<PAGE>
- --------------------------------------------------------------------------------
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, 1998
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 2, 1998
- ------------------------------ ------------------
Common Stock, $1.00 par value 34,950,648
- --------------------------------------------------------------------------------
<PAGE>
FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 ............. 3
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1998 ....... 4
and 1997
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 ........ 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 ..................... 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risk ............................................. 21
PART II - OTHER INFORMATION
Items 1-5. Not applicable
Item 6. Exhibits and Reports on Form 8-K .......................... 22
Signatures ........................................................... 27
2
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Securities available for sale at fair value:
Fixed maturity investments (cost: 1998 - $1,588,861; 1997 - $1,835,086) ..... $ 1,618,654 $ 1,893,876
Non-redeemable preferred stock (cost: 1998 - $487,097; 1997 - $356,223) ..... 504,647 378,832
------------ -----------
TOTAL SECURITIES AVAILABLE FOR SALE ........................................ 2,123,301 2,272,708
Loans receivable ............................................................... 2,461,329 1,983,687
Short-term investments ......................................................... 349,459 164,626
Other investments .............................................................. 5,720 5,479
------------ -----------
TOTAL INVESTMENTS AND LOANS ................................................ 4,939,809 4,426,500
Cash ........................................................................... 152,991 64,987
Accrued investment income ...................................................... 34,680 42,038
Premiums receivable and agents' balances ....................................... 169,621 146,144
Reinsurance recoverable on paid losses ......................................... 24,788 20,287
Reinsurance recoverable on unpaid losses ....................................... 779,162 522,928
Deferred policy acquisition costs .............................................. 40,267 38,014
Costs in excess of net assets acquired ......................................... 168,678 149,321
Deferred income taxes .......................................................... 167,063 148,757
Other assets ................................................................... 256,965 275,144
Assets held for discontinued operations ........................................ 242,629 256,507
------------ -----------
TOTAL ASSETS ............................................................... $ 6,976,653 $ 6,090,627
============ ===========
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses .......................................... $ 2,344,891 $ 2,163,323
Life insurance benefits and liabilities ...................................... 159,041 180,976
Unearned premiums ............................................................ 101,396 78,625
Dividends to policyholders ................................................... 22,685 37,626
------------ -----------
TOTAL CLAIMS AND POLICY LIABILITIES ........................................ 2,628,013 2,460,550
Reinsurance premiums payable and funds withheld ................................ 41,557 13,049
Other liabilities .............................................................. 292,450 250,877
Thrift deposits ................................................................ 1,851,345 1,492,985
Short-term debt ................................................................ 36,715 26,290
Long-term debt ................................................................. 913,870 691,068
Liabilities of discontinued operations ......................................... 209,115 222,993
------------ -----------
TOTAL LIABILITIES .......................................................... 5,973,065 5,157,812
Commitments and contingencies
Company-obligated mandatorily redeemable preferred securities of
subsidiary Trust holding solely Company junior subordinated debentures ....... 100,000 100,000
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share -- Authorized: 75,000,000 shares;
issued and outstanding: (1998 - 34,816,000 and 1997 - 34,571,000) ............ 34,816 34,571
Additional paid-in capital ..................................................... 331,718 323,065
Retained earnings .............................................................. 591,608 508,533
Deferred compensation .......................................................... (85,327) (86,263)
Accumulated other comprehensive income ......................................... 30,773 52,909
------------ -----------
TOTAL STOCKHOLDERS' EQUITY ................................................. 903,588 832,815
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 6,976,653 $ 6,090,627
============ ===========
See notes to consolidated financial statements on Form 10-Q.
</TABLE>
3
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Property and casualty premiums earned .................. $ 125,515 $ 168,436 $ 399,045 $ 404,466
Loan interest .......................................... 61,974 42,694 168,348 103,739
Net investment income .................................. 49,235 49,018 144,166 140,514
Realized investment losses ............................. (139) (456) (1,063) (1,485)
Other revenue .......................................... 16,490 7,580 44,269 20,928
--------- --------- --------- ---------
TOTAL REVENUES ..................................... 253,075 267,272 754,765 668,162
EXPENSES
Losses and loss adjustment expenses .................... 71,354 105,092 244,843 254,369
Policy acquisition costs ............................... 29,740 34,107 88,093 82,889
Provision for loan losses .............................. 4,423 2,747 9,405 6,643
Other operating costs and expenses ..................... 53,311 43,136 146,256 105,701
Dividends to policyholders ............................. 1,328 1,317 4,273 1,317
Interest expense ....................................... 42,321 38,647 115,980 103,053
--------- --------- --------- ---------
TOTAL EXPENSES ..................................... 202,477 225,046 608,850 553,972
--------- --------- --------- ---------
Income before taxes .................................... 50,598 42,226 145,915 114,190
Income tax expense ..................................... 16,411 13,407 47,493 36,074
--------- --------- --------- ---------
NET INCOME ......................................... $ 34,187 $ 28,819 $ 98,422 $ 78,116
========= ========= ========= =========
PER SHARE DATA
Net income:
Basic .............................................. $ 1.07 $ 0.97 $ 3.08 $ 2.79
Diluted ............................................ 0.98 0.85 2.82 2.35
Cash dividends ....................................... 0.15 0.15 0.45 0.45
Weighted average shares:
Basic .............................................. 32,048 29,737 31,956 27,971
Diluted ............................................ 35,053 34,402 35,012 34,179
See notes to consolidated financial statements on Form 10-Q.
</TABLE>
4
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................. $ 98,422 $ 78,116
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 ......................... (15,494) (8,208)
Change in accrued investment income .................................... 7,487 8,160
Change in claims and policy liabilities ................................ (302,252) (140,373)
Amortization of policy acquisition costs ............................... 88,093 82,889
Policy acquisition costs deferred ...................................... (90,185) (84,606)
Provision for deferred income taxes .................................... 17,411 12,838
Provision for loan losses .............................................. 9,405 6,643
Provision for depreciation and amortization ............................ 28,761 21,604
Net amortization on fixed maturity investments ......................... (18,975) (12,694)
Realized investment losses ............................................. 1,063 1,485
Change in other assets and liabilities ................................. 56,597 77,568
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................. (119,667) 43,422
INVESTING ACTIVITIES
Securities available for sale:
Purchases of securities .................................................. (659,138) (3,509,089)
Sales of securities ...................................................... 500,136 2,867,205
Securities matured or called ............................................. 295,744 23,923
Decrease in short-term and other investments ............................... 159,627 465,134
Loan originations and bulk purchases funded ................................ (1,690,172) (733,800)
Receipts from repayments of loans and bulk sales of loans .................. 1,203,125 463,797
Purchase of subsidiaries, less cash acquired ............................... (114,626) (317,205)
Purchase of property and equipment ......................................... (22,942) (15,700)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................................ (328,246) (755,735)
FINANCING ACTIVITIES
Proceeds from short-term debt .............................................. - 353,539
Repayments of short-term debt .............................................. (2,792) (1,967)
Proceeds from long-term debt ............................................... 277,750 274,260
Repayments of long-term debt ............................................... (36,228) (117,750)
Net increase in thrift deposits ............................................ 358,360 258,276
Annuity contract receipts .................................................. 748 1,202
Annuity contract withdrawals ............................................... (37,354) (25,269)
Dividends paid ............................................................. (15,311) (13,046)
Stock options exercised .................................................... 1,435 13,111
Net increase in deferred compensation plans ................................ (10,691) (20,393)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ 535,917 721,963
----------- -----------
INCREASE IN CASH ........................................................... 88,004 9,650
Cash at beginning of year .................................................. 64,987 55,378
----------- -----------
CASH AT SEPTEMBER 30, ...................................................... $ 152,991 $ 65,028
=========== ===========
See notes to consolidated financial statements on Form 10-Q.
</TABLE>
5
<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, 1997. Certain 1997 amounts have been
reclassified to conform to the 1998 presentation.
NOTE B --- ACQUISITION
On September 2, 1998, the Company completed the acquisition of UNICARE
Specialty Services, Inc., ("UNICARE") the workers' compensation insurance
subsidiary of WellPoint Health Networks Inc., one of the nation's largest
publicly traded managed care companies, for $110 million in cash. At acquisition
date, UNICARE's assets approximated $408 million, including $348 million in
investment securities. Liabilities assumed approximated $311 million, including
$293 million of loss reserves. UNICARE's operating results are included in the
Company's consolidated statement of income from the date of acquisition. The
impact of the UNICARE acquisition on the Company's results of operations for the
three and nine months ended September 30, 1998 was not material.
NOTE C --- COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 ("FASB 130"), "Reporting Comprehensive Income." This new
standard establishes new rules for the reporting of comprehensive income and its
components; however, the adoption of this standard had no impact on the
Company's net income or stockholders' equity. FASB 130 requires unrealized gains
or losses on the Company's securities available-for-sale to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to these requirements.
Total comprehensive income amounted to $9.8 million and $60.2 million for
the nine months ended September 30, 1998 and 1997, respectively, and $76.3
million and $120.3 million for the nine months ended September 30, 1998 and
1997, respectively. Included in comprehensive income for these periods was the
net change in unrealized gains (losses) of $(24.4) million and $31.3 million for
the three months ended September 30, 1998 and 1997, respectively, and $(22.1)
million and $42.2 million for the nine months ended September 30, 1998 and 1997,
respectively.
6
<PAGE>
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine month periods ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (numerator for basic earnings per share) ......................... $ 34,187 $ 28,819 $ 98,422 $ 78,116
Effect of dilutive securities:
Liquid Yield Option Notes ("LYONs") ....................................... 77 447 269 2,148
-------- -------- -------- --------
Income available to common stockholders
after assumed conversions (numerator for diluted earnings per share ....... $ 34,264 $ 29,266 $ 98,691 $ 80,264
======== ======== ======== ========
Weighted-average shares (denominator for basic earnings per share) .......... 32,048 29,737 31,956 27,971
Effect of dilutive securities:
Restricted stock .......................................................... 2,085 1,861 2,085 1,861
Stock options ............................................................. 461 241 474 150
LYONs ..................................................................... 459 2,563 497 4,197
-------- -------- -------- --------
Dilutive potential common shares ............................................ 3,005 4,665 3,056 6,208
-------- -------- --------- --------
Adjusted weighted-average shares and assumed
conversions (denominator for diluted earnings per share) .................. 35,053 34,402 35,012 34,179
======== ======== ======== ========
Basic earnings per share .................................................... $ 1.07 $ 0.97 $ 3.08 $ 2.79
======== ======== ======== ========
Diluted earnings per share .................................................. $ 0.98 $ 0.85 $ 2.82 $ 2.35
======== ======== ======== ========
</TABLE>
7
<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 ("MD&A") CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE FACTORS SET FORTH IN THIS
MD&A SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q.
RESULTS OF OPERATIONS
Fremont General is a nationwide insurance and financial services holding
company operating select businesses in niche markets. Fremont General's
insurance business includes one of the largest underwriters of workers'
compensation insurance in the nation. The Company's financial services business
includes commercial real estate lending, residential real estate lending,
commercial finance and insurance premium financing. The Company's reported
assets as of September 30, 1998 were $7.0 billion. Income before taxes for the
nine months ended September 30, 1998 was $146 million. The primary operating
strategy of the Company is to build upon its core business units through
acquisition opportunities and new business development. The Company's secondary
strategy is to achieve income balance and geographic diversity among its
business units in order to limit the exposure of the Company to industry, market
and regional concentrations. The Company's stock is traded on the New York Stock
Exchange under the symbol "FMT."
Consistent with its primary operating strategy, the Company's workers'
compensation insurance operations have recently expanded through acquisition. On
September 2, 1998, the Company acquired UNICARE Specialty Services, Inc.
("UNICARE"), the workers' compensation insurance subsidiary of Wellpoint Health
Networks Inc., one of the nation's largest publicly traded managed care
companies, for $110 million in cash. At acquisition date, UNICARE's assets
approximated $408 million, including $348 million in investment securities.
Liabilities assumed approximated $311 million, including $293 million of loss
reserves. Additionally, on August 1, 1997 the Company acquired Industrial
Indemnity Holdings, Inc. ("Industrial") from Talegen Holdings, Inc ("Talegen"),
a subsidiary of Xerox Corporation, whereby a subsidiary of the Company purchased
all of the issued and outstanding capital stock of Industrial. The purchase
price paid by the Company consisted of $365 million in cash and the pay-off of
approximately $79 million of an outstanding debt obligation that Industrial owed
to Talegen. Financing for the transaction was provided by internal funds and
bank borrowings. Industrial, which specializes in underwriting workers'
compensation insurance, has a strong presence in the western United States
dating back over 70 years.
The following table presents information for the three and nine months
ended September 30, 1998 and 1997 with respect to the Company's primary business
segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty .......... $ 170,488 $ 207,664 $ 531,257 $ 498,628
Financial services ............. 81,934 59,517 221,846 168,913
Corporate ...................... 653 91 1,662 621
--------- --------- --------- ---------
Total ................. $ 253,075 $ 267,272 $ 754,765 $ 668,162
========= ========= ========= =========
Income (Loss) Before Taxes:
Property and casualty .......... $ 42,860 $ 38,720 $ 124,884 $ 103,818
Financial services ............. 14,754 10,483 42,048 31,444
Corporate ...................... (7,016) (6,977) (21,017) (21,072)
--------- --------- --------- ---------
Total ................. $ 50,598 $ 42,226 $ 145,915 $ 114,190
========= ========= ========= =========
</TABLE>
The Company generated revenues of approximate $253 million and $755 million
in the three and nine months ended September 30, 1998, as compared to $267
million and $668 million in the same respective periods in
8
<PAGE>
1997. Revenues were lower in the three month period ended September 30, 1998 as
compared to the same prior year period due primarily to the impact of additional
ceded reinsurance costs incurred. These additional reinsurance costs were due
primarily to additional excess of loss reinsurance purchased for the Company's
workers' compensation insurance business which became effective January 1, 1998.
See "Property and Casualty Insurance Operations - Premiums." This was offset
partially by higher revenue in the financial services segment due mainly to
higher loan interest resulting from growth in the average loan portfolio, as
well as higher other revenues resulting primarily from residential real estate
loan sales. Revenues were higher in the nine months ended September 30,1998 as
compared to the same prior year period, due primarily to higher loan interest
and other revenues within the financial services segment. Additionally, workers'
compensation insurance premiums in the Company's property and casualty segment
were slightly lower in the nine month period ended September 30, 1998, as
compared to the same prior year period. Higher workers' compensation insurance
premiums, due mainly to the acquisition of Industrial on August 1, 1997, were
more than offset by the impact of additional ceded reinsurance costs incurred.
These additional reinsurance costs were due primarily to additional excess of
loss reinsurance purchased for the Company's workers' compensation insurance
business which became effective January 1, 1998. Higher revenues in the
financial services segment were due mainly to higher loan interest resulting
from growth in the average loan portfolio, as well as higher other revenues
resulting primarily from residential real estate loan sales. See "Financial
Services." Realized investment losses in the three and nine month periods ended
September 30, 1998 were $139,000 and $1,063,000, respectively, as compared to
$456,000 and $1,485,000 for the same respective periods in 1997.
The Company posted net income of $34.2 million or $0.98 diluted earnings
per share and $98.4 million or $2.82 diluted earnings per share for the three
and nine months ended September 30, 1998, respectively, as compared to $28.8
million or $0.85 diluted earnings per share and $78.1 million or $2.35 diluted
earnings per share for the same respective periods in 1997. Income before taxes
for the three and nine month periods ended September 30, 1998 was $50.6 million
and $145.9 million, respectively, as compared to $42.2 million and $114.2
million for the same respective periods of 1997, representing increases of 19.8%
and 27.8%, respectively, for the three and nine month periods.
The property and casualty insurance operations, consisting primarily of
workers' compensation insurance, posted income before taxes of $42.9 million and
$124.9 million for the three and nine month periods ended September 30, 1998,
respectively, as compared to $38.7 million and $103.8 million for the three and
nine month periods ended September 30, 1997, respectively. The increases in
income before taxes of 10.7% and 20.3% for the three and nine month periods,
respectively, were due primarily to the acquisition of Industrial and lower
losses incurred resulting from the additional reinsurance purchased by the
Company which became effective January 1, 1998. The combined ratio for the three
and nine month periods ended September 30, 1998 was 95.7% and 96.3%,
respectively, as compared to 93.2% and 92.0% for the same respective periods in
1997. The higher combined ratio was due primarily to the combined effects of
higher underwriting expenses associated with Industrial's operations, as well as
the previously mentioned additional reinsurance, which resulted in a lower
premium base as compared to the prior year periods. See "Property and Casualty
Insurance Operations - Premiums."
The financial services operations posted income before taxes for the three
and nine months ended September 30, 1998 of $14.8 million and $42.0 million,
respectively, as compared to $10.5 million and $31.4 million for the same
respective periods of 1997. The increases in income before taxes were due mainly
to the growth in the average loan portfolio of the real estate lending
operation, as well as to gains on residential real estate loan sales. The
average loan portfolio of the financial services operations grew to $2.24
billion for the nine month period ended September 30, 1998, from $1.86 billion
for the same period of 1997.
Corporate revenues during the three and nine month periods ended September
30, 1998 consisted primarily of investment income, while corporate expenses
consisted primarily of interest expense and general and administrative expenses.
The corporate loss before income taxes for the three and nine months ended
September 30, 1998 was $7.0 million and $21.0 million, respectively, as compared
to $7.0 million and $21.1 million for the same respective periods of 1997.
Income tax expense of $16.4 million and $47.5 million for the three and
nine months ended September 30, 1998, respectively, represents effective tax
rates of 32.4% and 32.5% on respective income before taxes of $50.6 million and
$145.9 million. 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.
9
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The following table represents information for the three and nine month
periods ended September 30, 1998 and 1997 with respect to the Company's property
and casualty insurance operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues ............................ $ 170,488 $ 207,664 $ 531,257 $ 498,628
Expenses ............................ 127,628 168,944 406,373 394,810
--------- --------- --------- ---------
Income Before Taxes ................. $ 42,860 $ 38,720 $ 124,884 $ 103,818
========= ========= ========= =========
</TABLE>
PREMIUMS. Insurance premiums from the Company's property and casualty
insurance operations were $125.5 million and $399.0 million in the three and
nine month periods ended September 30, 1998, as compared to $168.4 million and
$404.5 million for the same periods of 1997. The lower premiums in the three and
nine month periods ended September 30, 1998, were due primarily to the impact of
additional ceded reinsurance costs incurred, offset partially by the
Industrial-related increases in workers' compensation insurance premiums. These
additional reinsurance costs were due to additional excess of loss reinsurance
purchased for the Company's workers' compensation insurance business, which
became effective January 1, 1998. The Company purchased the additional
reinsurance in an effort to further reduce the volatility of operating results
which occurs through fluctuations in loss costs. The additional reinsurance
purchased reduced the point at which reinsurers assume liability ("the
attachment point") from $1 million per loss occurrence to $50,000 per loss
occurrence. See "Variability of Operating Results" and "Workers' Compensation
Regulation."
NET INVESTMENT INCOME. Net investment income within the property and
casualty insurance operations increased to $45.1 and $133.3 million in the three
and nine months ended September 30, 1998, from $39.7 million and $95.7 million
for the same periods of 1997. These increases were due primarily to the
acquisition of Industrial.
LOSS AND LOSS ADJUSTMENT EXPENSE. The property and casualty loss and loss
adjustment expenses ("LAE") were $71.4 million and $244.8 million in the three
and nine month periods ended September 30, 1998, as compared to $105.1 million
and $254.4 million for the same respective periods of 1997. In addition, the
ratio of these losses and LAE to property and casualty insurance premiums earned
("loss ratio") was 56.8% and 61.3% for the three and nine month periods ended
September 30, 1998, as compared to 62.4% and 62.9% for the same respective
periods of 1997. The loss ratio decreased in the three and nine months ended
September 30, 1998, as compared to the same prior year periods, due primarily to
lower ratios in 1998 resulting from the additional reinsurance purchased by the
Company and which became effective January 1, 1998, offset partially by higher
loss ratios in 1998 associated with Industrial. 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 insurance
premiums is referred to as the expense ratio, which was 37.8% and 33.9% for the
three and nine month periods ended September 30, 1998, as compared to 30.0% and
28.8% for the same periods of 1997. The increases in this ratio were due
primarily to a lower premium base in the three and nine month periods of
September 30, 1998, resulting from additional reinsurance costs incurred. See
"Premiums".
10
<PAGE>
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. Additionally, price
competition in Illinois, where the Company has a significant presence, continues
to impact the Company's profitability, where overall average decreases of 7.9%
and 10.0% in advisory premium rates, which workers' compensation insurance
companies in Illinois tend to follow, became effective January 1, 1998 and 1997,
respectively. See "Workers' Compensation Regulation." The acquisition of
Industrial has mitigated the adverse effects of this price competition in
Illinois by providing the Company with a broader geographic diversity of its
premium writings. Industrial has a significant presence in the western United
States, in addition to California. The Company anticipates that its results of
operations and financial condition will continue to be adversely affected by the
continued price competition in Illinois and California. 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. At September 30, 1998, approximately 63%
of the Company's inforce premiums were in California and Illinois. 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 insurance companies are provided with advisory
premium 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 premium rates,
companies in Illinois generally follow such rates. This characteristic has
resulted in increased price competition in Illinois, where overall average
decreases in advisory premium rates of 7.9% and 10.0% became effective January
1, 1998 and 1997, respectively. In contrast, insurance companies in California
have, since the adoption of an open rating system, generally set their premium
rates below such advisory premium 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. Most of the states in which the Company writes premiums
operate under some form of open rating system.
FINANCIAL SERVICES
The Company's financial services operations, which are comprised primarily
of the results of Fremont General Credit Corporation ("FGCC"), are principally
engaged in commercial and residential real estate lending, commercial finance
and insurance premium financing. Revenues consist primarily of interest income
and to a lesser extent fees and other income.
11
<PAGE>
The following table presents information for the three and nine month
periods ended September 30, 1998 and 1997 with respect to the Company's
financial services operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues ............................ $ 81,934 $ 59,517 $ 221,846 $ 168,913
Expenses ............................ 67,180 49,034 179,798 137,469
-------- -------- --------- ---------
Income Before Taxes ................. $ 14,754 $ 10,483 $ 42,048 $ 31,444
======== ======== ========= =========
</TABLE>
Revenues increased 38% and 31% in the three and nine month periods ended
September 30, 1998, respectively, as compared to the same respective periods of
1997, due primarily to greater loan interest revenue attributable to the growth
in the average loan portfolio of the commercial and residential real estate
lending operations. Additionally, higher revenues resulted from increased
residential real estate loan sales. These loan sales are pursuant to a program,
begun by the Company's real estate lending operation in 1995 and expanded in
1997, of selling certain residential real estate loans to other financial
institutions. This has allowed the Company an opportunity to become more
selective in its residential real estate loan portfolio, as well as to offer a
broader range of residential real estate loans to its customers, primarily
through independent brokers. These loan sales are made without recourse to the
Company or its subsidiaries.
Income before taxes in the financial services operations was $14.8 million
and $42.0 million for the three and nine month periods ended September 30, 1998,
respectively, as compared to $10.5 million and $31.4 million for the same
respective periods of 1997. The 41% and 34% increases in income before taxes in
the three and nine month periods ended September 30, 1998, respectively, were
due to higher income before taxes in the real estate lending operation.
Contributing to this higher income before taxes were higher loan interest
revenue due to a greater average real estate loan portfolio, as well as the
previously described gains on residential real estate loan sales. These
conditions were partially offset by increases in operating expenses.
12
<PAGE>
The following table identifies the interest income, interest expense,
average interest-bearing assets and liabilities, and interest margins for the
Company's financial services operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
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 real estate loans ..................... $ 1,158,924 $ 86,436 9.94% $ 925,977 $ 66,597 9.59%
Residential real estate loans .................... 404,881 28,493 9.38 305,792 22,063 9.62
Commercial finance loans ......................... 617,215 48,167 10.41 580,243 47,182 10.84
Other loans ...................................... 61,402 5,252 11.40 54,712 4,677 11.40
Investments ...................................... 225,110 9,229 5.47 180,782 7,460 5.50
----------- --------- ----------- ---------
Total interest bearing assets .................. $ 2,467,532 $ 177,577 9.60% $ 2,047,506 $ 147,979 9.64%
=========== ========= =========== =========
Interest bearing liabilities:
Time deposits .................................... $ 1,281,927 $ 55,105 5.73% $ 992,296 $ 43,306 5.82%
Savings deposits ................................. 360,189 14,052 5.20 257,449 9,710 5.03
Securitization obligation ........................ 283,602 13,142 6.18 301,355 13,819 6.11
Debt with banks .................................. 232,361 11,420 6.55 219,762 10,904 6.62
Debt from affiliates ............................. 53,932 2,453 6.06 50,968 2,042 5.34
Other ............................................ 1,458 37 3.38 7,093 303 5.70
----------- ---------- ----------- ---------
Total interest bearing liabilities ............. $ 2,213,469 $ 96,209 5.80% $ 1,828,923 $ 80,084 5.84%
=========== ========== =========== =========
Net interest income ................................ $ 81,368 $ 67,895
========== =========
Net yield .......................................... 4.40% 4.42%
- ---------------------------
(1) Annualized
(2) Average loan balances include non-accrual loan balances.
</TABLE>
The margin between the Company's interest income and cost of funds was
relatively even in the nine month period ended September 30, 1998 as compared to
the nine month period ended September 30, 1997, due primarily to the offsetting
effects of a decrease in the net yields in the commercial finance segment as
increases in the credit quality of the commercial finance portfolio and
continued competition resulted in lower yields; and an increase in the net
yields in the real estate lending operation, due mainly to an increase in the
yield on commercial real estate loans offset partially by a decrease in the
yield on residential real estate loans.
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,
1998 1997
------------------- ------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ----- ----------- -----
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
<S> <C> <C> <C> <C>
Term loans:
Real estate loans ...................... $ 1,757,660 70% $ 1,480,824 73%
Commercial finance loans ............... 237,153 9 158,013 8
----------- ----- ----------- -----
Total term loans ..................... 1,994,813 79 1,638,837 81
Revolving loans:
Commercial finance loans ............... 519,228 21 389,252 19
----------- ----- ----------- -----
Total loans .......................... 2,514,041 100 2,028,089 100
Less allowance for possible loan losses .. 52,712 2 44,402 2
----------- ----- ----------- -----
Loans receivable ..................... $ 2,461,329 98% $ 1,983,687 98%
=========== ===== =========== =====
</TABLE>
The following table illustrates the maturities of the Company's loans
receivable:
<TABLE>
<CAPTION>
MATURIES AT SEPTEMBER 30, 1998
------------------------------------------------
1 TO 24 25 - 60 OVER 60
MONTHS MONTHS MONTHS TOTAL
----------- --------- --------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Terms loans -- variable rate................... $ 376,895 $ 868,780 $ 461,879 $ 1,707,554
Term loans -- fixed rate ...................... 109,570 74,490 103,199 287,259
Revolving loans -- variable ................... 519,228 - - 519,228
----------- --------- --------- -----------
Total ................................. $ 1,005,693 $ 943,270 $ 565,078 $ 2,514,041
=========== ========= ========= ===========
</TABLE>
The Company monitors the relationship of fixed and variable rate loans and
interest bearing liabilities in order to minimize interest rate risk.
During 1997, the Company began originating both commercial and residential
real estate loans outside of California. The Company intends to seek portfolio
growth outside of California in order to achieve greater geographic diversity in
its loan portfolio and thereby lessen the Company's exposure to regional
economic conditions. The total amount of commercial and residential real estate
loans outstanding on properties located outside of California at September 30,
1998 was $164.5 million and $109.6 million, respectively.
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,
---------------------------
1998 1997
----------- -----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
<S> <C> <C>
Non-accrual loans .......................................................... $ 23,947 $ 28,610
Accrual loans 90 days past due ............................................. 1,617 882
Real estate owned ("REO") .................................................. 8,568 10,631
----------- -----------
Total non-performing assets ................................................ $ 34,132 $ 40,123
=========== ===========
Beginning allowance for possible loan losses ............................... $ 44,402 $ 37,747
Provision for loan losses .................................................. 9,405 6,643
Reserves established with portfolio acquisitions ........................... 777 -
Charge-offs:
Commercial real estate loans ............................................. 202 790
Residential real estate loans ............................................ 868 977
Commercial finance loans ................................................. 1,282 2,303
Other loans .............................................................. 117 152
----------- -----------
Total charge-offs ...................................................... 2,469 4,222
----------- -----------
Recoveries:
Commercial real estate loans ............................................. 319 338
Residential real estate loans ............................................ 92 596
Commercial finance loans ................................................. 116 11
Other loans .............................................................. 70 123
----------- ------------
Total recoveries ....................................................... 597 1,068
----------- ------------
Net charge-offs ............................................................ 1,872 3,154
----------- ------------
Ending allowance for possible loan losses .................................. $ 52,712 $ 41,236
=========== ============
Allocation of allowance for possible loan losses:
Real estate loans ........................................................ $ 38,811 $ 29,945
Commercial finance loans ................................................. 13,901 11,291
----------- ------------
Total allowance for possible loan losses ............................... $ 52,712 $ 41,236
=========== ============
Total loans receivable ..................................................... $ 2,514,041 $ 1,992,636
Average total loans receivable ............................................. $ 2,242,422 $ 1,864,222
Net charge-offs to average total loans receivable (annualized) ............. 0.11% 0.23%
Non-performing assets to total loans receivable ............................ 1.36% 2.01%
Allowance for possible loan losses to total loans receivable ............... 2.10% 2.07%
Allowance for possible loan losses to non-performing assets ................ 154.44% 102.77%
Allowance for possible loan losses to non-accrual
loans and accrual loans 90 days past due ................................. 206.20% 139.82%
</TABLE>
Non-performing assets decreased 14.9% to $34.1 million at September 30,
1998 from $40.1 million at September 30, 1997, despite a 26.2% increase in total
loans receivable to $2.5 billion at September 30, 1998 from $2.0 billion at
September 30, 1997.
The higher provision for loan losses in the nine month period ended
September 30, 1998, as compared to the same prior year period, is also
consistent with the overall increase in total loans receivable. The Company
15
<PAGE>
continues to experience low loan loss experience as evidenced by the continued
low ratio of net charge-offs to average total loans receivable. The Company's
low loan loss experience is further evidenced by the decrease in the ratio of
non-performing assets to total loans receivable in the preceding table. The
Company's ratio of the allowance for possible loan losses to non-accrual loans
and accrual loans 90 days past due increased to 206.20% from 139.82% for the
nine month periods ended September 30, 1998 and 1997, respectively, thereby
increasing the coverage of these non-performing assets by the allowance for
possible loan losses.
MARKET RISK
The Company is subject to market risk resulting primarily from fluctuations
in interest rates arising from balance sheet financial instruments such as
investments, loans and debt. In the property and casualty insurance operations,
the greatest interest rate risk exposure occurs where the interest rate of the
financial instrument is fixed in nature and there is a difference between the
fixed rate of the financial instrument and the market rate. The greatest
interest rate risk exposure in the financial services operations occurs when
interest rate gaps arise wherein assets are funded with liabilities having
different repricing intervals or different market indices to which the
instruments' interest rates are tied. Changes in interest rates will affect the
Company's net investment income, loan interest, interest expense and total
stockholders' equity. The objective of the Company's asset and liability
management activities is to provide the highest level of net interest income and
to seek cost effective sources of capital, while maintaining acceptable levels
of interest rate and liquidity risk. The Company has designated its entire
investment portfolio as investments that would be available for sale in response
to changing market conditions, liquidity requirements, interest rate movements
and other investment factors. The Company currently owns no derivative financial
instruments and, consequently, is not subject to market risk for such
off-balance sheet financial instruments. Furthermore, the Company does not have
exposure to foreign currency or commodity price risk.
For additional information regarding market risk, see the discussion set
forth under the subheadings "Property and Casualty Insurance Operations-Interest
Rate Risk," "Financial Services Operations-Interest Rate Risk" and "Fremont
General Corporation (Parent-only)-Interest Rate Risk" in the corresponding
Management's Discussion and Analysis in the Company's 1997 Annual Report on Form
10-K. No material changes in market risk have occurred since year-end.
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 of $47.3 million and $81.4 million
at September 30, 1998 and December 31, 1997, respectively.
The Company's thrift and loan subsidiary, which is principally engaged in
real estate lending, finances its lending activities primarily through customer
deposits, which have grown to $1.9 billion at September 30, 1998 from $1.5
billion at December 31, 1997. In addition, this subsidiary is eligible for
financing through the Federal Home Loan Bank of San Francisco ("FHLB"). This
financing is available at varying rates and terms. As of September 30, 1998,
$475 million was available under the facility with no advances 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. As of September 30, 1998, an
aggregate $235 million senior series and an aggregate $39 million subordinated
series of asset-backed certificates were outstanding. The interest rate on the
certificates, set monthly, ranged from LIBOR plus 0.23% to LIBOR plus 0.95% at
September 30, 1998. The securities issued in this program have a scheduled
maturity of three to five years, but could mature earlier depending on
fluctuations in outstanding balances of loans in the portfolio and other
factors. As of September 30, 1998, up to $265 million in additional publicly
offered asset-backed certificates may be issued pursuant to a shelf registration
statement to fund
16
<PAGE>
future growth in the commercial finance portfolio. In April 1997, $109.26
million in certificates ("Series D") were issued, comprised of $100 million in
senior certificates and $9.26 million in subordinated certificates. The Series D
certificates were issued to retire $100 million in maturing Series B
certificates. In December 1995, a commercial paper facility was established as
part of the asset securitization program. This facility, which expires in
December 2000, 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, 1998, $11 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 $450
million, which includes a revolving credit facility of $350 million and a term
loan of $100 million. The revolving credit facility converts to a term loan in
August 2000, with ultimate maturity of the term loan in June 2002. The $100
million term loan matures July 2001. The balance outstanding at September 30,
1998 of the revolving credit facility and the term loan was $374 million, with a
weighted average interest rate of 5.97%. This credit line is primarily used to
finance assets which are not included in the Company's asset securitization
program.
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 subsidiaries and dividends paid by its subsidiaries.
Stockholders' dividends declared aggregated $15.4 million and $13.9 million for
the quarters ended September 30, 1998 and 1997, 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 insurance 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 insurance subsidiaries during 1998, without prior
regulatory approval, is approximately $67.8 million.
To facilitate general corporate operations, the Company maintains a
revolving line of credit with a syndicated bank group that permits borrowings of
up to $400 million, of which $275 million was outstanding as of September 30,
1998. This credit facility expires in July 2002.
During 1997, an aggregate $266,744,000 principal amount at maturity of
Liquid Yield OptionTM Notes due October 12, 2013 (Zero Coupon-Subordinated)
("LYONs") were converted into 5,145,000 shares of the Company's Common Stock.
The effect of these conversions was an increase in stockholders' equity and a
decrease in long-term debt of $117 million. During the first nine months of
1998, an aggregate $13,067,000 principal amount at maturity of LYONs were
converted into 252,000 shares of the Company's Common Stock. The effect of these
conversions was an increase in stockholders' equity and a decrease in long-term
debt of $6.0 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 proceeds
from the sale of the Junior Subordinated Debentures were used to repay
approximately $50 million in revolving bank line of credit indebtedness, with
the remainder used for general corporate purposes. 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 are 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.
Net cash provided by (used in) operating activities of continuing
operations was $(120.0) million and $43.4 million for the nine months ended
September 30, 1998 and 1997, respectively. Net cash provided by (used in)
continuing operations decreased in the nine months September 30, 1998, due
primarily to a higher reduction in claims and policy liabilities and a decrease
in the change in other assets and liabilities, offset partially by an increase
in net income. The higher reduction in claims and policy liabilities is due
primarily to an increase in 1998 in reinsurance recoverables on unpaid losses
and LAE resulting from the additional excess of loss reinsurance purchased by
the Company and which became effective January 1, 1998. See "Premiums".
Contributing to the
17
<PAGE>
change in other assets and liabilities in the nine months ended September 30,
1998 is $22.4 million in reinsurance premium payable increases due primarily to
the previously mentioned additional reinsurance purchased by the Company.
Additionally, included in the change in other assets and liabilities in the nine
months ended September 30, 1997 is a $45 million collection on a policyholder
receivable classified in other assets.
Net cash used in investing activities decreased to $328.2 million from
$755.7 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in net cash used in investing activities was due
mainly to an increase in investment sales, maturities and calls, net of
purchases and short-term investment activity, and a decrease in the purchase of
subsidiaries as the UNICARE acquisition, completed September 2, 1998 at $110
million, was smaller than the Industrial acquisition, completed August 1, 1997
at $365 million. Partially offsetting these decreases was an increase in loan
originations, net of loan sales and repayments.
Net cash provided by financing activities was $535.9 million and $722.0
million in the nine months ended September 30, 1998 and 1997, respectively. The
decrease in net cash provided by financing activities was due primarily to a
decrease in short-term and long-term debt proceeds, net of repayments, and an
increase in annuity contract withdrawals. Contributing to the decrease in
short-term debt proceeds was $327.8 million in borrowings at September 30, 1997
pursuant to certain reverse repurchase agreements within the property and
casualty segment. Partially offsetting these decreases was an increase in thrift
deposits.
The amortized cost of the Company's invested assets was $2.43 billion and
$2.36 billion at September 30, 1998 and December 31, 1997, respectively. The
invested assets are up slightly at September 30, 1998, as compared to December
31, 1997, due mainly to an increase in the invested assets of the property and
casualty operations resulting from the acquisition of UNICARE.
The Company's property and casualty premium to surplus ratio for the year
ended December 31, 1997 was 1.5 to 1, which is within industry guidelines. The
FDIC has established certain capital and liquidity standards for its member
institutions, and the Company's thrift and loan subsidiary was in compliance
with these standards as of September 30, 1998.
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 at least the next twelve months.
YEAR 2000 READINESS DISCLOSURE
Problems may arise from computer software programs and operating systems
that use only two digits to designate the calendar year in a date code field.
For example, where the date September 21, 1998, is encoded as "09/21/98" instead
of "09/21/1998." Based on this two-digit format for date coding, computers with
date-sensitive programs could recognize the year 2000 as "00" and incorrectly
assume that the year is 1900. Similar problems can arise for systems dependent
upon embedded chips that are encoded to only use or recognize two digits when
referring to a calendar year. Additionally, problems may arise from the
computer's inability to process (including calculating, comparing, sequencing,
displaying, or storing), transmit, or receive date data from, into, and between
the 20th and 21st centuries, and during the years 1999 and 2000, and leap year
calculations. The Company refers to these problems as the "Year 2000 Problem."
The Company considers the Year 2000 Problem a critical business continuity issue
and has categorized the Year 2000 Problem into the following four areas:
OFFICE FACILITIES AND EQUIPMENT - Will the telephones, facsimile machines, copy
machines, elevators, air conditioning and heating systems, and other utility
systems used by the Company in its leased and owned facilities function properly
in the year 2000 and beyond?
KEY BUSINESS PARTNERS, VENDORS, OTHER SUPPLIERS - Will the Company's key
business partners, major vendors, and other suppliers face significant
disruption to the goods and services provided to the Company due to Year 2000
Problems?
CUSTOMERS - Will the Company's revenues be significantly adversely affected by
customers' inability to remediate successfully their own Year 2000 Problems?
18
<PAGE>
INTERNAL COMPUTER SYSTEMS - Considered the most important area to resolve, will
the Company's computer systems operate properly in the year 2000 and beyond?
The following discussion establishes the extent of work performed, or to be
performed, and results obtained as of September 30, 1998 in addressing the
impact of the Year 2000 Problem on the above-described areas.
OFFICE FACILITIES AND EQUIPMENT:
Regarding telephone systems, the Company is in the process of evaluating
all of its telephone systems to determine the extent of any Year 2000 Problems.
This evaluation is to be completed in the fourth quarter of 1998. For any of
those systems that are determined not to be Year 2000 compliant, the Company
will work with its telephone service providers to remediate Year 2000 issues and
currently anticipates full Year 2000 compliance on all telephone systems by June
30, 1999.
Regarding the Company's leased and owned facilities, we are currently in
the process of determining the extent of Year 2000 Problems (if any) as they
relate to the elevator, air conditioning/heating, and other utility systems in
these facilities. The Company anticipates this review to be completed by
December 31, 1998. The Company currently anticipates no significant disruption
from these various facility-related systems due to the Year 2000 Problem.
Finally, with regard to office equipment such as facsimile and copy
machines, the Company considers the risk minimal as to any significant cost or
disruption to its operations resulting from a Year 2000 Problem impacting any of
its office equipment (excluding telephone and computer systems). Accordingly, no
significant work is currently being planned in this area.
KEY BUSINESS PARTNERS, VENDORS, OTHER SUPPLIERS:
The Company has identified its key business partners, such as its critical
banking, employee benefits, reinsurance, auditors, outside legal counsel, and
other professional service relationships. The Company is in the process of
surveying all of these relationships as to their Year 2000 compliance, and will
develop appropriate contingency plans to avoid significant disruption to the
Company's operations. The Company anticipates this process to be completed by
March 31, 1999. Many surveys have already been received and evaluated in the
areas of employee benefits and reinsurance. Based on the evaluations received to
date, most of these business partners anticipate their Year 2000 compliance and
testing to be completed in early 1999.
In addition to key business partners, the Company's suppliers and vendors
are concentrated into the areas of office supplies, office furniture and
equipment, and computer hardware and software. With the exception of computer
software, the Company believes that there are many alternative suppliers for
their office supply and furniture needs, as well as several alternative sources
for computer hardware. Accordingly, the risk of a significant disruption to the
Company's operations due to a supplier's inability to resolve its Year 2000
Problems is considered minimal since the Company could select an alternate
supplier. (With regards to computer software, refer to the separate discussion
on the Company's internal computer systems.) In an effort to identify which
suppliers may have Year 2000 compliance difficulties, the Company is currently
in the process of identifying its more significant suppliers/vendors and will be
surveying them as to their Year 2000 compliance status. The results of these
surveys will be evaluated and appropriate contingency plans will be developed if
considered necessary. The Company expects this process to be completed by March
31, 1999.
CUSTOMERS:
In the financial services operations, the Company's revenues could be
impacted should a customer/borrower be unable to pay interest and/or principal
when due because of the customers' inability to resolve its Year 2000 Problems.
Regarding the real estate lending operation, the risk of a significant impact to
operating results is considered minimal since the Company would utilize the
collateral securing existing loans to mitigate any loan losses. Additionally for
commercial real estate loans, the borrower's Year 2000 risk is further limited
by the multiple tenant nature of most of the properties under collateral. The
Company has focused its attention on those commercial properties that are single
tenant, which are currently comprised of approximately fifty loans. The Company
is in the process of surveying these customers to determine their Year 2000
compliance. In its commercial finance operation, the Company is surveying its
entire customer base to ascertain whether or not any significant Year 2000
issues exist with existing borrowers. With regard to new loan customers, the
Company has adopted additional review procedures in both the real estate lending
and commercial finance operations to determine
19
<PAGE>
the extent of an applicant's Year 2000 compliance. Based on the results obtained
to date, the Company does not anticipate any significant impact to its financial
services revenues due to the Year 2000 Problem.
In its workers' compensation operation, the Company is in the process of
determining the extent of procedures to employ in ascertaining the potential
impact to its insurance premium revenues resulting from an insured's or agent's
inability to resolve their Year 2000 Problems. The Company anticipates
completing its action plan by December 31, 1998.
INTERNAL COMPUTER SYSTEMS:
As of September 30, 1998, significant Year 2000 compliance issues remain
only within the Company's workers' compensation operation. The Company's
computer-based systems ("Systems") supporting the financial services operations,
administrative systems (personnel, payroll and accounting) and treasury systems
(cash management and investment portfolio management) have all been rendered
substantially Year 2000 compliant.
Within the financial services segment, both the real estate lending and
commercial finance subsidiaries utilize application Systems that are vendor
supported. In the real estate lending operation, current application Systems are
substantially Year 2000 compliant, and the vendors are aware of the few
remaining issues that need to be resolved to render their systems fully
compliant. These solutions are expected to be included in the normal application
upgrade cycle that will occur by December 31, 1998. Accordingly, the real estate
lending unit is expected to be 100% compliant by December 31, 1998.
Additionally, these application Systems have been tested internally to validate
their Year 2000 compliance, with no significant errors identified or left
unresolved. Similarly, the commercial finance operation's application Systems,
while substantially compliant in their present form, will be fully compliant
after upgrading to the current version of the software, which is already
available and installed at several of the vendor's clients. The Company intends
to test these Systems in early 1999 to verify the vendors' representations.
With regard to the workers' compensation operation, the Company developed
an action plan in 1996 to render its workers' compensation Systems Year 2000
compliant. Based on an evaluation of the progress made as of September 30, 1998,
the Company estimates that its workers' compensation Systems, excluding those
Systems supporting the recently acquired Industrial Indemnity and Unicare
companies, will be Year 2000 compliant and substantially tested by December 31,
1998. The Industrial Indemnity and Unicare Systems are expected to be converted
to Year 2000 compliant Systems by June 30, 1999. Industrial will be moving onto
a new System that will, after full implementation, be the workers' compensation
operation's new nationwide claims and policy handling platform. The costs to be
incurred by the Company in completing these Year 2000 initiatives are not
expected to have a material impact on the Company's results of operations
(projected 1998 costs of $4.5 million).
Regarding administrative and back-office operations, the personnel,
payroll, accounting, and treasury Systems are 100% Year 2000 compliant. The
Company intends to test these Systems in early 1999 to verify the vendors'
representations.
In addition to its various application Systems, the Company maintains
several PC-based client/server network infrastructures. The majority of these
installations were established within the past five years. Substantially all of
these networks use the most current versions of network operating and data
transmission software, all of which are Year 2000 compliant. The Company is in
the process of identifying any PC hardware which is not Year 2000 compliant, as
well as testing vendors' representations as to Year 2000 compliance of installed
network software. These processes are anticipated to be completed by March 31,
1999 with no significant Year 2000 Problems expected.
Management of the Company continues to monitor the progress of its Year
2000 compliance initiatives and will continue to allocate resources necessary to
resolve significant Year 2000 Problems as they are identified. Based on the
progress of the work performed through September 30, 1998, the Company
anticipates that its office facilities and equipment; key business partners,
vendors and other suppliers; major customers; and internal computer systems will
be substantially Year 2000 compliant well in advance of December 31, 1999.
20
<PAGE>
Readers are cautioned that forward-looking statements contained in this
Year 2000 Readiness Disclosure section should be read in conjunction with the
Company's disclosures in the first paragraph after the heading "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the subheading "Market Risk" in the
Company's Management Discussion and Analysis contained in this Quarterly Report
on Form 10-Q is incorporated herein by reference.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
2.1 Stock Purchase Agreement by and among Talegen Holdings, Inc.,
Fremont Indemnity Company and Fremont General Corporation
dated as of May 16, 1997 including exhibits thereto. (Filed as
Exhibit No. 2.1 to Current Report on Form 8-K, as of August 1,
1997, Commission File Number 1-8007, and incorporated herein
by reference.)
2.2 Tax Allocation and Indemnification Agreement, dated as of May
16, 1997 by and among Xerox Financial Services, Inc., Talegen
Holdings, Inc., Industrial Indemnity Holdings, Inc., Fremont
General Corporation, and Fremont Indemnity Corporation, a
California corporation. (Filed as Exhibit No. 2.2 to Current
Report on Form 8-K, as of August 1, 1997, Commission File
Number 1-8007, and incorporated herein by reference.)
3.1 Restated Articles of Incorporation of Fremont General
Corporation and amendments. (Filed as Exhibit No. 3.1 to
Quarterly Report on Form 10-Q, for the period ended June 30,
1998, Commission File Number 1-8007, and incorporated herein
by reference.)
3.2 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.)
22
<PAGE>
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
4.4 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.)
4.5 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.)
4.6 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.)
4.7 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.)
4.8 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(a) 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.)
10.1(b) Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan. (Filed as Exhibit No. 10.1 (b)
to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1997, Commission File Number 1-8007, and
incorporated herein by reference.)
10.1(c) Amendment Number Three to the Fremont General Corporation
Employee Stock Ownership Plan.
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(a) Fremont General Corporation and Affiliated Companies
Investment Incentive Plan. (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.)
10.3(b) Amendments Number One, Two and Three to the Fremont General
Corporation and Affiliated Companies Investment Incentive
Plan. (Filed as Exhibit No. 10.3 (b) to Quarterly Report on
Form 10-Q, for the period ended September 30, 1997,Commission
File Number 1-8007, and incorporated herein by reference.)
10.3(c) Amendment Number Four to the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan. (Filed as
Exhibit No. 10.3 (c) to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1997, Commission File Number
1-8007, and incorporated herein by reference.)
10.3(d) Amendment Number Five to the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan.
23
<PAGE>
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
10.4(a) Trust Agreement for Investment Incentive Plan. (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 Plan.
(Filed as Exhibit No. 10.4 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.)
10.5(a) Supplemental Retirement Plan of the Company, as restated
January 1, 1997. (Filed as Exhibit No. 10.5 to Quarterly
Report on Form 10-Q, for the period ended September 30, 1997,
Commission File Number 1-8007, and incorporated herein by
reference.)
10.5(b) Amendment Number One to the Fremont General Corporation
Supplemental Retirement Plan of the Company. (Filed as Exhibit
No. 10.5(b) to Quarterly Report on Form 10-Q for the period
ended March 31, 1998, 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 restated January 1,
1997. (Filed as Exhibit No. 10.7 to Quarterly Report on Form
10-Q, for the period ended September 30, 1997, Commission File
Number 1-8007, and incorporated herein
by reference).
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 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 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 Amended Non-Qualified Stock Option Plan of 1989 and related
agreements of the Company. (Filed as Exhibit No. 10.9 to
Annual Report on Form 10-K, for the fiscal year ended December
31, 1996, Commission File Number 1-8007, and incorporated
herein by reference.)
10.10 1997 Stock Plan and related agreements. (Filed as Exhibit No.
10.10 to Quarterly Report on Form 10-Q, for the period ended
June 30, 1997, Commission File Number 1-8007, and incorporated
herein by reference.)
10.11(a) Long-Term Incentive Compensation Plan of the Company -
Senior Executive Plan. (Filed as Exhibit No. 10.10 (a) on Form
10-Q for the period ended September 30, 1996, Commission File
Number 1-8007, and incorporated herein by reference.)
24
<PAGE>
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
10.11(b) Long-Term Incentive Compensation Plan of the Company
(Filed as Exhibit No. 10.10 (b) on Form 10-Q for the period
ended September 30, 1996, Commission File Number 1-8007, and
incorporated herein by reference.)
10.12 1995 Restricted Stock Award Plan as amended and forms
of agreement thereunder. (Filed as Exhibit No. 4.1 to
Registration Statement on Form S-8/S-3 File No. 333-17525
which was filed on December 9, 1997, and incorporated
herein by reference.)
10.13 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.)
10.14(a) Employment Agreement between the Company and James A.
McIntyre dated January 1, 1994. (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(b) First Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 1, 1996. (Filed as
Exhibit No. 10.10 to Quarterly Report on Form 10-Q, for the
period ended June 30, 1997, Commission File Number 1-8007, and
incorporated herein by reference.)
10.14(c) Second Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 8, 1997. (Filed as
Exhibit No. 10.14 (c) to Quarterly Report on Form 10-Q, for
the period ended September 30, 1997, Commission File Number
1-8007, and incorporated herein by reference.)
10.15(a) Employment Agreement between the Company and Louis J.
Rampino dated February 8, 1996. (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.)
10.15(b) Employment Agreement between the Company and Wayne R.
Bailey dated February 8, 1996. (Filed as Exhibit No. 10.14 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 Management Continuity Agreement between the Company and
Raymond G. Meyers dated February 8, 1996. (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.)
10.17 1998 Management Incentive Compensation Plan of the Company.
(Filed as Exhibit No. 10.17 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1997, Commission File
Number 1-8007, and incorporated herein by reference.)
10.18 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.)
10.19 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.)
25
<PAGE>
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
10.20 Credit Agreement among Fremont General Corporation, Various
Lending Institutions and the Chase Manhattan Bank, N.A., As
Agent dated August 1, 1997. (Filed as Exhibit No. 10.20 to
Quarterly Report on Form 10-Q, for the period ended September
30, 1997, 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.)
27 Financial Data Schedule
(b) REPORT ON FORM 8-K.
None filed during the quarter ended September 30, 1998.
26
<PAGE>
SIGNATURES
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 13, 1998 /s/ LOUIS J. RAMPINO
----------------------------
Louis J. Rampino, President,
Chief Operating Officer and Director
Date: November 13, 1998 /s/ JOHN A. DONALDSON
-----------------------------
John A. Donaldson, Senior Vice
President, Controller and Chief
Accounting Officer
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
------------ -------------------------------------------------------------- -------------
<C> <S> <C>
2.1 Stock Purchase Agreement by and among Talegen Holdings, Inc.,
Fremont Indemnity Company and Fremont General Corporation
dated as of May 16, 1997 including exhibits thereto. (Filed as
Exhibit No. 2.1 to Current Report on Form 8-K, as of August 1,
1997, Commission File Number 1-8007, and incorporated herein
by reference.)
2.2 Tax Allocation and Indemnification Agreement, dated as of May
16, 1997 by and among Xerox Financial Services, Inc., Talegen
Holdings, Inc., Industrial Indemnity Holdings, Inc., Fremont
General Corporation, and Fremont Indemnity Corporation, a
California corporation. (Filed as Exhibit No. 2.2 to Current
Report on Form 8-K, as of August 1, 1997, 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 Quarterly Report on
Form 10-Q, for the period ended June 30, 1998, Commission File
Number 1-8007, and incorporated herein by reference.)
3.2 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 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.)
4.5 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.)
4.6 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.)
4.7 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.)
4.8 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(a) 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.)
10.1(b) Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan. (Filed as Exhibit No. 10.1 (b)
to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1997, Commission File Number 1-8007, and
incorporated herein by reference.)
10.1(c) Amendment Number Three to the Fremont General Corporation
Employee Stock Ownership Plan.
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(a) Fremont General Corporation and Affiliated Companies
Investment Incentive Plan. (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.)
10.3(b) Amendments Number One, Two and Three to the Fremont General
Corporation and Affiliated Companies Investment Incentive
Plan. (Filed as Exhibit No. 10.3 (b) to Quarterly Report on
Form 10-Q, for the period ended September 30, 1997,Commission
File Number 1-8007, and incorporated herein by reference.)
10.3(c) Amendment Number Four to the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan. (Filed as
Exhibit No. 10.3 (c) to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1997, Commission File Number
1-8007, and incorporated herein by reference.)
10.3(d) Amendment Number Five to the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan.
10.4(a) Trust Agreement for Investment Incentive Plan. (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 Plan.
(Filed as Exhibit No. 10.4 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.)
10.5(a) Supplemental Retirement Plan of the Company, as restated
January 1, 1997. (Filed as Exhibit No. 10.5 to Quarterly
Report on Form 10-Q, for the period ended September 30, 1997,
Commission File Number 1-8007, and incorporated herein by
reference.)
10.5(b) Amendment Number One to the Fremont General Corporation
Supplemental Retirement Plan of the Company. (Filed as Exhibit
No. 10.5(b) to Quarterly Report on Form 10-Q for the period
ended March 31, 1998, 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 restated January 1,
1997. (Filed as Exhibit No. 10.7 to Quarterly Report on Form
10-Q, for the period ended September 30, 1997, Commission File
Number 1-8007, and incorporated herein
by reference).
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 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 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 Amended Non-Qualified Stock Option Plan of 1989 and related
agreements of the Company. (Filed as Exhibit No. 10.9 to
Annual Report on Form 10-K, for the fiscal year ended December
31, 1996, Commission File Number 1-8007, and incorporated
herein by reference.)
10.10 1997 Stock Plan and related agreements. (Filed as Exhibit No.
10.10 to Quarterly Report on Form 10-Q, for the period ended
June 30, 1997, Commission File Number 1-8007, and incorporated
herein by reference.)
10.11(a) Long-Term Incentive Compensation Plan of the Company -
Senior Executive Plan. (Filed as Exhibit No. 10.10 (a) on Form
10-Q for the period ended September 30, 1996, Commission File
Number 1-8007, and incorporated herein by reference.)
10.11(b) Long-Term Incentive Compensation Plan of the Company
(Filed as Exhibit No. 10.10 (b) on Form 10-Q for the period
ended September 30, 1996, Commission File Number 1-8007, and
incorporated herein by reference.)
10.12 1995 Restricted Stock Award Plan as amended and forms
of agreement thereunder. (Filed as Exhibit No. 4.1 to
Registration Statement on Form S-8/S-3 File No. 333-17525
which was filed on December 9, 1997, and incorporated
herein by reference.)
10.13 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.)
10.14(a) Employment Agreement between the Company and James A.
McIntyre dated January 1, 1994. (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(b) First Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 1, 1996. (Filed as
Exhibit No. 10.10 to Quarterly Report on Form 10-Q, for the
period ended June 30, 1997, Commission File Number 1-8007, and
incorporated herein by reference.)
10.14(c) Second Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 8, 1997. (Filed as
Exhibit No. 10.14 (c) to Quarterly Report on Form 10-Q, for
the period ended September 30, 1997, Commission File Number
1-8007, and incorporated herein by reference.)
10.15(a) Employment Agreement between the Company and Louis J.
Rampino dated February 8, 1996. (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.)
10.15(b) Employment Agreement between the Company and Wayne R.
Bailey dated February 8, 1996. (Filed as Exhibit No. 10.14 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 Management Continuity Agreement between the Company and
Raymond G. Meyers dated February 8, 1996. (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.)
10.17 1998 Management Incentive Compensation Plan of the Company.
(Filed as Exhibit No. 10.17 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1997, Commission File
Number 1-8007, and incorporated herein by reference.)
10.18 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.)
10.19 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.)
10.20 Credit Agreement among Fremont General Corporation, Various
Lending Institutions and the Chase Manhattan Bank, N.A., As
Agent dated August 1, 1997. (Filed as Exhibit No. 10.20 to
Quarterly Report on Form 10-Q, for the period ended September
30, 1997, 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.)
27 Financial Data Schedule
</TABLE>
AMENDMENT NUMBER THREE
TO THE
FREMONT GENERAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1998, the Fremont General Corporation
Employee Stock Ownership Plan (the "Plan") is amended to provide that:
FIRST: On December 30, 1997, the Company executed an amendment to the Fremont
General Employee Stock Ownership Plan entitled "Amendment Number Four to the
Fremont General Corporation Employee Stock Ownership Plan." Said Amendment is
hereby retitled "Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan."
SECOND: Paragraph (a) of Section 1.7 is amended to read as follows:
(a) Compensation means all of an Employee's W-2 wages as
defined in Section 3401(a) of the Code for the purposes of income tax
withholding at the source but determined without regard to any rules
that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the
exception for agricultural labor in Section 3401(a)(2) of the Code).
Notwithstanding the foregoing, Compensation shall not include FICA paid
by the Employer with respect to nonqualified deferred compensation or
retirement plans, Rideshare payments, relocation payments, Excess/SRP
distributions, amounts realized from the exercise of nonqualified stock
options or when restricted stock held by an employee is no longer
subject to substantial risk of forfeiture, meals, moving expense
payments, fringe car payments, referral awards, parking, recognition
awards and nonperformance based bonuses including holiday bonuses,
hiring bonuses and travel incentive bonuses.
THIRD: The first sentence of Section 1.9 is amended to read as follows:
1.9 EMPLOYEE: Any person employed by the Employer or by a Participating
Employer, other than as an independent contractor.
FOURTH: Exhibit A is hereby deleted and Section 1.18 is amended to read as
follows:
1.18 PARTICIPATING EMPLOYEES: The Affiliated Companies which have,
from time to time, adopted the Plan.
FIFTH: Paragraph (d) of Section 1.30 shall be amended as follows:
(d) Each Year of Service completed by a Participant while he
or she was an employee of Beaver Insurance Company, Pacific
Compensation Insurance Company, Investors Bancor, Casualty Insurance
Company, Workers Compensation and Indemnity Company, Industrial
Indemnity Holdings, Inc. or its subsidiaries (including but not limited
to American All-Risk Group, Inc. and its subsidiaries) ("acquired
companies") shall be deemed a Year of Service under this Plan;
provided, however, and except with respect to past service credit
granted by the Company or the Plan Administrator on other terms prior
to the adoption of this amendment, in order to be entitled to past
service credit, an Employee must have been employed by such acquired
company at the time of its acquisition by or merger into the Employer
or any Affiliate Company.
SIXTH: The first sentence of Section 3.1(a) shall be amended to read as
follows:
3.1 EMPLOYER CONTRIBUTIONS:
(a) For each Plan Year, the Employer shall contribute to the
Trust such amount(s) on its behalf and on behalf of each Participating
Employer as the Board of Directors may deem appropriate and reasonable
considering the condition of the business and the interests of the Plan
Participants.
SEVENTH: Section 4.2(c) is hereby amended in its entirety to read as follows:
(c) Contributions on behalf of the Employer shall be allocated
among the Accounts of Participants who are Employees of the Employer
who complete 1000 Hours of Service during the Plan Year, and who are
employed by the Employer on the last day of the Plan Year, in the
proportion that each such Participant's Compensation for the Plan Year
bears to the total Compensation of all Participants who are Employees
of the Employer for the Plan Year. Contributions on behalf of a
Participating Employer shall be allocated among the accounts of
Participants who are Employees of such Participating Employer who
complete 1000 Hours of Service during the Plan Year, and who are
employed by such Participating Employer on the last day of the Plan
Year, in the proportion that each such Participant's Compensation for
the Plan Year bears to the total Compensation of all Participants who
are Employees of the Participating Employer for the Plan Year.
Notwithstanding the foregoing, however, effective as of January 1,
1993, if an allocation is made of Employer Stock released from a
Suspense Account, such stock and other cash or stock contributions
shall be allocated (1) first, to the Accounts of Special Participants,
in an amount equal to the Special Allocation, and (2) next, to the
Accounts of all Participants in the same manner described in this
Section as if there was no allocation made pursuant to a release of
Employer Stock from a Suspense Account. For purposes of this Section,
an Employee whose employment with the Employer terminates during this
Plan Year because this Employee (i) retires on or after reaching his
Normal Retirement Date, (ii) incurs a Permanent and Total Disability,
or (iii) dies, shall be deemed to have completed 1000 Hours of Service
during the Plan Year and to have been employed by the Employer on the
last day of the Plan Year.
EIGHTH: Wherever in this document there appears the amount of $3,500, including
but not limited to Sections 5.2, 6.5 and 6.9. That amount shall be
read as $5,000.
NINTH: New Section 6.12 shall be added to Section VI, and reads as follows:
6.12 MINIMUM DISTRIBUTION REQUIREMENTS:
(a) General Rules.
(i) Subject to Section 6.6 and any applicable
Appendices to the Plan, the requirements of this
Section shall apply to any distribution of a
Participant's interest and will take precedence over
any inconsistent provisions of this Plan.
(ii) All distributions required under this Section
shall be determined and made in accordance with the
proposed regulations under Section 401(a)(9) of the
Code, including the minimum distribution incidental
benefit requirement of Section 1.401(a)(9)-2 of the
proposed regulations.
(b) Required Beginning Date. The entire interest of a
Participant must be distributed or begin to be distributed no later
than the Participant's Required Beginning Date.
(c) Limits on Distribution Periods. As of the first
distribution calendar year, distributions, if not made in a single-sum,
may only be made over one of the following periods (or a combination
thereof):
(i) the life of the Participant,
(ii) the life of the Participant and a
designated Beneficiary,
(iii) a period certain not extending
beyond the life expectancy of the
Participant, or
(iv) a period certain not extending
beyond the joint and last survivor
expectancy of the Participant and a
designated Beneficiary.
(d) Determination of Amount to be Distributed Each Year.
If the Participant's interest is to be distributed in other than a
single sum, the following minimum distribution rules shall apply on or
after the Required Beginning Date:
(i) Individual Account.
(A) If a Participant's benefit is to be
distributed over (1) a period not extending beyond
the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant
and the Participant's designated Beneficiary or (2) a
period not extending beyond the life expectancy of
the designated Beneficiary, the amount required to be
distributed for each calendar year, beginning with
distributions for the first distribution calendar
year, must at least equal the quotient obtained by
dividing the Participant's benefit by the applicable
life expectancy.
(B) For calendar years beginning before
January 1, 1989, if the Participant's Spouse is not
the designated Beneficiary, the method of
distribution selected must assure that at least 50%
of the present value of the amount available for
distribution is paid within the life expectancy of
the Participant.
(C) For calendar years beginning after
December 31, 1988, the amount to be distributed each
year, beginning with distributions for the first
distribution calendar year shall not be less than the
quotient obtained by dividing the Participant's
benefit by the lesser of (1) the applicable life
expectancy or (2) if the Participant's Spouse is not
the designated Beneficiary, the applicable divisor
determined from the table set forth in Q&A-4 of
Section 1.401(a)(9)-2 of the Proposed Regulations.
Distributions after the death of the Participant
shall be distributed using the applicable life
expectancy in paragraph (A) above as the relevant
divisor without regard to proposed regulations
Section 1.401(a)(9)-2.
(D) The minimum distribution required for
the Participant's first distribution calendar year
must be made on or before the Participant's required
beginning date. The minimum distribution for other
calendar years, including the minimum distribution
for the distribution calendar year in which the
Employee's required beginning date occurs, must be
made on or before December 31 of that distribution
calendar year.
(ii) Other Forms. If the Participant's benefit is
distributed in the form of an annuity purchased from
an insurance company, distributions thereunder shall
be made in accordance with the requirements of
Section 401(a)(9) of the Code and the proposed
regulations thereunder. Any annuity contract
distributed from this Plan must be nontransferable.
(e) Definitions: For purposes of this Section, the
following definitions shall apply:
(i) Applicable Life Expectancy. The life expectancy
(or joint and last survivor expectancy) calculated
using the attained age of the Participant (or
designated Beneficiary) as of the Participant's (or
designated Beneficiary's) birthday in the applicable
calendar year reduced by one for each calendar year
which has elapsed since the date life expectancy was
first calculated. If life expectancy is being
recalculated, the applicable life expectancy shall be
the life expectancy as so recalculated. The
applicable calendar year shall be the first
distribution calendar year, and if life expectancy is
being recalculated such succeeding calendar year.
(ii) Designated Beneficiary. The individual who is
designated as the Beneficiary under the Plan in
accordance with Section 401(a)(9) of the Code and the
proposed regulations thereunder.
(iii) Distribution Calendar Year. A calendar year for
which a minimum distribution is required. For
distributions beginning before the Participant's
death, the first distribution calendar year is the
calendar year immediately preceding the calendar year
which contains the Participant's required beginning
date. For distributions beginning after the
Participant's death, the first distribution calendar
year is the calendar year in which distributions are
required to begin pursuant to Section 401(a)(9) of
the Code.
(iv) Five Percent Owner. A Participant is treated as
a Five Percent Owner for purposes of this Section if
such Participant is a Five Percent Owner as defined
in Section 416(i) of the Code (determined in
accordance with Section 416 of the Code but without
regard to whether the Plan is Top-Heavy) at any time
during the Plan Year ending with or within the
calendar year in which such owner attains age 66 1/2
or any subsequent Plan Year.
(v) Life Expectancy. Life expectancy and joint and
last survivor expectancy are computed by use of the
expected return multiples in Tables V and VI of
Section 1.72-9 of the income tax regulations. Unless
otherwise elected by the Participant (or Spouse in
the case of distributions which begin following the
Participant's death and in which the Spouse is named
as the designated Beneficiary) by the time
distributions are required to begin, life
expectancies shall be recalculated annually. Such
election shall be irrevocable as to the Participant
(or Spouse) and shall apply to all subsequent years.
The life expectancy of a nonspouse Beneficiary may
not be recalculated.
(vi) Participant's Benefit.
(A) The Account balance as of the last
Valuation Date in the calendar year immediately
preceding the distribution calendar year (valuation
calendar year) increased by the amount of any
contributions or forfeitures allocated to the Account
balance as of dates in the valuation calendar year
after the Valuation Date and decreased by
distributions made in the valuation calendar year
after the Valuation Date.
(B) Exception for second distribution
calendar year. For purposes of paragraph (A) above,
if any portion of the minimum distribution for the
first distribution calendar year is made in the
second distribution calendar year on or before the
required beginning date, the amount of the minimum
distribution made in the second distribution calendar
year shall be treated as if it had been made in the
immediately preceding distribution calendar year.
(vii) Required Beginning Date.
(A) Five Percent Owners: the first day
of April following the later of:
(1) the calendar year in which
the Participant attains age
70 1/2, or
(2) the earlier of the calendar
year with or within which
ends the Plan Year in which
the Participant becomes a
Five Percent Owner, or the
calendar year in which the
Participant's Severance
Date occurs.
Once begun,
distributions to a Five Percent Owner under
this Section must continue to be
distributed, even if the Participant ceases
to be a Five Percent Owner in a subsequent
year.
(B) Non-Five Percent Owners:
(1) Participants who are not Five
Percent Owners, but who attain age
70 1/2 prior to January 1, 1996: the
first day of April of the calendar
year following the calendar year in
which the Participant attains age 70
1/2.
(2) Participants who are not Five
Percent Owners and who attain age 70
1/2 between January 1, 1996 and
December 31, 1998: the first day of
April of the calendar year following
the calendar year in which the later
of attainment of age 70 1/2 or the
Participant's Severance Date occurs;
provided, however, that an Employee
whose Severance Date has not
occurred may irrevocably elect, in
writing, to defer distribution until
that Employee's Severance Date.
(3) Participants who are not Five
Percent Owners and who attain age 70
1/2 after December 31, 1998: the
date on which occurs the
Participant's Severance Date.
Dated: October 13, 1998 FREMONT GENERAL CORPORATION
By:/s/ RAYMOND G. MEYERS
---------------------------
Raymond G. Meyers
Senior Vice President
AMENDMENT NUMBER FIVE
TO THE
FREMONT GENERAL CORPORATION
AND AFFILIATED COMPANIES INVESTMENT INCENTIVE PLAN
Effective as of January 1, 1998, the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan (the "Plan") is amended to
provide that:
FIRST: Paragraph (a) of Section 2.10 is amended to read as follows:
Compensation means all of an Employee's W-2 wages as defined
in Section 3401(a) of the Code for the purposes of income tax
withholding at the source but determined without regard to any rules
that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the
exception for agricultural labor in Section 3401(a)(2) of the Code).
Notwithstanding the foregoing, Compensation shall not include FICA paid
by the Employer with respect to nonqualified deferred compensation or
retirement plans, Rideshare payments, relocation payments, Excess/SRP
distributions, amounts realized from the exercise of nonqualified stock
options or when restricted stock held by an employee is no longer
subject to substantial risk of forfeiture, meals, moving expense
payments, fringe car payments, referral awards, parking, recognition
awards and nonperformance based bonuses including holiday bonuses,
hiring bonuses and travel incentive bonuses.
SECOND: Exhibit A is hereby deleted and Section 2.30 is amended to read as
follows:
2.30 PARTICIPATING EMPLOYERS: The Affiliated Companies which have,
from time to time, adopted the Plan.
THIRD: Paragraph (c) of Section 2.44 shall be amended as follows:
(c) Each Year of Service completed by a Participant while he
or she was an employee of Beaver Insurance Company, Pacific
Compensation Insurance Company, Investors Bancor, Casualty Insurance
Company, Workers Compensation and Indemnity Company, Industrial
Indemnity Holdings, Inc. or its subsidiaries (including but not limited
to American All-Risk Group, Inc. and its subsidiaries) ("acquired
companies") shall be deemed a Year of Service under this Plan;
provided, however, and except with respect to past service credit
granted by the Company or the Plan Administrator on other terms prior
to the adoption of this amendment, in order to be entitled to past
service credit, an Employee must have been employed by such acquired
company at the time of its acquisition by or merger into the Employer
or any Affiliate Company.
FOURTH: Wherever in this document there appears the amount of $3,500, including
but not limited to Sections 6.2 and 6.6, that amount shall be read as
$5,000.
FIFTH: Sections 6.10(a) through (e) shall be amended in their entirety to read
as follows:
6.10 MINIMUM DISTRIBUTION REQUIREMENTS:
(a) General Rules.
(i) Subject to Section 6.8 and any applicable
Appendices to the Plan, the requirements of this
Section shall apply to any distribution of a
Participant's interest and will take precedence over
any inconsistent provisions of this Plan.
(ii) All distributions required under this Section
shall be determined and made in accordance with the
proposed regulations under Section 401(a)(9) of the
Code, including the minimum distribution incidental
benefit requirement of Section 1.401(a)(9)-2 of the
proposed regulations.
(b) Required Beginning Date. The entire interest of a
Participant must be distributed or begin to be distributed no later
than the Participant's Required Beginning Date.
(c) Limits on Distribution Periods. As of the first
distribution calendar year, distributions, if not made in a single-sum,
may only be made over one of the following periods (or a combination
thereof):
(i) the life of the Participant,
(ii) the life of the Participant and a designated
Beneficiary,
(iii) a period certain not extending beyond the
life expectancy of the Participant, or
(iv) a period certain not extending beyond the joint
and last survivor expectancy of the Participant and a
designated Beneficiary.
(d) Determination of Amount to be Distributed Each Year. If
the Participant's interest is to be distributed in other than a single
sum, the following minimum distribution rules shall apply on or after
the Required Beginning Date:
(i) Individual Account.
(A) If a Participant's benefit is to be
distributed over (1) a period not extending beyond the life
expectancy of the Participant or the joint life and last
survivor expectancy of the Participant and the Participant's
designated Beneficiary or (2) a period not extending beyond
the life expectancy of the designated Beneficiary, the amount
required to be distributed for each calendar year, beginning
with distributions for the first distribution calendar year,
must at least equal the quotient obtained by dividing the
Participant's benefit by the applicable life expectancy.
(B) For calendar years beginning before
January 1, 1989, if the Participant's Spouse is not the
designated Beneficiary, the method of distribution selected
must assure that at least 50% of the present value of the
amount available for distribution is paid within the life
expectancy of the Participant.
(C) For calendar years beginning after
December 31, 1988, the amount to be distributed each year,
beginning with distributions for the first distribution
calendar year shall not be less than the quotient obtained by
dividing the Participant's benefit by the lesser of (1) the
applicable life expectancy or (2) if the Participant's Spouse
is not the designated Beneficiary, the applicable divisor
determined from the table set forth in Q&A-4 of Section
1.401(a)(9)-2 of the Proposed Regulations. Distributions after
the death of the Participant shall be distributed using the
applicable life expectancy in paragraph (A) above as the
relevant divisor without regard to proposed regulations
Section 1.401(a)(9)-2.
(D) The minimum distribution required for
the Participant's first distribution calendar year must be
made on or before the Participant's required beginning date.
The minimum distribution for other calendar years, including
the minimum distribution for the distribution calendar year in
which the Employee's required beginning date occurs, must be
made on or before December 31 of that distribution calendar
year.
(ii) Other Forms. If the Participant's benefit is distributed
in the form of an annuity purchased from an insurance company,
distributions thereunder shall be made in accordance with the
requirements of Section 401(a)(9) of the Code and the proposed
regulations thereunder. Any annuity contract distributed from
this Plan must be nontransferable.
(e) Definitions: For purposes of this Section, the
following definitions shall apply:
(i) Applicable Life Expectancy. The life expectancy (or joint
and last survivor expectancy) calculated using the attained
age of the Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's) birthday in the
applicable calendar year reduced by one for each calendar year
which has elapsed since the date life expectancy was first
calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so
recalculated. The applicable calendar year shall be the first
distribution calendar year, and if life expectancy is being
recalculated such succeeding calendar year.
(ii) Designated Beneficiary. The individual who is designated
as the Beneficiary under the Plan in accordance with Section
401(a)(9) of the Code and the proposed regulations thereunder.
(iii) Distribution Calendar Year. A calendar year for which a
minimum distribution is required. For distributions beginning
before the Participant's death, the first distribution
calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required
beginning date. For distributions beginning after the
Participant's death, the first distribution calendar year is
the calendar year in which distributions are required to begin
pursuant to Section 401(a)(9) of the Code.
(iv) Five Percent Owner. A Participant is treated as a Five
Percent Owner for purposes of this Section if such Participant
is a Five Percent Owner as defined in Section 416(i) of the
Code (determined in accordance with Section 416 of the Code
but without regard to whether the Plan is Top-Heavy) at any
time during the Plan Year ending with or within the calendar
year in which such owner attains age 66 1/2 or any subsequent
Plan Year.
(v) Life Expectancy. Life expectancy and joint and last
survivor expectancy are computed by use of the expected return
multiples in Tables V and VI of Section 1.72-9 of the income
tax regulations. Unless otherwise elected by the Participant
(or Spouse in the case of distributions which begin following
the Participant's death and in which the Spouse is named as
the designated Beneficiary) by the time distributions are
required to begin, life expectancies shall be recalculated
annually. Such election shall be irrevocable as to the
Participant (or Spouse) and shall apply to all subsequent
years. The life expectancy of a nonspouse Beneficiary may not
be recalculated.
(vi) Participant's Benefit.
(A) The Account balance as of the last Valuation Date
in the calendar year immediately preceding the distribution
calendar year (valuation calendar year) increased by the
amount of any contributions or forfeitures allocated to the
Account balance as of dates in the valuation calendar year
after the Valuation Date and decreased by distributions made
in the valuation calendar year after the Valuation Date.
(B) Exception for second distribution calendar year.
For purposes of paragraph (A) above, if any portion of the
minimum distribution for the first distribution calendar year
is made in the second distribution calendar year on or before
the required beginning date, the amount of the minimum
distribution made in the second distribution calendar year
shall be treated as if it had been made in the immediately
preceding distribution calendar year.
(vii) Required Beginning Date.
(A) Five Percent Owners: the first day of April
following the later of:
(1) the calendar year in which the
Participant attains age 70 1/2, or
(2) the earlier of the calendar year with or
within which ends the Plan Year in which the
Participant becomes a Five Percent Owner, or
the calendar year in which the Participant's
Severance Date occurs.
Once begun,
distributions to a Five Percent Owner under
this Section must continue to be
distributed, even if the Participant ceases
to be a Five Percent Owner in a subsequent
year.
(B) Non-Five Percent Owners:
(1) Participants who are not Five Percent
Owners, but who attain age 70 1/2 prior to
January 1, 1996: the first day of April of
the calendar year following the calendar
year in which the Participant attains age 70
1/2.
(2) Participants who are not Five Percent
Owners and who attain age 70 1/2 between
January 1, 1996 and December 31, 1998: the
first day of April of the calendar year
following the calendar year in which the
later of attainment of age 70 1/2 or the
Participant's Severance Date occurs;
provided, however, that an Employee whose
Severance Date has not occurred may
irrevocably elect, in writing, to defer
distribution until that Employee's Severance
Date.
(3) Participants who are not Five Percent
Owners and who attain age 70 1/2 after
December 31, 1998: the date on which occurs
the Participant's Severance Date.
Dated: October 13, 1998 FREMONT GENERAL CORPORATION
By:/s/ RAYMOND G. MEYERS
------------------------
Raymond G. Meyers
Senior Vice President
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,618,654
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 504,647
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,939,809<F1>
<CASH> 152,991
<RECOVER-REINSURE> 24,788
<DEFERRED-ACQUISITION> 40,267
<TOTAL-ASSETS> 6,976,653
<POLICY-LOSSES> 2,503,932
<UNEARNED-PREMIUMS> 101,396
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 22,685
<NOTES-PAYABLE> 950,585
100,000
0
<COMMON> 34,816
<OTHER-SE> 868,772<F2>
<TOTAL-LIABILITY-AND-EQUITY> 6,976,653
399,045
<INVESTMENT-INCOME> 144,166
<INVESTMENT-GAINS> (1,063)
<OTHER-INCOME> 212,617<F3>
<BENEFITS> 244,843
<UNDERWRITING-AMORTIZATION> 88,093
<UNDERWRITING-OTHER> 47,232
<INCOME-PRETAX> 145,915
<INCOME-TAX> 47,493
<INCOME-CONTINUING> 98,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,422
<EPS-PRIMARY> 3.08<F4>
<EPS-DILUTED> 2.82<F5>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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<FN>
<F1>Includes Loans receivable, Short-term and Other investments.
<F2>Sum of Additional paid-in-capital, Retained earnings, Deferred Compensation
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<F3>Includes Loan interest and Other revenue.
<F4>Basic earnings per share
<F5>Diluted earnings per share
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</TABLE>
