionary.
Moreover, as a substantial Downey stockholder, Mr. McAlister's personal
interests are aligned with other shareholders' interests; and in the commentary
to its proposals, the NYSE noted that it does not view ownership of a
significant amount of stock, by itself, as a bar to an independence finding.
DIRECTORS OLSON AND MCQUARRIE
Mrs. Olson is Mr. McAlister's daughter. Mr. McQuarrie is the son of
Downey's other co-founder, the late Gerald McQuarrie. Despite these familial
ties to Downey's co-founders, these two directors are deemed independent in part
because they have not been officers or employees of Downey since 1982; and the
only compensation they receive from Downey is director's fees.
DIRECTORS HUNTER AND SMULL
These two directors were deemed not independent because their business
and/or banking relationships with Downey exceed the 2% of capital threshold
described above. Mr. Smull and related entities have obtained several loans from
Downey which, in the aggregate, exceed the 2% of capital threshold. Mr. Hunter
is an officer of McMillin Companies, an entity which also has received several
construction and development loans from Downey and is an equity partner in
certain developments with DSL Service Company, an affiliate of Downey. These
debt and equity transactions, in the aggregate, exceed the 2% of capital
threshold.
DIRECTOR ROSENTHAL
Mr. Rosenthal, as Downey's president and CEO, is not independent from
management.
9
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of February 28, 2003, certain
information regarding the beneficial ownership of shares of Common Stock by each
director, each of the executive officers named in the Summary Compensation Table
on Page 19 and by all directors and executive officers as a group. Unless
otherwise stated, the beneficial owner exercises sole voting and investment
power over their shares.
AGGREGATE NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED OUTSTANDING SHARES
------------------------ ------------------------- ------------------
Maurice L. McAlister ............ 5,650,705 (1) 20.2
Cheryl E. Olson ................. 566,580 (2) 2.0
Brent McQuarrie ................. 417,177 (3) 1.5
Daniel D. Rosenthal ............. 112,188 (4) *
Dr. Paul Kouri .................. 13,639 (5) *
James H. Hunter ................. 4,845 (6) *
Michael B. Abrahams ............. 4,000 *
Lester C. Smull ................. 598 *
Gerald E. Finnell ............... - *
Jane Wolfe ...................... 23,045 (7) *
Thomas E. Prince ................ 15,915 (8) *
John R. Gatzke .................. 3,838 *
All Directors and Executive
Officers as a Group (16 persons) 6,821,281 (9) 24.4%
------------------------
(1) Mr. McAlister with his spouse, Dianne S. McAlister, as Co-trustor and
Co-trustee of the McAlister Family Trust, exercise shared voting and
investment power over all shares.
(2) Includes 16,294 shares over which Mrs. Olson shares voting and investment
power.
(3) Includes 174,100 shares held by Mr. McQuarrie as Trustee for Jared
McQuarrie, Jennifer McQuarrie, Justin McQuarrie and Jamie McQuarrie (Four
Jays, Ltd.). In addition, Mr. McQuarrie shares voting and investment power
with his spouse, Kathryn McQuarrie, as Co-trustor and Co-trustee with
respect to 36,420 shares, all of which are held in trust for the benefit of
their children. Mr. McQuarrie holds 2,967 shares in an Individual
Retirement Account and Mr. McQuarrie's spouse, Kathryn McQuarrie, holds 827
shares in an Individual Retirement Account. Mr. McQuarrie holds sole voting
and investment power with respect to 1,050 shares and Mr. McQuarrie's
spouse, Kathryn McQuarrie, holds sole voting and investment power with
respect to 1,080 shares. Mr. McQuarrie's daughter, Jamie McQuarrie, holds
sole voting and investment power with respect to 733 shares. Mr. McQuarrie
holds 200,000 shares through Next Generation, Ltd., a Utah limited
partnership, in which he serves as General Partner.
(4) Includes options covering 32,270 shares that are exercisable within 60
days.
(5) Dr. Kouri shares voting and investment power with respect to 4,687 shares.
(6) Mr. Hunter holds 4,845 sahres through Llano Development, Inc. - Profit
Sharing Plan and Trust.
(7) Includes options covering 21,228 shares that are exercisable within 60
days.
(8) Includes options covering 15,915 shares that are exercisable within 60
days.
(9) Includes shared voting and investment power over 5,926,908 shares, includes
options covering 76,583 shares that are exercisable within 60 days.
* Less than 1% of outstanding Common Stock at February 28, 2003.
10
EXECUTIVE OFFICERS
Executive officers are elected annually and serve at the pleasure of the
Board.
The following table sets forth the names of the current executive officers
of Downey and the Bank, along with certain other information relating to such
persons:
AGE AT
NAME FEBRUARY 28, 2003 CURRENT POSITION
---- ------------- ---------------------------------------------------
Daniel D. Rosenthal (1) ....... 50 President and Chief Executive Officer of Downey and
the Bank
Thomas E. Prince .............. 56 Executive Vice President and Chief Financial Officer
of Downey and the Bank
Gary F. Torrell ............... 47 Executive Vice President, General Counsel and
Corporate Secretary of Downey and the Bank
Jane Wolfe .................... 57 Executive Vice President and Chief Administrative
Officer of Downey and the Bank
Stanley M. Tarbell ............ 42 Senior Vice President and Tax Director of Downey
and the Bank
John R. Gatzke ................ 42 Executive Vice President and Chief Lending Officer
of the Bank
Lillian E. Gavin .............. 40 Executive Vice President and Director of Compliance
and Risk Management of the Bank
Richard D. Grout .............. 47 Executive Vice President and Director of Retail
Banking of the Bank
Lelah Jenkins ................. 56 Executive Vice President and Chief Information
Officer of the Bank
Cliff J. Piscitelli ........... 53 Executive Vice President and Director of Asset
Management of the Bank
Kendice K. Briggs ............. 35 Senior Vice President and Director of Human
Resources of the Bank
Kevin W. Hughes ............... 41 Senior Vice President and Director of Portfolio
Management and Secondary Marketing of the
Bank
Kent J. Smith ................. 41 Senior Vice President and Controller of the Bank
--------------------
(1) See "Information Concerning Nominees and Directors - Directors Whose
Present Terms Continue until 2005," for a description of Mr. Rosenthal's
business background.
Thomas E. Prince - Prior to joining the Bank as Executive Vice President
and Chief Financial Officer in May 1992, Mr. Prince spent 24 years at Security
Pacific Corporation and Security Pacific National Bank in various financial
capacities, the last eight years of which as Senior Vice President and
Controller.
Gary F. Torrell - Prior to joining the Bank as Executive Vice President,
General Counsel and Corporate Secretary in January 2002, Mr. Torrell was senior
counsel at City National Bank. From 1983 through 1999, Mr. Torrell was in
private practice, including six years as a partner at Paul, Hastings, Janofsky &
Walker, LLP.
11
Jane Wolfe - Ms. Wolfe was appointed Executive Vice President and Chief
Administrative Officer of the Bank on January 24, 2001. Prior to re-joining the
Bank as Executive Vice President and Chief Lending Officer in April 1994, Ms.
Wolfe served as Senior Vice President and Manager of Mortgage Lending for
Liberty National Bank from September 1993 to April 1994. Ms. Wolfe acted as a
mortgage lending consultant to several financial institutions from November 1992
to September 1993. Prior to such time, Ms. Wolfe served as Executive Vice
President and Chief Lending Officer of the Bank from August 1978 to November
1992.
Stanley M. Tarbell - Mr. Tarbell has been Tax Director of the Bank since
1989 and was appointed Senior Vice President in June 1998. Mr. Tarbell joined
the Bank as Tax Manager in 1987, and prior thereto, was a practicing Certified
Public Accountant with the firm of Kenneth Leventhal and Company.
John R. Gatzke - Mr. Gatzke was appointed Executive Vice President and
Chief Lending Officer of the Bank in January 2001. Prior thereto, Mr. Gatzke
served as Senior Vice President and Assistant Chief Lending Officer of the Bank
from June 1998 to January 2001. Prior thereto, Mr. Gatzke served as Regional
Manager of Wholesale and Retail Lending of the Bank, and in 1997 was appointed
Senior Vice President and Director of Wholesale Lending of the Bank. Mr. Gatzke
previously held positions with the Bank from 1986 to 1990 and served as a loan
officer. Prior to re-joining the Bank in 1992, Mr. Gatzke was employed by Knight
Ridder Newspapers from 1990 to 1991, responsible for marketing and sales of real
estate advertising.
Lillian E. Gavin - Ms. Gavin was appointed Executive Vice President,
Director of Compliance and Risk Management of the Bank in December 1998. Prior
to joining the Bank as Senior Vice President, Director of Compliance and Risk
Management in 1997, Ms. Gavin was a senior examiner with the Office of Thrift
Supervision and its predecessor, the Federal Home Loan Bank Board, since 1987,
and was a bank liquidation specialist with the Federal Deposit Insurance
Corporation from 1984 to 1987.
Richard D. Grout - Mr. Grout was appointed Executive Vice President,
Director of Retail Banking of the Bank on March 1, 2000. Prior to his current
position, Mr. Grout was with Union Bank of California and was responsible for
the bank's mortgage origination for Los Angeles County. Prior thereto, Mr. Grout
was with Home Savings of America from 1995 to 1998 and American Savings Bank
from 1984 to 1995, where he held various retail banking management positions.
Lelah Jenkins - Ms. Jenkins was appointed Executive Vice President, Chief
Information Officer of the Bank in November 2002. From 1999 to 2002, Ms. Jenkins
served as Senior Vice President, Technology Strategy at California Federal. From
1995 to 1999, Ms. Jenkins served as Executive Vice President, Chief Information
Officer at Glendale Federal. From 1991 to 1995, Ms. Jenkins served as Director,
Company-Wide Financial Systems for The Walt Disney Company. From 1986 to 1991,
Ms. Jenkins served as Vice President, Systems and Programming at Glendale
Federal Bank.
Cliff J. Piscitelli - Mr. Piscitelli was appointed Executive Vice
President, Director of Asset Management of the Bank in April 2001. Prior
thereto, Mr. Piscitelli served as Director of Mortgage Banking of the Bank from
October 2000 to April 2001. Prior thereto, Mr. Piscitelli served as Chief
Executive Officer of KATL Properties from April 1995 to April 2000. Prior
thereto, Mr. Piscitelli served as Chief Executive Officer and co-owner of
Frontline Mortgage Company from December 1989 to January 1995.
Kendice K. Briggs - Ms. Briggs was appointed Senior Vice President,
Director of Human Resources of the Bank in November 2000. Ms. Briggs joined the
Bank in 1995 as an employment supervisor and was appointed Vice President and
Manager of Human Resources in July 1998. Prior thereto, Ms. Briggs managed the
Human Resources Department for Imperial Thrift and Loan Association from 1991 to
1995 and, prior thereto, worked for the accounting firm of Coopers & Lybrand in
their Professional Personnel Department.
12
Kevin W. Hughes - Mr. Hughes was appointed Senior Vice President, Director
of Portfolio Management and Secondary Marketing in February 2000. Mr. Hughes
joined the Bank as Vice President and Director of Secondary Marketing in 1998
and prior thereto, was Vice President, Portfolio Manager for Washington Mutual
Bank from 1997. Prior thereto, Mr. Hughes held various positions with American
Savings Bank from 1988 to 1997, with American Savings and Loan Association from
1984 to 1988, and with State Savings and Loan Association from 1982 to 1984.
Kent J. Smith - Mr. Smith was appointed Senior Vice President, Controller
of the Bank in January 2001. Prior thereto, Mr. Smith served as Vice President,
Acting Controller of the Bank from August 2000 and Vice President, Assistant
Controller of the Bank from June 1998 to July 2000. Mr. Smith joined the Bank in
October 1992 as a Senior Internal Auditor and was appointed Financial Reporting
Manager in February 1996.
13
AUDIT COMMITTEE REPORT
The Audit Committee of the Board is responsible for monitoring the
integrity of Downey's financial reporting process and systems of internal
controls regarding financial reporting, accounting and legal compliance. In
addition, the Audit Committee is responsible for monitoring the independence and
performance of Downey's independent auditors, the internal auditing department
and the internal asset review function. The Audit Committee also facilitates
communication among the independent auditors, management, the internal auditing
department, the internal asset review department and the Board. The Audit
Committee is currently composed of four directors, none of whom is employed by
Downey.
AUDIT PHILOSOPHY
During 2000, the Audit Committee revised its written charter to comply with
new rules relating to the functioning of corporate audit committees promulgated
by the Securities Exchange Commission ("SEC") and NYSE. The Audit Committee's
charter was approved by Downey's Board of Directors in January 2001 and is
attached to Downey's 2001 proxy statement as Appendix A.
During 2002, the Audit Committee met seven times. The Audit Committee
reviewed and discussed with management Downey's quarterly and annual audited
financial statements. The Audit Committee discussed with the independent
auditors the matters required to be discussed by Statement on Auditing Standards
No. 61.
Communications with Audit Committee
The Audit Committee discussed with the independent auditors changes in
significant accounting policies, the process used by management in formulating
material accounting estimates and the independent auditor's conclusions
regarding the reasonableness of such policies, estimates and adjustments arising
from the audit, if any, and any disagreements with management over the
application of accounting principles.
The Audit Committee received, reviewed and discussed with the independent
auditors, the auditor's written disclosures regarding independence and the
letter from the auditor required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees. Based on the review of such
disclosures and giving consideration to the non-audit services provided by KPMG
LLP during 2002, the Audit Committee has concluded that independence has not
been impaired or compromised.
Based on the Audit Committee's review and discussions described above, the
Audit Committee recommended to the Board that the audited financial statements
be included in Downey's Form 10-K filed with the SEC.
Respectfully submitted,
Sam Yellen, Chairman*
Michael B. Abrahams
Dr. Paul Kouri
Brent McQuarrie
* Former director Yellen, who retired from the Board effective February 26,
2003, reviewed this Audit Committee Report. Director Finnell, who joined the
Board and became the Chair of the Audit Committee on February 26, 2003, had no
involvement in the Audit Committee during 2002.
14
FEES
During 2002, the Company paid the following amounts to KPMG LLP for the
services as described below:
Audit Fees
Downey paid a total of $220,000 for the audit and review of Downey's 2002
financial statements.
Financial Information Systems Design and Implementation Fees
None.
All Other Fees
Downey paid a total of $126,085 for all other services performed by KPMG
LLP, the majority of which were related to tax projects.
PROPOSAL 2. RATIFY THE APPOINTMENT OF AUDITORS
The Audit Committee of the Board has appointed KPMG LLP as Downey's
auditors for the year 2003 and this appointment is being submitted to the
shareholders for ratification. In the event the appointment is not ratified by a
majority of votes cast, in person or by proxy, it is anticipated that no change
in auditors would be made for the current year because of the difficulty and
expense of making any change so long after the beginning of the current year.
However, such vote would be considered in connection with the appointment of
auditors for the next year.
KPMG LLP was Downey's auditor for the year ended December 31, 2002, and
their representative is expected to attend the meeting, respond to appropriate
questions and if such representative desires, which is not now anticipated, make
a statement.
In 1989, the Board engaged KPMG LLP as Downey's independent auditor and the
relationship which has existed has been the customary relationship between an
independent accountant and client.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THIS PROPOSAL. PROXIES,
UNLESS INDICATED TO THE CONTRARY, WILL BE VOTED "FOR" THIS PROPOSAL.
15
COMPENSATION COMMITTEE REPORT
COMPENSATION PHILOSOPHY
The Compensation Committee's goal is to align compensation programs with
the strategic direction of Downey and to attract, motivate and retain the best
qualified employees. In carrying out its duties, the Compensation Committee
evaluates compensation and benefits programs, including both qualified and
nonqualified programs, as well as medical, dental and other benefits programs
affecting all employees to ensure they are cost effective, competitive and fair.
The Compensation Committee periodically compares Downey's pay policies to
peer group institutions. The Compensation Committee strives to implement
benefits programs which, based upon competitive and cost considerations, deliver
the highest level of value consistent with corporate and shareholder interests.
Total compensation (including benefits) is established in the context of overall
job responsibilities, achieving corporate and individual performance goals and
objectives, as well as competitive compensation conditions.
2002 COMPENSATION PROGRAMS
During 2002, the components of the compensation programs included a base
salary, a bonus program ("Annual Incentive Plan"), the 1994 Long-Term Incentive
Plan, a Deferred Compensation Plan, a Section 125 Cafeteria Plan (i.e., medical,
vision, dental and life coverages) and an Employees' Retirement and Savings Plan
(401(k) Plan).
Base Salary
During 2002, the Compensation Committee reviewed base salaries of selected
employees, including all executive officers. Based on such review and the
Compensation Committee's assessment of market conditions and competitive
factors, the Compensation Committee recommended adjustments to base salaries for
such employees and executive officers. This recommendation was based on salary
survey data supplied by third party nationally recognized salary surveys and
salary surveys among the Bank's competitors.
Annual Incentive Plan
During 2002, the Compensation Committee reviewed and the Board approved an
Annual Incentive Plan for Downey. Individual performance objectives were
established for all eligible participants in the Annual Incentive Plan based
upon their individual responsibilities and Downey's 2002 approved corporate
performance target for net income, which aligned each participant's compensation
with Downey's approved business plan. During 2002, bonus incentives targeted
under the Annual Incentive Plan for the President (who is also the Chief
Executive Officer), and the Chief Administrative Officer were targeted at 120%
and 100% of their base salary, respectively. Other executive officers and
eligible participants of Downey and the Bank were targeted at between 10% and
100% of their base salary. Pursuant to the Annual Incentive Plan, those targeted
amounts may be adjusted based upon individual and corporate performance goals
which provide for a potential bonus payment of up to 168% of an individual's
targeted bonus amount. However, to the extent that actual corporate performance
was 80% or below the approved corporate performance goal, no bonus amounts were
to be paid to participants pursuant to the Annual Incentive Plan.
During 2002, Downey achieved 85% of its corporate performance target. Based
upon 2002 corporate and individual participant performance, bonuses paid,
relative to the targeted amounts for all such participants, represented, on
average, 30% of the bonus target.
16
1994 Long-Term Incentive Plan
In 1994, the Bank's Board approved a Long-Term Incentive Plan (the "LTIP").
The LTIP was submitted to the Bank's shareholders for approval at a special
meeting of shareholders held on December 21, 1994. Thereafter, the LTIP was
adopted and ratified by Downey and, pursuant thereto, shares of Downey are to be
issued upon the exercise of options or payments of other awards for which
payment is to be made in stock.
The LTIP was adopted to promote and advance the interests of Downey and its
shareholders by providing a means by which selected officers and employees would
be given an opportunity to acquire stock in Downey and other incentive-based
awards, to assist in attracting and retaining the services of employees holding
key positions and to provide incentives for such key employees to exert maximum
efforts toward results that are in the best interests of all shareholders.
Incentive stock options may be granted under the LTIP only to officers and key
employees, including directors if they are employees. Currently, approximately
38 officers and key employees are eligible to receive awards under the LTIP. The
LTIP is administered by the Compensation Committee and, during 2002, no stock
option grants or other awards were made under the LTIP.
Deferred Compensation Program
During 1995, the Compensation Committee reviewed and the Board approved
implementation of a Deferred Compensation Plan for key management employees and
directors. The Deferred Compensation Plan is considered to be an essential
element in a comprehensive competitive benefits package designed to attract and
retain individuals who contribute to the success of Downey. Participants are
eligible to defer compensation on a pre-tax basis, including director fees, and
earn a competitive interest rate on the amounts deferred. During 1999, the Board
terminated the 1995 Deferred Compensation Plan and a 1999 Deferred Compensation
Program was approved for key management employees and directors. Currently, 93
management employees and eight directors are eligible to participate in the
program. During 2002, 16 management employees and one director elected to defer
compensation pursuant to the 1999 Deferred Compensation Program.
Employees' Retirement and Savings Plan
The Bank offers to its employees a 401(k) plan. It is called the Downey
Savings Employees' Retirement and Savings Plan. Participants are permitted to
make contributions on a pre-tax basis, a portion of which is matched by the
Bank. For 2002, the Bank contributed $1.6 million as the employer match to the
Downey Savings Employees' Retirement and Savings Plan.
Employee Stock Purchase Plan
Downey offers its employees participation in Downey's Employee Stock
Purchase Plan. Downey believes that ownership of Downey's stock by employees
will foster greater employee interest in Downey's success, growth and
development and will be to the mutual benefit of the employee and Downey. The
Employee Stock Purchase Plan is designed to provide employees a continued
opportunity to purchase Downey stock through systematic payroll deductions.
Downey bears all costs of administering the Employee Stock Purchase Plan,
including broker's fees, commissions, postage and other costs incurred with
stock purchases. If an employee elects to terminate participation in the
Employee Stock Purchase Plan, or sells stock acquired through the Employee Stock
Purchase Plan, the employee is responsible for the associated costs.
President and Chief Executive Officer Compensation
During 2002, Daniel D. Rosenthal served as President and Chief Executive
Officer of Downey and the Bank. In accordance with the Annual Incentive Plan and
achievement of Downey's 2002 corporate
17
performance target, the Compensation Committee recommended and Downey's Board
approved an incentive compensation payment to Mr. Rosenthal of $126,000, which
amount represents 30% of the targeted incentive amount.
The Compensation Committee believes that the management team is dedicated
to achieving significant improvement in Downey's long-term financial
performance. The Compensation Committee further believes that Downey's
compensation policies are designed to align closely the financial interests of
senior executive management with the interests of Downey's shareholders and, as
administered by the Compensation Committee, will enhance management's efforts in
these areas.
Respectfully submitted,
Michael B. Abrahams, Chairman
Cheryl E. Olson
Lester C. Smull
18
COMPENSATION
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation from
Downey and its subsidiaries for services rendered during 2002, 2001, and 2000
which was earned, awarded or paid to Downey's Chief Executive Officer and
Downey's four other most highly compensated executive officers (collectively,
the "Named Executives").
LONG-TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
------------------------ -------
ANNUAL COMPENSATION RESTRICTED SECURITIES
------------------------- STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S) OPTIONS PAYOUTS COMPENSATION
--------------------------- ---- ------ ----- ---------- ----------- ------- ------------
Daniel Rosenthal ............... 2002 $350,000 $126,000 -- -- -- $ 6,000 (1)
President and Chief Executive 2001 325,000 477,360 -- -- -- 5,098 (1)
Officer 2000 300,000 492,624 -- -- -- 7,643 (1)
Jane Wolfe ..................... 2002 $291,500 $ 87,450 -- -- -- $ 8,954 (1)
Executive Vice President and 2001 275,016 336,600 -- -- -- 4,689 (1)
Chief Administrative Officer 2000 250,008 373,200 -- -- -- 4,416 (1)
John Gatzke .................... 2002 $207,907 $162,370 -- -- -- $ 5,521 (1)
Executive Vice President and 2001 198,008 242,352 -- -- -- 5,215 (1)
Chief Lending Officer 2000 180,006 268,704 -- -- -- 3,733 (1)
Thomas E. Prince ............... 2002 $211,848 $ 13,241 -- -- -- $ 6,515 (1)
Executive Vice President and 2001 203,708 50,925 -- -- -- 4,221 (1)
Chief Financial Officer 2000 194,007 53,350 -- -- -- 4,042 (1)
Gary F. Torrell ................ 2002 $204,646* $ 13,500 -- -- -- $10,000 (1)
Executive Vice President and
General Counsel
* Prorated amount actually paid (based on annual salary of $216,000) because
he was employed effective January 22, 2002.
(1) Includes all other compensation as follows:
COMPANY TOTAL
DEFERRED FLEX MATCHING ALL OTHER
COMP BENEFIT 401(K) SIGNING SERVICE PRIZE ANNUAL
NAME YEAR INTEREST CREDITS CONTRIBUTIONS BONUS AWARD AWARD COMPENSATION
--------------------------- ---- -------- ------- ---------- ----------- ------- ------- ------------
Daniel Rosenthal ............... 2002 $-- $ -- $6,000 $ -- $ -- $-- $ 6,000
2001 -- 3,398 1,700 -- -- -- 5,098
2000 -- 2,943 1,700 -- 3,000 -- 7,643
Jane Wolfe ..................... 2002 $-- $ -- $5,954 $ -- $3,000 $-- $ 8,954
2001 46 2,943 1,700 -- -- -- 4,689
2000 -- 2,716 1,700 -- -- -- 4,416
John Gatzke .................... 2002 $-- $ -- $5,521 $ -- $ -- $-- $ 5,521
2001 82 2,306 1,700 -- 1,000 127 5,215
2000 -- 2,033 1,700 -- -- -- 3,733
Thomas E. Prince ............... 2002 $-- $ -- $5,515 $ -- $1,000 $-- $ 6,515
2001 88 2,433 1,700 -- -- -- 4,221
2000 -- 2,342 1,700 -- -- -- 4,042
Gary F. Torrell ................ 2002 $-- $ -- $ -- $10,000 $ -- $-- $10,000
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Downey did not grant any options or stock appreciation rights to the Named
Executives during 2002.
19
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named
Executives concerning the exercise of options during 2002 and unexercised
options held by the Named Executives as of December 31, 2002:
AGGREGATED OPTION EXERCISES IN 2002
AND YEAR-END OPTION VALUES
Number of Value of Unexercised
Shares Number of Unexercised In-the-Money Options at
Acquired Options at 12/31/02 12/31/02 (1)
on Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ---------- -------- ----------- ------------- ----------- -------------
Daniel D. Rosenthal ..... -- -- 32,270 5,897 $546,318 $79,978
Jane Wolfe .............. -- -- 21,228 5,308 287,905 71,990
Thomas E. Prince ........ -- -- 15,915 2,894 270,182 39,250
-------------------------
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on December 31, 2002 ($39.00 per share)
and the exercise price of the options, multiplied by the number of shares
subject to the option.
DIRECTOR COMPENSATION
Annual Compensation
Currently, directors who are not employees receive (i) an annual retainer
of $24,000 payable monthly or quarterly, at the director's option, (ii) an
attendance fee of $1,000 for each Board meeting held on a regular Board meeting
day, and (iii) an attendance fee of $1,000 for each meeting of a Downey or Bank
committee or $500 for each meeting of DSL Service Company's Board held on a day
other than a regular Board meeting day. Non-employee directors who review the
Thrift Financial Reports and Consolidated Maturity/Rate Reports, required to be
filed quarterly with the Office of Thrift Supervision, also receive a $500 fee
per quarter in connection with the review and execution of those regulatory
reports. The Chairmen of Downey's Audit and Compensation Committees each receive
an additional annual retainer of $5,000 and $3,000, respectively. The Chairman
of Downey's and the Bank's Boards is entitled to receive an additional annual
retainer of $2,500, respectively. Downey's and the Bank's Chairman has declined
to accept these additional annual retainers. Directors are reimbursed for
reasonable out-of-pocket expenses incurred in the performance of their duties.
Furthermore, directors are entitled to participate in and receive the medical
benefit coverage provided to the Bank's employees.
Director Retirement Benefits
A retirement benefit (the "Director Retirement Benefits") will be paid to
each non-employee director or his or her designated beneficiary, in equal
monthly installments for a period of 60 months beginning the month following his
or her retirement. The aggregate Director Retirement Benefits for each director
will equal one-third of the number of months of service as a director by such
individual (up to a maximum of 15 years of service) multiplied by the average
monthly qualified (non-employee) director compensation paid to such individual
during the three years preceding cessation of service as a director. Qualified
director compensation includes the annual retainer plus all meeting fees for the
Boards and committees of Downey, the Bank and their respective subsidiaries. The
right of each director to begin to receive such Director Retirement Benefits is
subject to the individual director having (i) ceased serving as a director of
Downey and the Bank, and (ii) served as a director for at least three years. If
a majority interest of Downey's outstanding stock is transferred or acquired
(other
20
than by will or by the laws of descent and distribution), then the entire earned
Director Retirement Benefits becomes payable immediately, and the three-year
minimum service requirement does not apply. If a retired director so requests,
Downey, at its option, may make a single lump-sum payment of the Director
Retirement Benefits. Any such accelerated payment would be discounted at the
interest rate then in effect for the Bank's five-year certificate of deposit.
As previously noted, former director Sam Yellen retired in February 2003.
In recognition of his service to Downey and the Bank and with Board approval, on
January 15, 2003 Downey, the Bank and Mr. Yellen entered into a Director
Retirement Benefits Agreement (the "DRBA") which provides for Mr. Yellen to
receive the regular Director Retirement Benefits for 60 months commencing in May
2005 (at the rate of $3,055.55 per month) plus supplemental director retirement
benefits of $4,416.66 per month from March 2003 through April 2005. The total
amount due to Mr. Yellen under the DRBA is $298,166.33.
Founder Retirement Agreement
On December 21, 1989, the Bank entered into a retirement agreement (the
"Founder Retirement Agreement") with Mr. McAlister, pursuant to which Mr.
McAlister's compensation was $32,167 per month, which payments commenced upon
Mr. McAlister's retirement as President of DSL Service Company, a subsidiary of
the Bank, in 1993. The Founder Retirement Agreement provides for adjustments to
compensation payments every three years, based on the Consumer Price Index, as
defined under the Founder Retirement Agreement. Pursuant to these adjustments,
Mr. McAlister's compensation was adjusted to $35,688.27 per month, effective as
of July 1, 1999.
During 2000, in consideration and in recognition of Mr. McAlister having
completed more than thirty years of service and his continuing involvement with
the growth of Downey and the Bank, the Bank agreed to amend the Founder
Retirement Agreement pursuant to which Mr. McAlister and the Bank agreed that
Mr. McAlister would be entitled to receive monthly compensation for so long as
Mr. McAlister lives but not less than 120 months from June 28, 2000. Thus, the
payments will be made to Mr. McAlister's estate through June 2010 should he die
prior to that date. During 2002, Mr. McAlister received $428,259 under the
Founder Retirement Agreement. If a majority interest of Downey's Common Stock is
transferred or acquired, then such compensation shall continue as scheduled or,
at Downey's option, a lump-sum payment equal to the then present value of any
remaining compensation shall be paid.
21
PERFORMANCE GRAPH
The table below compares the performance of Downey with that of the S&P 500
composite index, the selected Peer Group and the 2001 Peer Group. The selected
Peer Group is SNL Securities' Western Thrift Index for publicly traded savings
institution holding companies. The SNL Securities' Western Thrift Index is
comprised of 31 companies and is considered more representative than the 2001
Peer Group, as the prior index now only consists of two companies thereby making
it less representative of competition in Downey's primary market areas. The
following table assumes $100 invested on December 31, 1997 in Downey, the S&P
500 and equally in the companies in the Peer Group and 2001 Peer Group, and
assumes reinvestment of dividends on a daily basis.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
DOWNEY, S&P 500 Index, PEER GROUP AND 2001 PEER GROUP
1997 1998 1999 2000 2001 2002
Downey 100.00 94.95 76.59 211.28 159.76 152.29
S&P 500 100.00 128.55 155.60 141.42 124.63 96.95
Peer Group 100.00 86.08 68.99 136.30 126.18 143.17
2001 Peer Group 100.00 90.68 69.70 146.34 136.09 152.44
22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND CERTAIN BUSINESS RELATIONSHIPS
During 2002, employees of Downey and the Bank provided accounting and
related services to Maurice L. McAlister, Chairman of Downey's Board of
Directors, certain members of Mr. McAlister's family and certain of his
controlled affiliates. The aggregate value of these services was approximately
$64,431. Downey and the Bank have been fully reimbursed for the services
provided.
Mr. Smull, a director of Downey and the Bank, has a business relationship
that is discussed in the following paragraph.
On November 1, 2002, the Bank's Board approved a proposed transaction in
which the Bank would enter into a commercial lease with Business Properties #22,
a California General Partnership ("BP #22"), to lease premises from BP #22 for a
Huntington Beach branch. Lester C. Smull, a director of Downey and the Bank, and
one of the three members of Downey's Compensation Committee, is the managing
general partner of BP #22. It is expected that the definitive lease agreement
will contain customary terms and conditions, provide for a term of five years,
charge rent at the rate of $8,000 per month, subject to increases of 3% every
five years, and provide for two consecutive five-year options to extend the
term. Management believes that the terms of the proposed lease arrangement,
including the monthly rent, are at least as favorable to the Bank as prevailing
terms that could be obtained from a non-affiliated person.
LOANS TO MANAGEMENT AND DIRECTORS
The Bank offers loans to directors, officers and employees of Downey, the
Bank and their respective subsidiaries. These loans are made in the ordinary
course of business and, in the judgment of management, do not involve more than
the normal risk of collectability or present other unfavorable features. The
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
involving non-affiliated persons.
Over a period of approximately 26 years, the Bank has made various loans to
Director Smull, in his individual capacity, to the Smull Family Trust and to a
number of California partnerships in which Director Smull is a managing general
partner. As of December 31, 2002, the Bank had loans outstanding to Director
Smull or his related partnerships in an aggregate amount of approximately $19.9
million. Each of the loans to Director Smull or his related partnerships (i) was
made in the ordinary course of business and on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions involving non-affiliated persons, and (ii) did not
involve more than the normal risk of collectability or present other unfavorable
features.
On December 20, 2000, the Bank made a loan to Director Kouri and his wife
Bobbie Jean Kouri in the amount of $260,000, secured by 13,639 shares of Downey
stock held by the Kouris. As of December 31, 2002, the outstanding balance of
the loan was $230,000.
The Bank has made various loans to McMillin Companies, LLC, where Director
Hunter is Executive Vice President of Planning and Acquisition. As of December
31, 2002, the Bank had loans outstanding to McMillin Companies, LLC and related
entities in an aggregate amount of $49.6 million. In addition, DSL Service
Company has a $19.8 million investment in McMillin Morgan Hill, LLC. Each of the
loans to the McMillin Companies partnerships (i) was made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
involving non-affiliated persons, and (ii) did not involve more than the normal
risk of collectability or present other unfavorable features.
23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
At the close of business on February 28, 2003, the record date for the
Annual Meeting, there were 27,928,722 shares of Downey's Common Stock
outstanding and entitled to vote, all of one class, and each having one vote.
The holders of a majority of the shares outstanding and entitled to vote, either
present in person or represented by proxy, constitute a quorum for the Annual
Meeting.
PRINCIPAL SHAREHOLDERS
Information concerning the owners of more than 5% of the outstanding Common
Stock as of the record date for the Annual Meeting follows:
Percent of
Amount/Nature of Outstanding
Name/Address Beneficial Ownership Stock
------------ -------------------- -----------
McAlister Family Trust (1) .............. 5,650,705 20.2%
3501 Jamboree Road
Newport Beach, CA 92660
Gerald H. McQuarrie Family Trusts (2) ... 1,522,405 5.5%
Hawkins, Cloward & Simister
1095 South 800 East, Suite #1
Orem, UT 84097
-----------------------------------------
(1) Mr. McAlister with his spouse, Dianne S. McAlister, as Co-trustor and
Co-trustee of the McAlister Family Trust, exercise shared voting and
investment power over all shares.
(2) Oneida B. McQuarrie-Gibson serves as Trustee for the Gerald H. McQuarrie
Family Trusts. Includes 61,283 shares held by the Survivor Trust of the
Gerald H. McQuarrie Trusts; 7,216 shares held by the By-Pass Trust of the
Gerald H. McQuarrie Family Trusts; 76,150 shares held by the Exempt Marital
Trust of the Gerald H. McQuarrie Family Trusts; 1,088,255 shares held by
the Non-Exempt Marital Trust of the Gerald H. McQuarrie Family Trusts;
92,743 shares held by OBM-Brent, Ltd.; 98,379 shares held by OBM-Scott,
Ltd.; and 98,379 shares held by OBM-Sandy, Ltd.
24
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information as of year-end 2002 and 2001
relating to equity compensation plans of Downey pursuant to which grants of
options, restricted stock, or other rights to acquire shares have been or may be
granted, all of which have been approved by security holders.
Plan category Number of Weighted- Number of
securities to average securities
be issued exercise remaining
upon price of available for
exercise of outstanding future issuance
outstanding options options under equity compensation
plans
--------------- ------------------- ----------- -------------------------
December 31, 2002:
Equity compensation plans
approved by security
holders 92,475 $23.67 131,851
December 31, 2001:
Equity compensation plans
approved by security
holders 120,189 $22.69 131,851
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Downey's and,
as may be determined, the Bank's and their respective subsidiaries' executive
officers, directors and persons who own more than ten percent (10%) of Downey's
Common Stock, to file with the SEC and the NYSE reports of ownership of Downey
securities and changes in reported ownership. Officers, directors and greater
than ten percent (10%) shareholders are required by SEC rules to furnish Downey
with copies of all Section 16(a) reports they file.
Based solely on a review of the reports furnished to Downey, or written
representations from reporting persons that all reportable transactions were
reported, Downey believes that during the period January 1, 2002 to December 31,
2002, Downey's officers, directors and greater than ten percent (10%) owners
timely filed all reports they were required to file under Section 16(a); except
that one report, covering a total of four open market sale transactions by Mr.
Brent McQuarrie, was not timely reported on SEC Form 4. The transactions were
reported as soon as they became known. In addition, one open market sale
transaction by Mr. Richard Grout was not timely reported on SEC Form 4 but was
reported and timely filed on his year-end report on SEC Form 5.
PROPOSALS OF SHAREHOLDERS
It is presently anticipated that the 2004 Annual Meeting of Shareholders
will be held in April 2004. Shareholders desiring to exercise their rights under
the proxy rules to submit shareholder proposals are advised that their proposals
must be received by Downey no later than November 14, 2003, in order to be
eligible for inclusion in Downey's proxy statement relating to that meeting.
Shareholders desiring to submit proposals pursuant to the proxy rules should
submit their proposals to the Corporate Secretary, Downey Financial Corp., 3501
Jamboree Road, Newport Beach, California 92660.
ANNUAL REPORT TO SHAREHOLDERS
Downey's Annual Report to Shareholders and Report on Form 10-K, which
includes the consolidated financial statements and related notes thereto,
accompanies this Proxy Statement.
Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are available free of
charge from our internet site, www.downeysavings.com, by clicking on "Investor
Relations" located on our home page and proceeding to "Corporate Filings."
25
SINGLE COPIES OF DOWNEY'S ANNUAL REPORT TO SHAREHOLDERS, AND REPORT ON FORM
10-K (WITHOUT EXHIBITS) MAY BE OBTAINED, FREE OF CHARGE, UPON WRITTEN REQUEST
TO: DOWNEY FINANCIAL CORP., 3501 JAMBOREE ROAD, NEWPORT BEACH, CALIFORNIA 92660,
ATTENTION: CORPORATE SECRETARY.
OTHER BUSINESS
PRESENTED BY MANAGEMENT
As of the date of this Proxy Statement, the management of Downey does not
know of any other matters that are to be presented for action at the Annual
Meeting. Should any other matters come before the Annual Meeting or any
adjournment thereof, the persons named in the enclosed proxy will have
discretionary authority to vote all proxies with respect to such matters in
accordance with their judgment. Additional business may be properly brought
before the Annual Meeting by or at the direction of a majority of Downey's
Board.
PRESENTED BY SHAREHOLDERS
Pursuant to Downey's Bylaws, only such business shall be conducted, and
only such proposals shall be acted upon at the Annual Meeting as are properly
brought before the Annual Meeting. For any new business proposed by management
to be properly brought before the Annual Meeting such new business shall be
approved by the Board, either directly or through its approval of proxy
solicitation materials related thereto, and shall be stated in writing and filed
with the Corporate Secretary of Downey at least 60 days before the date of the
Annual Meeting, and all business so stated, proposed and filed shall be
considered at the Annual Meeting. Any shareholder may make any other proposal at
the Annual Meeting and the same may be discussed and considered, but unless
properly brought before the Annual Meeting, such proposal shall not be acted
upon at the Annual Meeting. For a proposal to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Corporate Secretary of Downey. To be timely, a
shareholder's notice must be delivered to or received at the principal executive
offices of Downey not less than 120 calendar days before the date of Downey's
proxy statement released to shareholders in connection with the previous year's
annual meeting of shareholders, except that, if no annual meeting was held in
the previous year or if the date of the annual meeting has been changed by more
than 30 calendar days from the date contemplated at the time of the previous
year's proxy statement, notice by the shareholder to be timely must be so
received no later than the close of business on the 10th day following the day
on which such notice of the date of the annual meeting was mailed. A
shareholder's notice to the Corporate Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (i) a brief
description of the proposal desired to be brought before the annual meeting,
(ii) the name and address of the shareholder proposing such business, and (iii)
the class and number of shares of Downey which are owned of record by the
shareholder. Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in Downey's Bylaws.
/s/ Gary F. Torrell
Gary F. Torrell
Corporate Secretary
26
REVOCABLE PROXY
DOWNEY FINANCIAL CORP.
ANNUAL MEETING OF SHAREHOLDERS - APRIL 23, 2003
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder(s) of Downey Financial Corp. (the "Company")
hereby nominates, constitutes and appoints Maurice L. McAlister and Brent
McQuarrie, and each of them, the attorney, agent and proxy of the undersigned,
with full power of substitution, to vote all stock of the Company which the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the
Company (the "Annual Meeting") to be held at the Irvine Marriott, 18000 Von
Karman Avenue, Irvine, California, on April 23, 2003 at 10:00 a.m., local time,
and any adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally thereat, as follows:
THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF ALL NOMINEES AND "FOR" THE
RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS AUDITOR FOR THE YEAR 2003 UNLESS
AUTHORITY TO DO SO IS WITHHELD.
PLEASE SIGN AND DATE ON REVERSE SIDE
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD IN THE ENVELOPE PROVIDED AS SOON AS POSSIBLE.
ANNUAL MEETING OF SHAREHOLDERS OF
DOWNEY FINANCIAL CORP.
APRIL 23, 2003
Please detach and mail in the envelope provided
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE /X/
1. Elect three Class 2 Directors for terms of three years each:
NOMINEES:
/ / For All Nominees / / Cheryl E. Olson
/ / Withhold Authority For All Nominees / / Lester C. Smull
/ / For All Except (See instructions below) / / Michael B. Abrahams
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here /X/
--------------------------------------------------------
FOR AGAINST ABSTAIN
2. Ratify the appointment of KPMG LLP as / / / / / /
auditors for the year 2003; and
3. OTHER BUSINESS. In their discretion, the proxyholders are authorized to
transact such other business as may properly come before the Annual Meeting
and any adjournment or adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE OF "FOR" THE ELECTION OF EACH OF
THE NOMINEES LISTED AT LEFT. ALL PROPOSALS TO BE ACTED UPON ARE PROPOSALS OF THE
COMPANY. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY SHALL BE
VOTED BY THE PROXYHOLDERS IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY
OF THE BOARD OF DIRECTORS.
THE UNDERSIGNED HEREBY RATIFIES AND CONFIRMS ALL THAT SAID ATTORNEYS AND
PROXYHOLDERS, OR EITHER OF THEM, OR THEIR SUBSTITUTES, SHALL LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF, AND HEREBY REVOKES ANY AND ALL PROXIES
HERETOFORE GIVEN BY THE UNDERSIGNED TO VOTE AT THE MEETING. THE UNDERSIGNED
HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND THE PROXY
STATEMENT ACCOMPANYING SAID NOTICE.
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered names(s) on the account may not be submitted via this method.
/ /
Please check here if you plan to attend the meeting. / /
---------------------------- ------------------------ ------
NAME OF SHAREHOLDER, PRINTED SIGNATURE OF SHAREHOLDER DATE
---------------------------- ------------------------ ------
NAME OF SHAREHOLDER, PRINTED SIGNATURE OF SHAREHOLDER DATE
NOTE: Please sign exactly as name appears. When shares are held as joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer, and if a
partnership, please sign in full partnership name by authorized person.