Feuding Factions Prepare for Crown Annual Meeting

San Diego County Business Editor

Weeks of public mudslinging between the warring factions vying for control at Crown Bancorp have been replaced by private maneuverings as both sides plot their strategies for Friday's scheduled annual meeting.

Both Crown management and a dissident shareholder group were playing their plans close to the vest Monday, declining to elaborate on what might happen at the once-delayed shareholder gathering.

Last Friday, state banking officials unsuccessfully attempted to prevent dissident shareholder Ed Schmidt--a former president of Crown's Capital Bank of Carlsbad subsidiary--from voting proxies he has obtained during a weeks-long campaign. Coronado-based Crown also operated Bank of Coronado.

San Diego Superior Court Judge Arthur Jones denied the Banking Dept.'s request for a temporary restraining order, but scheduled an Aug. 14 hearing on the state's lawsuit accusing Schmidt of violating California banking regulations by not registering a "change of control" application with regulators.

Lawsuit Reported

The lawsuit was filed Friday, according to both Crown management and Schmidt's attorney. No record of the suit exists in court, however, and state banking officials did not return a reporter's phone calls Monday.

Because the hearing is scheduled for two weeks after Crown shareholders meet, the stage appears to be set for a long-awaited showdown vote this Friday.

As of last week, Schmidt had 153,078 revocable proxies--about 24% of Crown's outstanding shares. Those proxies did not include thousands of other shares belonging to several other dissidents--including former Chairman Dustin Rose, former President James Klingensmith and real estate investor Michael Saywitz, who have aligned themselves with Schmidt.

Crown management reportedly has only about 200,000 proxies ready to vote for them. Crown President Mike Justice said Monday that he has "enough proxies, depending on how the Schmidt contingent is voted."

There are several possible scenarios for Friday's annual meeting:

Crown could attempt to limit Schmidt's votes to those shares he actually owns outright--about 2,050. Or, Crown management could limit Schmidt's proxies to 9.9% of Crown's outstanding number of shares--the percentage allowed by regulators without a formal change-of-control request.

Management Option

Another management option is to allow Schmidt to vote all of his proxies, which would usher in at least three new board members.

No matter which option is chosen, one side or the other will challenge it in court.

Crown management could postpone the annual meeting until after the Aug. 14 hearing, at which time it might secure a firm ruling on how many proxies Schmidt can vote.

However, under state banking law, the annual meeting can be held no later than Aug. 30--or 15 months after the company's previous meeting, according to a banking industry attorney.

Schmidt's supporters could show up at Friday's meeting and vote their own shares, thereby sidestepping the as-yet unresolved legal issue of whether he can vote their proxies. Under this scenario, Schmidt's group could win at least three seats, sources within his camp maintain.

A compromise to avoid Friday's showdown could still take place, although both sides on Monday refused to confirm whether they're even talking with each other about such a possibility. Earlier this month, attempts to reach a compromise slate of directors failed.

Dissident Directors

The proposal called for three dissident directors and four management-backed board members. The stumbling block was whether to include Schmidt in the dissident board group. Schmidt was runner up to Mike Justice last fall for the Crown presidency and there remains tension between the two, sources familiar with the company have said.

A compromise would be the least costly avenue and would avoid further negative publicity for Crown.

Both of its subsidiaries already are operating under regulatory provisos and the company--with $60.4 million in assets and a loss of $2.5 million last year--has already spent too much money and management time in the proxy fight, both sides concede.

Schmidt has waged his proxy fight by promising to raise as much as $2.5 million in capital. Crown management has criticized the dissident group by claiming that the company's losses and problems were created during Schmidt's tenure.

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