<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1999
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 OCTOBER 31, 1999
- ------------------------------ ------------------
Common Stock, $1.00 par value 70,038,594
- --------------------------------------------------------------------------------
<PAGE>
FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 ............... 3
Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1999 and 1998 ............................ 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 .......... 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 ....................... 9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk ............................................... 25
PART II - OTHER INFORMATION
Items 1-5. Not applicable
Item 6. Exhibits and Reports on Form 8-K ............................ 26
Signature .............................................................. 32
2
<PAGE>
<TABLE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Securities available for sale at fair value:
Fixed maturity investments (cost: 1999-$1,505,464; 1998-$1,597,585) ....... $ 1,463,001 $ 1,646,772
Non-redeemable preferred stock (cost: 1999-$426,533; 1998-$489,714) ....... 411,159 500,376
----------- -----------
Total securities available for sale .................................... 1,874,160 2,147,148
Loans receivable ............................................................ 3,656,147 2,958,176
Loans held for sale ......................................................... 443,292 -
Short-term investments ...................................................... 82,487 222,719
Other investments ........................................................... 34,673 16,890
----------- -----------
Total Investments and Loans ............................................ 6,090,759 5,344,933
Cash ........................................................................ 244,962 79,875
Accrued investment income ................................................... 41,113 44,038
Premiums receivable and agents' balances .................................... 220,927 184,355
Reinsurance recoverable on paid losses ...................................... 23,921 15,801
Reinsurance recoverable on unpaid losses .................................... 951,472 829,002
Deferred policy acquisition costs ........................................... 58,475 44,996
Costs in excess of net assets acquired ...................................... 161,091 164,467
Deferred income taxes ....................................................... 139,367 145,410
Other assets ................................................................ 341,180 273,157
Assets held for discontinued operations ..................................... 272,580 243,578
----------- -----------
TOTAL ASSETS ........................................................... $ 8,545,847 $ 7,369,612
=========== ===========
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses ....................................... $ 2,260,443 $ 2,298,118
Life insurance benefits and liabilities ................................... 128,425 136,973
Unearned premiums ......................................................... 171,920 119,774
Dividends to policyholders ................................................ 15,129 16,162
----------- -----------
TOTAL CLAIMS AND POLICY LIABILITIES .................................... 2,575,917 2,571,027
Reinsurance premiums payable and funds withheld ............................. 58,170 46,124
Other liabilities ........................................................... 216,244 277,938
Thrift deposits ............................................................. 3,185,835 2,134,839
Short-term debt ............................................................. 353,709 165,702
Long-term debt .............................................................. 1,007,483 913,006
Liabilities of discontinued operations ...................................... 239,066 210,064
----------- -----------
TOTAL LIABILITIES ...................................................... 7,636,424 6,318,700
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: 150,000,000 shares;
issued and outstanding: (1999-70,043,000 and 1998-69,939,000) ............. 70,043 69,939
Additional paid-in capital .................................................. 301,652 308,369
Retained earnings ........................................................... 587,695 620,612
Deferred compensation ....................................................... (112,373) (86,910)
Accumulated other comprehensive income (loss) ............................... (37,594) 38,902
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................. 809,423 950,912
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 8,545,847 $ 7,369,612
=========== ===========
See notes to consolidated financial statements on Form 10-Q.
</TABLE>
3
<PAGE>
<TABLE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Property and casualty premiums earned ............ $ 207,838 $ 125,515 $ 575,813 $ 399,045
Loan interest .................................... 99,116 63,867 267,614 172,770
Net investment income ............................ 40,844 49,235 129,447 144,166
Realized investment losses ....................... (2,173) (139) (1,875) (1,063)
Other revenue .................................... 4,101 12,309 13,617 34,082
--------- --------- --------- ---------
TOTAL REVENUES ................................. 349,726 250,787 984,616 749,000
EXPENSES
Losses and loss adjustment expenses .............. 264,727 71,354 480,278 244,843
Policy acquisition costs ......................... 48,156 29,740 136,834 88,093
Provision for loan losses ........................ 6,906 4,423 16,780 9,405
Other operating costs and expenses ............... 53,022 51,023 147,028 140,491
Dividends to policyholders ....................... 7,379 1,328 20,490 4,273
Interest expense ................................. 63,952 42,321 174,490 115,980
--------- --------- --------- ---------
TOTAL EXPENSES ................................. 444,142 200,189 975,900 603,085
--------- --------- --------- ---------
Income (loss) before taxes ....................... (94,416) 50,598 8,716 145,915
Income tax expense (benefit)...................... (33,503) 16,411 343 47,493
--------- --------- --------- ---------
Income (loss) from continuing operations ......... (60,913) 34,187 8,373 98,422
Net loss from discontinued operations ............ (25,000) - (25,000) -
--------- --------- --------- ---------
NET INCOME (LOSS) ................................ $ (85,913) $ 34,187 $ (16,627) $ 98,422
========= ========= ========= =========
PER SHARE DATA
Basic:
Income (loss) from continuing operations ....... $ (0.92) $ 0.53 $ 0.13 $ 1.54
Net loss from discontinued operations .......... (0.38) - (0.38) -
Net income (loss) .............................. (1.30) 0.53 (0.25) 1.54
Diluted:
Income (loss) from continuing operations ....... (0.92) 0.49 0.13 1.41
Net loss from discontinued operations .......... (0.38) - (0.38) -
Net income (loss) .............................. (1.30) 0.49 (0.25) 1.41
Cash dividends ................................... 0.08 0.075 0.24 0.225
Weighted average shares:
Basic .......................................... 66,205 64,095 66,755 63,911
Diluted ........................................ 66,205 70,106 66,755 70,025
See notes to consolidated financial statements on Form 10-Q.
</TABLE>
4
<PAGE>
<TABLE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations ........................................... $ 8,873 $ 98,422
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Change in premiums receivable and agents' balances
and reinsurance recoverable on paid losses ......................... (44,692) (15,494)
Change in accrued investment income .................................... 2,925 7,487
Change in claims and policy liabilities ................................ (86,603) (302,252)
Amortization of policy acquisition costs ............................... 136,834 88,093
Policy acquisition costs deferred ...................................... (150,313) (90,185)
Provision for deferred income taxes .................................... 45,586 17,411
Provision for loan losses .............................................. 16,780 9,405
Provision for depreciation and amortization ............................ 32,407 28,761
Net amortization on fixed maturity investments ......................... (9,158) (18,975)
Realized investment losses ............................................. 1,875 1,063
Change in other assets and liabilities ................................. (111,895) 56,597
------------ -----------
NET CASH USED IN CONTINUING OPERATIONS ........................... (157,381) (119,667)
Effect of discontinued operations ........................................... (25,000) -
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES ............................... (182,381) (119,667)
INVESTING ACTIVITIES
Securities available for sale:
Purchases of securities ................................................ (500,341) (659,138)
Sales of securities .................................................... 469,677 500,136
Securities matured or called ........................................... 193,249 295,744
Decrease in short-term and other investments ................................ 122,449 159,627
Loan originations and bulk purchases funded ................................. (3,298,939) (1,690,172)
Receipts from repayments of loans and bulk sales of loans ................... 2,140,896 1,203,125
Purchase of subsidiaries, less cash acquired - (114,626)
Purchase of property and equipment .......................................... (19,958) (22,942)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES ............................... (892,967) (328,246)
FINANCING ACTIVITIES
Proceeds from short-term debt ............................................... 153,224 -
Repayments of short-term debt ............................................... (19,467) (2,792)
Proceeds from long-term debt ................................................ 497,237 277,750
Repayments of long-term debt ................................................ (347,285) (36,228)
Net increase in thrift deposits ............................................. 1,050,996 358,360
Annuity contract receipts ................................................... 675 748
Annuity contract withdrawals ................................................ (32,090) (37,354)
Dividends paid .............................................................. (16,782) (15,311)
Stock options exercised ..................................................... 407 1,435
Net increase in deferred compensation plans ................................. (46,480) (10,691)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 1,240,435 535,917
------------ -----------
INCREASE IN CASH ............................................................ 165,087 88,004
Cash at beginning of year ................................................... 79,875 64,987
------------ -----------
CASH AT SEPTEMBER 30, ....................................................... $ 244,962 $ 152,991
============ ===========
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, 1998. Certain 1998 amounts have been
reclassified to conform to the 1999 presentation.
NOTE B - DISCONTINUED OPERATIONS
In the quarter ended September 30, 1999 the Company incurred a net loss of
$25 million to recognize the contribution of additional assets to these
operations. The additional assets were considered necessary as the Company
observed an increase in reported asbestos and environmental claims in excess of
previous estimates. The Company's discontinued insurance operations consist
primarily of assumed treaty and facultative reinsurance business that was
discontinued between 1986 and 1991. In 1990, the Company established a
management group to actively manage the liquidation of this business. The
liabilities associated with this business are long term in duration and,
therefore, the Company continues to be subject to claims being reported. Claims
under these reinsurance treaties include professional liability, product
liability and general liability which include environmental and asbestos claims.
NOTE C - SENIOR NOTES
On March 17, 1999, the Company issued $425 million of Senior Notes ("the
Senior Notes") in a private placement. The Senior Notes were subsequently
exchanged for notes registered with the Securities and Exchange Commission under
a Form S-4 Registration Statement effective on May 11, 1999. These notes consist
of $200 million Series B 7.70% Senior Notes due 2004 and $225 million Series B
7.875% Senior Notes due 2009.
NOTE D - COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) are summarized in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------
1999 1998 1999 1998
---------- ---------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net income (loss) ........................................................ $ (85,913) $ 34,187 $ (16,627) $ 98,422
Other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of tax:
Net change in unrealized gains (losses) during the period,
net of deferred income tax expense (benefit) ................... (22,028) (23,776) (69,735) (17,372)
Less: reclassification adjustment net of tax ...................... 341 (599) (6,761) (4,764)
---------- ---------- --------- ---------
Other comprehensive income (loss) .............................. (21,687) (24,375) (76,496) (22,136)
---------- ---------- --------- ---------
Total comprehensive income (loss) ........................................ $ (107,600) $ 9,812 $ (93,123) $ 76,286
========== ========== ========= =========
</TABLE>
6
<PAGE>
The net change in unrealized gains (losses) during the period is net of
deferred income tax expense (benefit) of $(1,678,000) and $(13,125,000) for the
three months ended September 30, 1999 and 1998, respectively and $(41,190,000)
and $(11,920,000) for the nine months ended September 30, 1999 and 1998,
respectively. The reclassification adjustments are net of deferred income tax
expense (benefit) of $(184,000) and $(322,000) for the three months ended
September 30, 1999 and 1998, respectively and $(3,641,000) and $2,566,000 for
the nine months ended September 30, 1999 and 1998, respectively. The
reclassification adjustments avoid double counting net unrealized gains (losses)
included in accumulated other comprehensive income in different periods.
NOTE E - OPERATIONS BY REPORTABLE SEGMENT
The Company's businesses are managed within two reportable segments:
property and casualty insurance services and financial services. Additionally,
there are certain corporate revenues and expenses, comprised primarily of
investment income, interest expense and certain general and administrative
expenses, that the Company does not allocate to its segments.
The following data at and for the three and nine months ended September 30,
1999 and 1998 provide certain information necessary for reportable segment
disclosure, as well as a reconciliation to total consolidated financial
information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
REVENUES
Property and casualty insurance services ................. $ 244,217 $ 170,488 $ 696,868 $ 531,257
Financial services ....................................... 105,277 79,646 286,627 216,081
Unallocated corporate revenue ............................ 232 653 1,121 1,662
--------- --------- --------- ---------
Total .................................................... 349,726 250,787 984,616 749,000
Intersegment:
Property and casualty insurance services ................. 292 312 836 927
Unallocated corporate revenue ............................ 11,806 9,136 30,792 26,775
--------- --------- --------- ---------
12,098 9,448 31,628 27,702
--------- --------- --------- ---------
Total revenue ............................................ 361,824 260,235 1,016,244 776,702
Reconciling items: intersegment revenues ................ (12,098) (9,448) (31,628) (27,702)
---------- --------- --------- ---------
Total consolidated ....................................... $ 349,726 $ 250,787 $ 984,616 $ 749,000
========== ========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES
Property and casualty insurance services ................. $ (104,361) $ 42,860 $ (19,881) $ 124,884
Financial services ....................................... 17,417 14,754 51,085 42,048
Unallocated corporate loss ............................... (6,402) (5,946) (19,319) (17,848)
---------- --------- --------- ---------
Total .................................................... (93,346) 51,668 11,885 149,084
Reconciling items - intercompany dividends ............... (1,070) (1,070) (3,169) (3,169)
---------- ---------- --------- ---------
Total consolidated ....................................... $ (94,416) $ 50,598 $ 8,716 $ 145,915
========== ========== ========= =========
</TABLE>
The assets of the financial services segment increased by $1.3 billion at
September 30, 1999 versus the amount reported at December 31, 1998 due to the
growth in the loan portfolio of the Company's thrift and loan subsidiary.
7
<PAGE>
NOTE F - 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, 1999
and 1998, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) (NUMERATOR FOR BASIC EARNINGS PER SHARE) $ (85,913) $ 34,187 $ (16,627) $ 98,422
Effect of dilutive securities:
Liquid Yield Option Notes ("LYONs") - 77 - 269
--------- -------- --------- --------
INCOME AVAILABLE TO COMMON STOCKHOLDERS AFTER ASSUMED
CONVERSIONS (NUMERATOR FOR DILUTED EARNINGS PER SHARE) $ (85,913) $ 34,264 $ (16,627) $ 98,691
========= ========= ========= ========
WEIGHTED-AVERAGE SHARES
(DENOMINATOR FOR BASIC EARNINGS PER SHARE) 66,205 64,095 66,755 63,911
Effect of dilutive securities:
Restricted stock - 4,171 - 4,172
Stock options - 922 - 948
LYONs - 918 - 994
--------- --------- --------- --------
Dilutive potential common shares - 6,011 - 6,114
--------- --------- --------- --------
ADJUSTED WEIGHTED-AVERAGE SHARES AND ASSUMED
CONVERSIONS (DENOMINATOR FOR DILUTED EARNINGS PER SHARE) 66,205 70,106 66,755 70,025
========= ========= ========= ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations $ (0.92) $ 0.53 $ 0.13 $ 1.54
Net loss from discontinued operations (0.38) - (0.38) -
--------- --------- --------- --------
$ (1.30) $ 0.53 $ (0.25) $ 1.54
========= ========= ========= ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations $ (0.92) $ 0.49 $ 0.13 $ 1.41
Net loss from discontinued operations (0.38) - (0.38) -
-------- --------- ------------ --------
$ (1.30) $ 0.49 $ (0.25) $ 1.41
======== ========= ============ ========
</TABLE>
For the three and nine months ended September 30, 1999, dilutive securities
of 2,576,000 and 2,765,000, respectfully, were not included in diluted weighted
average shares outstanding because the effect would have been antidilutive.
8
<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 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 Corporation is a nationwide insurance and financial
services holding company operating select businesses in niche markets. The
property and casualty insurance services business of Fremont General Corporation
and its subsidiaries ("the Company") includes one of the largest underwriters of
workers' compensation insurance in the nation. The Company's financial services
business includes commercial and residential real estate lending, commercial
finance, syndicated loans and insurance premium financing. The Company's
reported assets as of September 30, 1999 were $8.5 billion. Income from
continuing operations for the nine months ended September 30, 1999 was $8.4
million. Additionally, the Company recorded a net loss from discontinued
insurance operations in the quarter ended September 30, 1999 of $25 million.
(See Property and Casualty Insurance Services - Discontinued Operations.") The
Company's business strategy includes achieving income balance and geographic
diversity among its business units in order to limit its exposure to industry,
market and regional concentrations. In addition, the Company seeks to expand its
businesses through new business development and acquisitions. The Company's
stock is traded on the New York Stock Exchange under the symbol "FMT."
SPECIAL DISCUSSION CONCERNING PROPERTY AND CASUALTY INSURANCE SERVICES RESULTS
In the quarter ended September 30, 1999, the Company's property and
casualty insurance services operation experienced a significant decrease in
income before taxes from $42.9 million in the quarter ended September 30, 1998
to a loss before tax of $104.4 million in the quarter ended September 30, 1999.
This decrease was the primary result of a significant decrease in the third
quarter of 1999 in the Company's estimates of reinsurance recoverables on unpaid
losses. This re-estimation was in recognition of a lower than actuarially
predicted level of incurred losses ceded under certain reinsurance contracts
that were effective January 1, 1998. These reinsurance contracts reduced the
Company's net loss exposure from a historical retention of $1 million per
occurrence to $50,000 per occurrence. Prior to entering into these reinsurance
agreements the Company had estimated its expected gross incurred loss and loss
adjustment expenses ("LAE"). Estimates of net incurred loss and LAE were then
established utilizing actuarial indications based upon historical experience and
other factors considered appropriate to forecast incurred losses to be ceded
under these reinsurance agreements. During the quarter ended September 30, 1999
and pursuant to its regular review of incurred loss and LAE estimates, the
Company observed a deterioration in these actuarial predictions. To assist the
Company in its determination of loss and LAE reserve estimates as of September
30, 1999, the Company retained outside actuarial consultants who performed an
independent actuarial analysis of the Company's loss and LAE reserves as of June
30, 1999. These actuarial indications were further confirmed at September 30,
1999. Based on its evaluation as of September 30, 1999 of the outside
consultant's findings as well as other factors considered appropriate, the
Company believes its estimates of reinsurance recoverables on unpaid losses are
an adequate provision for losses ceded under reinsurance agreements. The Company
emphasizes that its estimates of gross incurred loss and LAE reserves have
remained stable during the nine months ended September 30, 1999.
While the Company believes that the recorded loss and LAE reserves at
September 30, 1999, including its estimates of reinsurance recoverables on
unpaid losses, are an adequate provision for insured events, it understands that
the establishment of appropriate reserves is an inherently uncertain process and
is subject to a number of highly variable circumstances. Recent loss and LAE
developments, in particular development of incurred losses ceded under
reinsurance contracts, will be monitored by the Company in the fourth quarter to
assess their continuity with trends observed through September 30, 1999.
Therefore, in recognition of the uncertainty and volatility associated primarily
with the recent ceded loss development, the Company anticipates that additional
loss and LAE reserves and/or further reductions in reinsurance recoverables on
unpaid losses will be necessary in the fourth quarter of 1999. The Company
estimates that this could result in consolidated earnings recorded to an
approximate break-even level. These actions should enable the Company to further
insulate itself from uncertain adverse impacts of future events that may occur.
9
<PAGE>
The preceding discussion contains forward-looking statements that involve
risk and uncertainties. Our actual results could differ materially from those
anticipated in these statements as a result of certain factors including those
discussed below. Our property and casualty insurance subsidiaries are required
to maintain reserves to cover their ultimate liability for losses and LAE with
respect to reported and unreported claims incurred as of the end of each
accounting period, including estimates of reinsurance recoverables on unpaid
losses. These reserves do not represent an exact calculation of liabilities, but
instead are estimates involving actuarial projections at a given time of what
the Company expects the ultimate settlement and administration of claims will
cost. These projections are based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims frequency and
severity and judicial theories of liability. Other factors could cause actual
results to differ materially including: business conditions, severity and
frequency of claims, interest rates, changes in the insurance and financial
service industries and the general economy, competitive factors, price
pressures, and other factors. (See "Property and Casualty Insurance Services
Variability of Operating Results.")
The following table presents information for the three and nine months
ended September 30, 1999 and 1998 with respect to the Company's primary business
segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance services ...................... $ 244,217 $ 170,488 $ 696,868 $ 531,257
Financial services ............................................ 105,277 79,646 286,627 216,081
Unallocated corporate revenue ................................. 232 653 1,121 1,662
---------- ---------- ---------- ----------
Total ...................................................... $ 349,726 $ 250,787 $ 984,616 $ 749,000
========== ========== ========== ==========
Income (Loss) Before Taxes:
Property and casualty insurance services ...................... $ (104,361) $ 42,860 $ (19,881) $ 124,884
Financial services ............................................ 17,417 14,754 51,085 42,048
Unallocated corporate loss .................................... (7,472) (7,016) (22,488) (21,017)
---------- ---------- ---------- ----------
Total ...................................................... $ (94,416) $ 50,598 $ 8,716 $ 145,915
========== ========== ========== ==========
</TABLE>
The Company generated revenues of approximately $350 million and $985
million in the three and nine months ended September 30, 1999, as compared to
$251 million and $749 million for the three and nine months ended September 30,
1998. The increases in revenues are due mainly to higher workers' compensation
insurance premiums in the property and casualty insurance services segment and
to higher loan interest in the financial services segment. Higher workers'
compensation insurance premiums were achieved primarily from new business
development, and from the September 1, 1998 acquisition of UNICARE Specialty
Services, Inc. ("Unicare") from Wellpoint Health Networks, Inc. (See "Property
and Casualty Insurance Services Premiums.") The increase in loan interest
revenue is consistent with the significant growth in the average loan portfolio
of the financial services operation in the three and nine months ended September
30, 1999, as compared with the same prior year periods. (See "Financial
Services.") Realized investment losses in the three and nine month periods ended
September 30, 1999 were $2.2 million and $1.9 million, respectively, as compared
to $139,000 and $1.1 million for the same respective periods in 1998.
The Company posted net income (loss) from continuing operations of $(60.9)
million or $(0.92) diluted earnings per share and $8.4 million or $0.13 diluted
earnings per share for the three and nine months ended September 30, 1999,
respectively, as compared to $34.2 million or $0.49 diluted earnings per share
and $98.4 million or $1.41 diluted earnings per share for the same respective
periods in 1998. Income (loss) before taxes from continuing operations for the
three and nine month periods ended September 30, 1999 was $(94.4) million and
$8.7 million, respectively, as compared to $50.6 million and $145.9 million for
the same respective periods of 1998.
The property and casualty insurance services operations, consisting
primarily of workers' compensation insurance, posted a loss before taxes of
$104.4 million and $19.9 million for the three and nine month periods ended
September 30, 1999, respectively, as compared to income before taxes of $42.9
million and $124.9 million for the same respective periods in 1998. The
significant decreases in income before taxes for both the three and nine
10
<PAGE>
months ended September 30, 1999 is due primarily to the previously discussed
reductions in the estimated incurred losses ceded under certain reinsurance
agreements which were effective January 1, 1998. This change in estimate
resulted in an increase in the net incurred losses retained by the Company and
thereby reduced income before taxes. (See "Special Discussion Concerning
Property and Casualty Insurance Services Results.") The combined ratio for the
three and nine month ended September 30, 1999 was 163.8% and 120.4%,
respectively, as compared to 95.7% and 96.3% for the same respective periods in
1998.
The financial services operations posted income before taxes for the three
and nine months ended September 30, 1999 of $17.4 million and $51.1 million,
respectively, as compared to $14.8 million and $42.0 million for the same
respective periods in 1998. The increases in income before taxes are due mainly
to the growth in the total average loan portfolio, offset partially by lower
gains on residential real estate loan sales. The average loan portfolio of the
financial services operations grew to $3.69 billion for the nine month period
ended September 30, 1999, respectively, from $2.24 billion for the same
respective period in 1998.
In its regular review of strategic alternatives, management has decided to
explore the possible sale of its commercial finance subsidiary, Fremont
Financial Corporation. As of September 30, 1999, Fremont Financial Corporation
had loans receivable of approximately $770 million, debt outstanding of
approximately $660 million and equity of approximately $110 million. The Company
has been periodically approached over the last several years by various
financial institutions, expressing an interest in acquiring this property. At
this time, management believes that if an attractive transaction can be
negotiated, the proceeds from the sale of this company could be more effectively
utilized in supporting Fremont General Corporation's other operations and in
reducing its outstanding debt. The sale of Fremont Financial Corporation would
also eliminate commercial finance loans from the product offerings of the
financial services operations. (See "Financial Services.")
Unallocated corporate revenues during the three and nine month periods
ended September 30, 1999 consisted primarily of investment income, while
unallocated corporate expenses consisted primarily of interest expense and
general and administrative expenses. The unallocated corporate loss before taxes
for the three and nine months ended September 30, 1999 was $7.5 million and
$22.5 million, respectively, as compared to $7.0 million and $21.0 million for
the same respective periods in 1998. The increases in unallocated corporate loss
before taxes are due mainly to the effects of an increase in long-term debt and
interest rates pursuant to the issuance on March 17, 1999 of $425 million of
Senior Notes ("the Senior Notes") in a private placement. The Senior Notes were
subsequently exchanged for notes registered under the Securities Act in a Form
S-4 Registration Statement effective on May 11, 1999. (See "Liquidity and
Capital Resources.") Net proceeds from the Senior Notes were used to repay all
indebtedness outstanding under the Company's revolving line of credit and for
general corporate purposes, including working capital. The Senior Notes carry
interest rates which are higher than the revolving line of credit, and this also
contributed to the increase in interest expense in the three and nine month
periods ended September 30, 1999, as compared to the same prior year periods.
Income tax expense (benefit) of $(33.5) million and $343,000 for the three
and nine months ended September 30, 1999, respectively, represents effective tax
rates of 35% and 4%, respectively, on income (loss) before taxes from continuing
operations of $(94.4) million and $8.7 million for the same respective periods.
The effective tax rate for the nine months ended September 30, 1999 is lower
than the federal enacted tax rate of 35%, due mainly to the offsetting effects
of higher tax rates in the financial services segment resulting from various
state income taxes, and higher tax benefits in the property and casualty
insurance services segment due to tax exempt investment income which further
increases the property and casualty taxable loss.
11
<PAGE>
PROPERTY AND CASUALTY INSURANCE SERVICES
The following table represents information for the three and nine month
periods ended September 30, 1999 and 1998 with respect to the Company's property
and casualty insurance services operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1999 1998 1999 1998
----------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues ......................................................... $ 244,217 $ 170,488 $ 696,868 $ 531,257
Expenses ......................................................... 348,578 127,628 716,749 406,373
---------- --------- --------- ---------
Income (Loss) Before Taxes ................................... $ (104,361) $ 42,860 $ (19,881) $ 124,884
========== ========= ========= =========
</TABLE>
PREMIUMS. Insurance premiums from the Company's property and casualty
insurance services operations were $207.8 million and $575.8 million in the
three and nine month periods ended September 30, 1999, as compared to $125.5
million and $399.0 million for the same respective periods in 1998. The
increases in premiums are due primarily to new business development and to the
September 1, 1998 acquisition of Unicare. New business development was
significant in the three and nine months ended September 30, 1999 totaling
approximately $95 million and $370 million, respectively, in estimated annual
direct premiums written. This compares to $82 million and $113 million in
estimated annual direct premiums written for the same respective prior year
periods. Using estimated annual premiums on policies in effect at September 30,
1999 and 1998 (referred to as "inforce premiums"), the Company's inforce premium
has grown 43.2% to $982.4 million at September 30, 1999 from $685.8 million at
September 30, 1998. While the growth in inforce premium is considered
significant, the Company has remained conservative in its underwriting
standards. This is evidenced by the fact that the $370 million is new business
written in the nine months ended September 30, 1999 represents only 9.4% of the
approximate $3.9 billion in estimated annual premiums submitted to the Company
for underwriting consideration in the same period. This percentage is at or
below the Company's historical experience. Furthermore, as discussed previously
the Company's gross incurred loss estimates have remained stable over the nine
months ended September 30, 1999 which the Company believes is indicative of
underwriting consistency. (See "Special Discussion Concerning Property and
Casualty Insurance Services Results.") The growth in inforce premium has
occurred across all of the Company's geographic regions nationally. The Company
has also broadened the size of premium accounts underwritten to include accounts
in excess of $100,000. This has been achieved while maintaining an average
premium per policy in the $14,000 range, relatively unchanged from December 31,
1998 levels.
NET INVESTMENT INCOME. Net investment income within the property and
casualty insurance services operations was slightly lower at $38.3 million and
$121.5 million in the three and nine month periods ended September 30, 1999, as
compared to $45.1 million and $133.3 million for the same respective periods in
1998. Higher invested assets associated with the Unicare acquisition was more
than offset by higher ceded reinsurance costs and claim payments, resulting in
lower average invested assets in the three and nine months ended September 30,
1999, as compared to the same respective prior year periods.
LOSS AND LOSS ADJUSTMENT EXPENSE. The property and casualty insurance
services loss and loss adjustment expenses ("LAE") were $264.7 million and
$480.3 million for the three and nine month periods ended September 30, 1999, as
compared to $71.4 million and $244.8 million for the same respective periods in
1998. In addition, the ratio of these losses and LAE to property and casualty
insurance premiums earned ("loss ratio") was 127.4%, and 83.4% for the three and
nine months ended September 30, 1999, respectively. This is compared to loss
ratios of 56.8% and 61.3% for the same respective periods in 1998. The loss
ratio increased significantly in the three and nine months ended September 30,
1999, as compared to the same prior year periods, due mainly to the recognition
of a lower than actuarially predicted level of incurred losses ceded under
certain reinsurance contracts that were effective January 1, 1998. (See "Special
Discussion Concerning Property and Casualty Insurance Services Results.")
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.
12
<PAGE>
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 32.8% and 33.5% for the
three and nine month periods ended September 30, 1999, as compared to 37.8% and
33.9% for the same respective periods in 1998. The lower expense ratio for the
three and nine month periods ended September 30, 1999 relative to the same
respective prior year periods, was due primarily to a significant increase in
the premium base in 1999 resulting from increases in new business development,
as well as to the September 1, 1998 acquisition of Unicare. (See "Premiums.")
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, legislation and regulations, court
decisions, the judicial climate, and general economic conditions and trends, all
of which are outside of Fremont's control. In addition, the Company's results of
operations can be affected by the Company's ability to evaluate the impact of
its reinsurance agreements on its results of operations. 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. The establishment of appropriate loss and
LAE reserves and reinsurance recoverables on unpaid losses necessarily involves
estimates, and reserve adjustments have caused significant fluctuations in
operating results from year to year. (See "Special Discussion Concerning
Property and Casualty Insurance Services Results.") 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, has adversely impacted the Company's profitability,
where overall average decreases of 0.2%, 7.9%, and 10.0% in advisory premium
rates, which workers' compensation insurance companies in Illinois tend to
follow, became effective January 1, 1999, 1998 and 1997, respectively. (See
"Workers' Compensation Regulation.") During the third quarter of 1999, the
Company observed a change in the competitive environment permitting the Company
an opportunity to secure premium rate increases without impacting its business
retention percentages. This is further evidenced by the announcement on October
29, 1999 by the Insurance Commissioner for the California Department of
Insurance that advisory pure premium rates are to be increased by 18.4%
effective January 1, 2000. This percentage increase is in line with
recommendations which were recently published by the Workers' Compensation
Insurance Rating Bureau ("WCIRB"). The WCIRB is a California organization,
licensed and designated by the California Insurance Commissioner as a rating
agency, whose primary purpose is to develop advisory premium rate
recommendations in California using California historical loss and LAE
experience of insurers authorized to write workers' compensation insurance in
the state. The Company however, cannot be certain that the perceived improvement
in the competitive environment will continue.
The Company's workers' compensation insurance business competes in a market
characterized by competition on the basis of price and service. In addition,
state regulatory changes could affect competition in the states where the
Company transacts business. Although the Company is one of the largest writers
of workers' compensation insurance in the nation, certain of its competitors are
larger and have greater resources than the Company. The Company cannot be
certain that it will continue to maintain its market share in the future.
WORKERS' COMPENSATION REGULATION. The Company's workers' compensation
insurance operations are concentrated in California and Illinois, with
additional writings in 44 other states and the District of Columbia. Insurance
companies are subject to supervision and regulation by the state insurance
authority in each state in which they transact business. Such supervision and
regulation relate to the numerous aspects of an insurance company's business and
financial condition. The primary purpose of such supervision and regulation is
the protection of policyholders rather than the investors or stockholders of an
issuer. The Company's multistate insurance operations require, and will continue
to require, the Company to devote significant resources to comply with the
regulations of each state in which the Company transacts business.
13
<PAGE>
At September 30, 1999, approximately 61% of the Company's workers'
compensation insurance policies inforce 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 companies are provided with advisory premium rates
(expected losses and expenses) or loss costs (expected losses only) which vary
by job classification. Each insurance company determines its own rates based in
part upon its particular loss experience and operating costs. Insurance
companies have generally set their premium rates below such advisory rates. This
characteristic has resulted in continued price competition in Illinois, where
overall average decreases in advisory premium rates of 0.2%, 7.9%, and 10.0%
became effective January 1, 1999, 1998 and 1997, respectively. 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. The repeal of the minimum rate
law has resulted in lower premiums and lower profitability on the Company's
California workers' compensation insurance policies due to increased price
competition. The Company has recently observed some moderation of price
competition in California. This is further evidenced by the announcement on
October 29, 1999 by the Insurance Commissioner for the California Department of
Insurance that advisory pure premium rates are to be increased by 18.4%
effective January 1, 2000. Most of the states in which Fremont writes premiums
operate under some form of open rating system.
DISCONTINUED OPERATIONS. In the quarter ended September 30, 1999 the
Company incurred a net loss of $25 million to recognize the contribution of
additional assets to these operations. The additional assets were considered
necessary as the Company observed an increase in reported asbestos and
environmental claims in excess of previous estimates. The Company's discontinued
insurance operations consist primarily of assumed treaty and facultative
reinsurance business that was discontinued between 1986 and 1991. In 1990, the
Company established a management group to actively manage the liquidation of
this business. The liabilities associated with this business are long term in
duration and, therefore, the Company continues to be subject to claims being
reported. Claims under these reinsurance treaties include professional
liability, product liability and general liability which include environmental
and asbestos claims.
FINANCIAL SERVICES
The Company's financial services operations, which are comprised of the
results of Fremont General Credit Corporation ("FGCC"), are principally engaged
in commercial and residential real estate lending, commercial finance,
syndicated loans (large commercial loans originated and serviced by other
financial institutions) and insurance premium financing. Revenues consist
primarily of interest income and to a lesser extent fees and other income. As
previously discussed, the Company is exploring the possible sale of its
commercial finance subsidiary. Should this sale occur, interest revenues related
to commercial finance lending would be eliminated, as well as the associated
interest expense and operating expenses.
The following table presents information for the three and nine month
periods ended September 30, 1999 and 1998 with respect to the Company's
financial services operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1999 1998 1999 1998
----------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues ......................................................... $ 105,277 $ 79,646 $ 286,627 $ 216,081
Expenses ......................................................... 87,860 64,892 235,542 174,033
---------- --------- --------- ---------
Income Before Taxes .......................................... $ 17,417 $ 14,754 $ 51,085 $ 42,048
========== ========= ========= =========
</TABLE>
Revenues increased 32.2 % and 32.6 % in the three and nine month periods
ended September 30, 1999, respectively, as compared to the same respective
periods in 1998, due primarily to greater loan interest revenue attributable to
the growth in the total average loan portfolio of the financial services
operation. Partially offsetting the increase in interest revenues were lower
gains on the sale of residential real estate loans and lower investment income.
The residential real estate 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
14
<PAGE>
brokers. These loan sales are made without recourse to the Company or its
subsidiaries. Due to market disruption and oversupply, the Company observed that
prices for these loans began to decrease in late 1998. The Company, rather than
sell the loans at prices lower than what it believed was the economic benefit to
be derived, began a program to retain these benefits by either retaining the
loans in its portfolio or by securitizing them. On March 23, 1999, the Company's
thrift issued, through a trust, its first securitization of these loans in the
amount of approximately $415 million. On June 24, 1999 and September 23, 1999,
additional securitizations were completed in separate trusts in the approximate
amounts of $495 million and $500 million, respectively. These trusts issued
notes collateralized by pools of the Company's first lien residential mortgage
loans. The notes are subject to an unconditional and irrevocable guarantee of
timely payment of interest and ultimate payment of loan principal provided by
financial guarantee insurance policies. Servicing of the loans is being provided
by third parties. The senior classes of these notes have been rated AAA by
Standard and Poor's and Aaa by Moody's. The Company will continue to monitor
market conditions to determine the appropriateness of any additional
securitizations.
Income before taxes in the financial services operation was $17.4 million
and $51.1 million for the three and nine month periods ended September 30, 1999,
as compared to $14.8 million and $42.0 million for the same respective periods
in 1998. The increases in income before taxes of 18.0 % and 21.5 % for the three
and nine month periods ended September 30, 1999, respectively, was due to the
previously described growth in the total average financial services loan
portfolio, partially offset by lower gains on the sale of residential real
estate loans.
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,
------------------------------------------------------------------------------
1999 1998
------------------------------------ -------------------------------------
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 .............. $ 2,020,855 $ 138,438 9.16% $ 1,158,924 $ 86,436 9.97%
Residential real estate loans ............. 614,761 50,120 10.90 404,881 28,493 9.41
Commercial finance loans .................. 525,558 42,761 10.88 400,242 35,958 12.01
Syndicated loans .......................... 472,247 31,586 8.94 216,973 16,631 10.25
Insurance premium finance loans ........... 59,419 4,709 10.60 61,402 5,252 11.44
Investments ............................... 177,133 6,812 5.14 225,110 9,229 5.48
----------- --------- ----------- ---------
Total interest bearing assets ............. $ 3,869,973 $ 274,426 9.48% $ 2,467,532 $ 181,999 9.86%
=========== ========= =========== =========
Interest bearing liabilities:
Time deposits ............................. $ 2,006,256 $ 79,839 5.32% $ 1,281,927 $ 55,105 5.75%
Savings deposits .......................... 643,327 23,922 4.97 360,189 14,052 5.22
Debt with banks ........................... 590,385 23,179 5.25 232,361 11,420 6.57
Securitization obligation ................. 332,657 13,791 5.54 283,602 13,142 6.20
Debt from affiliates ...................... 113,718 5,833 6.86 53,932 2,453 6.08
Other ..................................... 35,707 2,403 9.00 1,458 37 3.39
----------- --------- ----------- ---------
Total interest bearing liabilities ........ $ 3,722,050 $ 148,967 5.35% $ 2,213,469 $ 96,209 5.81%
=========== ========= =========== =========
Net interest income .......................... $ 125,459 $ 85,790
========= =========
Net yield .................................... 4.33% 4.65%
- -----------------
(1)Annualized
(2)Average loan balances include non-acccrual loan balances
</TABLE>
15
<PAGE>
The margin between the Company's interest income and cost of funds
decreased in the nine months ended September 30, 1999 as compared to the same
period of 1998, due primarily to the combined effects of a decrease in the net
yields on commercial real estate and commercial finance loans. Additionally,
increases in the level of syndicated loans, which generally carry lower net
yields, has also contributed to the decline in net yields.
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,
1999 1998
--------------------- ---------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ----- ----------- -----
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
<S> <C> <C> <C> <C>
Term loans:
Commercial and residential real estate loans ......... $ 2,564,718 69% $ 2,110,301 70%
Syndicated loans ..................................... 409,414 11 168,170 6
Commercial finance loans ............................. 129,973 3 168,040 5
Insurance premium finance loans ...................... 63,203 2 58,563 2
----------- ----- ----------- -----
Total term loans ................................... 3,167,308 85 2,505,074 83
----------- ----- ----------- -----
Revolving loans:
Commercial finance loans ............................. 423,445 11 317,468 11
Syndicated loans ..................................... 133,535 4 191,980 6
----------- ----- ----------- -----
Total revolving loans .............................. 556,980 15 509,448 17
----------- ----- ----------- -----
Total loans ........................................ 3,724,288 100 3,014,522 100
Less allowance for possible loan losses ................ 68,141 2 56,346 2
----------- ----- ----------- ----
Loans receivable ................................... $ 3,656,147 98% $ 2,958,176 98%
=========== ===== =========== =====
</TABLE>
The following table illustrates the maturities of the Company's loans
receivable:
<TABLE>
<CAPTION>
MATURITIES AT SEPTEMBER 30, 1999
-----------------------------------------------------------
1 TO 24 25 - 60 OVER 60
MONTHS MONTHS MONTHS TOTAL
----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Term loans -- variable rate ................... $ 1,119,853 $ 896,346 $ 723,747 $ 2,739,946
Term loans -- fixed rate ...................... 122,933 83,878 220,551 427,362
Revolving loans -- variable rate .............. 540,487 10,986 5,507 556,980
----------- ----------- ----------- -----------
Total ............................. $ 1,783,273 $ 991,210 $ 949,805 $ 3,724,288
=========== =========== =========== ===========
</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,
1999 was $885.2 million and $361.6 million, respectively.
16
<PAGE>
During periods when economic conditions are unfavorable, the Company's
financial services businesses may not be able to originate new loan products or
maintain credit quality at previously attained levels. This may negatively
affect the Company's net finance income and levels of non-performing assets and
net charge-offs. Changes in market interest rates, or in the relationships
between various interest rates, could cause the Company's interest margins to
vary and may result in significant changes in the prepayment patterns of the
Company's finance receivables, which could adversely affect the Company's
results of operations and financial condition.
The Company's financial services businesses maintain reserves for credit
losses on its portfolio of finance receivables in amounts that the Company
believes is sufficient to provide adequate protection against potential losses.
The Company attempts to minimize the impact that adverse economic developments
could have on the Company's financial services loan portfolio by concentrating
primarily on lending on a senior and secured basis and by carefully monitoring
the underlying collateral that secures these loans. Although the Company
believes that its level of reserves is sufficient to cover potential credit
losses, the Company's reserves could prove to be inadequate due to unanticipated
adverse changes in economic conditions or discrete events that adversely affect
specific borrowers, industries or markets. Any of these changes could impair the
Company's ability to realize the expected value of the collateral securing
certain of its finance receivables.
The Company's financial services businesses compete in markets that are
highly competitive and are characterized by factors that vary based upon product
and geographic region. The markets in which the Company competes are typically
characterized by a large number of competitors who compete based primarily upon
price, terms and loan structure. The Company primarily competes with banks,
mortgage, insurance, and finance companies, many of which are larger and have
greater financial resources than the Company. The competitive forces of these
markets could adversely affect the Company's net finance income, loan
origination volume or net credit losses.
17
<PAGE>
The following table describes the asset classifications, loss
experience and reserve reconciliation of the financial services operation as
of or for the periods ended as shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1999 1998
----------- -----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
<S> <C> <C>
Non-accrual loans ...................................................... $ 28,506 $ 23,947
Accrual loans 90 days past due ......................................... 2,654 1,617
Real estate owned ("REO") .............................................. 9,570 8,568
----------- -----------
Total non-performing assets ............................................ $ 40,730 $ 34,132
=========== ===========
Beginning allowance for possible loan losses ........................... $ 56,346 $ 44,402
Provision for loan losses .............................................. 16,780 9,405
Reserves established with portfolio acquisitions ....................... 542 777
Charge-offs:
Commercial and residential real estate loans ................. 1,487 1,071
Commercial finance loans ..................................... 2,858 1,282
Syndicated loans ............................................. 1,300 -
Insurance premium finance loans .............................. 75 117
----------- -----------
Total charge-offs ............................................ 5,720 2,470
----------- -----------
Recoveries:
Commercial and residential real estate loans ................. 126 457
Commercial finance loans ..................................... 52 116
Syndicated loans ............................................. - -
Insurance premium finance loans .............................. 15 25
----------- -----------
Total recoveries ............................................. 193 598
----------- -----------
Net charge-offs ........................................................ 5,527 1,872
----------- -----------
Ending allowance for possible loan losses .............................. $ 68,141 $ 52,712
=========== ===========
Allocation of allowance for possible loan losses:
Commercial and residential real estate loans ................. $ 48,087 $ 38,340
Commercial finance loans ..................................... 10,242 11,769
Syndicated loans ............................................. 9,272 2,132
Insurance premium finance loans .............................. 540 471
----------- -----------
Total allowance for possible loan losses ..................... $ 68,141 $ 52,712
=========== ===========
Total loans receivable ................................................. $ 3,724,288 $ 2,514,041
Average total loans receivable ......................................... $ 3,692,840 $ 2,242,422
Net charge-offs to average total loans receivable (annualized) ......... 0.20% 0.11%
Non-performing assets to total loans receivable ........................ 1.09% 1.36%
Allowance for possible loan losses to total loans receivable ........... 1.83% 2.10%
Allowance for possible loan losses to non-performing assets ............ 167.30% 154.44%
Allowance for possible loan losses to non-accrual
loans and accrual loans 90 days past due ..................... 218.68% 206.20%
</TABLE>
Non-performing assets increased 19.3% to $40.7 million at September 30,
1999 from $34.1 million at September 30, 1998, and is considered consistent with
the 48.1% increase in total loans receivable to $3.72 billion at September 30,
1999 from $2.51 billion at September 30, 1998.
18
<PAGE>
The higher provision for loan losses in the nine month period ended
September 30, 1999, as compared to the same prior year period, is also
consistent with the overall increase in total loans receivable. The Company
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 218.68 % from 206.20% for the
nine month periods ended September 30, 1999 and 1998, 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 services
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 1998 Annual Report on Form
10-K. No material changes in market risk have occurred since year-end, except
for Fremont General Corporation's issuance on March 17, 1999 of $425 million of
Senior Notes offered in a private placement. (See "Liquidity and Capital
Resources.") The proceeds were used to repay all outstanding indebtedness under
the Company's revolving line of credit and for general corporate purposes. This
transaction has the effect of increasing the interest rate exposure related to
LIBOR and United States prime interest rates because the Senior Notes are fixed
rate obligations, the proceeds of which were used to repay variable interest
rate debt.
During the nine months ended September 30, 1999, the Company experienced a
change in the unrealized gain (loss) on investments from an unrealized gain of
$59.8 million at December 31, 1998 to an unrealized loss of $57.8 million at
September 30, 1999. The $117.6 million decrease resulted primarily from an
increase in market interest rates during the period which had the effect of
lowering the fair value of the Company's fixed rate investment portfolio. (See
Note B of Notes to Consolidated Financial Statements on Form 10-Q.)
LIQUIDITY AND CAPITAL RESOURCES
The property and casualty insurance operations must have cash and liquid
assets available to meet their obligations to policyholders in accordance with
contractual obligations, in addition to having the funds available to meet
ordinary operating costs. These operations have several sources of funds to meet
their obligations, including cash flow from operations, recoveries from
reinsurance contracts and investment securities. By statute, the majority of the
cash from these operations is required to be invested in investment grade
securities to provide protection for policyholders. The Company invests in fixed
income and preferred equity securities with an objective of providing a
reasonable return while limiting credit and liquidity risk. The Company's
investment portfolio had an unrealized gain (loss) of $(57.8) million and $59.8
million at September 30, 1999 and December 31, 1998, respectively.
The Company's thrift and loan subsidiary, which is principally engaged in
commercial and residential real estate lending, syndicated loans and insurance
premium financing, finances its lending activities primarily through customer
deposits, which have grown to $3.19 billion at September 30, 1999 from $2.13
billion at December 31, 1998. In addition, this subsidiary is eligible for
financing through the Federal Home Loan Bank of
19
<PAGE>
San Francisco ("FHLB"). This financing is available at varying rates and terms.
As of September 30, 1999, approximately $342 million was available under the
facility of which $229.5 million was outstanding. In October 1999, the Company's
thrift and loan subsidiary established a warehouse financing facility with a
bank that will be used to finance certain residential real estate loans held for
ultimate cash sale or securitization. This facility permits borrowings up to
$200 million with a variable interest rate of LIBOR plus 0.375%
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, 1999, 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, 1999. The securities issued in this program have a scheduled
maturity of two to four years, but could mature earlier depending on
fluctuations in outstanding balances of loans in the portfolio and other
factors. As of September 30, 1999, up to $265 million in additional publicly
offered asset-backed certificates may be issued pursuant to a shelf registration
statement to fund future growth in the commercial finance portfolio. 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,
1999, $64 million of commercial paper at face value 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 $419
million, which includes a revolving credit facility of $350 million and a term
loan of $69 million. The revolving credit facility converts to a term loan in
August 2000, with ultimate maturity of the term loan in September 2002. The term
loan matures July 2001. This facility is also used to finance certain syndicated
loans. The balance outstanding at September 30, 1999 of the revolving credit
facility and the term loan was $303 million, with a weighted average interest
rate of 5.77%. This credit line is primarily used to finance assets which are
not included in the Company's asset securitization program. As previously
discussed, the Company is exploring the possible sale of the commercial finance
subsidiary. Should this sale occur, the debt associated with this subsidiary
would be eliminated. (See "Financial Services.")
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 $16.3 million and $15.3 million for
the nine month periods ended September 30, 1999 and 1998, 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. The maximum amount
available for payment of dividends by the property and casualty insurance
subsidiaries during 1999, without prior regulatory approval, is approximately
$235.3 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 $300 million. At September 30, 1999, $62 million was outstanding under
this facility. This credit facility expires in June 2003. On March 17, 1999,
Fremont General Corporation issued $425 million of Senior Notes consisting of
$200 million of 7.70% Senior Notes due 2004 and $225 million of 7.875% Senior
Notes due 2009. Net proceeds from the Senior Notes were used to repay all
indebtedness outstanding under the revolving line of credit and for general
corporate purposes, including working capital. The Senior Notes were offered in
a private placement to qualified institutional buyers and a limited number of
institutional accredited investors. The Company subsequently filed a
Registration Statement on Form S-4, which was declared effective by the
Securities and Exchange Commission on May 11, 1999, in connection with an
exchange offer by the Company and the issuance of an equal principal amount of
exchange notes upon tender of the initial $425 million of Senior Notes. The
exchange notes consist of $200 million of 7.70% Series B Senior Notes due 2004
and $225 million of 7.875% Series B Senior Notes due 2009. The form and terms of
the exchange notes are substantially identical to those of the initial notes,
except that the exchange notes have been registered under the Securities Act and
therefore, do not bear legends restricting their transfer and are not entitled
to registration rights or additional interest as did the initial notes. As of
June 11, 1999, the closing date for the exchange offer, all outstanding Senior
Notes had been exchanged for Series B Senior Notes. The exchange notes evidence
the same debt as the initial notes and both the initial notes and the exchange
notes are governed by the same indenture.
20
<PAGE>
During 1998, an aggregate $21.0 million principal amount at maturity of
Liquid Yield OptionTM Notes due October 12, 2013 (Zero Coupon-Subordinated)
("LYONs") were converted into 809,000 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 $10 million. During the first nine months of 1999,
an aggregate $3.7 million principal amount at maturity of LYONs were converted
into 141,000 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 $1.7 million.
Net cash used in operating activities was $182.4 million and $119.8 million
for the nine months ended September 30, 1999 and 1998, respectively. The
increase in net cash used in operating activities was due primarily to a
decrease in net income; the effect of the net loss from discontinued operations;
increases in premiums receivable and agents' balances; increases in policy
acquisition costs deferred, net of amortization; and a decrease in the change in
other assets, net of other liabilities. Partially offsetting these conditions
was a significantly lower decline in claims and policy liabilities; an increase
in the provision for deferred income taxes; an increase in the provision for
loan losses; and a decrease in the net amortization on fixed maturity
investments. The increase in premiums receivable and policy acquisition costs
deferred is consistent with the significant growth in insurance premiums earned.
(See "Property and Casualty Insurance Services - Premiums.") The significant
decrease in the change in other assets, net of other liabilities, is due mainly
to the payment of certain accrued operating expenses including payments under
various incentive compensation plans, as well as a decrease in other liabilities
resulting from the tax benefits recorded in the quarter ended September 30,
1999. Additionally, the recognition of approximately $58 million in residual
interest receivable in connection with the securitizations of certain
residential real estate loans originated by the Company contributed to the
decrease in the change in other assets, net of other liabilities. (See
"Financial Services.")
Net cash used in investing activities increased to $893.0 million from
$328.2 million in the nine months ended September 30, 1999 and 1998,
respectively. The increase in net cash used in investing activities was due
mainly to significant increases in loan originations, net of loan repayments and
bulk sales of loans. The increase in loan originations is consistent with the
overall increase in loans receivable to $3.72 billion at September 30, 1999 from
$2.51 billion at September 30, 1998. Additionally, included in receipts from
repayments of loans and bulk sales of loans is $1.4 billion in residential real
estate loans sold through securitizations. Partially offsetting the increase in
net cash used in investing activities is the September 1, 1998 acquisition of
Unicare which required funds in the nine month period ended September 30, 1998.
Investment securities sold, matured, or called, net of purchases and short-term
investment activity remained relatively flat in the nine months ended September
30, 1999 as compared to the same prior year period.
Net cash provided by financing activities was $1.24 billion and $535.9
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase in net cash provided by financing activities was due primarily to an
increase in thrift deposits and an increase in the proceeds from long-term and
short-term debt, net of repayments. Partially offsetting these increases is a
net increase in deferred compensation plans which served to decrease cash
provided by financing activities and resulted primarily from the Company's
Common Stock buyback program initiated by the Company in July 1999. The increase
in thrift deposits was used to support the growth in the Company's financial
services loan portfolio. The increase in net proceeds from long-term and
short-term debt was due primarily to a net increase in borrowings under the
Company's thrift and loan financing facility with the FHLB, offset partially by
a lower net utilization of the Company's revolving line of credit in the
commercial finance operation. Additionally, there was an increase in net
long-term debt resulting from Fremont General Corporation's issuance on March
17, 1999 of $425 million of Senior Notes, and the use of a majority of the
proceeds in the repayment of all the indebtedness under Fremont General
Corporation's revolving line of credit.
The amortized cost of the Company's invested assets was $2.05 billion and
$2.33 billion at September 30, 1999 and December 31, 1998, respectively. The
invested assets are down modestly at September 30, 1999, as compared to December
31, 1998, due mainly to decreases in invested assets resulting from cash
requirements within the Company's property and casualty insurance services
operation, as well as payments under various incentive compensation plans.
The Company's property and casualty premium to surplus ratio for the year
ended December 31, 1998 was 1.0 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, 1999.
21
<PAGE>
The Company believes that its existing cash, its bank lines of credit,
revenues from operations and other available sources of liquidity will be
sufficient to satisfy its liquidity needs for the next several years.
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 December 21, 2000 is encoded as "12/21/00" instead
of "12/21/2000." 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. Fremont General Corporation and its subsidiary companies
(collectively "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?
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 November 10, 1999 in addressing the impact
of the Year 2000 Problem on the above-described areas.
OFFICE FACILITIES AND EQUIPMENT:
The Company has evaluated all of its telephone systems to determine the
extent of any Year 2000 Problems. Substantially all of the Company's telephone
systems have been rendered Year 2000 compliant.
Regarding the Company's leased facilities, we have inquired from facility
owners the extent of any Year 2000 Problems (if any) as they relate to the
elevator, air conditioning/heating, and other utility systems in these
facilities. The Company has evaluated representations rendered by these facility
owners for most of the Company's leased facilities. Based on the representations
received through November 10, 1999, the Company anticipates no significant
disruption from these various facility-related systems due to the Year 2000
Problem. Further, with respect to the Company's owned facilities, an evaluation
of the extent of any Year 2000 Problems relating to these facilities' utility
and elevator systems has been made and no significant disruptions (if any) to
the Company's operations from these systems are anticipated.
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.
22
<PAGE>
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 has surveyed, and
evaluated survey responses, for substantially all of these relationships as to
their Year 2000 compliance, and has developed appropriate contingency plans in
its effort to avoid significant disruption to the Company's operations.
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 regard 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 has identified
its more significant suppliers/vendors and has surveyed them as to their Year
2000 compliance status. The results of these surveys were evaluated and
appropriate contingency plans have been developed.
CUSTOMERS:
In the financial services operation, 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 commercial and residential real estate loans, 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. The Company has surveyed these customers to
determine their Year 2000 compliance. For commercial finance loans, the Company
has surveyed the majority of its 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 for both
real estate and commercial finance loans to determine 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. For the Company's thrift deposits, the
Company's effort to mitigate the risk of significant depositor withdrawals has
been pursued through an educational program, as recommended by the FDIC, aimed
at informing current and prospective depositors as to the thrift's Year 2000
compliance efforts and results.
In its property and casualty insurance services operation, the Company has
surveyed its largest agents and producers. As of November 10, 1999, the majority
of those surveyed have responded and the Company has evaluated these responses.
Based on these evaluations, the Company does not anticipate a significant
disruption to its insurance premium revenues resulting from a Year 2000 Problem
effecting its agents and producers.
INTERNAL COMPUTER SYSTEMS:
As of November 10, 1999, substantial Year 2000 compliance has been achieved
across all of the Company's operations. The Company's computer-based systems
("Systems") supporting the property and casualty insurance operations, 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, substantially all operations utilize
application Systems that are vendor supported. All current application Systems
are substantially Year 2000 compliant. Additionally, these application Systems
have been tested internally to validate their Year 2000 compliance, with no
significant errors identified or left unresolved.
With regard to the property and casualty insurance services 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
November 10, 1999, the Company believes that its Systems that support its
operations are
23
<PAGE>
substantially Year 2000 compliant (including testing). The property and casualty
insurance operation will be moving onto new Systems that will, after full
implementation, be the workers' compensation operation's new nationwide claims
and policy handling platform. The costs incurred by the Company in completing
these Year 2000 initiatives have not had a material impact on the Company's
results of operations. (Inception to September 30, 1999 costs of $4.6 million,
of which $4.5 million was incurred through December 31, 1998.)
Regarding administrative and back-office operations, the Company believes
that its personnel, payroll, accounting, and treasury Systems are Year 2000
compliant. The Company has tested these Systems with no significant errors
identified or left unresolved.
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 believed to be Year 2000 compliant. The
Company has tested the vendors' representations as to Year 2000 compliance of
installed network software with no significant errors identified or left
unresolved. Additionally, the Company has inventoried all of its PC hardware.
Substantially all of the PC hardware is believed to be Year 2000 compliant.
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 November 10, 1999, the Company
anticipates that its office facilities and equipment; key business partners,
vendors and other suppliers; major customers; and internal computer systems are
substantially Year 2000 compliant. For all mission critical Systems, the Company
has developed appropriate contingency plans in the event an unanticipated Year
2000 Problem occurs.
RISK FACTORS:
Due to the dependence of the Company's property and casualty insurance
services and financial services businesses on computer technology to operate its
businesses, and the dependence of the insurance and financial services
industries on computer technology, the nature and impact of Year 2000 processing
failures on the Company's businesses could be material. The Company believes its
mission critical Systems are substantially Year 2000 compliant at September 30,
1999. The Company cannot assure you that its Year 2000 compliance efforts will
be successful even though these compliance efforts were completed in a timely
manner. It is difficult to predict with certainty what will happen in connection
with the Year 2000 Problem after December 31, 1999. Despite the Company's best
efforts to mitigate and remediate its Year 2000 Problem, if key business
partners, vendors and other suppliers, facility owners, or customers have
over-estimated their own Year 2000 readiness, or been less than truthful or
forthcoming in their Year 2000 readiness disclosure, the Company will be forced
to implement certain of its contingency plans, and may be jeopardized with
respect to its own Year 2000 compliance status. In this scenario, it is possible
that the Company may experience unfavorable business factors and expenditures in
excess of budget which could result in a negative effect on results of
operations in one or all of the Company's businesses, depending upon the
specific nature of the problem or problems.
Worst-case scenarios (events the Company does not anticipate will occur)
might involve the inability of several of the Company's workers' compensation
insurance operation's major insureds, and/or agents, to resolve their respective
Year 2000 Problem. If this were to occur, effects could include the loss of
business that might be material to the Company. Furthermore, negative economic
conditions precipitated by the Year 2000 Problem could adversely impact the
financial services operation's ability to originate loans or maintain credit
quality at previously attained levels and could negatively affect the Company's
net finance income, levels of non-performing assets and net charge-offs. The
Company's operations are highly dependent on the ability of its banking business
partners to process its financial transactions. If the Company's key banking
business partners, as well as the banking industry in general, fail to resolve
their respective Year 2000 Problems, if any, serious consequences to the Company
could result including the disruption to its normal pattern of cash flows, or
increased risk for possible legal actions for breach of contract or other harm.
These consequences could adversely affect the Company's results of operations
and financial condition. While the Company does not anticipate any of these
scenarios to occur, in making its own Year 2000 Readiness Disclosure statements,
the Company has relied upon the honesty and forthrightness of its key business
partners, vendors and other suppliers, facility owners and customers in making
their respective Year 2000 readiness representations to the Company.
24
<PAGE>
SAFE HARBOR STATEMENT (FORWARD LOOKING STATEMENTS AND YEAR 2000 READINESS
DISCLOSURE)
Except for historical information contained herein, statements in this Year
2000 Readiness Disclosure statement are forward looking statements that involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements. Such risks include,
among others, the negative impact on the Company's financial results which could
result from the inability of any of the named parties or organizations, or other
unnamed parties or organizations, to become Year 2000 compliant by December 31,
1999. For more complete information concerning factors which could affect the
Company's financial results, reference is made to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, the Company's Quarterly Reports
on Form 10-Q for each of the quarters ending March 31, 1999 and June 30, 1999
and other reports the Company has filed with the Securities and Exchange
Commission. Statements in this Year 2000 Readiness Disclosure are intended to,
in all respects, comport with and meet the requirements of the Y2K Disclosure
Act, which became effective on October 19, 1998 (the "Act"), and to provide the
fullest extent of the safe harbor protections provided under the Act.
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.
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PART II - OTHER INFORMATION
Item 1: Legal Proceedings.
None.
Item 2: Changes in Securities and Use of Proceeds.
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
---------- ----------------------------------------------------------
3.1 Restated Articles of Incorporation of Fremont General
Corporation. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q, for the
period ended June 30, 1998, Commission File Number
1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of
Fremont General Corporation. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
3.3 Amended and Restated By-Laws of Fremont General
Corporation. (Incorporated by reference to Exhibit 3.3 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the
Registrant. (Incorporated by reference to Exhibit (1) to
the Registrant's Form 8-A filed on March 17, 1993,
Commission File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due
2013 between the Registrant and Bankers Trust Company.
(Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3 filed on October 1, 1993.)
4.3 Indenture among the Registrant, the Trust and First
Interstate Bank of California, a California banking
corporation, as trustee. (Incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
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.
(Incorporated by reference to Exhibit 4.5 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
4.5 Preferred Securities Guarantee Agreement between the
Registrant and The Chase Manhattan Bank, N.A., a national
banking association, as Preferred Guarantee Trustee.
(Incorporated by
26
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
reference to Exhibit 4.6 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant.
(Incorporated by reference to Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5).
(Incorporated by reference to Exhibit 4.8 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
4.8 Form of 9% Junior Subordinated Debenture. (Included in
Exhibit 4.3). (Incorporated by reference to Exhibit 4.9 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.9 Indenture dated as of March 1, 1999 between the Registrant
and The First National Bank of Chicago, as trustee.
(Incorporated by reference to Exhibit 4.9 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1998, Commission File Number
1-8007.)
4.10 Registration Rights Agreement among the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit
Suisse First Boston Corporation, Goldman, Sachs & Co., and
Warburg Dillon Read LLC. (Incorporated by reference to
Exhibit 4.10 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
4.11 Form of Fremont General Corporation 7.70% Senior Notes due
2004. (Incorporated by reference to Exhibit 4.11 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1998, Commission File Number
1-8007.)
4.12 Form of Fremont General Corporation 7.875% Senior Notes
due 2009. (Incorporated by reference to Exhibit 4.12 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
4.13 Form of Registrant's Series B 7.70% Senior Note due 2004.
(Incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-4 filed on
April 26, 1999.)
4.14 Form of Registrant's Series B 7.875% Senior Note due 2009.
(Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-4 filed on
April 26, 1999.)
10.1(a) Fremont General Corporation Employee Stock Ownership Plan.
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.1(b) Amendment Number One to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (b) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.1(c) Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (b) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1997,
Commission File Number 1-8007.)
10.1(d) Amendment Number Three to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (c) to the Registrant's Quarterly Report
on form 10-Q, for the period ended September 30, 1998,
Commission File Number 1-8007.)
27
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.1(e) Amendment Number Four to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (d) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.2 Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan. and amendment (Incorporated
by reference to Exhibit 10.2 to Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.3(a) Fremont General Corporation and Affiliated Companies
Investment Incentive Plan. (Incorporated by reference to
Exhibit 10.3 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.3(b) Amendments Number One, Two and Three to the Fremont
General Corporation and Affiliated Companies Investment
Incentive Plan. (Incorporated by reference to Exhibit 10.3
(b) to the Registrant's Quarterly Report on form 10-Q, for
the period ended September 30, 1997, Commission File
Number 1-8007.)
10.3(c) Amendment Number Four to the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K, for the Fiscal
Year Ended December 31, 1997, Commission File Number
1-8007.)
10.3(d) Amendment Number Five to the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3(d) to the
Registrant's Quarterly Report on form 10-Q, for the period
ended September 30, 1998, Commission File Number 1-8007.)
10.4(a) Fremont General Corporation Investment Incentive Program
Trust. (Incorporated by reference to Exhibit (10)(xi) to
the Registrant's Annual Report on Form 10-K, for the
Fiscal Year Ended December 31, 1993, Commission File
Number 1-8007.)
10.4(b) Amendment to the Fremont General Corporation Investment
Incentive Program Trust. (Incorporated by reference to
Exhibit 10.4 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.5(a) Fremont General Corporation Supplemental Retirement Plan,
as restated January 1, 1997. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q, for the period ended September 30, 1997, Commission
File Number 1-8007.)
10.5(b) Amendment Number One to the Fremont General Corporation
Supplemental Retirement Plan. (Incorporated by reference
to Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q, for the period ended March 31, 1998, Commission
File Number 1-8007.)
10.5(c) Amendment Number Two to the Fremont General Corporation
Supplemental Retirement Plan of the Company. (Incorporated
by reference to Exhibit 10.5 (b) to the Registrant's
Annual Report on Form 10-K, for the fiscal year ended
December 31, 1998, Commission File Number 1-8007.)
28
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.6 Trust Agreement for Fremont General Corporation
Supplemental Retirement Plan and Fremont General
Corporation Senior Supplemental Retirement Plan and
amendment. (Incorporated by reference to Exhibit 10.6 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.7(a) Fremont General Corporation Senior Supplemental Retirement
Plan, as restated January 1, 1997. (Incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended September 30,
1997, Commission File Number 1-8007.)
10.7(b) First Amendment to the Fremont General Corporation Senior
Supplemental. (Incorporated by reference to Exhibit 10.7
(b) to the Registrant's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
10.8(a) Fremont General Corporation Excess Benefit Plan Restated
effective as of January 1, 1997 and First Amendment dated
December 21, 1998. (Incorporated by reference to Exhibit
10.8 (a) to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1998, Commission
File Number 1-8007.)
10.8(b) Amendment to Excess Benefit Plan of Fremont General
Corporation. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.8(c) Trust Agreement for Fremont General Corporation Excess
Benefit Plan. (Incorporated by reference to Exhibit 10.8
to the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.9 Amended Non-Qualified Stock Option Plan of 1989 and
related agreements of the Company. (Incorporated by
reference to Exhibit 10.9 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1996, Commission
File Number 1-8007.)
10.10 1997 Stock Plan and related agreements. (Incorporated by
reference to Exhibit 10.10 to Quarterly Report on
Form 10-Q, for the period ended June 30, 1997, Commission
File Number 1-8007.)
10.11(a) Long-Term Incentive Compensation Plan of the Company -
Senior Executive Plan. (Incorporated by reference to
Exhibit 10.10 (a) on Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1996, Commission
File Number 1-8007.)
10.11(b) Long-Term Incentive Compensation Plan of the Company
(Incorporated by reference to Exhibit 10.10 (b) on
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1996, Commission File Number 1-8007.)
10.12 1995 Restricted Stock Award Plan As Amended and forms of
agreement thereunder. (Incorporated by reference to
Exhibit 4.1 to Registration Statement on Registrant's Form
S-8/S-3 File 333-17525 which was filed on December 9,
1997.)
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. (Incorporated by reference to Exhibit 10.12 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.13(a) Exhibit A to the Fremont General Corporation Employee
Benefits Trust ("Grantor Trust") dated September 7, 1995
between the Company and Merrill Lynch Trust Company of
California.
29
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.14(a) Employment Agreement between the Company and James A.
McIntyre dated January 1, 1994. (Incorporated by reference
to Exhibit (10)(i) to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994, Commission
File Number 1-8007.)
10.14(b) First Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 1, 1996.
(Incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q, for the period
ended June 30, 1997, Commission File Number 1-8007.)
10.14(c) Second Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 8, 1997.
(Incorporated by reference to Exhibit 10.14 (c) to the
Registrant's Quarterly Report on Form 10-Q, for the period
ended September 30, 1997, Commission File Number 1-8007.)
10.15(a) Employment Agreement between the Company and Louis J.
Rampino dated February 8, 1996. (Incorporated by reference
to Exhibit 10.14 (a) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.15(b) Employment Agreement between the Company and Wayne R.
Bailey dated February 8, 1996. (Incorporated by reference
to Exhibit 10.14 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.16 Management Continuity Agreement between the Company and
Raymond G. Meyers dated February 8, 1996. (Incorporated by
reference to Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007.)
10.17 1999 Management Incentive Compensation Plan of the
Company. (Incorporated by reference to Exhibit 10.17 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
10.18 Continuing Compensation Plan for Retired Directors.
(Incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.19 Amended and Restated Credit Agreement among Fremont
General Corporation, Various Lending Institutions, and The
Chase Manhattan Bank, as Administrative Agent, Dated as of
August 1, 1997 and amended and restated as of June 30,
1999. (Incorporated by reference to Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.)
10.20 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. (Incorporated by reference to
Exhibit (10)(viii) to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1995.)
10.21(a) Second Amended and Restated Credit Agreement among Fremont
Financial Corporation, Various Lending Institutions, Wells
Fargo Bank N.A. and Fleet Bank National Association as
Co-Agents, and The Chase Manhattan Bank as Agent, dated as
of June 23, 1997. (Incorporated by reference to Exhibit
10.22 (a) to the Registrant's Quarterly Report on Form
10-Q/A Amendment 1, for the period ended September 30,
1998, Commission File Number 1-8007.)
30
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.21(b) First Amendment and Consent dated as of October 21, 1997,
to the Second Amended and Restated Credit Agreement among
Fremont Financial Corporation, Various Lending
Institutions, Wells Fargo Bank N.A. and Fleet Bank
National Association as Co-Agents, and The Chase Manhattan
Bank as Agent. (Incorporated by reference to Exhibit 10.22
(b) to the Registrant's Quarterly Report on Form 10-Q/A
Amendment No. 1, for the period ended September 30, 1998,
Commission File Number 1-8007).
27 Financial Data Schedule
(b) Report on Form 8-K. None.
31
<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 15, 1999 /s/ LOUIS J. RAMPINO
-----------------------------------------
Louis J. Rampino, President,
Chief Operating Officer and Director
Date: November 15, 1999 /s/ JOHN A. DONALDSON
-----------------------------------------
John A. Donaldson, Senior Vice President,
Controller and Chief Accounting Officer
32
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
3.1 Restated Articles of Incorporation of Fremont General
Corporation. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q, for the
period ended June 30, 1998, Commission File Number
1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of
Fremont General Corporation. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
3.3 Amended and Restated By-Laws of Fremont General
Corporation. (Incorporated by reference to Exhibit 3.3 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the
Registrant. (Incorporated by reference to Exhibit (1) to
the Registrant's Form 8-A filed on March 17, 1993,
Commission File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due
2013 between the Registrant and Bankers Trust Company.
(Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3 filed on October 1, 1993.)
4.3 Indenture among the Registrant, the Trust and First
Interstate Bank of California, a California banking
corporation, as trustee. (Incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
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.
(Incorporated by reference to Exhibit 4.5 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
4.5 Preferred Securities Guarantee Agreement between the
Registrant and The Chase Manhattan Bank, N.A., a national
banking association, as Preferred Guarantee Trustee.
(Incorporated by
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
reference to Exhibit 4.6 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant.
(Incorporated by reference to Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5).
(Incorporated by reference to Exhibit 4.8 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
4.8 Form of 9% Junior Subordinated Debenture. (Included in
Exhibit 4.3). (Incorporated by reference to Exhibit 4.9 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.9 Indenture dated as of March 1, 1999 between the Registrant
and The First National Bank of Chicago, as trustee.
(Incorporated by reference to Exhibit 4.9 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1998, Commission File Number
1-8007.)
4.10 Registration Rights Agreement among the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit
Suisse First Boston Corporation, Goldman, Sachs & Co., and
Warburg Dillon Read LLC. (Incorporated by reference to
Exhibit 4.10 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
4.11 Form of Fremont General Corporation 7.70% Senior Notes due
2004. (Incorporated by reference to Exhibit 4.11 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1998, Commission File Number
1-8007.)
4.12 Form of Fremont General Corporation 7.875% Senior Notes
due 2009. (Incorporated by reference to Exhibit 4.12 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
4.13 Form of Registrant's Series B 7.70% Senior Note due 2004.
(Incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-4 filed on
April 26, 1999.)
4.14 Form of Registrant's Series B 7.875% Senior Note due 2009.
(Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-4 filed on
April 26, 1999.)
10.1(a) Fremont General Corporation Employee Stock Ownership Plan.
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.1(b) Amendment Number One to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (b) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.1(c) Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (b) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1997,
Commission File Number 1-8007.)
10.1(d) Amendment Number Three to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (c) to the Registrant's Quarterly Report
on form 10-Q, for the period ended September 30, 1998,
Commission File Number 1-8007.)
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.1(e) Amendment Number Four to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference
to Exhibit 10.1 (d) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.2 Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan. and amendment (Incorporated
by reference to Exhibit 10.2 to Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.3(a) Fremont General Corporation and Affiliated Companies
Investment Incentive Plan. (Incorporated by reference to
Exhibit 10.3 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.3(b) Amendments Number One, Two and Three to the Fremont
General Corporation and Affiliated Companies Investment
Incentive Plan. (Incorporated by reference to Exhibit 10.3
(b) to the Registrant's Quarterly Report on form 10-Q, for
the period ended September 30, 1997, Commission File
Number 1-8007.)
10.3(c) Amendment Number Four to the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K, for the Fiscal
Year Ended December 31, 1997, Commission File Number
1-8007.)
10.3(d) Amendment Number Five to the Fremont General Corporation
and Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3(d) to the
Registrant's Quarterly Report on form 10-Q, for the period
ended September 30, 1998, Commission File Number 1-8007.)
10.4(a) Fremont General Corporation Investment Incentive Program
Trust. (Incorporated by reference to Exhibit (10)(xi) to
the Registrant's Annual Report on Form 10-K, for the
Fiscal Year Ended December 31, 1993, Commission File
Number 1-8007.)
10.4(b) Amendment to the Fremont General Corporation Investment
Incentive Program Trust. (Incorporated by reference to
Exhibit 10.4 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.5(a) Fremont General Corporation Supplemental Retirement Plan,
as restated January 1, 1997. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q, for the period ended September 30, 1997, Commission
File Number 1-8007.)
10.5(b) Amendment Number One to the Fremont General Corporation
Supplemental Retirement Plan. (Incorporated by reference
to Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q, for the period ended March 31, 1998, Commission
File Number 1-8007.)
10.5(c) Amendment Number Two to the Fremont General Corporation
Supplemental Retirement Plan of the Company. (Incorporated
by reference to Exhibit 10.5 (b) to the Registrant's
Annual Report on Form 10-K, for the fiscal year ended
December 31, 1998, Commission File Number 1-8007.)
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.6 Trust Agreement for Fremont General Corporation
Supplemental Retirement Plan and Fremont General
Corporation Senior Supplemental Retirement Plan and
amendment. (Incorporated by reference to Exhibit 10.6 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.7(a) Fremont General Corporation Senior Supplemental Retirement
Plan, as restated January 1, 1997. (Incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended September 30,
1997, Commission File Number 1-8007.)
10.7(b) First Amendment to the Fremont General Corporation Senior
Supplemental. (Incorporated by reference to Exhibit 10.7
(b) to the Registrant's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
10.8(a) Fremont General Corporation Excess Benefit Plan Restated
effective as of January 1, 1997 and First Amendment dated
December 21, 1998. (Incorporated by reference to Exhibit
10.8 (a) to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1998, Commission
File Number 1-8007.)
10.8(b) Amendment to Excess Benefit Plan of Fremont General
Corporation. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.8(c) Trust Agreement for Fremont General Corporation Excess
Benefit Plan. (Incorporated by reference to Exhibit 10.8
to the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.9 Amended Non-Qualified Stock Option Plan of 1989 and
related agreements of the Company. (Incorporated by
reference to Exhibit 10.9 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1996, Commission
File Number 1-8007.)
10.10 1997 Stock Plan and related agreements. (Incorporated by
reference to Exhibit 10.10 to Quarterly Report on
Form 10-Q, for the period ended June 30, 1997, Commission
File Number 1-8007.)
10.11(a) Long-Term Incentive Compensation Plan of the Company -
Senior Executive Plan. (Incorporated by reference to
Exhibit 10.10 (a) on Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1996, Commission
File Number 1-8007.)
10.11(b) Long-Term Incentive Compensation Plan of the Company
(Incorporated by reference to Exhibit 10.10 (b) on
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1996, Commission File Number 1-8007.)
10.12 1995 Restricted Stock Award Plan As Amended and forms of
agreement thereunder. (Incorporated by reference to
Exhibit 4.1 to Registration Statement on Registrant's Form
S-8/S-3 File 333-17525 which was filed on December 9,
1997.)
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. (Incorporated by reference to Exhibit 10.12 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.13(a) Exhibit A to the Fremont General Corporation Employee
Benefits Trust ("Grantor Trust") dated September 7, 1995
between the Company and Merrill Lynch Trust Company of
California.
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.14(a) Employment Agreement between the Company and James A.
McIntyre dated January 1, 1994. (Incorporated by reference
to Exhibit (10)(i) to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994, Commission
File Number 1-8007.)
10.14(b) First Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 1, 1996.
(Incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q, for the period
ended June 30, 1997, Commission File Number 1-8007.)
10.14(c) Second Amendment to Employment Agreement between the
Company and James A. McIntyre dated August 8, 1997.
(Incorporated by reference to Exhibit 10.14 (c) to the
Registrant's Quarterly Report on Form 10-Q, for the period
ended September 30, 1997, Commission File Number 1-8007.)
10.15(a) Employment Agreement between the Company and Louis J.
Rampino dated February 8, 1996. (Incorporated by reference
to Exhibit 10.14 (a) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.15(b) Employment Agreement between the Company and Wayne R.
Bailey dated February 8, 1996. (Incorporated by reference
to Exhibit 10.14 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.16 Management Continuity Agreement between the Company and
Raymond G. Meyers dated February 8, 1996. (Incorporated by
reference to Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007.)
10.17 1999 Management Incentive Compensation Plan of the
Company. (Incorporated by reference to Exhibit 10.17 to
the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
10.18 Continuing Compensation Plan for Retired Directors.
(Incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.19 Amended and Restated Credit Agreement among Fremont
General Corporation, Various Lending Institutions, and The
Chase Manhattan Bank, as Administrative Agent, Dated as of
August 1, 1997 and amended and restated as of June 30,
1999. (Incorporated by reference to Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.)
10.20 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. (Incorporated by reference to
Exhibit (10)(viii) to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1995.)
10.21(a) Second Amended and Restated Credit Agreement among Fremont
Financial Corporation, Various Lending Institutions, Wells
Fargo Bank N.A. and Fleet Bank National Association as
Co-Agents, and The Chase Manhattan Bank as Agent, dated as
of June 23, 1997. (Incorporated by reference to Exhibit
10.22 (a) to the Registrant's Quarterly Report on Form
10-Q/A Amendment 1, for the period ended September 30,
1998, Commission File Number 1-8007.)
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- ----------------------------------------------------------
10.21(b) First Amendment and Consent dated as of October 21, 1997,
to the Second Amended and Restated Credit Agreement among
Fremont Financial Corporation, Various Lending
Institutions, Wells Fargo Bank N.A. and Fleet Bank
National Association as Co-Agents, and The Chase Manhattan
Bank as Agent. (Incorporated by reference to Exhibit 10.22
(b) to the Registrant's Quarterly Report on Form 10-Q/A
Amendment No. 1, for the period ended September 30, 1998,
Commission File Number 1-8007).
27 Financial Data Schedule
EXHIBIT A
FREMONT GENERAL CORPORATION
EMPLOYEE BENEFITS TRUST
APPLICABLE PLANS
PLAN NAME
Fremont General Corporation Employee Stock Ownership Plan
Fremont General Corporation Investment Incentive Program
Fremont General Corporation Excess Benefit Plan
Fremont General Corporation Supplemental Retirement Plan
Fremont General Corporation Senior Supplemental Retirement Plan
Fremont General Corporation Long-Term Incentive Compensation Plan of 1993
Fremont General Corporation Nonqualified Stock Option Plan of 1989
Fremont General Corporation Restricted Stock Award Plan of 1995
Fremont General Corporation Stock Plan of 1997
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,463,001
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 411,159
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,090,759<F1>
<CASH> 244,962
<RECOVER-REINSURE> 23,921
<DEFERRED-ACQUISITION> 58,475
<TOTAL-ASSETS> 8,545,847
<POLICY-LOSSES> 2,388,868
<UNEARNED-PREMIUMS> 171,920
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 15,129
<NOTES-PAYABLE> 1,361,192
100,000
0
<COMMON> 70,043
<OTHER-SE> 739,380<F2>
<TOTAL-LIABILITY-AND-EQUITY> 8,545,847
575,813
<INVESTMENT-INCOME> 129,447
<INVESTMENT-GAINS> (1,875)
<OTHER-INCOME> 281,231<F3>
<BENEFITS> 480,278
<UNDERWRITING-AMORTIZATION> 136,834
<UNDERWRITING-OTHER> 55,836
<INCOME-PRETAX> 8,716
<INCOME-TAX> 343
<INCOME-CONTINUING> 8,373
<DISCONTINUED> (25,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,627)
<EPS-BASIC> (0.25)<F4>
<EPS-DILUTED> (0.25)<F5>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes Loans receivable, Loans held for sale, Short-term and Other
investments.
<F2>Sum of Additional paid-in-capital, Retained earnings, Deferred Compensation
and Accumulated other comprehensive income (loss).
<F3>Includes Loan interest and Other revenue.
<F4>Basic earnings per share
<F5>Diluted earnings per share
</FN>
</TABLE>
