<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT - AMENDMENT NO. 2
PURSUANT TO SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 22, 1995
FREMONT GENERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEVADA
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
1-8007 95-2815260
(Commission File Number) (I.R.S. Employer Identification No.)
</TABLE>
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<S> <C>
2020 SANTA MONICA BOULEVARD - SUITE 600 SANTA MONICA, CA 90404
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(310) 315-5500
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changes Since Last Report)
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<PAGE> 2
The undersigned Registrant hereby amends the following items,
financial statements, exhibits or other portions of its Current Report dated
March 8, 1995 on Form 8-K as set forth in the pages attached hereto:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
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PAGE
NUMBER
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(a) Financial statements of business acquired.
The following special purpose financial statements of the Specialty
Workers' Compensation Unit of The Continental Corporation (referred to
elsewhere in this Form 8-K/A as Casualty Insurance Company) are filed as
part of this report:
Independent Auditors' Reports . . . . . . . . . . . . . . . . . . . . . . . 4 - 5
Statements of Assets to be Acquired and Liabilities to be Assumed
at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 6
Statements of Underwriting Gains and Losses for the years ended
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Special Purpose Financial Statements . . . . . . . . . . . . . . . 8 - 17
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2
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PAGE
NUMBER
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(b) Pro forma financial information.
The following pro forma condensed consolidated
financial information of the Registrant is filed
as part of this report:
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Pro Forma Condensed Consolidated Balance Sheet at
December 31, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . 19
Pro Forma Condensed Consolidated Statement of Income for the
year ended December 31, 1994 (unaudited) . . . . . . . . . . . . . . 20
Note to Pro Forma Condensed Consolidated Financial Statements . . . . . . . 21 - 22
(c) Exhibits.
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NUMBER DESCRIPTION
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(2)(i) Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the
Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, dated as of
December 16, 1994. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of February 22, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
(2)(ii) Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation Insurance Company,
Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation
and Casualty Insurance Company, dated as of December 16, 1994. (Filed as Exhibit No. 2.2 to
Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
(23)(i) Consent of Ernst & Young LLP Independent Auditors
(23)(ii) Consent of KPMG Peat Marwick LLP Independent Auditors
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3
<PAGE> 4
Report of Independent Auditors
The Board of Directors
The Continental Corporation
We have audited the accompanying special purpose Statement of Assets to be
Acquired and Liabilities to be Assumed of the Specialty Workers' Compensation
Business Unit of The Continental Corporation (Continental) as of December 31,
1994, and the related special purpose Statement of Underwriting Gains and
Losses for the year then ended. These financial statements are the
responsibility of Continental's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements. We believe that our audit provides a reasonable basis for our
opinion.
As described in Note 1, the accompanying financial statements were prepared
solely for the purpose of complying with the filing instructions of the
Securities and Exchange Commission (for inclusion in Form 8-K of Fremont
General Corporation) and are intended to present the assets to be acquired
(excluding cash and investments) and liabilities to be assumed of the specialty
workers' compensation business unit of Continental by Fremont General
Corporation, pursuant to the provisions of the Stock Purchase Agreement
described in Note 1. The financial statements are not intended to be a complete
presentation of the specialty workers' compensation business unit's financial
position or results of operation.
In our opinion, the 1994 financial statements referred to above present fairly,
in all material respects, the assets to be acquired (excluding cash and
investments) and liabilities to be assumed of the specialty workers'
compensation business unit of Continental, and the related underwriting gains
and losses for the year then ended on the basis described in Note 1, and in
accordance with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 23, 1995
4
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Continental Corporation:
We have audited the accompanying special purpose Statement of Assets to be
Acquired and Liabilities to be Assumed of the Specialty Workers' Compensation
Business Unit of The Continental Corporation (Continental) as of December 31,
1993 and the related special purpose Statement of Underwriting Gains and Losses
for the year then ended. These financial statements are the responsibility of
Continental's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements. We believe that our audit provides a reasonable basis for our
opinion.
As described in Note 1, the accompanying financial statements were prepared
solely for the purpose of complying with the filing instructions of the
Security and Exchange Commission (for inclusion in Form 8-K of Fremont General
Corporation) and are intended to present the assets to be acquired (excluding
cash and investments) and liabilities to be assumed as well as the related
underwriting gains and losses of the specialty workers' compensation business
unit of Continental pursuant to the provisions of the Stock Purchase Agreement
between Continental and Fremont General Corporation described in Note 1. The
financial statements are not intended to be a complete presentation of the
specialty workers' compensation business unit's financial position or results
of operation.
In our opinion, the special purpose financial statements referred to above
present fairly, in all material respects, the assets to be acquired (excluding
cash and investments) and liabilities to be assumed of the specialty workers'
compensation business unit of Continental, pursuant to the Stock Purchase
Agreement described in Note 1 as of December 31, 1993 and the related
underwriting gains and losses for the year then ended on the basis described in
Note 1, and in accordance with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
March 23, 1995
5
<PAGE> 6
Specialty Workers' Compensation Business Unit of
The Continental Corporation
Statements of Assets to be Acquired and Liabilities to be Assumed
<TABLE>
<CAPTION>
December 31
1994 1993
---------------------------
(In Thousands)
<S> <C> <C>
Assets to be acquired
Premiums receivable $149,633 $146,073
Reinsurance receivable 139,175 159,620
Deferred policy acquisition costs 20,532 20,133
Deferred income taxes 56,610 48,353
Other assets 3,416 3,088
---------------------------
Total assets to be acquired $369,366 $377,267
===========================
Liabilities to be assumed
Outstanding losses and loss expenses 706,514 649,157
Unearned premiums 157,135 155,241
Dividends to policyholders and other
policyholder liabilities 19,996 19,566
Other liabilities 10,755 11,052
---------------------------
Total liabilities to be assumed $894,400 $835,016
===========================
</TABLE>
See accompanying notes.
6
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Statements of Underwriting Gains and Losses
<TABLE>
<CAPTION>
Year ended December 31
1994 1993
------------------------------
(In Thousands)
<S> <C> <C>
Premiums written $388,291 $365,378
Increase in unearned premiums (1,894) (18,877)
-------------------------------
Premiums earned 386,397 346,501
Losses and loss expenses incurred 303,624 298,951
Underwriting expenses incurred 86,073 73,667
-------------------------------
Losses and expenses incurred 389,697 372,618
Other income 6,937 8,262
-------------------------------
Net underwriting gain (loss) before
policyholder dividends 3,637 (17,855)
Policyholder dividends 8,210 9,004
-------------------------------
Underwriting loss $ (4,573) $(26,859)
==============================
</TABLE>
See accompanying notes.
7
<PAGE> 8
Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements
December 31, 1994 and 1993
1. BACKGROUND AND BASIS OF PRESENTATION
On December 16, 1994, Fremont General Corporation ("Fremont") and its wholly
owned subsidiary, Fremont Compensation Insurance Company, entered into a Stock
Purchase Agreement ("the Agreement") with The Continental Corporation
("Continental") and its subsidiaries, The Buckeye Union Insurance Company
("Buckeye") and Casualty Insurance Company ("Casualty"), whereby Fremont agreed
to acquire the specialty workers' compensation business unit ("the Business")
of Continental. The Business is primarily written by Casualty and its wholly
owned subsidiary, Workers' Compensation and Indemnity Company of California
(collectively "the Company") in Illinois, and to a lessor extent, Wisconsin,
Indiana, Michigan, and California. Pursuant to the Agreement, which closed on
February 22, 1995, ("the Closing Date"), 100% of the issued and outstanding
common stock of Casualty was acquired by Fremont. The Business also includes
certain workers' compensation insurance policies which had been written by
Continental and certain affiliates on behalf of the Company ("the Fronted
Business"). The Fronted Business was acquired by Fremont through reinsurance
agreements effective on the Closing Date. The agreement also specified that
certain policies (primarily non workers' compensation insurance) written on
behalf of Continental by the Company that were not part of the Business were
excluded from the acquisition through reinsurance arrangements executed between
Casualty and Continental concurrent with the closing. Accordingly, reinsurance
receivables from Continental of $22,185,000 at December 31, 1994, ($30,050,000
at December 31, 1993), have been recorded in the accompanying special purpose
financial statements to offset the outstanding losses and loss expenses
associated with such policies.
Since December 31, 1989, the Company has participated in an intercompany
pooling arrangement with several insurance subsidiaries of Continental, whereby
underwriting revenues and expenses that were directly produced by the companies
participating in the intercompany pooling arrangement were ceded to The
Continental Insurance Company and then retroceded to the participating
companies in accordance with allocation percentages contained in the
intercompany pooling arrangement. Pursuant to the Agreement, the Company
withdrew from the Continental pooling arrangement on January 1, 1995.
8
<PAGE> 9
Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
1. BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)
Because of the intercompany pooling arrangement, the Business has not been
reported as a separate legal entity and as a result, separate financial
statements of the Business, which would include investments and investment
results and current tax provisions, were not prepared. The accompanying
special purpose financial statements report the accounts of the Business on a
direct basis, before giving effect to any participation in the intercompany
pooling arrangement, and exclude investment activity and taxes.
The accompanying special purpose financial statements have been prepared from
the historical accounting records of the Company and Continental and have been
prepared solely for the purpose of complying with the filing instructions of
the Securities and Exchange Commission (for inclusion in the form 8-K filing of
Fremont), and are intended to present the assets to be acquired and the
liabilities to be assumed, as well as the related underwriting gains and losses
of the Business, excluding investments and investment results and taxes
pursuant to the provisions of the Agreement. Certain liabilities and assets of
the Company which are not included in the Business and retained by Continental
have not been reflected in the accompanying special purpose financial
statements. Because investments, investment results and current tax provisions
are excluded from the accompanying special purpose financial statements, the
statement of cash flows is not presented. Accordingly, the accompanying
special purpose financial statements are not intended to be a complete
presentation of financial position or results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PREMIUMS EARNED
Unearned premiums are amortized into revenue on a daily pro rata basis over the
terms of the policies. Premiums receivable include amounts for audits which
have been earned but not billed, as well as amounts which have been recorded or
billed but are not yet due, and are net of an allowance for doubtful accounts
of $938,000 at December 31, 1994, ($1,108,000 at December 31, 1993).
9
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company acts as a servicing carrier in the state of Illinois for
involuntary assigned risk business, and collects a commission for the
processing of this business; such processing primarily includes premium
collection and loss adjusting services. This commission income is reflected as
other income in the accompanying financial statements. The Company has
recorded an allowance of $356,000 at December 31, 1994, ($722,000 at December
31, 1993) for commissions related to the involuntary business deemed
uncollectible.
OUTSTANDING LOSSES AND LOSS EXPENSES
Outstanding losses and loss expenses include the accumulation of case reserves
for claims reported prior to the end of the reporting period, as well as
estimates for losses incurred prior to the end of the reporting period but not
reported to the Company; additionally, reserves are established for the costs
of investigating and adjusting all losses incurred, including those incurred
but not yet reported to the Company.
DEFERRED POLICY ACQUISITION COSTS
Variable costs that are directly related to the production of business,
principally commissions and premium taxes, are deferred and amortized over the
period in which the related premiums are earned. Deferred policy acquisition
costs are limited to their net realizable value after consideration of
investment income or the related premiums.
Policy acquisition costs deferred during 1994 amounted to $54,058,000
($48,375,000 in 1993). Included in underwriting expenses incurred are policy
acquisition costs amortized to income during 1994 which amounted to $53,659,000
($45,772,000 in 1993).
DIVIDENDS TO POLICYHOLDERS AND OTHER POLICYHOLDER LIABILITIES
Certain policies written by the Company (primarily those in California and
Wisconsin) are eligible for policyholder dividends. Dividends to policyholders
are accrued during the period in which the related premiums are earned;
however, such dividends do not become due and payable until declared by the
Boards of Directors of the Company.
10
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
In accordance with Financial Accounting Standards Board Statement 109
"Accounting for Income Taxes", deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of existing assets and liabilities, and are measured using an estimate of
tax rates to be in effect when such bases differences are eliminated.
3. REINSURANCE
In the ordinary course of business, the Company cedes business to reinsurers,
and assumes business from other insurers. Purchasing reinsurance allows the
Business to limit its exposure to catastrophic risks and other concentrations
of risk. However, purchasing reinsurance does not relieve the Business of its
obligations to its insureds. To minimize exposure to significant losses from
reinsurance recoverables, the Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers.
Based upon the Company's evaluation of its reinsurers, the Company believes
that it does not require a reserve for uncollectible reinsurance.
11
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
3. REINSURANCE (CONTINUED)
During the years ended December 31, 1994 and 1993, the Business had the
following reinsurance activity:
<TABLE>
<CAPTION>
1994 1993
------------------------------------
<S> <C> <C>
Written Premiums:
Direct $343,553,000 $340,251,000
Assumed 82,236,000 67,204,000
Ceded 37,498,000 42,077,000
------------------------------------
Net $388,291,000 $365,378,000
====================================
Earned Premiums:
Direct $344,677,000 $330,506,000
Assumed 79,175,000 57,258,000
Ceded 37,455,000 41,263,000
------------------------------------
Net $386,397,000 $346,501,000
====================================
Losses and Loss Expenses Incurred:
Direct $275,115,000 $306,068,000
Assumed 53,705,000 35,833,000
Ceded 25,196,000 42,950,000
------------------------------------
Net $303,624,000 $298,951,000
====================================
</TABLE>
Reinsurance for other than involuntary assigned risk business for accident
years subsequent to 1989 has been excluded from the accompanying special
purpose financial statements and the tables above since the underlying treaties
have been commuted as of the closing date and are not part of the Business.
Pursuant to the Agreement, reinsurance receivable on paid losses at the closing
date will be retained by Continental and remitted to Continental by Casualty as
received. Included in reinsurance receivable are amounts receivable for paid
losses of $8,000,000 at December 31, 1994 and 1993. A corresponding liability
has been recorded reflecting the retention by Continental of the receivable
amount.
12
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
3. REINSURANCE (CONTINUED)
At December 31, 1994, the Company has reinsurance amounts due on unpaid losses
of $71,197,000 from Continental and its affiliates ($82,435,000 at December 31,
1993). Included in such amounts is $41,012,000 at December 31, 1994,
($52,385,000 at December 31,1993), which represents a receivable under an
aggregate stop loss treaty for accident years 1989 and prior placed on behalf
of the Company by Continental. This receivable has been included in the
accompanying special purpose financial statements since this business relates
to accident year 1989 and prior and since Continental provided a reinsurance
agreement providing for indemnification to the Company for such outstanding
losses. The liability for any payments under the predecessor stop loss treaty
has been retained by Continental. Also included in reinsurance receivable is
$22,185,000 at December 31, 1994, ($30,050,000 at December 31, 1993), due from
Continental for excluded business ceded to Continental by Casualty concurrent
with the Agreement.
4. INCOME TAXES
The Company has filed or will file a consolidated tax return for Federal income
tax purposes with Continental and its other subsidiaries through December 31,
1994.
Included in the accompanying special purpose financial statements are net
deferred tax assets, representing the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax return purposes. The components of the Company's net deferred
tax asset at December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
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<S> <C> <C>
Deferred tax asset:
Loss reserve discounting $49,174,000 $41,823,000
Dividends to policyholders 5,845,000 5,284,000
Unearned premiums 11,000,000 10,866,000
Other 1,601,000 2,367,000
------------------------------
Deferred tax assets 67,620,000 60,340,000
Deferred tax liabilities:
Deferred policy acquisition costs 7,186,000 7,047,000
Accrued audit premiums 3,824,000 4,940,000
------------------------------
Deferred tax liabilities 11,010,000 11,987,000
------------------------------
Net deferred tax asset $56,610,000 $48,353,000
==============================
</TABLE>
13
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
The deferred tax assets are recorded without provision for a valuation
allowance, as it is management's belief that such assets will be fully
realizable based upon the Company's future projected earnings.
In accordance with the provisions of the Agreement, any additional unaccrued
taxes payable for tax periods prior to the acquisition will be indemnified by
Continental.
Current taxes payable have been excluded from the accompanying special purpose
financial statements since Continental retains responsibility for such payments
relating to periods prior to the acquisition.
5. EMPLOYEE BENEFIT PLANS
The Company participates in Continental's defined benefit retirement plan, as
well as Continental's 401 (k) Incentive Savings plan; additionally, the Company
also participates in Continental's health care and dental care plans.
Management of the Company are eligible to participate in Continental's long
term incentive plan through the closing date.
With respect to pension and welfare plans, the Company employees who will
continue employment with the Company subsequent to the acquisition will receive
the following benefits:
The accrued benefits under the retirement plan of Continental
shall become fully vested and shall be paid to such employees
in accordance with the terms of Continental's retirement plan;
The participant's account balances in the Incentive Savings
Plan will be transferred to the savings plan of Fremont;
The employees will be eligible to participate in the welfare
plans of Fremont.
With respect to employee postemployment and postretirement benefits other than
pension, the Company employees who will continue employment with the Company
subsequent to the acquisition, will no longer be eligible to participate in
Continental plans. Accordingly, no such liabilities have been included in the
accompanying special purpose financial statements.
14
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Pursuant to the Agreement, Continental will indemnify Fremont for all benefit
obligations which were not adequately reserved at the closing date and related
to obligations arising on or prior to the closing date.
6. OUTSTANDING LOSSES AND LOSS EXPENSES
The following table sets forth development of losses and loss expenses for the
years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
-----------------------------------
<S> <C> <C>
Outstanding losses and loss expenses at
January 1, net of reinsurance $497,537,000 $435,949,000
Reinsurance receivables on outstanding
losses and loss expenses 151,620,000 146,743,000
-----------------------------------
Outstanding losses and loss expenses at
January 1 649,157,000 582,692,000
Incurred related to:
Current year 303,624,000 298,951,000
Prior years -- --
-----------------------------------
Total incurred 303,624,000 298,951,000
Paid related to:
Current year 69,527,000 66,491,000
Prior years 174,072,000 165,995,000
-----------------------------------
Total paid 243,599,000 232,486,000
Outstanding losses and loss expenses at
December 31 706,514,000 649,157,000
Reinsurance receivables on outstanding
losses and loss expenses 131,175,000 151,620,000
-----------------------------------
Outstanding losses and loss expenses at
December 31, net of reinsurance $575,339,000 $497,537,000
===================================
</TABLE>
There was no development of prior insured amounts during 1994 and 1993 since
the year end reserves as of December 31, 1993 and 1992 were established based
on a reserve analysis performed in 1994.
15
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
6. OUTSTANDING LOSSES AND LOSS EXPENSES (CONTINUED)
Workers' compensation permanent disability reserves are discounted using the
statutory permitted discount rate of 3.5%, and amounted to $10,200,000 at
December 31, 1994, ($17,820,000 at December 31, 1993). Reserves are
continually monitored and reviewed, and as settlements are made or reserves
are adjusted, any differences are reported in current operations.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its office facilities and operating equipment
under cancelable and noncancelable agreements. Total rental expense under
these agreements amounted to $2,525,000 in 1994, ($1,992,000 in 1993). At
December 31, 1994, the minimum aggregate rental commitment under all
noncancelable leases (net of sublease income) is as follows:
<TABLE>
<S> <C>
1995 $1,139,000
1996 1,120,000
1997 1,133,000
1998 984,000
1999 919,000
Thereafter 1,326,000
----------
Total $6,621,000
==========
</TABLE>
In the ordinary course of business, the Company is named as a defendant in
legal proceedings relating to insurance policies that have been issued and
other incidental matters. Management believes that none of the actions will
result in any liability that is materially in excess of any provisions made in
the accompanying special purpose financial statements.
8. RELATED PARTY TRANSACTIONS
During 1994 and 1993 Continental provided services to the Company. These
services were primarily management and administration and claims adjustment.
Accordingly, the related costs were allocated to the Company. These expenses,
which amounted to $11,417,000 in 1994, ($11,625,000 in 1993), are intended to
approximate the actual costs of services provided.
16
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Specialty Workers' Compensation Business Unit of
The Continental Corporation
Notes to Special Purpose Financial Statements (continued)
9. DIVIDENDS PAID
During 1993, the Company paid $3,500,000 in cash dividends to Buckeye.
10. SUBSEQUENT EVENT
On February 22, 1995, Fremont and Continental satisfied the conditions of the
Agreement, and ownership of the Company was transferred from Continental to
Fremont.
17
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited Pro Forma Condensed Consolidated
Balance Sheet of the Company as of December 31, 1994 gives effect to the
acquisition of Casualty Insurance Company ("Casualty") as if it had occurred on
December 31, 1994. The unaudited Pro Forma Condensed Consolidated Statement of
Income for the year ended December 31, 1994 presents operating results of the
Company as if the acquisition of Casualty had occurred on January 1, 1994. Pro
forma adjustments to reflect the acquisition have been applied to the
historical statement of income of the Company. The pro forma adjustments are
based upon available information and certain assumptions that management of the
Company believes are reasonable in the circumstances. The Pro Forma Condensed
Consolidated Financial Statements should be read in conjunction with the
consolidated financial statements of the Company, including the notes thereto,
and the other financial information pertaining to the Company included in the
Annual Report on Form 10-K, for the year ended December 31, 1994, filed on
March 31, 1995 and the special purpose financial statements including the notes
thereto of Casualty included elsewhere in this Form 8-K/A. The Pro Forma
Condensed Consolidated Financial Statements are not intended to be indicative
of the consolidated results of operations or financial position of the Company
that would have been reported if the acquisition had occurred at the dates
indicated or of the consolidated results of future operations or of future
financial position.
The acquisition of Casualty is accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16, entitled "Business
Combinations." Under purchase accounting, the total purchase price is
allocated to the acquired assets and liabilities based on their fair values.
Allocation of the purchase price is subject to valuations and other studies
which are not yet complete. Accordingly, the final allocation may be different
from the amounts reflected herein. However, management of the Company does not
believe such differences will be material.
18
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FREMONT GENERAL CORPORATION AND SUBSIDIARIES
AND ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED OF CASUALTY INSURANCE
COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1994 (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Fremont General Casualty Pro Forma
Corporation Insurance Adjustments Pro Forma
and Subsidiaries Company (Note 1) Consolidated
---------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash, investments and accrued investment income $ 933,598 $ -- $ 726,814 a
(175,000) b $1,485,412
Loans receivable 1,440,774 -- -- 1,440,774
Premiums receivable and agents' balances 48,556 149,633 (78,979) d 119,210
Reinsurance recoverable 143,355 139,175 -- 282,530
Deferred policy acquisition costs 59,286 20,532 (11,394) d 68,424
Costs in excess of net assets acquired 28,776 -- 48,220 b
6,365 c 83,361
Deferred income taxes 88,426 56,610 -- 145,036
Other assets 54,806 3,416 (462) c 57,760
Assets held for discontinued operations 336,813 -- -- 336,813
---------- -------- --------- ----------
TOTAL ASSETS $3,134,390 $369,366 $ 515,564 $4,019,320
========== ======== ========= ==========
Liabilities
Losses and loss adjustment expenses $ 746,661 $706,514 $ -- $1,453,175
Life insurance benefits and liabilities 172,425 -- -- 172,425
Unearned premiums 47,551 157,135 (90,373) d 114,313
Dividends to policyholders 46,067 19,996 -- 66,063
Other liabilities 75,682 10,755 5,903 c 92,340
Thrift deposits 746,977 -- -- 746,977
Short-term debt 176,325 -- -- 176,325
Long-term debt 468,390 -- 75,000 b 543,390
Liabilities of discontinued operations 303,299 -- -- 303,299
---------- -------- --------- ----------
TOTAL LIABILITIES 2,783,377 894,400 (9,470) 3,668,307
STOCKHOLDERS' EQUITY
Common Stock 15,388 -- -- 15,388
Additional paid-in capital 80,264 -- -- 80,264
Retained earnings 331,713 -- -- 331,713
Unearned Employee Stock Ownership Plan shares (10,987) -- -- (10,987)
Net unrealized loss on investments, net of deferred taxes (65,365) -- -- (65,365)
---------- -------- --------- ----------
TOTAL STOCKHOLDERS' EQUITY 351,013 -- -- 351,013
---------- -------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,134,390 $894,400 $ (9,470) $4,019,320
========== ======== ========= ==========
</TABLE>
See Note to Pro Forma Condensed Consolidated Financial Statements
19
<PAGE> 20
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
AND STATEMENT OF UNDERWRITING GAINS AND LOSSES OF CASUALTY INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1994 (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Fremont General Casualty Pro Forma
Corporation Insurance Adjustments Pro Forma
and Subsidiaries Company (Note 1) Consolidated
---------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Premiums earned:
Property and casualty $433,584 $386,397 $ -- $ 819,981
Life insurance 14,689 -- -- 14,689
Net investment income 76,821 -- 38,440 e 115,261
Loan interest 113,382 -- -- 113,382
Realized investment gains (losses) (315) -- -- (315)
Other revenue 14,987 6,937 -- 21,924
-------- -------- -------- ----------
Total Revenues 653,148 393,334 38,440 1,084,922
EXPENSES
Losses and loss adjustment expenses 273,599 303,624 2,160 f 579,383
Life insurance benefits 13,002 -- -- 13,002
Policy acquisition costs 86,990 86,073 (11,417) g 161,646
Provision for loan losses 11,980 -- -- 11,980
Other operating costs and expenses 77,076 -- 4,796 f
2,183 h 84,055
Dividends to policyholders 49,654 8,210 -- 57,864
Interest expense 59,276 -- 4,213 i 63,489
-------- -------- -------- ----------
Total Expenses 571,577 397,907 1,935 971,419
-------- -------- -------- ----------
Income before taxes 81,571 (4,573) 36,505 113,503
Income tax expense 25,759 -- 14,601 j 40,360
-------- -------- -------- ----------
Net income $ 55,812 $ (4,573) $ 21,904 $ 73,143
======== ======== ======== ==========
PER SHARE DATA:
Primary:
Net income $ 3.57 $ 4.67
======== ==========
Weighted average shares 15,650 15,650
======== ==========
Fully diluted:
Net income $ 3.00 $ 3.87
======== ==========
Weighted average shares 20,021 20,021
======== ==========
</TABLE>
See Note to Pro Forma Condensed Consolidated Financial Statements
20
<PAGE> 21
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTE TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRO FORMA ADJUSTMENTS
The accompanying Pro Forma Condensed Consolidated Financial Statements
give effect to the following pro forma adjustments necessary to reflect the
acquisition outlined in the preceding Introduction as if the acquisition
occurred at the dates indicated in the Introduction:
a. To record cash, investments and accrued investment income
with a market value of $726,814,000 transferred to the Company by the seller,
The Buckeye Union Insurance Company ("Buckeye"), pursuant to a formula included
in the Stock Purchase Agreement. This formula stipulates that Buckeye will
transfer cash and investments with a market value equal to the difference
between the total of the liabilities assumed plus $201,780,000 in stockholders'
equity of Casualty Insurance Company ("Casualty") determined in accordance with
generally accepted accounting principles at date of purchase, less assets to be
acquired at date of purchase (excluding cash, investments and accrued
investment income).
b. To record the purchase of Casualty by the Company as follows:
<TABLE>
<CAPTION>
(Thousands of dollars)
----------------------
<S> <C>
Cash $ 175,000
Note payable to Buckeye and additional borrowing
by the Company under existing line of credit 75,000
---------
Total purchase price $ 250,000
GAAP stockholders' equity of Casualty at date of acquisition
pursuant to the Stock Purchase Agreement (201,780)
---------
Costs in excess of net assets acquired $ 48,220
=========
</TABLE>
c. To record the following estimated acquisition-related costs:
<TABLE>
<CAPTION>
(Thousands of dollars)
----------------------
<S> <C>
Financial advisor fees $2,000
Other professional fees including legal, auditing and
consulting 1,073
Reinsurance costs for additional coverage 1,524
Other costs 1,768
------
Total acquisition-related costs $6,365
======
</TABLE>
Included in the above total are $462,000 in costs which were prepaid
as of December 31, 1994 and included in other assets. The remaining $5,903,000
is established as an other liability.
d. To record reductions in premiums receivable and agents' balances,
deferred policy acquisition costs and unearned premiums to conform Casualty's
accounting policies related to the recognition of premiums written and policy
acquisition costs with that of the Company. There is no impact on revenue or
expense for these changes in accounting policy.
e. To record an estimate for investment income to be earned on the
net additional investments acquired totaling $551,814,000
($726,814,000-adjustment "a" less $175,000,000-adjustment "b"), as well as the
net investment income to be earned on the net estimated cash flow from
underwriting operations of Casualty less applicable pro forma
21
<PAGE> 22
adjustments. The cash flow from underwriting operations and applicable pro
forma adjustments are assumed to be generated ratably over the year ended
December 31, 1994. The average investment income yield used was 6.681% which
represents the average yield for 1994 on U.S. Treasury notes with a five-year
maturity. This maturity level was selected as it represents the average
maturity of the Company's pre-acquisition workers' compensation investment
portfolio. Additionally, to avoid speculation on interest rates which would
have been earned in the Casualty operation, the Company used interest rates on
U.S. Treasury securities as a benchmark. However, it is the Company's
intention to invest the acquired investments and cash in investment grade
corporate securities in accordance with the Company's existing investment
policy.
f. To record an estimate for additional loss adjustment expenses of
$2,160,000 and other operating costs and expenses of $4,796,000 in recognition
of the expected additional staff and data processing resources to be added by
the Company to Casualty's operations.
g. To record the elimination of management fees payable to The
Continental Corporation.
h. To record one year of amortization of costs in excess of net
assets acquired on a straight line basis over a 25 year period.
i. To record the estimated annual interest expense associated with
the note payable to Buckeye and the acquisition-related borrowing by the
Company under its existing line of credit.
j. To record an accrual for federal and state income taxes on
Casualty's net underwriting loss of $4,573,000, plus or minus taxable pro forma
income and expense adjustments.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by
the undersigned, thereunto duly authorized.
FREMONT GENERAL CORPORATION
Date: February 6, 1996 BY: /s/ JOHN A. DONALDSON
----------------------------------------
John A. Donaldson
Controller and Chief Accounting Officer
<PAGE> 1
EXHIBIT (23)(i)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 23, 1995, included in the
Current Report on Form 8-K of Fremont General Corporation for the year ended
December 31, 1994, with respect to the special purpose Statement of Assets to
be Acquired and Liabilities to be Assumed of the Specialty Workers'
Compensation Business Unit of The Continental Corporation as of December 31,
1994, and the related special purpose Statement of Underwriting Gains and
Losses for the year then ended, as amended, included in this Form 8-K/A.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 6, 1996
<PAGE> 1
EXHIBIT (23)(ii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The Continental Corporation:
We consent to the inclusion of our report dated March 23, 1995, with respect to
the special purpose Statement of Assets to be Acquired and Liabilities to be
Assumed of the Specialty Workers' Compensation Business Unit of The Continental
Corporation as of December 31, 1993 and the related special purpose Statement
of Underwriting Gains and Losses for the year then ended, which report appears
in Fremont General Corporation's Current Report - Amendment No. 2 on Form 8-K/A
dated February 7, 1996.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
February 7, 1996
