<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
Commission File Number 1-8007
FREMONT GENERAL CORPORATION
(Exact name of registrant as specified in this charter)
Nevada 95-2815260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2020 Santa Monica Blvd.
Santa Monica, California 90404
(Address of principal executive offices)
(Zip Code)
(310) 315-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15 (d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock:
Shares Outstanding
Class November 8, 1996
----------------------------- ------------------
Common Stock, $1.00 par value 27,501,132
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FREMONT GENERAL CORPORATION
INDEX
PART I - Financial Information
Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 ................... 3
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1996 and 1995 .... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 .............. 5
Notes to Consolidated Financial Statements on Form 10-Q ...... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 7
PART II - Other Information
Items 1-5 Not applicable
Item 6. Exhibits and Reports on Form 8-K ............................. 20
Signature .............................................................. 24
2
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FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
ASSETS
Securities available for sale at fair value:
Fixed maturity investments (cost: 1996 - $1,120,967; 1995 - $1,255,434) ... $ 1,101,332 $ 1,296,550
Non-redeemable preferred stock (cost: 1996 - $376,018; 1995 - $285,337) ... 369,170 277,451
------------- --------------
Total securities available for sale .................................... 1,470,502 1,574,001
Loans receivable ............................................................... 1,706,201 1,499,043
Short-term investments ......................................................... 115,264 362,163
Other investments .............................................................. 3,270 1,726
------------- --------------
Total Investments and Loans ............................................ 3,295,237 3,436,933
Cash ........................................................................... 30,926 39,559
Accrued investment income ...................................................... 20,617 30,396
Premiums receivable and agents' balances ....................................... 100,709 107,973
Reinsurance recoverable on paid losses ......................................... 8,852 9,422
Reinsurance recoverable on unpaid losses ....................................... 611,090 289,461
Deferred policy acquisition costs .............................................. 25,425 76,638
Costs in excess of net assets acquired ......................................... 67,452 70,656
Deferred income taxes .......................................................... 80,664 78,619
Other assets ................................................................... 72,675 75,240
Assets held for discontinued operations ........................................ 265,675 262,502
------------- --------------
Total Assets ........................................................... $ 4,579,322 $ 4,477,399
============= ==============
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses ........................................ $ 1,310,200 $ 1,455,692
Life insurance benefits and liabilities .................................... 368,484 374,724
Unearned premiums .......................................................... 88,832 100,481
Dividends to policyholders ................................................. 35,048 40,822
------------- -------------
Total Claims and Policy Liabilities .................................... 1,802,564 1,971,719
Reinsurance premiums payable and funds withheld ................................ 4,488 5,452
Other liabilities .............................................................. 54,167 81,371
Thrift deposits ................................................................ 1,034,502 926,312
Short-term debt ................................................................ 147,368 72,191
Long-term debt ................................................................. 687,295 693,276
Liabilities of discontinued operations ......................................... 232,161 228,988
------------- -------------
Total Liabilities ...................................................... 3,962,545 3,979,309
Commitments and contingencies
Company-obligated mandatorily redeemable preferred securities of
subsidiary Trust holding solely Company junior subordinated debentures ..... 100,000 -
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share - Authorized: 49,500,000 shares;
issued and outstanding: (1996 - 27,501,000 and 1995 - 25,393,000) .......... 27,501 25,393
Additional paid-in capital ..................................................... 151,647 110,103
Retained earnings .............................................................. 399,808 347,607
Deferred compensation .......................................................... (44,965) (6,612)
Net unrealized gain (loss) on investments, net of deferred taxes ............... (17,214) 21,599
------------- -------------
Total Stockholders' Equity ............................................. 516,777 498,090
------------- -------------
Total Liabilities and Stockholders' Equity ............................. $ 4,579,322 $ 4,477,399
============= =============
See notes to consolidated financial statements on Form 10-Q.
3
</TABLE>
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------- ------------ ------------- ------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues
Property and casualty premiums earned ........... $ 120,096 $ 159,125 $ 372,334 $ 457,694
Net investment income ........................... 30,159 31,950 95,228 85,842
Loan interest ................................... 42,216 40,488 119,270 120,928
Realized investment gains (losses) .............. (170) (69) (1,694) 8
Other revenue ................................... 5,085 7,005 15,589 26,179
------------ ------------ ------------ -----------
Total Revenues .......................... 197,386 238,499 600,727 690,651
Expenses
Losses and loss adjustment expenses ............. 82,035 122,463 261,540 353,017
Policy acquisition costs ........................ 23,072 34,980 72,587 95,026
Provision for loan losses ....................... 3,305 2,146 9,153 10,504
Other operating costs and expenses .............. 26,562 26,714 78,522 86,497
Interest expense ................................ 28,735 25,336 84,704 72,757
------------ ------------ ------------ -----------
Total Expenses .......................... 163,709 211,639 506,506 617,801
------------ ------------ ------------ -----------
Income before taxes ............................. 33,677 26,860 94,221 72,850
Income tax expense .............................. 10,738 8,595 30,339 23,512
------------ ------------ ------------ -----------
Net Income ........................... $ 22,939 $ 18,265 $ 63,882 $ 49,338
============ ============ ============ ===========
Per Share Data
Net income:
Primary ................................... $ 0.85 $ 0.70 $ 2.42 $ 1.90
Fully diluted ............................. 0.71 0.58 2.01 1.58
Cash dividends ................................. 0.15 0.13 0.45 0.38
Weighted average shares:
Primary ................................... 26,961 26,190 26,345 25,987
Fully diluted ............................. 34,199 33,408 33,563 33,232
See notes to consolidated financial statements on Form 10-Q.
4
</TABLE>
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FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------- -------------
(Thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 63,882 $ 49,338
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in premiums receivable and agents' balances
and reinsurance recoverable on paid losses .......... 7,059 762
Change in accrued investment income ..................... 9,779 (10,124)
Change in claims and policy liabilities ................. (173,710) (35,987)
Amortization of policy acquisition costs ................ 72,587 95,026
Policy acquisition costs deferred ....................... (70,312) (113,414)
Provision for deferred income taxes ..................... 18,854 8,841
Provision for loan losses ............................... 9,153 10,504
Provision for depreciation and amortization ............. 18,216 13,769
Net amortization on fixed maturity investments .......... (18,008) (1,888)
Realized investment (gains) losses ...................... 1,694 (8)
Change in other assets and liabilities .................. (28,976) 9,890
------------ ------------
Net Cash Provided by (Used in) Operating Activities ... (89,782) 26,709
INVESTING ACTIVITIES Securities available for sale:
Purchases of securities ................................. (1,286,971) (2,353,101)
Sales of securities ..................................... 1,297,117 1,611,086
Securities matured or called ............................ 49,955 65,359
Securities held to maturity:
Purchases of securities ................................. - (117,660)
Sales of securities ..................................... - -
Securities matured or called ............................ - 5,464
Decrease in short-term and other investments ................ 245,355 761,212
Loan originations and bulk purchases funded ................. (508,796) (334,566)
Receipts from repayments of loans ........................... 291,789 256,762
Purchase of subsidiaries, less cash acquired ................ - (249,305)
Purchase of property and equipment .......................... (8,815) (5,623)
------------ ------------
Net Cash Provided by (Used in) Investing Activities ... 79,634 (360,372)
FINANCING ACTIVITIES
Proceeds from short-term debt ............................... 145,401 30,134
Repayments of short-term debt ............................... (72,191) (189,755)
Proceeds from long-term debt ................................ 121,058 315,000
Repayments of long-term debt ................................ (101,004) (42,808)
Net increase in thrift deposits ............................. 108,190 82,147
Annuity contract receipts ................................... 128,543 154,087
Annuity contract withdrawals ................................ (30,756) (12,068)
Proceeds from sale of Preferred Securities .................. 100,000 -
Dividends paid .............................................. (10,942) (9,234)
Stock options exercised ..................................... 1,374 68
Settlement under life insurance reinsurance agreement ....... (360,000) -
Net (increase) decrease in deferred compensation plans ...... (28,158) 4,375
------------ ------------
Net Cash Provided by Financing Activities ............. 1,515 331,946
------------ ------------
Decrease in Cash ............................................ (8,633) (1,717)
Cash at beginning of year ................................... 39,559 31,058
------------ ------------
Cash at September 30, ....................................... $ 30,926 $ 29,341
============ ============
See notes to consolidated financial statements on Form 10-Q.
5
</TABLE>
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON FORM 10-Q
(Unaudited)
NOTE A --- Basis of Presentation of Financial Statements
These statements have been prepared in accordance with generally accepted
accounting principles and, accordingly, adjustments (consisting of normal
accruals) have been made as management considers necessary for fair
presentations. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995. Certain 1995 amounts have been
reclassified to conform to the 1996 presentation.
NOTE B --- Public Offering
On March 1, 1996, Fremont General Financing I, a statutory business trust
(the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100
million of 9% Trust Originated Preferred SecuritiesSM ("the Preferred
Securities") in a public offering. The Preferred Securities represent preferred
undivided beneficial interests in the assets of the Trust. The proceeds from the
sale of the Preferred Securities were invested in 9% Junior Subordinated
Debentures of the Company ("the Junior Subordinated Debentures"). The $100
million Junior Subordinated Debentures are the sole asset of the Trust.
The Preferred Securities will be redeemed upon maturity of the Junior
Subordinated Debentures in 2026, subject to the election available to the
Company to extend the maturity up to 2045, and they may be redeemed, in whole or
in part, at any time on or after March 31, 2001 and under certain specified
circumstances.
The Junior Subordinated Debentures rank pari passu with the Company's $302
million aggregate principal amount at maturity of Liquid Yield Option Notes due
2013, and subordinate and junior to all senior indebtedness of the Company.
Payment of distributions out of cash held by the Trust, and payments on
liquidation of the Trust or the redemption of the Preferred Securities are
guaranteed by the Company to the extent that the trust has funds available to
make such payments. The Company has provided for back-up undertakings that,
considered together, constitute a full and unconditional guarantee by the
Company of the Trust's obligations under the Preferred Securities.
NOTE C --- Reinsurance
On January 1, 1996, the Company entered into a reinsurance and assumption
agreement with a reinsurer whereby assets and liabilities related to certain
life and annuity insurance polices, primarily investment-type contracts and
credit life and accident and health, were ceded to the reinsurer. This
reinsurance agreement is part of several other agreements which collectively act
to significantly reduce the Company's life insurance operations. In the second
quarter ended June 30, 1996 these agreements settled, which resulted in the
transfer of $360 million in securities and cash to the reinsurer in support of
the liabilities ceded. The effect on net income from these agreements was not
material.
NOTE D --- Stockholders' Equity and Per Share Data
The three-for-two Common Stock split declared on December 4, 1995 was
distributed on February 7, 1996 to stockholders of record on January 8, 1996.
Per share data have been computed based on the weighted average number of
shares outstanding adjusted retroactively for this stock split.
During the first nine months of 1996, the Company purchased an aggregate
1,351,097 shares at an aggregate cost of approximately $32 million and issued
681,000 shares with a fair value of $16 million to fund stock-based management
and employee benefit programs.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors including those set forth elsewhere in this Quarterly
Report on Form 10-Q.
RESULTS OF OPERATIONS
Fremont General Corporation (the "Company"), a nationwide property and
casualty insurance and financial services holding company, operates through its
wholly-owned subsidiaries in select businesses in niche markets. The three core
operating lines of business are workers' compensation insurance, real estate
lending and commercial finance lending. Additionally, on a smaller scale, the
Company is involved in underwriting various other insurance products.
The following table presents information for the three and nine months
ended September 30, 1996 and 1995 with respect to the Company's primary business
segments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------- ------------ -----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues:
Workers' compensation ......................... $ 138,974 $ 177,122 $ 431,097 $ 504,068
Professional medical liability,
corporate and other ....................... 8,802 9,027 25,284 28,253
------------- ------------- ------------ -----------
Total property and casualty ... 147,776 186,149 456,381 532,321
Financial services ............................ 49,333 52,236 143,041 157,822
Corporate ..................................... 277 114 1,305 508
------------- ------------- ------------ -----------
Total ......................... $ 197,386 $ 238,499 $ 600,727 $ 690,651
============= ============= ============ ===========
Income (Loss) Before Taxes:
Workers' compensation ......................... $ 31,514 $ 23,316 $ 88,042 $ 61,556
Professional medical liability,
corporate and other ....................... (799) (380) (1,922) (1,508)
------------- ------------- ------------ -----------
Total property and casualty ... 30,715 22,936 86,120 60,048
Financial services ............................ 9,724 9,518 26,112 25,838
Corporate ..................................... (6,762) (5,594) (18,011) (13,036)
------------- ------------- ------------ -----------
Total ......................... $ 33,677 $ 26,860 $ 94,221 $ 72,850
============= ============= ============ ===========
</TABLE>
The Company generated revenues of approximately $197 million and $601
million in the three and nine month periods ended September 30, 1996, as
compared to $238 million and $691 million for the same periods in 1995. Revenues
were lower in the three and nine month periods ended September 30, 1996 as
compared to the same periods of 1995, due primarily to lower workers'
compensation insurance premiums and lower life insurance premiums in the
financial services segment. The lower premiums in the nine month period ended
September 30, 1996 as compared to the same prior year period were partially
offset by higher net investment income. The higher net investment income is due
primarily to higher invested assets resulting from the acquisition on February
22, 1995, of Casualty Insurance Company ("Casualty") from the Buckeye Union
Insurance Company. Casualty underwrites workers' compensation insurance
primarily in Illinois and several other mid-western states. Casualty currently
is the largest underwriter of workers' compensation insurance in Illinois and
has provided the Company with a significant presence in the mid-western region.
Workers' compensation insurance premiums were lower in the nine month period
ended September 30, 1996 as compared to the same prior year period, due
primarily to lower
7
<PAGE>
premiums earned in California, partially offset by higher premiums earned in the
mid-western region resulting from the acquisition of Casualty. With respect to
the three month period ended September 30, 1996, both the west (primarily
California) and mid-west regions posted lower workers' compensation earned
premiums as compared to the same prior year period. See "Property and Casualty
Insurance Operations - Premiums." Lower revenues in the financial services
segment are due primarily to lower life insurance premiums as the Company
significantly reduced its life insurance operations effective January 1, 1996 by
entering into certain reinsurance and assumption agreements with a reinsurer.
See "Financial Services." Realized investment gains (losses) in the three and
nine month periods ended September 30, 1996 were $(170,000) and $(1,694,000),
respectively, compared to $(69,000) and $8,000, respectively, for the same
periods in 1995.
The Company had net income of $22.9 million or $0.85 per share and $63.9
million or $2.42 per share for the three and nine month periods ended September
30, 1996, respectively, as compared to $18.3 million or $0.70 per share and
$49.3 million or $1.90 per share, for the same periods in 1995. Income before
taxes for the three and nine month periods ended September 30, 1996 was $33.7
million and $94.2 million as compared to $26.9 million and $72.9 million for the
same periods in 1995, representing increases of 25.4% and 29.3% for the three
and nine month periods, respectively.
Workers' compensation insurance operations posted income before taxes of
$31.5 million and $88.0 million for the three and nine month periods ended
September 30, 1996, respectively, as compared to $23.3 million and $61.6 million
for the same periods in 1995. The increases in income before taxes of 35.2% and
43.0% for the three and nine month periods, respectively, are due primarily to
lower claim frequency and the acquisition of Casualty, offset partially by lower
income on the Company's California business. The combined ratio for the three
and nine month periods ended September 30, 1996 was 93.3% and 95.5%,
respectively, as compared to 100.3% and 100.6% for the same periods in 1995.
The Company's professional medical liability, corporate and other segment
is composed principally of revenues and expenses that pertain to the Company's
professional medical liability business ("medical malpractice"), as well as
miscellaneous expenses associated with the Company's downstream property and
casualty insurance holding company, Fremont Compensation Insurance Group
(formerly Fremont Insurance Group, Inc.). Medical malpractice premiums were $7.6
million and $21.3 million for the three and nine month periods ended September
30, 1996, respectively, as compared to $7.3 million and $22.7 million for the
same periods in 1995. Income before taxes for the medical malpractice business
was $1.1 million and $2.9 million for the three and nine month periods ended
September 30, 1996, respectively, as compared to $1.3 million and $3.8 million
for the same periods in 1995. The lower income before taxes for the nine months
ended September 30, 1996 is consistent with the lower premiums earned in the
medical malpractice segment. Expenses of Fremont Compensation Insurance Group
include interest expense on debt and other obligations of $1.7 million and $4.7
million for the three and nine month periods ended September 30, 1996,
respectively, as compared to $1.7 million and $4.9 million for the same periods
in 1995. Since the operations of Fremont Compensation Insurance Group consist
primarily of interest expense and overhead expenses, management does not expect
it to operate at a profit.
The financial services business segment posted income before taxes for the
the three and nine month periods ended September 30, 1996 of $9.7 million and
$26.1 million, respectively, as compared to $9.5 million and $25.8 million for
the same periods of 1995. Although income before taxes was relatively flat as
compared to the three and nine month periods ended September 30, 1995, the nine
month results in 1996 were negatively impacted by the establishment of a
specific loan loss reserve associated with a particular loan in the commercial
finance loan portfolio. The average loan portfolio in the financial services
segment grew to $1.57 billion in the nine month period ended September 30, 1996
from $1.50 billion in the same period of 1995. Also impacting the financial
services segment in 1996 is the significant reduction in life insurance premiums
resulting from certain reinsurance and assumption agreements entered into
between the Company and a reinsurer which became effective December 31, 1995 and
January 1, 1996. Income before taxes in the life insurance operation was nil in
both the three and nine month periods ended September 30, 1996, as compared to
$0.5 million and $1.6 million for the same periods in 1995. See "Financial
Services."
8
<PAGE>
Corporate revenues during the three and nine month periods ended September
30, 1996 and 1995 consisted primarily of investment income, while corporate
expenses consisted primarily of interest expense and general and administrative
expense. The corporate loss before income taxes for the three and nine month
periods ended September 30, 1996 was $6.8 million and $18.0 million,
respectively, as compared to $5.6 million and $13.0 million for the same periods
of 1995. The increase in the corporate loss before taxes for the three and nine
month periods ended September 30, 1996 over the same periods in 1995, was due
primarily to increased interest expense and increased administrative expenses.
The increase in interest expense is principally due to additional debt incurred
in the acquisition of Casualty, as well as to accrued dividends in connection
with a public offering on March 1, 1996 of $100 million of 9% Trust Originated
Preferred SecuritiesSM (the "Preferred Securities") sold by a consolidated
wholly-owned subsidiary of the Company. See "Liquidity and Capital Resources."
Since the proceeds from this offering were invested in 9% Junior Subordinated
Debentures of the Company, the accrued dividends on the Preferred Securities
have been classified in the Consolidated Statements of Income as interest
expense.
Income tax expense of $10.7 million and $30.3 million for the three and
nine month periods ended September 30, 1996, respectively, represents effective
tax rates of 31.9% and 32.2% on pre-tax income of $33.7 million and $94.2
million. The Company's effective tax rates are flat as compared to effective tax
rates of 32.0% and 32.3% for the same periods in 1995. These effective tax rates
are lower than the enacted federal income tax rate of 35%, due primarily to tax
exempt investment income which reduces the Company's taxable income.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The following table represents information for the three and nine month
periods ended September 30, 1996 and 1995 with respect to the Company's property
and casualty insurance operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues ................................. $ 147,776 $ 186,149 $ 456,381 $ 532,321
Expenses ................................. 117,061 163,213 370,261 472,273
------------ ------------ ------------ ------------
Income before taxes ...................... $ 30,715 $ 22,936 $ 86,120 $ 60,048
============ ============ ============ ============
</TABLE>
Revenues from the property and casualty insurance operations consist
primarily of workers' compensation insurance premiums earned and net investment
income. Expenses consist primarily of loss and loss adjustment expenses, policy
acquisition costs and other operating costs and expenses.
PREMIUMS. Premiums earned from the Company's workers' compensation
insurance operations were $112.2 million and $350.1 million in the three and
nine month periods ended September 30, 1996, respectively, as compared to $151.3
million and $433.3 million for the same periods of 1995. Premiums were lower in
the three and nine month periods ended September 30, 1996 as compared to the
same periods of 1995, due primarily to lower premium rates and non-renewals in
the west region. For the three and nine month periods ended September 30, 1996,
the Company's workers' compensation insurance premiums earned in its western
region, consisting primarily of California, accounted for $42.8 million and
$131.6 million, or 38.2% and 37.6% of the Company's total workers' compensation
insurance premiums earned, respectively. This also represents decreases of $29.2
million and $96.2 million from the same respective periods in 1995. These
decreases were due primarily to the increased price competition resulting from
California's adoption of an open rating system and the repeal of the minimum
rate law. See "Workers' Compensation Regulation." This increased price
competition has led to (i) lower premium rates and (ii) a lower average policy
size due to the Company's shift in focus to smaller employers. Additionally, an
increase in non-renewing policies have contributed to the lower premium volume
in California. The increase in non-renewing policies occurs as a result of
certain premium prices falling below required minimum pricing pursuant to the
Company's underwriting standards. For the three and nine month periods ended
September 30, 1996, the Company's workers' compensation insurance premiums
earned in its mid-western region,
9
<PAGE>
consisting primarily of Illinois, accounted for $69.4 million and $218.5
million, or 61.8% and 62.4%, respectively, of the Company's total workers'
compensation insurance premiums earned. This is compared to $79.2 million and
$205.4 million in premiums earned in the same respective periods of 1995. The
lower premiums earned in the third quarter ended September 30, 1996 as compared
to the same period in 1995, are due primarily to price competition in Illinois,
where an overall average decrease of 13.6% in advisory rates, which workers'
compensation insurance companies in Illinois tend to follow, became effective
January 1, 1996. See "Variability of Operating Results." With respect to the
nine month period ended September 1996, premiums earned are higher than the same
period in 1995, due primarily to the fact that the Casualty acquisition settled
on February 22, 1996, and therefore, only seven months of Casualty's operating
results are included in the Company's results for the nine month period ended
September 30, 1995.
NET INVESTMENT INCOME. Net investment income within the property and
casualty insurance operations was $27.8 million and $85.7 million in the three
and nine month periods ended September 30, 1996, as compared to $27.0 million
and $74.6 million for the same periods of 1995. Higher net investment income was
earned in the nine month period ended September 30, 1996 as compared to the same
period in 1995, due primarily to the fact that only seven months of Casualty's
operations are included in the Company's results of operations in the nine month
period ended September 30, 1995.
LOSS AND LOSS ADJUSTMENT EXPENSE. Workers' compensation loss and loss
adjustment expenses ("LAE") were $75.8 million and $244.1 million for the three
and nine month periods ended September 30, 1996, respectively, as compared to
$116.5 million and $333.8 million for the same periods in 1995. In addition, the
ratio of these losses and LAE to workers' compensation insurance premiums earned
was 67.5% and 69.7% for the three and nine month periods ended September 30,
1996, respectively, as compared to 77.0% for both the three and nine months
ended September 30, 1995. The decreases in incurred loss and LAE in the three
and nine month periods ended September 30, 1996 as compared to the same periods
of 1995, are due primarily to lower claim frequency and severity in the
Company's mid-west region and to a lower level of incurred losses and LAE in the
Company's west region resulting from lower insurance premiums earned on
California policies which resulted from increased competition. See "Premiums".
The Company regularly reviews its reserving techniques, overall reserve
position and reinsurance. In light of present facts and current legal
interpretations, management believes that adequate provisions have been made for
loss reserves. In making this determination, management has considered its
claims experience to date, loss development history for prior accident years and
estimates of future trends of claims frequency and severity. However,
establishment of appropriate reserves is an inherently uncertain process, and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience. Subsequent actual experience
has resulted and could result in loss reserves being too high or too low. Future
loss development could require reserves for prior periods to be increased, which
would adversely impact earnings in future periods.
POLICY ACQUISITION COSTS AND OTHER OPERATING COSTS AND EXPENSES. The ratio
of policy acquisition costs and other operating costs and expenses to premiums
earned is referred to as the expense ratio, which for the Company's workers'
compensation business was 25.8% for both the three and nine month periods ended
September 30, 1996, respectively, as compared to 23.3% and 23.6% in the same
respective periods of 1995. The increase in this ratio in the three and nine
month periods ended September 30, 1996 was due primarily to higher operating
costs and expenses, partially offset by lower agents' commission costs.
DIVIDENDS TO POLICYHOLDERS. In the three and nine month periods ended
September 30, 1996 and September 30, 1995, there were no dividends accrued. This
is due primarily to a change in the type of workers' compensation insurance
policy written on and after January 1, 1995. In 1995, the Company's workers'
compensation insurance policies, both in California and those underwritten by
Casualty, were predominately written as non-participating, which does not
include provisions for dividend consideration. Prior to 1995 the Company's
policies were predominately written as participating, thereby obligating the
Company to consider the payment of dividends. This shift in policy type is due
primarily to the increased competition in the California market which has
resulted from the repeal of the minimum rate law, effective January 1, 1995. The
Company anticipates that this
10
<PAGE>
shift to non-participating policies will continue and be a characteristic
element of the competitive environment established by the July 1993 California
legislation. See "Workers' Compensation Regulation."
VARIABILITY OF OPERATING RESULTS. The Company's profitability can be
affected significantly by many factors including competition, the severity and
frequency of claims, interest rates, regulations, court decisions, the judicial
climate, and general economic conditions and trends, all of which are outside of
the Company's control. These factors have contributed, and in the future could
contribute, to significant variation of results of operations in different
aspects of the Company's business from quarter to quarter and year to year. With
respect to the workers' compensation insurance business, changes in economic
conditions can lead to reduced premium levels due to lower payrolls as well as
increased claims due to the tendency of workers who are laid off to submit
workers' compensation claims. Legislative and regulatory changes can also
contribute to variable operating results for workers' compensation insurance
businesses. For example, in 1995 the Company experienced the negative impact of
lower premiums and lower profitability on the Company's California workers'
compensation business due to increased price competition resulting from
legislation enacted in California in July 1993 which, among other things,
repealed the minimum rate law effective January 1, 1995. See "Workers'
Compensation Regulation." Additionally, price competition in Illinois continues
to impact the Company's profitability, where an overall average decrease of
13.6% in advisory rates, which workers' compensation insurance companies in
Illinois tend to follow, became effective January 1, 1996. The Company
anticipates that its results of operations and financial condition will continue
to be adversely affected by the increased price competition which has lowered
the Company's workers' compensation insurance premiums earned in California and
Illinois. Also, the establishment of appropriate reserves necessarily involves
estimates, and reserve adjustments have caused significant fluctuations in
operating results from year to year.
WORKERS' COMPENSATION REGULATION. Illinois began operating under an open
rating system in 1982 and California began operating under such a system
effective January 1, 1995. In an open rating system, workers' compensation
companies are provided with advisory rates by job classification and each
insurance company determines its own rates based in part upon its particular
operating and loss costs. Although insurance companies are not required to adopt
such advisory rates, companies in Illinois generally follow such rates. Premiums
in Illinois have decreased, due in part to the 13.6% decrease in overall average
advisory rates which became effective January 1, 1996. However, insurance
companies in California have, since the adoption of an open rating system,
generally set their premium rates below such advisory rates. Before January 1,
1995, California operated under a minimum rate law, whereby premium rates
established by the California Department of Insurance were the minimum rates
which could be charged by an insurance carrier.
In July 1993, California enacted legislation to reform the workers'
compensation insurance system and to, among other things, (i) reduce workers'
compensation manual premium rates by 7% effective July 16, 1993 and (ii) repeal
the minimum rate law effective January 1, 1995. In addition to the July 1993
legislation, in December 1993, the California Insurance Commissioner reduced
workers' compensation manual premium rates on new and renewal business an
additional 12.7% effective January 1, 1994. In September 1994, California
workers' compensation manual premium rates were further reduced by 16% effective
October 1, 1994 on all business incepting on or after January 1, 1994.
The repeal of the minimum rate law on January 1, 1995 has resulted in lower
premiums and lower profitability in the Company's California workers'
compensation insurance business due to increased price competition. The Company
believes that its acquisition of Casualty, with policies written primarily
outside of California, has lessened the impact of the repeal of the minimum rate
law by providing geographic diversity, which mitigates the impact of economic
and regulatory changes within a regional marketplace.
FINANCIAL SERVICES
The Company's financial services operations are principally engaged in
commercial and residential real estate lending through Fremont Investment & Loan
and asset-based commercial finance lending through Fremont Financial. The
Company also has small premium finance and life insurance operations included in
this segment. Revenues consist principally of interest income and, to a lesser
extent, fees and other income.
11
<PAGE>
The following table presents information with respect to the Company's
financial services operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ------------ -----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues ........................................ $ 49,333 $ 52,236 $ 143,041 $ 157,822
Expenses ........................................ 39,609 42,718 116,929 131,984
----------- ----------- ------------ -----------
Income Before Taxes ............................. $ 9,724 $ 9,518 $ 26,112 $ 25,838
=========== =========== ============ ===========
</TABLE>
Revenues decreased 5.6% and 9.4% in the three and nine month periods ended
September 30, 1996, respectively, as compared to the same periods of 1995, due
primarily to lower life insurance revenues. These lower life insurance revenues
resulted from certain reinsurance and assumption agreements which the Company
entered into on December 31, 1995 and January 1, 1996, primarily with one
reinsurer, whereby assets and liabilities related to certain life and annuity
insurance policies, primarily investment-type contracts and credit life and
accident and health, were ceded to the reinsurer. The reinsurance agreements are
part of several other agreements which collectively act to significantly reduce
the Company's life insurance operations. The effect on income before taxes and
net income from these agreements was not material.
Income before taxes in the financial services operations was $9.7 million
and $26.1 million for the three and nine month periods ended September 30, 1996,
respectively, as compared to $9.5 million and $25.8 million for the same periods
of 1995. Income before taxes was relatively flat in the financial services
segment for the three and nine month periods ended September 30, 1996 as
compared to the same periods of 1995, due primarily to higher income before
taxes in the real estate lending operation as lower loan loss experience
resulted in a lower provision for loan losses. This was offset substantially by
lower income in the commercial finance operation due to a specific loan loss
reserve associated with a particular loan in the commercial finance loan
portfolio. Additionally, lower income was earned in the life insurance operation
due to certain reinsurance agreements which became effective on December 31,
1995 and January 1, 1996 and which resulted in a significant reduction in the
Company's life insurance operations in 1996.
12
<PAGE>
The following table identifies the interest income, interest expense,
average interest-bearing assets and liabilities, and interest margins for the
Company's real estate lending and commercial finance subsidiaries:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Cost (1) Balance Interest Cost (1)
--------------- --------- -------- --------------- --------- --------
(Thousands of dollars, except percents)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing assets (2):
Commercial finance
and other assets ................ $ 650,888 $ 53,603 10.98% $ 607,217 $ 54,536 11.98%
Real estate lending:
Cash equivalents ................... 148,519 5,925 5.32 88,856 3,674 5.51
Investments ........................ 30,196 1,277 5.64 832 16 2.56
Commercial real estate loans ....... 724,363 52,511 9.67 679,972 49,855 9.78
Residential real estate loans ...... 198,727 14,087 9.45 125,626 9,171 9.73
Contract loans ..................... 41 - - 7,332 726 13.20
Installment loans .................. 538 54 13.38 2,630 252 12.78
Finance leases ..................... - - - 45 3 8.89
-------------- -------- -------------- --------
Total interest bearing assets ........ $ 1,753,272 $127,457 9.69 $ 1,512,510 $118,233 10.42
============== ======== ============== ========
Interest bearing liabilities:
Savings deposits ..................... $ 252,918 $ 9,405 4.96% $ 110,301 $ 4,268 5.16%
Time deposits ........................ 718,757 30,859 5.72 665,143 30,011 6.02
Commercial paper and other ........... 2,132 77 4.82 18,394 974 7.06
Securitization obligation ............ 297,017 13,598 6.10 318,889 15,789 6.60
Debt with banks ...................... 233,940 11,322 6.45 166,050 8,366 6.72
Debt from affiliates ................. 58,915 2,161 4.89 47,733 1,675 4.68
-------------- -------- -------------- --------
Total interest bearing liabilities ... $ 1,563,679 $ 67,422 5.75 $ 1,326,510 $ 61,083 6.14
============== ======== ============== ========
Net interest income .................... $ 60,035 $ 57,150
======== ========
Net yield .............................. 4.57% 5.04%
- ----------------------------
(1) Annualized.
(2) Average loan balances include non-accrual loan balances.
</TABLE>
The margin between the Company's interest income and cost of funds
decreased in the nine month period ended September 30, 1996 as compared to the
nine month period ended September 30, 1995, due primarily to an increase in
lower yielding cash equivalents and changes in the mix of loans, offset
partially by a modest decrease in the cost of savings and time deposits in the
real estate lending operation. Additionally, there was a slight decrease in the
net margins in the commercial finance lending segment. In the real estate
lending operation, the change in portfolio mix occurred as the Company completed
in 1996 its shift from high rate, high risk residential real estate loans
secured by personal property or junior liens on real estate, to lower yielding
residential first trust deed real estate loans. The lower yields on the first
trust deed loans are compensated for by the improved underlying collateral and
by the improved lien position on the collateral. The net margins decreased in
the commercial finance segment due primarily to an increase in the competitive
environment.
13
<PAGE>
LOANS RECEIVABLE AND RESERVE ACTIVITY. The following table shows loans
receivable in the various financing categories and the percentages of the total
represented by each category:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------------------ -----------------------
% of % of
Amount Total Amount Total
------------- -------- -------------- -------
(Thousands of dollars, except percents)
<S> <C> <C> <C> <C>
Accounts receivable and inventory loans:
Commercial finance ........................... $ 457,357 26% $ 415,038 27%
Term loans:
Commercial finance ........................... 182,492 10 110,647 7
Real estate lending .......................... 1,036,153 60 888,952 58
Other ........................................ 65,493 4 116,187 8
------------ -------- -------------- --------
Total term loans ......................... 1,284,138 74 1,115,786 73
------------ -------- -------------- --------
Total loans .............................. 1,741,495 100 1,530,824 100
Less allowance for possible loan losses .......... 35,294 2 31,781 2
------------ -------- -------------- --------
Loans receivable ............................. $ 1,706,201 98% $ 1,499,043 98%
============ ======== ============== ========
</TABLE>
The following table illustrates the maturities of the Company's loans
receivable:
<TABLE>
<CAPTION>
Maturities at September 30, 1996
-----------------------------------------------------------
1 to 24 25 to 60 Over 60
Months Months Months Total
----------- ------------ ------------ ---------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Accounts receivable and inventory
loans -- variable rate ............. $ 457,357 $ - $ - $ 457,357
Term loans -- variable rate ............. 182,517 78,222 824,038 1,084,777
Term loans -- fixed rate ................ 97,809 33,285 68,267 199,361
----------- ------------ ------------ ---------------
Total ............................... $ 737,683 $ 111,507 $ 892,305 $ 1,741,495
=========== ============ ============ ===============
</TABLE>
The Company monitors the relationship of fixed and variable rate loans and
interest bearing liabilities in order to minimize interest rate risk.
Adverse economic developments can negatively affect the Company's business
and results of operations in a number of ways. Such developments can, among
other things, reduce the demand for loans, impair the ability of borrowers to
pay loans and impair the value of the underlying collateral.
14
<PAGE>
The following table describes the asset classifications, loss experience
and reserve reconciliation of the real estate lending and commercial finance
operations as of or for the periods ended as shown below:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1995
-------------- ---------------
(Thousands of dollars, except percents)
<S> <C> <C>
Non-accrual loans .................................................... $ 26,824 $ 42,331
Accrual loans 90 days past due ....................................... 349 1,820
Real estate owned ("REO") ............................................ 9,953 4,596
------------- --------------
Total non-performing assets .......................................... $ 37,126 $ 48,747
============= ==============
Beginning allowance for possible loan losses ......................... $ 31,781 $ 27,406
Provision for loan losses ............................................ 9,153 10,504
Reserves established with portfolio acquisitions ..................... 1,830 -
Charge-offs:
Commercial finance and other loans ............................... 5,456 113
Real estate lending:
Commercial real estate loans ................................. 2,681 1,561
Residential real estate loans ................................ 229 1,158
Contract and installment loans ............................... 94 207
------------- ---------------
Total charge-offs ................................................ 8,460 3,039
------------- ---------------
Recoveries:
Commercial finance and other loans ............................... 29 1,023
Real estate lending:
Commercial real estate loans ................................. 564 1,404
Residential real estate loans ................................ 139 193
Contract and installment loans ............................... 250 1
Finance leases ............................................... 8 -
------------- ---------------
Total recoveries ................................................. 990 2,621
------------- ---------------
Net charge-offs ..................................................... 7,470 418
------------- ---------------
Ending allowance for possible loan losses ........................... $ 35,294 $ 37,492
============= ===============
Allocation of allowance for possible loan losses:
Commercial finance and other loans .............................. $ 13,672 $ 15,830
Real estate lending ............................................. 21,622 21,662
------------- --------------
Total allowance for possible loan losses ........................ $ 35,294 $ 37,492
============= ==============
Total loans receivable .............................................. $ 1,741,495 $ 1,545,566
Average total loans receivable ...................................... 1,573,796 1,495,260
Net charge-offs to average total loans receivable ................... 0.63% 0.04%
Non-performing assets to total loans receivable ..................... 2.13% 3.15%
Allowance for possible loan losses to total loans receivable ........ 2.03% 2.43%
Allowance for possible loan losses to non-performing assets ......... 95.07% 76.91%
Allowance for possible loan losses to non-accrual
loans and accrual loans 90 days past due ........................ 129.89% 84.92%
</TABLE>
15
<PAGE>
Non-performing assets decreased to $37.1 million at September 30, 1996 from
$48.7 million at September 30, 1995. This decrease is due primarily to decreases
in non-accrual loans in the commercial finance and real estate lending
operations, offset partially by an increase in REO in the real estate lending
operation. The decrease in non-accrual loans in the commercial finance lending
operation is primarily due to one loan in the commercial finance portfolio
classified as non-accrual at September 30, 1995 and subsequently charged-off.
The decrease in non-accrual loans in the real estate lending operation is due
primarily to improved loan loss experience.
The lower provision for loan losses in the nine month period ended
September 30, 1996 as compared to the same period in 1995, is due primarily to
improved loan loss experience in the real estate lending operation, offset
partially by an additional specific loan loss reserve in the commercial finance
operation associated with one loan in the commercial finance portfolio.
Substantially all of the charge-offs in the commercial finance segment in the
nine months ended September 30, 1996 were also related to this loan. This
accounts for the increase in net charge-offs to average total loans receivable
to 0.63% at September 30, 1996 from 0.04% at September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The property and casualty insurance operations must have cash and liquid
assets available to meet their obligations to policyholders in accordance with
contractual obligations, in addition to having the funds available to meet
ordinary operating costs. These operations have several sources of funds to meet
their obligations, including cash flow from operations, recoveries from
reinsurance contracts and investment securities. By statute, the majority of the
cash from these operations is required to be invested in investment grade
securities to provide protection for policyholders. The Company invests in fixed
income and preferred equity securities with an objective of providing a
reasonable return while limiting credit and liquidity risk. The Company's
investment portfolio had an unrealized gain (loss) of $(26.5) million and $33.2
million at September 30, 1996 and December 31, 1995, respectively.
The Company's thrift and loan subsidiary finances its lending activities
primarily through customer deposits, which have grown to $1.035 billion at
September 30, 1996 from $926 million at December 31, 1995. In addition, Fremont
Investment & Loan is eligible for financing through the Federal Home Loan Bank
of San Francisco. This financing is available at varying rates and terms. As of
September 30, 1996, $231 million was available under the facility with $21
million outstanding.
The Company's commercial finance operation funds its lending activities
primarily through its asset securitization program, an unsecured revolving line
of credit with a syndicated bank group and its capital. The asset securitization
program was established to provide a stable and cost effective source of funds
to facilitate the expansion of this business. The securities issued in this
program have scheduled maturities in 1997 and 2000, but could mature earlier
depending on fluctuations in outstanding balances of loans in the portfolio and
other factors. During April 1995, the Company issued $30 million in subordinated
variable rate asset-backed certificates, which mature in 2000, via a private
placement. In February 1996, $135 million in asset-backed certificates were
issued which mature in 2000. The proceeds were used, in conjunction with
existing cash, to retire $200 million in previously issued variable rate
asset-backed certificates. As of September 30, 1996 there were $265 million in
outstanding variable rate asset-backed certificates. Additionally, up to $365
million in additional publicly offered asset-backed certificates may be issued
pursuant to a shelf registration statement to fund future growth in the
commercial finance loan portfolio. In December 1995, a commercial paper facility
was established as part of the asset securitization program. This facility,
which expires in December 1998, provides for the issuance of up to $150 million
in commercial paper, dependent upon the level of assets within the asset
securitization program. As of September 30, 1996, $47 million was outstanding
under this facility. The commercial finance operation's unsecured revolving line
of credit is with a syndicated bank group that presently permits borrowings of
up to $400 million, of which $270 million was outstanding as of September 30,
1996. This credit line is primarily used to finance assets which are not
included in the Company's asset securitization program. This credit line expires
August 1998.
As a holding company, Fremont General pays its operating expenses, meets
its other obligations and pays stockholders' dividends from its cash on hand,
management fees paid by its
16
<PAGE>
subsidiaries and dividends paid by its subsidiaries. Stockholders' dividends
declared aggregated $11.7 million and $9.7 million for the nine months ended
September 30, 1996 and 1995, respectively. Several of the Company's subsidiaries
are subject to certain statutory and regulatory restrictions and various
agreements, principally loan agreements, that restrict their ability to
distribute dividends to the Company. The Company expects that during the next
few years dividends from its subsidiaries will consist of dividends from its
property and casualty subsidiaries and dividends on preferred stock of its
thrift and loan holding company and commercial finance subsidiaries. The maximum
amount available for payment of dividends by the property and casualty
subsidiaries at December 31, 1995 without prior regulatory approval is
approximately $30 million.
To facilitate general corporate operations, in August 1994 the Company
obtained a revolving line of credit with a syndicated bank group that permitted
borrowings of up to $150 million. In August 1995, the Company negotiated an
increase of this line to $200 million, of which $15 million was outstanding as
of September 30, 1996. In August 1997, this credit line converts to a term loan
of up to $100 million, with scheduled semi-annual payments through August 2001.
In addition, in July 1994 the Company replaced its internally financed loan to
its Employee Stock Ownership Plan ("ESOP") with an external bank-financed loan
totaling $11 million. The maximum principal amount of this loan was increased to
$15 million in August 1995. The loan is due in seven equal annual installments
commencing on April 1, 1996 and is secured by certain shares of the ESOP. The
balance outstanding at September 30, 1996 was $12 million. The interest and
principal payments are guaranteed by the Company.
On February 22, 1995, the Company completed the acquisition of Casualty
which resulted in the disbursement of funds totaling $256.5 million, comprised
of $231.5 million in cash and $25 million in a note payable to the seller. In
September 1995, the note payable to the seller was refinanced using the
Company's existing revolving line of credit. The cash used to fund the
acquisition includes $55 million in borrowings under the Company's existing line
of credit and the remainder from internally generated funds.
During the third quarter of 1996, an aggregate $71,243,000 principal amount
at maturity of Liquid Yield OptionTM Notes due October 12, 2013 (Zero
Coupon-Subordinated) (the "LYONs") were converted into 1,374,000 shares of the
Company's Common Stock. The effect of the conversions was an increase in
stockholders' equity and a decrease in long-term debt of $30 million.
On March 1, 1996, Fremont General Financing I, a statutory business trust
(the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100
million of 9% Trust Originated Preferred SecuritiesSM ("the Preferred
Securities") in a public offering. The Preferred Securities represent preferred
undivided beneficial interests in the assets of the Trust. The proceeds from the
sale of the Preferred Securities were invested in 9% Junior Subordinated
Debentures of the Company ("the Junior Subordinated Debentures"). The $100
million Junior Subordinated Debentures are the sole asset of the Trust. The
Preferred Securities will be redeemed upon maturity of the Junior Subordinated
Debentures in 2026, subject to the election available to the Company to extend
the maturity up to 2045, and they may be redeemed, in whole or in part, at any
time on or after March 31, 2001 and under certain specified circumstances. The
Junior Subordinated Debentures rank pari passu with the Company's $302,477,000
aggregate principal amount at maturity of Liquid Yield Option(TM) Notes due
2013, and subordinate and junior to all senior indebtedness of the Company.
Payment of distributions out of cash held by the Trust, and payments on
liquidation of the Trust or the redemption of the Preferred Securities are
guaranteed by the Company. The Company used the proceeds from the sale of the
Junior Subordinated Debentures to reduce outstanding debt under the Company's
revolving line of credit by approximately $50 million, and the remaining
proceeds have been used for general corporate purposes. The reduction of $50
million in the Company's revolving line of credit occurred over several months,
with the final reduction paid in May 1996.
Net cash provided by (used in) operating activities of continuing
operations was $(89.8) million and $26.7 million for the nine months ended
September 30, 1996 and 1995, respectively. Net cash provided by (used in)
continuing operations decreased in the nine months ended September 30, 1996 over
the same period of 1995 due primarily to a decrease in claims and policy
liabilities, a lower amortization of policy acquisition costs and a decrease in
other liabilities due primarily to the settlement of accrued operating costs.
These conditions were partially offset by higher net income, a decrease in
premiums receivable and agents' balances, lower policy acquisition costs
deferred and a higher provision for deferred income taxes. The decreases in
claims and policy
17
<PAGE>
liabilities, premiums receivable and agents' balances and the lower policy
acquisition costs deferred and amortized resulted principally from lower premium
volume in the Company's workers' compensation insurance business. The higher
provision for deferred income taxes resulted primarily from the decrease in
claims and policy liabilities, offset partially by a decrease in deferred policy
acquisition costs.
Net cash provided by (used in) investing activities increased to $79.6
million from $(360.4) million for the nine months ended September 30, 1996 and
1995, respectively. The increase in net cash provided by (used in) investing
activities is due primarily to a decrease in investment purchases, net of sales,
maturities, and calls, the February 1995 purchase of Casualty for a net cash
disbursement of $249.3 million and an increase in receipts from repayments of
loans. These conditions were partially offset by an increase in loan
originations. The significant decrease in short-term and other investments of
$515.9 million and the significant level of securities purchased in the nine
months ended September 30, 1995, was due primarily to the effects of investing
the acquired short-term investment portfolio of Casualty into long-term
securities.
Net cash provided by financing activities was $1.5 million and $331.9
million in the nine months ended September 30, 1996 and 1995, respectively. Net
cash provided by financing activities decreased in the nine months ended
September 30, 1996 as compared to the same period of 1995, due primarily to the
lower long-term debt proceeds, net of repayments, the payment in 1996 of $360.0
million in settlement of certain reinsurance and assumption agreements within
the life insurance operation which became effective January 1, 1996 between the
Company and a reinsurer (see "Financial Services"), as well as an increase in
deferred compensation plans. These conditions were partially offset by an
increase in the proceeds from short-term debt, net of repayments, an increase in
thrift deposits and the impact of the proceeds from the sale of 9% Trust
Originated Preferred SecuritiesSM on March 1, 1996 in a public offering by the
trust. The lower long-term debt proceeds, net of repayments is due principally
to lower long-term bank line activity within the commercial finance operation.
The increase in deferred compensation plans is due primarily to the repurchase
by the Company of its Common Stock in the first quarter of 1996 pursuant to
certain deferred compensation programs. The increase in short-term debt proceeds
is due primarily to $77 million in reverse repurchase agreements outstanding at
September 30, 1996, an increase of $31 million in commercial paper borrowings,
and lower repayments of short-term bank line debt within the commercial finance
operation.
The amortized cost of the Company's invested assets were $1.62 billion and
$1.91 billion at September 30, 1996 and December 31, 1995, respectively.
Contributing to the $290 million decrease in the invested assets were $363.4
million in settlement of certain reinsurance and assumption agreements with a
reinsurer which became effective January 1, 1996 (see "Financial Services"), $90
million in cash flow used in operating activities, a $44 million decrease in net
annuity receipts in the life insurance operations and $28 million used to fund
certain deferred compensation plans. These conditions were partially offset by
$100 million in proceeds from the public offering on March 1, 1996 of 9% Trust
Originated Preferred SecuritiesSM by a subsidiary of the Company and a $77
million increase in reverse repurchase agreements.
The Company's property and casualty premium to surplus ratio for the year
ended December 31, 1995 was 2.3 to 1, which is within industry guidelines. The
FDIC has established certain capital and liquidity standards for its member
institutions, and Fremont Investment & Loan was in compliance with these
standards as of September 30, 1996.
The Company believes that its existing cash, its bank lines of credit,
revenues from operations and other available sources of liquidity will be
sufficient to satisfy its liquidity needs for the next several years.
The Company's strategy is to expand its business to the extent possible
without adversely impacting its loan portfolio and policyholder base. However,
the Company's strategic model is not dependent on growth as a source of
liquidity. While the level of revenues will obviously affect results of
operations, the Company's liquidity is not dependent on future revenue growth.
18
<PAGE>
CHANGES IN ACCOUNTING PRINCIPLES
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("FASB 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of " , which requires impairment
losses to be recorded on long-lived assets used in operations, including
intangible assets, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. FASB 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted FASB
121 in the first quarter of 1996 and the effect of adoption was not material.
Also, in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for
Stock-Based Compensation" that is effective for fiscal years beginning after
December 15, 1995. FASB 123 establishes a method of accounting for stock-based
compensation that is based on the fair value of stock options and other similar
stock-based instruments and encourages, but does not require, adoption of that
method. The Company has elected to continue following Accounting Principles
Board Opinion No. 25 for measuring compensation cost. Pursuant to FASB 123, the
Company will disclose pro forma net income and earnings per share calculated as
if the recognition and measurement provisions of the new standard had been
adopted.
19
<PAGE>
PART II - OTHER INFORMATION
Item (s) 1- 5: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ---------- -----------
2.1 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.)
2.2 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.)
3.1 Restated Articles of Incorporation of Fremont General Corporation.
(Filed as Exhibit No. 3.1 to Registration Statement on Form S-3 File
No 33-64771 which was declared effective on March 1, 1996, and
incorporated herein by reference.
3.2 Certificate of Amendment of Articles of Incorporation of Fremont
General Corporation. (Filed as Exhibit 3.2 to Registration Statement
on Form S-3 File No. 33-64771 which was declared effective on March 1,
1996 and herein incorporated by reference.)
3.3 Amended and Restated By-Laws of Fremont General Corporation. (Filed as
Exhibit No. 3.3 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed
as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File
Number 1-8007, and incorporated herein by reference.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between
the Registrant and Bankers Trust Company. (Filed as Exhibit No. 4.4 to
Registration Statement on Form S-3 filed on October 1, 1993, and
incorporated herein by reference.)
4.3 Indenture among the Registrant, the Trust and First Interstate Bank of
California, a California banking corporation, as trustee. (Filed as
Exhibit No. 4.3 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
4.4 Declaration of Trust among the Registrant, the Regular Trustees and
The Chase Manhattan Bank (USA), a Delaware banking corporation, as
Delaware trustee. (Filed as Exhibit No. 4.4 to Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007, and incorporated herein by reference.)
4.5 Amended and Restated Declaration of Trust among the Registrant, the
Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking
corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A.,
a national banking association, as Institutional Trustee. (Filed as
Exhibit No. 4.5 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
20
<PAGE>
Exhibit No. Description
- ---------- -----------
4.6 Preferred Securities Guarantee Agreement between the Registrant and
The Chase Manhattan Bank, N.A., a national banking association, as
Preferred Guarantee Trustee. (Filed as Exhibit No. 4.6 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
4.7 Common Securities Guarantee Agreement by the Registrant. (Filed as
Exhibit No. 4.7 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
4.8 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as
Exhibit No. 4.8 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
4.9 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3).
(Filed as Exhibit No. 4.9 to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File Number 1-8007,
and incorporated herein by reference.)
10.1 Fremont General Corporation Employee Stock Ownership Plan as amended.
(Filed as Exhibit No. 10.1 to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File Number 1-8007,
and incorporated herein by reference.)
10.2 Amended and Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
10.3 Fremont General Corporation and Affiliated Companies Investment
Incentive Program as amended. (Filed as Exhibit No. 10.3 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit
No. (10)(xi) to Annual Report on Form 10-K, for the Fiscal Year Ended
December 31, 1993, Commission File Number 1-8007, and incorporated
herein by reference.)
10.4(b) Amendment to Trust Agreement for Investment Incentive Program. (Filed
as Exhibit No. 10.4 (b) to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No.
(10)(v) to Annual Report on Form 10-K, for the Fiscal Year Ended
December 31, 1990, Commission File Number 1-8007, and incorporated
herein by reference.)
10.5(b) Amendment to Supplemental Retirement Plan. (Filed as Exhibit No. 10.5
(b) to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)
10.6 Trust Agreement for Supplemental Retirement Plan of the Company and
the Senior Supplemental Retirement Plan of The Company, as amended.
(Filed as Exhibit No. 10.6 to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File Number 1-8007,
and incorporated herein by reference.)
10.7 Senior Supplemental Retirement Plan, as amended. (Filed as Exhibit No.
10.7 to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)
21
<PAGE>
Exhibit No. Description
- ---------- -----------
10.8(a) Excess Benefit Plan of the Company. (Filed as Exhibit No. (10)(vi) to
Annual Report on Form 10-K, for the Fiscal Year Ended December 31,
1993, Commission File Number 1-8007, and incorporated herein by
reference.)
10.8(b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No.
10.8 (b) to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)
10.8(c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8
(c) to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)
10.9 Non-Qualified Stock Option Plan of 1989 of the Company. (Filed as
Exhibit No. 10.9 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
10.10(a) Long-Term Incentive Compensation Plan of the Company - Senior
Executive Participation.
10.10(b) Long-Term Incentive Compensation Plan of the Company.
10.11 1995 Restricted Stock Award Plan, as amended. (Filed as Exhibit No.
(10)(i) to Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, Commission File Number 1-8007, and incorporated herein by
reference.)
10.12 Fremont General Corporation Employee Benefits Trust Agreement
("Grantor Trust") dated September 7, 1995 between the Company and
Merrill Lynch Trust Company of California. (Filed as Exhibit No. 10.12
to Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by
reference.)
10.13 Employment Agreement between the Company and James A. McIntyre. (Filed
as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period
ended March 31, 1994, Commission File Number 1-8007, and incorporated
herein by reference.)
10.14(a) Employment Agreement between the Company and Louis J. Rampino.(Filed
as Exhibit No. 10.14 (a) to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
10.14(b) Employment Agreement between the Company and Wayne R. Bailey. (Filed
as Exhibit No. 10.14 (b) to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
10.15 Management Continuity Agreement between the Company and Raymond
G.Meyers. (Filed as Exhibit No. 10.15 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1995, Commission File Number
1-8007, and incorporated herein by reference.)
10.16 1996 Management Incentive Compensation Plan of the Company. (Filed as
Exhibit No. 10.16 to Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1996, Commission File Number 1-8007, and incorporated
herein by reference.)
10.17 Continuing Compensation Plan for Retired Directors. Filed as Exhibit
No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)
22
<PAGE>
Exhibit No. Description
- ---------- -----------
10.18 Non-Employee Directors' Deferred Compensation Plan.(Filed as Exhibit
No. 10.18 to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)
10.19(a) Amended and Restated Credit Agreement among Fremont General
Corporation, Various Lending Institutions and the Chase Manhattan
Bank, N.A., As Agent. (Filed as Exhibit No. (10)(xiii) to Quarterly
Report on Form 10-Q for the period ended September 30, 1995,
Commission File Number 1-08007, and incorporated herein by reference.)
10.19(b) Amendment to Credit Agreement. (Filed as Exhibit No. 10.19 (b) to
Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by
reference.)
10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in
connection with the Credit Agreement among Fremont General
Corporation, Various Lending Institutions and the Chase Manhattan
Bank, N.A., As Agent. (Filed as Exhibit No. 10.20 to Annual Report on
Form 10-K, for the fiscal year ended December 31, 1995, Commission
File Number 1-8007, and incorporated herein by reference.)
10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company
of California as trustee for the Fremont General Corporation Employee
Stock Ownership Trust. The Plan Committee (hereinafter described) on
behalf of the Fremont General Corporation Employee Stock Ownership
Plan, Fremont General Corporation, and First Interstate Bank of
California August 10, 1995. (Filed as Exhibit No. (10)(viii) to
Quarterly Report on Form 10-Q for the period ended September 30, 1995,
and incorporated herein by reference.)
11 Statement re: Computation of per share earnings.
27 Financial Data Schedule
(b) Report on Form 8-K. None filed during the quarter ended
September 30, 1996.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FREMONT GENERAL CORPORATION
Date: November 14, 1996 /s/ LOUIS J. RAMPINO
-------------------------------------
Louis J. Rampino, President,
Chief Operating Officer and Director
Date: November 14, 1996 /s/ JOHN A. DONALDSON
-------------------------------------
John A. Donaldson, Controller
and Chief Accounting Officer
24
FREMONT GENERAL CORPORATION
LONG-TERM INCENTIVE COMPENSATION PLAN OF 1996
SENIOR EXECUTIVE PARTICIPATION
TO: PARTICIPANT
PURPOSE OF THE PLAN
To provide you with an incentive to achieve the pre-tax earnings target for
Fremont General Corporation over the three year term of the Plan, of
$400,000,000.
TARGET BONUS
Your target bonus award for this Plan will be equal to your average compensation
(base salary or midpoint, whichever is higher) over the three year term of the
Plan. The bonus award will be determined based on the actual pre-tax earnings
achieved as illustrated in the table below.
PRE-TAX RESULTS % OF TARGET ACTUAL BONUS AS% OF TARGET BONUS
60% 60%
70% 70%
80% 80%
90% 90%
100% TARGET 100%
110% 125%
120% or more 150%
STOCK APPRECIATION FEATURE
You may elect to tie your cash bonus award, as determined by the formula above,
to the performance of Fremont General Corporation's common stock over the three
year term of the Plan.
If you elect this feature, your bonus will first be calculated as described
above using the Plan's standard formula. The STOCK APPRECIATION FEATURE will
then be applied to the result of that calculation. The election of this feature
will adjust the bonus that you would otherwise have been awarded by dividing the
amount determined under the Plan's formula by $24.00 (which was the price of
Fremont stock at the beginning of the Plan term). This adjustment determines a
number of "common stock equivalent units". These "units" will then be multiplied
by the "closing" trading price of the stock at the maturity of the Plan. This
calculation will yield your actual bonus award under the STOCK APPRECIATION
FEATURE. The "closing" trading price will be the average of the daily closing
prices (NYSE) of the stock for each trading day commencing on the day after
Fremont General releases its year-end 1998 earnings and the day prior to the
February 1999 Fremont General Board Meeting.
STOCK APPRECIATION FEATURE - EXAMPLE
Assume for illustration purposes that the LTICP award you earned for the
1993-1995 Plan was $250,000, which was equal to 100% of your average
compensation over the Plan term. By applying the STOCK APPRECIATION FEATURE
described above, this 1995 bonus compensation amount would have been divided by
the price of FGC stock at the inception of the Plan ($20.25 as adjusted for
splits and dividend) yielding 12,345 "units". These 12,345 "units" would then
have been multiplied by the closing trading price at Plan maturity ($36/share)
for a total bonus award of $444,420.
Note: This example is for illustration only. Nevertheless, you can estimate the
potential of this bonus option under the new Plan by applying the same
calculations. The price of the stock at the inception of this new Plan was
$24.00 per share.
Election of the STOCK APPRECIATION FEATURE must be made at the inception of the
Plan and is irrevocable.
PARTICIPANT ELIGIBILITY AND QUALIFICATION
You have been designated by the Board of Directors of Fremont General to
participate in this Plan. You must be actively employed in good standing at the
Plan Maturity date (12/31/98) to qualify for an award under the terms of the
Plan.
TERM OF THE PLAN
The LTICP is effective as of January 1, 1996, and matures in December 31, 1998.
PAYMENT OF BONUS AWARD
The bonus earned under the terms of this Plan is payable in cash after the Plan
maturity date. The payment is subject to all applicable tax withholding and
reporting requirements then in effect. Some or all of this payment may be
deferred into a Deferred Compensation Plan.
DISCLAIMER
The LTICP is a non-funded bonus compensation Plan which is contingent upon
specific performance as set forth above and is not subject to ERISA
requirements. There is no provision for accrual of any non-forfeitable vesting
rights. This LTICP and any of its terms may be modified, suspended, or
terminated at any time in any manner at the sole discretion of the Board of
Directors of Fremont General Corporation.
FREMONT GENERAL CORPORATION
LONG-TERM INCENTIVE COMPENSATION PLAN OF 1996
PURPOSE OF THE PLAN
It is the purpose of Fremont's executive compensation policies and practices to
attract, retain and motivate executives and key employees and to reward their
success in achieving the financial goals that increase Shareholder value. In
that regard, the Long-term Incentive Compensation Plan ("LTICP") is designed to
link a substantial portion of the compensation of our executives directly to the
long-range growth and increased value of the Company.
To accomplish this, the LTICP pays generous bonus awards upon the successful
achievement, over a three (3) year period, of the earnings goals described
herein.
Participating Companies
The following companies are designated as participating companies. These may be
changed and others may be added from time to time at the discretion of the Board
of Directors.
Fremont General Corporation
Fremont Compensation Insurance Company
Fremont Financial Corporation
Fremont Investment & Loan
FIC/Medical Professional Liability Division
Fremont Premium Finance Corporation
Individual Participation
Officers and other key management employees, as designated by the Board of each
participating company and approved by the Board of Fremont General, shall be
eligible to participate in the LTICP. The Corporate Personnel Department
maintains the rosters of designated participants and issues notices of
participation to those designated. New Participation New participants may be
added from time to time upon the approval of the Personnel Officer pursuant to
the following schedule:
o New participants entering the LTICP after inception but prior to 12/31/96 will
be eligible for full participation.
o New participants entering the LTICP on or after 1/1/97 but prior to 12/31/97
will be eligible for prorated participation as follows:
o Entrants between 1/1/97 and 6/30/97 will be eligible for a maximum of
two-thirds of any appropriate bonus award;
o Entrants between 7/1/97 and 12/31/97 will be eligible for a maximum of
one-half of any appropriate bonus award.
o No new participant will enter the LTICP after 12/31/97.
Individual Bonus Awards
A. Bonus Awards Bonus awards to designated participants in each company will be
earned upon the achievement of at least 60% of that company's TARGET, and will
increase commensurate with performance greater than 60% of TARGET as follows:
Bonus as Percent of Base Salary*
Pre-Tax Earnings Results Grades 14 & Below Grades 15 & Above
- ----------------------------------------------------------------------
Minimum 60% 10% 25%
70% 15% 30%
80% 20% 35%
90% 25% 40%
Target 100% 30% 50%
110% 40% 75%
Maximum 120% 50% 100%
*"Base Salary" will be the arithmetic average of the participants' actual
annualized salary or the participants' salary grade midpoint, whichever is
greater, as of December 31 of each of the three (3) plan years.
B. Additional Bonus The LTICP provides for an "additional bonus" of one-half
(50%) of any bonus earned pursuant to the schedule above.
The additional bonus will be awarded if Fremont General Corporation achieves at
least 120% of its three (3) year pre-tax earnings target of $400,000,000 (or
$480,000,000).
Participant Eligibility and Qualification
Participants who have been designated by the Board of Directors of Fremont
General to participate in this Plan must be actively employed in good standing
at the Plan Maturity date (12/31/98) to qualify for an award under the terms of
the Plan.
Term of the Plan The LTICP is effective as of January 1, 1996, and matures on
December 31, 1998.
Payment of Bonus Award
The bonus earned under the terms of this Plan is payable in cash after the Plan
maturity date. The payment is subject to all applicable tax withholding and
reporting requirements then in effect. Some or all of this payment may be
deferred into a Deferred Compensation plan.
Disclaimer
This LTICP is a non-funded bonus compensation plan which is contingent upon
specific performance as set forth above and is not subject to ERISA
requirements. There is no provision for accrual of any non-forfeitable vesting
rights. This LTICP and any of its terms may be modified, suspended, or
terminated at any time and in any manner at the sole discretion of the Fremont
General Corporation's Board of Directors.
FREMONT GENERAL CORPORATION EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1996 1995* 1996 1995*
------------ ----------- ------------ ------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 26,008 25,391 25,398 25,391
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 953 799 947 596
------------ ----------- ------------ ------------
Total 26,961 26,190 26,345 25,987
============ =========== ============ ============
Net income $22,939 $18,265 $63,882 $49,338
============ =========== ============ ============
Per share earnings $0.85 $0.70 $2.42 $1.90
============ =========== ============ ============
Fully Diluted:
Weighted average shares outstanding 26,008 25,391 25,398 25,391
Net effect of dilutive stock options -
based on the treasury stock method
using the quarter-end market price,
if higher than average market price 1,043 808 977 632
Assumed conversion of LYONs: 7,148 7,209 7,188 7,209
------------ ----------- ------------ ------------
Total 34,199 33,408 33,563 33,232
============ =========== ============ ============
Net income $22,939 $18,265 $63,882 $49,338
Income adjustments for fully diluted computation:
Add interest expense and amortization
of prepaid expense, net of federal
income tax, for assumed conversion
of LYONs 1,185 1,139 3,543 3,325
------------ ----------- ------------ ------------
Total $24,124 $19,404 $67,425 $52,663
============ =========== ============ ============
Per share earnings $0.71 $0.58 $2.01 $1.58
============ =========== ============ ============
* Adjusted retroactively for all stock splits and dividends.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
SEC Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000038984
<NAME> FREMONT GENERAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 1,101,332
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 369,170
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,295,237<F1>
<CASH> 30,926
<RECOVER-REINSURE> 8,852
<DEFERRED-ACQUISITION> 25,425
<TOTAL-ASSETS> 4,579,322
<POLICY-LOSSES> 1,678,684
<UNEARNED-PREMIUMS> 88,832
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 35,048
<NOTES-PAYABLE> 834,663
100,000
0
<COMMON> 27,501
<OTHER-SE> 489,276<F2>
<TOTAL-LIABILITY-AND-EQUITY> 4,579,322
372,334
<INVESTMENT-INCOME> 95,228
<INVESTMENT-GAINS> (1,694)
<OTHER-INCOME> 134,859<F3>
<BENEFITS> 261,540
<UNDERWRITING-AMORTIZATION> 72,587
<UNDERWRITING-OTHER> 22,540
<INCOME-PRETAX> 94,221
<INCOME-TAX> 30,339
<INCOME-CONTINUING> 63,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,882
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Total investments and loans receivable.
<F2>Additional paid-in capital, Retained earnings, Deferred compensation
and Net unrealized gain (loss) on investments, net of deferred taxes.
<F3>Loan interest and Other revenue.
</FN>
</TABLE>
