<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 June 30, 2000
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 its 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 the 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 July 31, 2000
----- ------------------
Common Stock, $1.00 par value 69,998,094
--------------------------------------------------------------------------------
<PAGE>
FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 ................... 3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999 ..... 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 ............... 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 ....................... 10
Item 3. Quantitative and Qualitative Disclosure About
Market Risk ............................................... 26
PART II - OTHER INFORMATION
Items 1-3. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders ......... 27
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K ............................ 28
Signatures ............................................................. 33
2
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Securities available for sale at fair value:
Fixed maturity investments (cost: 2000-$1,418,533; 1999-$1,458,721) ....... $ 1,333,910 $ 1,391,229
Non-redeemable preferred stock (cost: 2000-$402,845; 1999-$407,903) ....... 365,279 369,103
----------- -----------
Total securities available for sale ..................................... 1,699,189 1,760,332
Loans receivable ............................................................ 3,140,412 3,060,984
Loans held for sale ......................................................... 402,269 294,639
Short-term investments ...................................................... 462,987 410,457
Residual interests in securitized loans-at fair value ....................... 59,564 62,959
Other investments ........................................................... 10,725 35,045
----------- ------------
TOTAL INVESTMENTS AND LOANS ............................................. 5,775,146 5,624,416
Cash ........................................................................ 70,647 65,102
Accrued investment income ................................................... 44,674 44,244
Premiums receivable and agents' balances .................................... 284,003 265,714
Reinsurance recoverable on paid losses ...................................... 33,814 19,822
Reinsurance recoverable on unpaid losses .................................... 924,282 1,049,477
Deferred policy acquisition costs ........................................... 62,469 59,198
Costs in excess of net assets acquired ...................................... 154,147 157,927
Deferred income taxes ....................................................... 413,464 243,645
Other assets ................................................................ 237,627 236,167
Assets held for discontinued operations ..................................... 231,129 249,523
----------- -----------
TOTAL ASSETS ............................................................ $ 8,231,402 $ 8,015,235
=========== ===========
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses ....................................... $ 2,809,261 $ 2,434,757
Life insurance benefits and liabilities ................................... 100,848 118,390
Unearned premiums ......................................................... 164,085 180,583
Dividends to policyholders ................................................ 38,670 20,144
----------- -----------
TOTAL CLAIMS AND POLICY LIABILITIES ..................................... 3,112,864 2,753,874
Reinsurance premiums payable and funds withheld ............................. 30,791 63,806
Other liabilities ........................................................... 276,726 288,017
Thrift deposits ............................................................. 3,634,195 3,423,243
Short-term debt ............................................................. - 10,000
Long-term debt .............................................................. 419,128 429,185
Liabilities of discontinued operations ...................................... 197,615 216,009
----------- -----------
TOTAL LIABILITIES ....................................................... 7,671,319 7,184,134
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: (2000-69,998,000 and 1999-70,039,000) ........... 69,998 70,039
Additional paid-in capital .................................................. 278,161 285,922
Retained earnings ........................................................... 263,958 533,523
Deferred compensation ....................................................... (72,611) (89,293)
Accumulated other comprehensive loss ........................................ (79,423) (69,090)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .............................................. 460,083 731,101
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 8,231,402 $ 8,015,235
=========== ===========
</TABLE>
See notes to consolidated financial statements on Form 10-Q.
3
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
REVENUES
Property and casualty premiums earned ....................... $ 289,575 $ 197,632 $ 548,685 $ 367,975
Loan interest ............................................... 91,971 89,053 179,306 168,498
Net investment income ....................................... 42,126 43,283 83,575 88,603
Realized investment gains (losses) .......................... (28) 273 (239) 298
Other revenue ............................................... 4,690 5,870 9,644 9,516
---------- --------- ---------- ---------
Total Revenues ......................................... 428,334 336,111 820,971 634,890
Expenses
Losses and loss adjustment expenses ......................... 647,902 118,010 852,264 215,551
Policy acquisition costs .................................... 54,711 45,556 112,821 88,678
Provision for loan losses ................................... 3,372 5,748 5,405 9,874
Other operating costs and expenses .......................... 49,024 48,163 97,096 94,006
Dividends to policyholders .................................. 26,137 6,849 32,485 13,111
Interest expense ............................................ 64,793 59,864 124,957 110,538
---------- --------- ---------- ---------
Total Expenses ...................................... 845,939 284,190 1,225,028 531,758
---------- --------- ---------- ---------
Income (loss) before taxes and extraordinary item ........... (417,605) 51,921 (404,057) 103,132
Income tax expense (benefit) ................................ (147,287) 16,946 (143,223) 33,846
---------- --------- ---------- ---------
Income (loss) from continuing operations .................... (270,318) 34,975 (260,834) 69,286
Extraordinary item .......................................... 2,245 - 2,245 -
---------- --------- ---------- ---------
Net income (loss) ........................................... $ (268,073) $ 34,975 $ (258,589) $ 69,286
========== ========= ========== =========
Per Share Data
Basic:
Income (loss) from continuing operations .................. $ (4.29) $ 0.52 $ (4.17) $ 1.03
Extraordinary item ........................................ 0.03 - 0.03 -
Net income (loss) ......................................... (4.26) 0.52 (4.14) 1.03
Diluted:
Income (loss) from continuing operations .................. (4.29) 0.50 (4.17) 0.99
Extraordinary item ........................................ 0.03 - 0.03 -
Net income (loss) ......................................... (4.26) 0.50 (4.14) 0.99
Cash dividends ............................................. 0.08 0.08 0.16 0.16
Weighted average shares:
Basic ..................................................... 62,939 67,188 62,529 67,035
Diluted ................................................... 62,939 70,008 62,529 69,906
</TABLE>
See notes to consolidated financial statements on Form 10-Q
4
<PAGE>
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations ................................... $ (260,834) $ 69,286
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Change in premiums receivable and agents' balances
and reinsurance recoverable on paid losses ........................... (32,281) (26,751)
Change in accrued investment income .................................... (430) (6,610)
Change in claims and policy liabilities ................................ 516,473 (169,310)
Amortization of policy acquisition costs ............................... 112,821 88,678
Policy acquisition costs deferred ...................................... (116,092) (99,306)
Net change in residual interests in securitized loans .................. 3,395 (41,622)
Provision for deferred income taxes .................................... (164,255) 45,102
Provision for loan losses .............................................. 5,405 9,874
Provision for depreciation and amortization ............................ 22,366 20,783
Net amortization on fixed maturity investments ......................... (871) (7,498)
Realized investment (gains) losses ..................................... 239 (298)
Change in other assets and liabilities ................................. (48,659) (35,569)
------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................. 37,277 (153,241)
INVESTING ACTIVITIES
Securities available for sale:
Purchases of securities .................................................. (71,730) (391,335)
Sales of securities ...................................................... 82,685 324,296
Securities matured or called ............................................. 34,923 155,475
(Increase) decrease in short-term and other investments .................... (28,210) 21,303
Loan originations and bulk purchases funded ................................ (1,808,489) (2,215,434)
Receipts from repayments of loans and bulk sales of loans .................. 1,616,026 1,462,868
Purchase of property and equipment ......................................... (11,757) (14,179)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................................ (186,552) (657,006)
FINANCING ACTIVITIES
Proceeds from short-term debt .............................................. - 38,322
Repayments of short-term debt .............................................. (10,000) (13,217)
Proceeds from long-term debt ............................................... - 435,237
Repayments of long-term debt ............................................... (7,734) (336,285)
Net increase in thrift deposits ............................................ 210,952 731,959
Annuity contract receipts .................................................. 273 195
Annuity contract withdrawals ............................................... (32,561) (17,805)
Dividends paid ............................................................. (10,979) (11,072)
Net (increase) decrease in deferred compensation plans ..................... 4,869 (4,732)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ 154,820 822,602
------------ ------------
INCREASE IN CASH ........................................................... 5,545 12,355
Cash at beginning of year .................................................. 65,102 79,875
------------ ------------
CASH AT JUNE 30, ........................................................... $ 70,647 $ 92,230
============ ============
</TABLE>
See notes to consolidated financial statements on Form 10-Q.
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, 1999. Certain 1999 amounts have been
reclassified to conform to the 2000 presentation.
NOTE B - TOTAL COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) are summarized in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net income (loss) ................................................. $ (268,073) $ 34,975 $ (258,589) $ 69,286
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) ..................................... (16,889) (40,791) (9,745) (47,707)
Less: reclassification adjustment, net of
tax deferred income tax expense (benefit) ................. 1,985 (2,980) (588) (7,102)
---------- --------- ---------- ---------
Other comprehensive income (loss) ...................... (14,904) (43,771) (10,333) (54,809)
---------- --------- ---------- ---------
Total comprehensive income (loss) ................................. $ (282,977) $ (8,796) $ (268,922) $ 14,477
========== ========= ========== =========
</TABLE>
The net change in unrealized gains (losses) during the period is net of
deferred income tax expense (benefit) of $(9,094,000) and $(21,965,000) for the
three months ended June 30, 2000 and 1999, respectively and $(5,564,000) and
$(25,688,000) for the six months ended June 30, 1999 and 1998, respectively. The
reclassification adjustments are net of deferred income tax expense (benefit) of
$(1,069,000) and $1,604,000 for the three months ended June 30, 2000 and 1999,
respectively and $316,000 and $3,824,000 for the six months ended June 30, 2000
and 1999, respectively. The reclassification adjustments avoid double counting
net unrealized gains (losses) included in accumulated other comprehensive income
in different periods.
NOTE C - OPERATIONS BY REPORTABLE SEGMENT
The Company's businesses are managed within two reportable segments:
property and casualty insurance 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.
6
<PAGE>
The following data at and for the three and six months ended June 30, 2000
and 1999 provide certain information necessary for reportable segment
disclosure, as well as a reconciliation to total consolidated financial
information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
REVENUES
Property and casualty insurance .................................. $ 326,426 $ 238,824 $ 622,075 $ 452,651
Financial services ............................................... 100,745 96,709 196,419 181,350
Unallocated corporate revenue .................................... 1,163 578 2,477 889
---------- --------- ---------- ---------
Total ............................................................ 428,334 336,111 820,971 634,890
Intersegment:
Property and casualty insurance .................................. - 272 - 544
Unallocated corporate revenue .................................... 2,390 9,809 10,136 18,986
---------- --------- ---------- ---------
2,390 10,081 10,136 19,530
---------- --------- ---------- ---------
Total revenue .................................................... 430,724 346,192 831,107 654,420
Reconciling items: intersegment revenues ........................ (2,390) (10,081) (10,136) (19,530)
---------- --------- ---------- ---------
Total consolidated ............................................... $ 428,334 $ 336,111 $ 820,971 $ 634,890
========== ========= ========== =========
Income (loss) before taxes and extraordinary item
Property and casualty insurance .................................. $ (425,833) $ 42,227 $ (425,766) $ 84,480
Financial services ............................................... 23,072 17,222 43,902 33,668
Unallocated corporate loss ....................................... (14,775) (6,459) (22,054) (12,877)
---------- --------- ---------- ---------
Total ............................................................ (417,536) 52,990 (403,918) 105,271
Reconciling items: intercompany dividends ........................ (69) (1,069) (139) (2,139)
---------- --------- ---------- ---------
Total consolidated ............................................... $ (417,605) $ 51,921 $ (404,057) $ 103,132
========== ========= ========== =========
</TABLE>
7
<PAGE>
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share ("EPS") for the three and six months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS
(NUMERATOR FOR BASIC EPS) ..................................... $ (270,318) $ 34,975 $ (260,834) $ 69,286
Effect of dilutive securities:
Liquid Yield Option Notes ("LYONs") ........................... - 35 - 77
---------- --------- ---------- ----------
INCOME (LOSS) AFTER ASSUMED CONVERSIONS
(NUMERATOR FOR DILUTED EPS) ................................... $ (270,318) $ 35,010 $ (260,834) $ 69,363
========== ========= ========== ==========
WEIGHTED-AVERAGE SHARES
(DENOMINATOR FOR BASIC EPS) ................................... 62,939 67,188 62,529 67,035
Effect of dilutive securities:
Restricted stock .............................................. - 2,083 - 2,083
Stock options ................................................. - 349 - 369
LYONs ......................................................... - 388 - 419
---------- --------- ---------- ------------
Dilutive potential common shares ................................ - 2,820 - 2,871
---------- --------- ---------- ------------
ADJUSTED WEIGHTED-AVERAGE SHARES AND ASSUMED
CONVERSIONS (DENOMINATOR FOR DILUTED EPS) ..................... 62,939 70,008 62,529 69,906
========== ========= ========== ============
BASIC EPS FROM CONTINUING OPERATIONS ............................ $ (4.29) $ 0.52 $ (4.17) $ 1.03
========== ========= ========== ============
DILUTED EPS FROM CONTINUING OPERATIONS .......................... $ (4.29) $ 0.50 $ (4.17) $ 0.99
========== ========= ========== ============
</TABLE>
For the three and six months ended June 30, 2000, six million dilutive
securities were excluded from the calculation of diluted earnings per share
because the effects would have been antidilutive.
NOTE E - EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In June 2000, the Company purchased $6,300,000 par value of its 7.70%
Series B Senior Notes due 2004 ("Senior Notes") at a cost of $2,687,000. This
extinguishment of debt resulted in a gain of $2,245,000, net of deferred taxes
of $1,368,000, that is reported as an extraordinary item in the accompanying
Consolidated Statements of Operations.
8
<PAGE>
NOTE F - SUBSEQUENT EVENTS
REINSURANCE TRANSACTIONS
In an effort to mitigate the impact on the Company's property and casualty
insurance operation of the gross loss and LAE reserve action in the three months
ended June 30, 2000, the Company has entered into a letter of intent with XL
Capital Ltd ("XL") which includes, among other things, an agreement to
establish an adverse development reinsurance agreement between an insurance
subsidiary of XL and the Company's workers' compensation insurance subsidiaries.
The reinsurance agreement is expected to provide reinsurance coverage for
workers' compensation losses occurring in 1999 and prior years.
The letter of intent also includes an agreement for Fremont General
Corporation to issue both common stock warrants and senior non-callable
convertible debentures (the "debentures") to XL. The common stock warrants
provide XL the option to purchase up to 7 million shares of common stock of
Fremont General Corporation at an exercise price not to exceed $5.00 per share.
With respect to the debentures, the Company is expected to issue, at XL's
discretion, between $15 and $25 million in principal amount of debentures, which
will carry a coupon rate of 10%, a maturity of ten years, and be convertible
into the common stock of Fremont General Corporation at a price not to exceed
$5.00 per share. Final terms of the debentures have yet to be determined by the
Company and XL. The transaction was structured by XL Financial Solutions, a
division of XL. XL's common stock is traded on the New York Stock Exchange under
the symbol "XL."
RATING CHANGE
On August 10, 2000 A.M. Best changed the rating for the Company's workers'
compensation insurance subsidiaries to "B" (Fair). This is a change of two
notches from the previous rating of "B++" (Very Good) and resulted from both
company specific issues, as well as to A.M. Best's general concerns relating to
workers' compensation market conditions in California. A "B" rating is A.M.
Best's seventh highest rating category out of fifteen rating categories ranging
from "A++" (Superior) to "F" (In Liquidation).
9
<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 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 is currently engaged in commercial and residential real estate lending,
investments in syndicated loans (large commercial loans originated and serviced
by other financial institutions) and insurance premium financing. The Company's
reported assets as of June 30, 2000 were $8.2 billion.
The Company's business strategy is to achieve income balance and geographic
diversity among its business units in order to limit its exposure to market and
regional concentrations. The Company's business strategy also includes growing
its business through new business development. The Company's stock is traded on
the New York Stock Exchange under the symbol "FMT."
The following table presents information for the three and six months ended
June 30, 2000 and 1999 with respect to the Company's primary business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance .................. $ 326,426 $ 238,824 $ 622,075 $ 452,651
Financial services ............................... 100,745 96,709 196,419 181,350
Unallocated corporate revenue .................... 1,163 578 2,477 889
---------- --------- ---------- ---------
Total .......................................... $ 428,334 $ 336,111 $ 820,971 $ 634,890
========== ========= ========== =========
Income (Loss) Before Taxes and
Extraordinary Item:
Property and casualty insurance .................. $ (425,833) $ 42,227 $ (425,766) $ 84,480
Financial services ............................... 23,072 17,222 43,902 33,668
Unallocated corporate loss ....................... (14,844) (7,528) (22,193) (15,016)
---------- --------- ---------- ---------
Total .......................................... $ (417,605) $ 51,921 $ (404,057) $ 103,132
========== ========= ========== =========
</TABLE>
The significant property and casualty insurance segment loss before taxes
in the three and six months ended June 30, 2000 is predominantly the result of
increases in the Company's gross liability for loss and loss adjustment expenses
("gross loss and LAE reserves") totaling $450 million under workers'
compensation insurance policies effective in or prior to 1999. For a discussion
concerning the Company's gross loss and LAE reserve actions in the quarter ended
June 30, 2000, see "Property and Casualty Insurance Operation - Loss and Loss
Adjustment Expense." See also "Subsequent Events" for a discussion of
reinsurance actions initiated between the Company and a reinsurer after June 30,
2000. Also contributing to the property and casualty insurance segment loss
before taxes in the quarter ended June 30, 2000 is an increase of $20 million in
the Company's liability for dividends to policyholders. (See "Property and
Casualty Insurance Operations - Dividends to Policyholders.")
The Company also posted a higher unallocated corporate loss before taxes in
the quarter ended June 30, 2000 due mainly to higher interest expense, net of
affiliate interest income. (See further discussion following.)
The Company generated revenues of approximately $428 million and $821
million in the three and six months ended June 30, 2000, respectively, as
compared to $336 million and $635 for the same respective periods ended June 30,
1999. The increases in revenues are due mainly to higher workers' compensation
insurance premiums in the property and casualty insurance segment and to higher
loan interest in the financial services
10
<PAGE>
segment. Higher workers' compensation insurance premiums were achieved primarily
from the combined effects of: i) new business development after June 30, 1999,
ii) premium rate increases which the Company began implementing during the
second half of 1999 and accelerated in the six months ended June 30, 2000, iii)
lower reinsurance costs beginning January 1, 2000, and iv) additional premiums
earned in the three months ended June 30, 2000 under certain expired
retrospectively rated workers' compensation insurance policies. (See "Property
and Casualty Insurance Operation - Premiums.") The increase in loan interest
revenue is due mainly to an overall increase in loan portfolio yield and to the
growth in the average loan portfolio. Excluding the Company's commercial finance
subsidiary which was sold in December 1999, the average loan portfolio grew to
$3.69 billion and $3.64 billion in the three and six months ended June 30, 2000
from $3.10 billion and $2.86 billion in the same respective prior year periods.
(See "Financial Services Operation.") Realized investment gains (losses) in the
three and six month periods ended June 30, 2000 were $(28,000) and $(239,000),
respectively, as compared to $273,000 and $298,000 for the same respective
periods in 1999.
The Company posted income (loss) from continuing operations of $(270.3)
million and $(260.8) million for the three and six months ended June 30, 2000,
respectively, as compared to $35.0 million and $69.3 million for the same
respective periods in 1999. Net income (loss) for the three and six months ended
June 30, 2000 was $(268.1) million or $(4.26) diluted earnings per share and
$(258.6) million or $(4.14) diluted earnings per share, respectively, as
compared to $35.0 million or $ 0.50 diluted earnings per share and $69.3 million
or $ 0.99 diluted earnings per share for the same respective periods of 1999.
During the three months ended June 30, 2000 the Company purchased $6.3
million principal amount of its publicly traded 7.7% Series B Senior Notes due
2004 ("Senior Notes"), which were originally issued by the Company pursuant to
an exchange offer in the second quarter of 1999. (See "Liquidity and Capital
Resources.") The cost to the Company was approximately $2.6 million, resulting
in an extraordinary gain before taxes of $3.7 million ($2.2 million after
taxes). The after-tax gain is reported as an extraordinary item in the
accompanying Consolidated Statements of Operations.
The property and casualty insurance operation, consisting primarily of
workers' compensation insurance, posted loss before taxes of $425.8 million for
both the three and six month periods ended June 30, 2000, as compared to income
before taxes of $42.2 million and $84.5 million for the same respective periods
in 1999. The significant loss before taxes in the three and six months ended
June 30, 2000 is due primarily to a $450 million increase in the Company's gross
loss and LAE reserves under workers' compensation insurance policies effective
in or prior to 1999, and to a much lesser extent, an increase of $20 million in
the Company's liability for dividends to policyholders. Partially offsetting
these losses and expenses were higher premiums resulting from certain expired
retrospectively rated workers' compensation insurance policies, and lower
reinsurance costs. (See "Property & Casualty Insurance Operation - Premiums",
"Loss and Loss Adjustment Expense", and "Dividends to Policyholders.") The
combined ratio for the three and six months ended June 30, 2000 was 259.0% and
189.4%, respectively, as compared to 95.7% and 96.0% for the same respective
periods in 1999.
The financial services operation posted income before taxes for the three
and six months ended June 30, 2000 of $23.1 million and $43.9 million,
respectively, as compared to $17.2 million and $33.7 million for the same
respective periods in 1999. The increases in income before taxes was due
primarily to the growth in the total average loan portfolio of the Company's
thrift and loan subsidiary and, to a lesser extent, higher gains on residential
real estate whole loan sales, higher investment income and a lower provision for
loan losses. Partially offsetting these increases was a decrease in income
before taxes due to the Company's sale of its commercial finance subsidiary in
December 1999 to The FINOVA Group, Inc. for approximately $708 million in cash
including the refinancing and assumption of existing debt. (See "Financial
Services Operation.")
Unallocated corporate revenues during the three and six month periods ended
June 30, 2000 consisted primarily of investment income, while unallocated
corporate expenses consisted primarily of interest expense, net of any affiliate
interest income, and general and administrative expenses. The unallocated
corporate loss before taxes for the three and six months ended June 30, 2000 was
$14.8 million and $22.2 million, respectively, as compared to $7.5 million and
$15.0 million for the same respective periods in 1999. The unallocated corporate
loss before taxes increased significantly in the three and six months ended June
30, 2000 due primarily to lower affiliate interest income from the Company's
downstream holding company subsidiaries. The lower affiliate interest income
resulted from the Company's conversions on January 1, 2000 and April 1, 2000 of
approximately $154 million and $267 million, respectively, in notes receivable
due from these subsidiaries to common equity in the subsidiaries, thereby
establishing capital contributions to them. The January 1, 2000 conversion
transaction affected Fremont General Credit Corporation ("FGCC"), the downstream
holding company subsidiary that holds the Company's thrift and
11
<PAGE>
loan subsidiary, Fremont Investment & Loan. The April 1, 2000 conversion
transaction impacted Fremont Compensation Insurance Group, Inc. ("FCIG"), which
is the downstream holding company subsidiary that holds the Company's insurance
company subsidiaries. With these debt conversions, beginning January 1, 2000,
and to a larger extent April 1, 2000, the Company's unallocated corporate
interest expense is, and will continue to be, higher. After these conversions,
there is no affiliate debt due from the Company's downstream holding company
subsidiaries. (See "Liquidity and Capital Resources.")
Income tax benefits of $147.3 million and $143.2 million for the three and
six months ended June 30, 2000, represents effective tax benefit rates of 35.3%
and 35.4%, respectively, on loss before taxes and extraordinary item of $417.6
million and $404.1 million for the same respective periods. The effective tax
rates for both periods presented are higher than the federal enacted tax rate of
35%, due mainly to tax exempt investment income which increases the Company's
taxable loss, offset partially by higher income tax provisions resulting from
state income taxes within the Company's financial services operation. As the
Company is currently in a net loss carryover condition, the entire income tax
benefit in the six months ended June 30, 2000 has been recognized as a deferred
tax asset, which totals $413.5 million at June 30, 2000. In the Company's
opinion, the deferred tax assets will be fully realized through future taxable
income and no valuation allowance is considered necessary.
PROPERTY AND CASUALTY INSURANCE OPERATION
The following table presents information for the three and six month
periods ended June 30, 2000 and 1999 with respect to the Company's property and
casualty insurance operation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- --------- ----------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues ........................................... $ 326,426 $ 238,824 $ 622,075 $ 452,651
Expenses ........................................... 752,259 196,597 1,047,841 368,171
---------- --------- ----------- ---------
Income (Loss) Before Taxes ......................... $ (425,833) $ 42,227 $ (425,766) $ 84,480
========== ========= =========== =========
</TABLE>
PREMIUMS. Insurance premiums from the Company's property and casualty
insurance operations were $289.6 million and $548.7 million in the three and six
month periods ended June 30, 2000, as compared to $197.6 million and $368.0
million for the same respective periods in 1999. The increase in premiums is due
primarily to the combined effects of: i) an expansion in the Company's premium
base through new business development since June 30, 1999, ii) premium rate
increases which the Company began implementing during the second half of 1999
and accelerated in the six months ended June 30, 2000, iii) lower reinsurance
costs beginning January 1, 2000, and iv) additional premiums earned in the
three months ended June 30, 2000 under certain expired retrospectively rated
workers' compensation insurance policies.
Using estimated annual premiums on policies in effect at June 30, 2000 and
1999 (referred to as "inforce premiums"), the Company's inforce premiums have
grown 3% to $974.6 million at June 30, 2000 from $942.8 million at June 30,
1999. Additionally, the concentration of the Company's inforce premium in
California and Illinois experienced a reduction to 56% at June 30, 2000 from 63%
at June 30, 1999.
During the six months ended June 30, 2000, the Company achieved premium
rate increases across all of its national geographic regions. On a weighted
average basis, these increases averaged 18.3% on a consolidated basis. These
premium rate increases are a continuation of efforts by the Company, which began
in the second half of 1999, to further strengthen its premium rate levels. While
these actions have resulted in a reduction of new business development in the
six months ended June 30, 2000 as compared to the same prior year period, the
Company has attempted to be selective in its underwriting. This is evidenced by
the fact that the new business written by the Company in the six months ended
June 30, 2000 and 1999 represented only 2.8% and 10.7% of the approximate $3.30
billion and $2.57 billion, respectively, in estimated annual premiums submitted
to the Company for underwriting consideration. The Company's commitment to
strengthening its premium rate levels has also resulted in a reduction in
renewal business and contributed to a further reduction in the Company's inforce
premiums in July 2000 to $917.9 million.
12
<PAGE>
Excluding reinsurance actions initiated by the Company after June 30, 2000,
beginning January 1, 2000 the Company's reinsurance costs, which are included as
a reduction to net premiums earned, were reduced significantly due to the
December 31, 1999 expiration of certain low-level reinsurance contracts that had
incepted January 1, 1998. (See "Subsequent Events.") Effective for insurance
policies incepting after December 31, 1999 and until April 1, 2000, the
Company's reinsurance program assumed liability for loss and certain loss
adjustment expenses in excess of $1 million per loss occurrence (the "attachment
point") and up to a maximum of $399 million. Effective April 1, 2000, the
Company purchased additional reinsurance that lowered the attachment point to
$250,000 per loss occurrence and thereby increased the maximum reinsured under
workers' compensation insurance policies to $399.75 million per loss occurrence.
For insurance policies incepting January 1, 1998 and through December 31, 1999,
the attachment point was significantly lower at $50,000 per loss occurrence due
to these now-expired low-level reinsurance contracts. (See "Loss and Loss
Adjustment Expense.")
During the three months ended June 30, 2000, the Company recorded
approximately $44 million in additional premiums under certain expired
retrospectively rated workers' compensation insurance policies as a result of
additional loss experience under these insurance policies. Fremont Industrial
Indemnity Company (formerly Industrial Indemnity Company) ("FIIC"), which the
Company acquired in August 1997, originally underwrote the affected insurance
policies. These insurance policies expired prior to the Company's acquisition of
FIIC and are not characteristic of the Company's current policyholder base,
which is comprised mainly of small to medium size employers. Typically, the
terms of retrospectively rated insurance policies provide for additional
premiums when loss experience under the insurance policy reaches certain levels
as specified within the policy. Usually the extent of any additional premiums is
subject to a maximum limit as specified within the policy.
NET INVESTMENT INCOME. Net investment income within the property and
casualty insurance operation was $36.7 million and $73.2 million in the three
and six months ended June 30, 2000, as compared to $40.1 million and $83.2
million in the same respective periods in 1999. Lower investment income was due
mainly to lower average invested assets in the three and six months ended June
30, 2000, as compared to the same prior year periods. The lower average invested
assets resulting primarily from higher ceded reinsurance costs in 1999 and claim
payments. (See "Subsequent Events.")
LOSS AND LOSS ADJUSTMENT EXPENSE. The property and casualty insurance
operation's loss and LAE incurred was $647.9 million and $852.3 million for the
three and six month periods ended June 30, 2000, as compared to $118.0 million
and $215.6 million for the three and six month periods ended June 30, 1999. In
addition, the ratio of these losses and LAE to property and casualty insurance
premiums earned ("loss ratio") was 224.1% and 155.7% for the three and six
months ended June 30, 2000, respectively, versus 59.7% and 58.6% for the same
respective periods in 1999. The significant increases to loss and LAE incurred
in the three and six months ended June 30, 2000 resulted from the combined
effects of significant increases in the Company's gross loss and LAE reserves
under workers' compensation insurance policies effective in or prior to 1999,
and lower reinsurance recoveries in the three and six months ended June 30,
2000.
In the three months ended June 30, 2000, the Company increased its gross
loss and LAE reserves under workers' compensation insurance policies effective
in or prior to 1999 by $450 million. The Company's reserve action was determined
through an evaluation of several factors, including increased severity trends
observed since December 31, 1999 relating to the 1999 and prior accident years,
increased variability of actuarial indications, and increased uncertainty within
the workers' compensation industry as to the underlying causes and consequent
ultimate impact of both increases in claim severity and an acceleration in the
payment of claims.
Of the $450 million total gross loss and LAE reserve increase, $400 million
relates to loss and directly allocated loss adjustment expenses ("ALAE"), with
the remaining reserve increase of $50 million relating to that portion of the
Company's gross LAE reserves that provide for the general and administrative
costs of settling estimated claims and which are not allocated to specific
claims (referred to generally as "unallocated loss adjustment expense" or
"ULAE"). Contributing to the Company's determination to increase its gross loss
and ALAE reserves was an observed increase in the gross claim severity trend
primarily related to the 1999 accident year and to a lesser extent, 1998 and
prior accident years. At December 31, 1999, the Company had observed relative
stability in its gross loss and ALAE indications, particularly with regard to
accident years prior to 1998, as compared to its observations of reinsurance
recoveries. During the three months ended September 30, 1999 and the three
months ended December 31, 1999, the Company had recorded significant reductions
in its original estimates of reinsurance recoveries. (See "Special Discussion
Concerning Reinsurance Transactions and Reserve Adjustments Recognized in 1999"
following.) During the six months ended June 30, 2000, the Company observed that
the gross severity trend for the 1999 accident year was both higher than that
observed for the 1998 accident year, and was emerging at
13
<PAGE>
levels higher than what was expected to emerge using the actuarial indications
at December 31, 1999. During this same period but to a lesser extent than the
1999 year, the Company observed that the 1998 accident year was also emerging at
levels higher than what was actuarially predicted at December 31, 1999.
Another contributing factor to the Company's gross loss and ALAE reserve
actions in the three months ended June 30, 2000 was increased variability
observed among the actuarial methods evaluated by the Company at June 30, 2000.
In addition to the actuarial indications developed by the Company's retained
independent actuaries, the Company reviewed actuarial indications from other
independent actuaries and observed variability among the actuarial methods
employed and the results derived. Other than as specifically articulated by the
actuary, the Company is not able to determine with certainty the specific cause
or causes of the observed variability of actuarial indications and has reached
its own conclusions based on a review of its internal data base and a subjective
evaluation of both internal and external factors.
The Company also observed that the workers' compensation industry,
particularly in California, has experienced significant increases in claim
severity on the 1999 accident year and to a lesser extent, the 1998 accident
year. These severity increases covered both medical and indemnity costs, and
were above levels adjusted for estimated inflation. The frequency of claims,
however, has remained stable. The increasing severity on the 1999 accident year,
coupled with a continuing industry-wide acceleration in paid losses observed by
the Company over the past several years, has resulted in significant increases
in the projections of total industry-wide losses and ALAE. While certain factors
have been cited as reasons for the industry-wide severity increases and paid
loss acceleration, conclusive evidence has not been identified by the Company to
either support or refute these findings.
In addition to the previously discussed gross loss and ALAE reserve
increase, the Company strengthened its ULAE reserves by $50 million. Similar to
the Company's observations concerning its gross loss and ALAE reserves, the
Company observed increased variability among actuarial indications of its ULAE
reserves. The Company determined its reserve action after reviewing indications
from two independent actuarial reviews, as well as a review of both internal
data and available industry information related to claim administration costs.
Effective for workers' compensation insurance policies incepting January 1,
2000 and after, and until April 1, 2000, the Company's reinsurance limits were
significantly reduced through the expiration at December 31, 1999 of certain
low-level reinsurance contracts. The reinsurance "attachment point" was
increased from $50,000 per loss occurrence prior to January 1, 2000 to $1
million per loss occurrence on January 1, 2000 and after. Effective April 1,
2000, the Company purchased additional reinsurance that lowered the attachment
point to $250,000 per loss occurrence. Excluding reinsurance actions initiated
by the Company after June 30, 2000, the Company anticipates that these changes
in the Company's reinsurance program at January 1, 2000 and April 1, 2000 will
have the net effect of lowering the total amount of reinsurance recoveries in
calendar year 2000 as compared to calendar year 1999. (See "Subsequent Events.")
Lower amounts of reinsurance recoveries have been recognized in the three and
six months ended June 30, 2000 as compared to the same prior year periods. (See
"Premiums.")
SPECIAL DISCUSSION CONCERNING REINSURANCE TRANSACTIONS AND RESERVE
ADJUSTMENTS RECOGNIZED IN 1999. For the year ended December 31, 1999 and
resulting from Company actions taken after June 30, 1999, the Company's property
and casualty insurance operation recorded a loss before taxes from continuing
operations of $116.2 million. This loss resulted primarily from the combined
adverse effect on incurred loss and LAE of a lower than expected level of
reinsurance recoverables than had been actuarially predicted at inception,
coupled with the Company's recognition of the settlement agreement with Reliance
Insurance Company ("Reliance") under a reinsurance contract that was in effect
from January 1, 1998 through December 31, 1999.
With regard to the lower than expected reinsurance recoverables, in the
third and fourth quarters of 1999, the Company lowered its estimate of
reinsurance recoverables on unpaid losses for the 1998 and 1999 accident years
by approximately $147 million. This decrease was in recognition of a lower than
actuarially predicted level of incurred losses ceded under certain reinsurance
contracts that were in effect from January 1, 1998 through December 31, 1999.
These reinsurance contracts reduced the Company's net loss exposure from a
historical retention of $1 million per loss occurrence to $50,000 per loss
occurrence. Prior to entering into these reinsurance agreements, the Company had
estimated its expected gross incurred loss and LAE. Estimates of incurred loss
and LAE, net of reinsurance recoveries, 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 third quarter of 1999 and pursuant to its
regular review of net incurred loss and LAE estimates, the Company observed a
deterioration in these net loss and LAE estimates as compared to the actuarial
predictions. To assist the Company in its determination of net loss and LAE
reserve estimates, the Company retained outside
14
<PAGE>
actuarial consultants who performed an independent actuarial analysis of the
Company's net loss and LAE reserves as of June 30, 1999. These actuarial
indications were reaffirmed at September 30, 1999 and further re-evaluated by
independent outside actuaries at December 31, 1999, which resulted in the
Company's recognition of the deterioration in reinsurance recoverables in the
third and fourth quarters of 1999. (See "Variability of Operating Results.")
Also contributing to the Company's loss before taxes in 1999 was the
recognition of $75 million in lower reinsurance recoverables on the 1998 and
1999 accident years pursuant to a settlement agreement entered into February 28,
2000 between the Company and Reliance under a reinsurance contract that was in
effect from January 1, 1998 through December 31, 1999. Under the settlement
agreement, the Company received approximately $102 million in cash and no longer
has any involvement with the Reliance workers' compensation reinsurance programs
brokered for Reliance by Unicover Managers, Inc. The Company evaluated the
adequacy of the expected cash settlement under the agreement with the assistance
of an independent actuarial analysis of the expected losses and loss adjustment
expenses to be paid under the Reliance reinsurance contract after December 31,
1999. A range of expected loss payments was estimated and then discounted to a
present value basis using investment yields considered appropriate. Based on
these indications, the cash settlement is within the range of present values.
The $75 million decrease in reinsurance recoverables represents primarily the
adjustment necessary to bring the estimated reinsurance recoverables relating to
the 1998 and 1999 accident years under the reinsurance contract with Reliance to
a present value basis at December 31, 1999.
The Company's property and casualty insurance operation is required to
maintain reserves to cover the Company's ultimate liability for loss and LAE
with respect to reported and unreported claims incurred as of the end of each
accounting period. 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 and LAE reserves, net of reinsurance recoverables. These reserves
do not represent an exact calculation of liabilities, but instead are estimates
involving actuarial projections at a given time of what the ultimate settlement
and administration of claims will cost, including estimates of reinsurance
recoveries associated with the estimated claims costs. 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, as well as other factors. The establishment of
appropriate gross loss and LAE reserves and reinsurance recoverables is an
inherently uncertain process and there can be no certainty that currently
established gross loss and LAE reserves and reinsurance recoverables will prove
to be adequate in light of subsequent actual experience. Subsequent actual
experience has resulted, and could result, in net loss and LAE reserves being
too high or too low. The Company's future loss and LAE development could require
an increase in its gross loss and LAE reserves or a decrease in its reinsurance
recoverables from prior periods, which would adversely affect the Company's
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. The Company's expense ratio was
25.9% and 27.8% for the three and six months ended June 30, 2000, as compared to
32.5% and 33.8% for the same respective periods in 1999. The decrease in the
expense ratio in the three and six month periods ended June 30, 2000 is due
mainly to increases in the premium base resulting from both lower reinsurance
premiums ceded beginning January 1, 2000, and additional premiums earned in the
three months ended June 30, 2000 under certain expired retrospectively rated
workers' compensation insurance policies. (See "Premiums.")
DIVIDENDS TO POLICYHOLDERS. The Company's policyholder dividend ratio was
9.0% and 5.9% for the three and six months ended June 30, 2000, respectively, as
compared to 3.5% and 3.6% for the same respective periods in 1999. The
significant increase in the policyholder dividend ratio in the three and six
month periods ended June 30, 2000 is due mainly to a non-recurring adjustment of
$20 million to increase the Company's liability for dividends to policyholders
("PHD"). The increase in the Company's PHD liability relates to workers'
compensation insurance policies that are "participating", which obligates the
Company to consider the payment of dividends. Although the substantial majority
of the Company's workers' compensation insurance policies within its primary
regions of California and Illinois are written as "non-participating" and
thereby do not obligate the Company to consider the payment of dividends, the
Company does write "participating" business in other states. During the three
months ended June 30, 2000 and primarily for those participating insurance
policies written by the Company in its midwest and eastern regions, the Company
refined its model used in estimating its ultimate PHD liability. The majority of
the Company's participating insurance policies are written in its midwest and
eastern regions. As a result of this refinement, the Company determined that the
loss experience under these participating insurance policies was lower than
previously estimated, thereby resulting in an increase in PHD liability.
15
<PAGE>
VARIABILITY OF OPERATING RESULTS. The Company's profitability can be
affected significantly by many factors including competition, the severity and
frequency of claims, fluctuation in interest rates and the rate of inflation,
legislation and regulations, court decisions, the judicial and regulatory
climate and general economic conditions and trends, all of which are outside of
the Company's control. In addition, the Company's results may be affected by its
ability to assess and integrate successfully the operations of acquired
companies, as well as the Company's ability to contain expenses and to implement
appropriate technological changes. Any of these factors could contribute to
significant variation in the Company's results of operations within the
different aspects of its business, or businesses taken as a whole, from quarter
to quarter and from year to year. Also, the establishment of appropriate loss
and LAE reserves, net of reinsurance recoverables, necessarily involves
estimates, and reserve adjustments have caused significant fluctuations in
operating results from year to year.
With respect to the Company's 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 insurance claims. Changes in market interest
rates can affect the amount of interest income that the Company earns on its
investment portfolio, as well as the amount of realized and unrealized gains or
losses on specific holdings within the Company's investment portfolio.
Legislative and regulatory changes can also cause the operating results of the
Company's workers' compensation insurance businesses to vary.
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 Fremont. The Company cannot be certain
that it will continue to maintain its market share in the future or that the
Company will be able to obtain adequate pricing for its insurance products. Over
the past several years, the Company has observed a reduction in the number of
competitors resulting from the consolidation of companies into other entities,
companies who are forced to terminate underwriting activities through regulatory
actions by state insurance authorities, as well as from companies electing to
reduce or discontinue the writing of workers' compensation insurance in certain
jurisdictions.
The Company's workers' compensation insurance operations are concentrated
in California and Illinois, with approximately 56% of the Company's premium
inforce being located in these two states as of June 30, 2000. Because of this
concentration, the Company's financial position and results of operations have
been and are expected to continue to be influenced by general trends in the
respective states' economies, and in particular, the condition of the workers'
compensation insurance market within each state. The impact of unfavorable
economic conditions, legislation, regulatory restriction and supervision, and
other trends within these two states may result in greater uncertainty and
volatility in the Company's business operations and could adversely affect the
results of the Company's operations and its financial condition more than if the
Company's premium had been originated with more geographic diversification.
WORKERS' COMPENSATION REGULATION. The Company's workers' compensation
insurance operation has premiums inforce in forty-five 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 injured workers and
policyholders rather than investors or stockholders of an insurer. The Company's
multistate insurance operations require, and will continue to require,
significant resources of the Company in order to continue to comply with the
regulations of each state in which the Company transacts business.
Illinois began operating under an open rating system in 1982 and California
began operating under such a system effective January 1, 1995. Generally, in an
open rating system, workers' compensation insurance 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 sets its
base rates to reflect its particular loss experience and operating costs.
Although insurance companies are not required to adopt such advisory premium
rates, companies in Illinois generally follow such rates. However, insurance
companies in California have, since the adoption of an open rating system,
generally set their premium rates below such advisory rates. Before January 1,
1995, California operated under a minimum rate law, whereby premium rates
established by the California Department of Insurance were the minimum rates
that could be charged by an insurance carrier. The repeal of the minimum rate
law has
16
<PAGE>
resulted in lower premiums and profitability on the Company's California
workers' compensation insurance policies due to increased price competition.
Beginning in the second half of 1999 and continuing in the first quarter of 2000
however, the Company observed a lessening of price competition in its primary
regions of California and Illinois. It is uncertain however, whether the
observed lessening in the competitive environment and the Company's ability to
increase premium rates will continue.
FINANCIAL SERVICES OPERATION
The Company's financial services operations, which are comprised of the
results of Fremont General Credit Corporation, are principally engaged in
commercial and residential real estate lending, investing in syndicated loans
and insurance premium financing. Revenues consist principally of interest income
and, to a lesser extent, gains on whole loan sales, fees and other income. Prior
to the December 20, 1999 sale of the Company's commercial finance subsidiary,
the Company provided commercial finance loans, primarily secured by accounts
receivable, inventory, and machinery and equipment, to small and middle market
companies on a nationwide basis.
The following table presents information for the three and six month
periods ended June 30, 2000 and 1999 with respect to the Company's financial
services operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- --------- ----------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues ........................................... $ 100,745 $ 96,709 $ 196,419 $ 181,350
Expenses ........................................... 77,673 79,487 152,517 147,682
---------- --------- ----------- ---------
Income (Loss) Before Taxes ......................... $ 23,072 $ 17,222 $ 43,902 $ 33,668
========== ========= =========== =========
</TABLE>
Revenues increased 4.2% and 8.3% in the three and six month periods ended
June 30, 2000, respectively, as compared to the same respective periods in 1999,
due primarily to greater loan interest revenue attributable to a higher loan
portfolio yield and to the growth in the total average loan portfolio of the
Company's thrift and loan subsidiary, Fremont Investment & Loan (the "thrift").
Excluding the Company's commercial finance subsidiary which was sold in December
1999, the average loan portfolio grew to $3.69 billion and $3.64 billion in the
three and six months ended June 30, 2000 from $3.10 billion and $2.86 billion in
the same respective prior year periods. Also contributing to the increased
revenues were gains on residential real estate whole loan sales of $2.9 million
and $4.9 million in the three and six months ended June 30, 2000 as compared to
$623,000 and $627,000 in the same respective prior year periods. Investment
income increased to $4.3 million and $7.9 million versus $2.8 million and $4.5
million for the three and six months ended June 30, 2000 and 1999, respectively.
Income before taxes in the financial services operation was $23.1 million
and $43.9 million for the three and six month periods ended June 30, 2000, as
compared to $17.2 million and $33.7 million for the same respective periods of
1999. The increase in income before taxes was due to the previously described
growth in the thrift's total average financial services loan portfolio, an
increase in the net yield earned on the loan portfolio, higher gains on
residential real estate whole loan sales, higher investment income, and a lower
provision for loan losses. Partially offsetting these increases was a decrease
in income before taxes due to the previously described sale of the Company's
commercial finance subsidiary in December 1999.
17
<PAGE>
The following table identifies the interest income, interest expense,
average interest bearing assets and liabilities, and interest margins for the
Company's financial services operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
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 .......... $ 2,437,521 $ 120,917 9.98% $ 1,889,685 $ 84,779 9.05%
Residential real estate loans(3) ...... 788,548 38,000 9.69 728,270 33,500 9.28
Syndicated loans ...................... 342,174 16,481 9.69 448,197 19,857 8.93
Insurance premium finance loans ....... 72,097 3,908 10.90 58,714 3,106 10.67
Commercial finance loans .............. - - - 511,100 27,256 10.75
Investments ........................... 245,717 7,880 6.45 212,090 4,501 4.28
----------- --------- ----------- ---------
Total interest bearing assets ....... $ 3,886,057 $ 187,186 9.69% $ 3,848,056 $ 172,999 9.07%
=========== ========= =========== =========
Interest bearing liabilities:
Time deposits ......................... $ 2,840,573 $ 82,495 5.84% $ 1,858,825 $ 48,975 5.31%
Savings deposits ...................... 676,585 18,181 5.40 604,942 14,865 4.96
Securitization obligation ............. - - - 644,412 17,071 5.34
Debt with banks and
other institutions ................... 6,621 207 6.29 325,204 8,808 5.46
Debt from affiliates .................. - - - 96,932 2,807 5.84
Other ................................. 1,933 19 1.98 42,730 1,224 5.78
----------- --------- ----------- ---------
Total interest bearing
liabilities ....................... $ 3,525,712 $ 100,902 5.76% $ 3,573,045 $ 93,750 5.29%
=========== ========= =========== =========
Net interest income ..................... $ 86,284 $ 79,249
========= =========
Net interest yield on
interest-earning assets ............... 4.47% 4.15%
<FN>
(1) Annualized
(2) Average loan balances include non-acccrual loan balances
(3) Includes loans held for sale
</FN>
</TABLE>
The margin between the Company's interest income and cost of funds
increased in the six months ended June 30, 2000 as compared to the same period
of 1999, due primarily to the combined effects of an increase in the net yields
on commercial real estate and syndicated loans, as well as a decrease in net
yields resulting from the sale of the Company's commercial finance subsidiary,
which had experienced net yields in excess of the total consolidated loan
portfolio net yield of 4.15% in the six month period ended June 30, 1999.
18
<PAGE>
LOANS RECEIVABLE AND RESERVE ACTIVITY. The following table shows loans
receivable in the various financing categories and the percentages of the total
represented by each category:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------- ---------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ----- ----------- -----
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
<S> <C> <C> <C> <C>
Term loans:
Commercial real estate loans ............. $ 2,617,202 82% $ 2,332,880 75%
Syndicated loans ......................... 341,534 11 322,715 10
Residential real estate loans ............ 151,500 5 388,297 13
Insurance premium finance loans .......... 83,083 2 64,596 2
----------- ------ ----------- -----
Total term loans ........................ 3,193,319 100 3,108,488 100
----------- ------ ----------- -----
Revolving loans:
Syndicated loans .......................... 6,667 - 8,990 -
----------- ------ ----------- -----
Total loans ............................. 3,199,986 100 3,117,478 100
Less allowance for possible loans ........... (59,574) (2) (56,494) (2)
----------- ------ ----------- ------
Loans receivable ........................ $ 3,140,412 98% $ 3,060,984 98%
=========== ====== =========== ======
</TABLE>
The following table illustrates the maturities of the Company's loans
receivable:
<TABLE>
<CAPTION>
MATURITIES AT JUNE 30, 2000
-------------------------------------------------------
1 TO 24 25 - 60 OVER 60
MONTHS MONTHS MONTHS TOTAL
----------- --------- --------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Term loans - variable rate ......................... $ 1,284,357 $ 838,453 $ 494,493 $ 2,617,303
Term loans - fixed rate ............................ 132,651 97,105 346,260 576,016
Revolving loans - variable rate .................... - 6,611 56 6,667
----------- --------- --------- -----------
Total ................................ $ 1,417,008 $ 942,169 $ 840,809 $ 3,199,986
=========== ========= ========= ===========
</TABLE>
The Company monitors the relationship of fixed and variable rate loans and
interest bearing liabilities in order to minimize interest rate risk.
The Company originates both commercial and residential real estate loans
outside of California. The Company seeks 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 June 30, 2000, including loans held for sale,
was $1.2 billion and $327 million, respectively.
19
<PAGE>
The following table describes the asset classifications, loss experience
and reserve reconciliation of the financial services operation as of or for the
six month periods ended as shown below:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999(1)
----------- ------------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
<S> <C> <C>
Non-accrual loans .......................................................... $ 41,569 $ 27,526
Accrual loans 90 days past due ............................................. 3,182 2,767
Real estate owned ("REO") .................................................. 2,965 8,297
----------- ------------
Total non-performing assets ................................................ $ 47,716 $ 38,590
=========== ============
Beginning allowance for possible loan losses ............................... $ 56,494 $ 56,346
Provision for loan losses .................................................. 5,405 9,874
Reserves established with portfolio acquisitions ........................... - 2,010
Charge-offs:
Commercial real estate loans ............................................. 1,763 520
Residential real estate loans ............................................ 598 601
Syndicated loans ......................................................... - 950
Insurance premium finance loans .......................................... 77 31
Commercial finance loans ................................................. - 125
----------- ------------
Total charge-offs ...................................................... 2,438 2,227
----------- ------------
Recoveries:
Commercial real estate loans ............................................. 43 27
Residential real estate loans ............................................ 57 38
Syndicated loans ......................................................... - -
Insurance premium finance loans .......................................... 13 11
Commercial finance loans ................................................. - 13
----------- ------------
Total recoveries ....................................................... 113 89
----------- -------------
Net charge-offs ............................................................ 2,325 2,138
----------- ------------
Ending allowance for possible loan losses .................................. $ 59,574 $ 66,092
=========== ============
Allocation of allowance for possible loan losses:
Commercial real estate loans ............................................. $ 48,764 $ 38,691
Residential real estate loans ............................................ 4,392 7,577
Syndicated loans ......................................................... 5,573 8,409
Insurance premium finance loans .......................................... 845 481
Commercial finance loans ................................................. - 10,934
----------- -----------
Total allowance for possible loan losses ............................... $ 59,574 $ 66,092
=========== ===========
Total loans receivable ..................................................... $ 3,199,986 $ 3,583,517
Average total loans receivable ............................................. 3,640,340 3,635,966
Net charge-offs to average total loans receivable (annualized) ............. 0.13% 0.12%
Non-performing assets to total loans receivable ............................ 1.49% 1.08%
Allowance for possible loan losses to total loans receivable ............... 1.86% 1.84%
Allowance for possible loan losses to non-performing assets ................ 124.85% 171.27%
Allowance for possible loan losses to non-accrual
loans and accrual loans 90 days past due ................................ 133.12% 218.18%
<FN>
(1) Includes the Company's commercial finance subsidiary which was sold in
December 31, 1999.
</FN>
</TABLE>
20
<PAGE>
Although non-performing assets increased to $47.7 million at June 30, 2000
from $38.6 million at June 30, 1999, the non-performing asset level at June 30,
2000 continues to be below industry benchmarks and is not considered unusual by
the Company. The Company's net charge-offs to average total loans receivable
continues to be low at 0.13% and 0.12% (annualized) for the six months ended
June 30, 2000 and 1999, respectively. Furthermore, this continued low loan loss
experience, coupled with modest loan portfolio growth versus significant loan
portfolio growth in the six months ended June 30, 2000 and 1999, respectively,
resulted in a lower provision for loan losses in the six months ended June 30,
2000.
RESIDENTIAL REAL ESTATE LOAN SECURITIZATIONS. The Company's residential
real estate operation began a program in 1999 of selling loans through
securitization. In the six months ended June 30, 1999, the Company completed two
securitizations totaling approximately $910 million in residential real estate
loans. No securitizations were completed in the six months ended June 30, 2000.
At June 30, 2000 and 1999, the Company had approximately $1.18 billion (three
securitizations) and $890 million (two securitizations), respectively, in
residential real estate loans under securitization which are not included in the
Company's balance sheet.
In the Company's securitizations, the Company sells residential real estate
loans to a special purpose entity, which is established for the limited purpose
of purchasing the loans and issuing interest bearing securities that represent
interests in the loans. The securitization is treated as a sale and the loans
sold are removed from the Company's balance sheet. The securities issued to
third party investors are collateralized by the underlying pool of residential
real estate loans. The investors and the special purpose entity have no recourse
to the Company for failure of the residential loan borrowers to pay when due.
The Company retains a residual interest, which represents the right to receive
certain future cash flows which are generally equal to the value of the
principal and interest to be collected on the loans in excess of: (i) the
principal and interest to be paid on the securities; and (ii) various
contractual net servicing fees and other expenses. Most of the Company's
residual interests, however, are generally restricted until investors and other
expenses have been paid or otherwise are subordinate to investor's interests.
Upon completion of the securitization, the Company records its residual
interests as an asset on the balance sheet. Gains or losses on a securitization
are based on the estimated fair value of the proceeds from the sale, net of
related transaction costs and the allocated carrying value of the loans sold.
Fair value is determined by computing the net present value of the estimated
cash flows retained, using the dates that such cash flows are expected to be
released to the Company (the cash-out method), at a discount rate considered
commensurate with the risks associated with the cash flows. The amounts and
timing of the cash flows are estimated after considering various economic
factors and other factors, including prepayment speeds and delinquency, default
and loss rates. The outstanding balance of the Company's residual interests at
June 30, 2000 was $60 million. Since the value of the residual interests is
subject to substantial credit, prepayment, and interest rate risks on the loans
sold, the Company recognized no gain on the residual interests it retained.
However, income may be recognized in future periods if the credit, prepayment,
and interest rate risk factors develop more favorably than the Company's
original assumptions. (See "Variability of Operating Results.")
VARIABILITY OF OPERATING RESULTS. During periods when economic conditions
are unfavorable, the Company's financial services businesses may not be able to
originate new loan products or maintain the credit quality of its finance
receivables at previously attained levels, both in its portfolio and for those
loans that have been securitized. This may result in increased levels of
non-performing assets and net credit losses. Changes in market interest rates,
or in the relationships between various interest rates could cause the Company's
interest margins to be reduced and may result in significant changes in the
prepayment patterns of the Company's finance receivables. These risk factors
could adversely affect the value of the Company's loans and their related
collateral, as well as, the valuation of the residual interests in the Company's
securitized loans, both of which could adversely affect the Company's results of
operations and financial condition. For example, the Company has recognized in
the three months ended June 30, 2000 $1.4 million in losses associated with a
reduction in the valuation of its residual interests in securitized loans.
The Company's financial services businesses maintain reserves for credit
losses on its portfolio of finance receivables in amounts that the Company
believes are sufficient to provide adequate protection against potential losses.
The finance receivables that the Company primarily originates, both for its
portfolio and for securitization, are generally non-conventional and
non-investment grade loans. To mitigate for the somewhat higher potential risk
of the lending that the Company is primarily engaged in and for the impact that
adverse economic developments could have on the Company's finance receivables,
the Company lends primarily on a senior and secured basis and employs a
proactive asset management approach. The Company also attempts to carefully
evaluate the underlying collateral that secures these loans and to maintain
underwriting standards that are designed to effect appropriate loan to
collateral valuations and cash flow coverages. Although the Company believes
that its consolidated level of
21
<PAGE>
reserves is sufficient to cover potential credit losses, these 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 or the timing of the realization thereof.
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 and
mortgage 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.
While the Company attempts to diversify its loan origination by geographic
region, the Company's geographic concentration of commercial and residential
real estate loans in California may subject its loan portfolio and securitized
loans to higher rates of delinquencies, defaults and losses in an economic
downturn in California than the rates experienced in loan portfolios having
greater geographic diversity. At June 30, 2000, approximately half of the
Company's commercial and residential real estate loans, both in its portfolio
and those loans that have been securitized, were collateralized by properties
located in California. Adverse events in California, such as real estate market
declines or the occurrence of natural disasters upon property located therein,
may have a more significant adverse effect upon the Company's operating results
and financial condition than if a higher percentage of its loans were
collateralized by properties located outside California.
The Company's primary financial services business is a Federal Deposit
Insurance Corporation ("FDIC") insured thrift and loan subject to supervision
and regulation by the California Department of Financial Institutions and the
FDIC. Federal and state regulations prescribe certain minimum capital
requirements and, while the Company's thrift is currently in compliance with
such requirements, in the future the Company could be required to make
additional contributions to its thrift in order to maintain compliance with such
requirements. Future changes in government regulation and policy could adversely
affect the thrift and loan industry, including the Company's thrift. Such
changes in regulations and policies may place restrictions on or make changes to
the Company's lending business and increase the costs of compliance.
MARKET RISK
The Company is subject to market risk resulting primarily from fluctuations
in interest rates arising from balance sheet financial instruments such as
investments, loans and debt. In the property and casualty insurance operations,
the greatest interest rate risk exposure occurs where the interest rate of the
financial instrument is fixed in nature and there is a difference between the
fixed rate of the financial instrument and the market rate. The greatest
interest rate risk exposure in the financial services operations occurs when
interest rate gaps arise wherein assets are funded with liabilities having
different repricing intervals or different market indices to which the
instruments' interest rates are tied. Changes in interest rates will affect the
Company's net investment income, loan interest, interest expense and total
stockholders' equity. The objective of the Company's asset and liability
management activities is to provide the highest level of net interest income and
to seek cost effective sources of capital, while maintaining acceptable levels
of interest rate and liquidity risk. The Company has designated its entire
investment portfolio as investments that would be available for sale in response
to changing market conditions, liquidity requirements, interest rate movements
and other investment factors. The Company currently owns no significant
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 Management's Discussion
and Analysis in the Company's 1999 Annual Report on Form 10-K. No material
changes in market risk have occurred in the quarter ended June 30, 2000.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The property and casualty insurance operation must have cash and liquid
assets available to meet its obligations to policyholders in accordance with
contractual obligations, in addition to having the funds available to meet
ordinary operating costs. The operation has several sources of funds to meet its
obligations, including cash flow from operations, recoveries from reinsurance
contracts, and investment securities. By statute, the majority of the cash from
the operation 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 loss before tax of $122.2 million and $106.3 million at June 30,
2000 and December 31, 1999, respectively.
The Company's property and casualty insurance subsidiaries are required in
certain states to maintain on deposit investments meeting specified standards
that have an aggregate market value equal to the Company's workers' compensation
loss reserves. At December 31, 1999, the Company had approximately $500 million
in cash and investment securities at amortized value that exceeded this
requirement. (See "Subsequent Events.")
The Company's thrift and loan subsidiary finances its lending activities
through customer deposits, which have grown to $3.63 billion at June 30, 2000
from $3.42 billion at December 31, 1999. Additionally, beginning in 1999, the
Company financed certain of its residential real estate loans through
securitization. During 1999, the Company sold approximately $1.41 billion of
residential real estate loans in three securitizations. There were no
securitizations completed in the six months ended June 30, 2000. The thrift is
also eligible for financing through the Federal Home Loan Bank of San Francisco
("FHLB"), which financing is available at varying rates and terms. As of June
30, 2000, $648 million was available under the facility from the FHLB with no
amounts outstanding. In October 1999, the thrift established a warehouse
financing facility that may be used to finance certain residential real estate
loans held for sale through securitization or whole loan sale. The facility
permits secured borrowings up to $200 million with a variable interest rate of
LIBOR plus 0.375%. As of June 30, 2000, there were no borrowings under this
facility. Additionally in 1999, the thrift obtained a line of credit with the
Federal Reserve Bank of San Francisco, and at June 30, 2000 had a borrowing
capacity of $248.4 million, with no amounts outstanding.
As a holding company, Fremont General Corporation ("the holding company")
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
$11.0 million and $11.1 million in the six months ended June 30, 2000 and 1999,
respectively. Several of the Company's subsidiaries are subject to certain
statutory and regulatory restrictions that restrict their ability to distribute
dividends to the holding company. Based on available liquidity at June 30, 2000,
the Company does not currently anticipate the need for any dividends from its
subsidiaries for the remainder of the calendar year. Additionally, in August
2000 the holding company cancelled its syndicated bank line, which had permitted
borrowings of up to $225 million. The Company had no borrowings under the
facility during the six months ended June 30, 2000 and the size and structure of
the facility was no longer considered appropriate for the holding company's
requirements. The holding company is considering the need for a new credit
facility that would more closely address its current liquidity requirements.
(See "Subsequent Events.")
On January 1, 2000 and April 1, 2000, the holding company converted
approximately $154 million and $267 million, respectively, in notes receivable
due from the Company's downstream holding company subsidiaries, FGCC and FCIG,
to common equity in the subsidiaries, thereby establishing capital contributions
to them. The January 1, 2000 conversion transaction affected FGCC, the
downstream holding company subsidiary that holds the Company's thrift and loan
subsidiary, and the April 1, 2000 conversion transaction impacted FCIG, which is
the downstream holding company subsidiary that holds the Company's insurance
company subsidiaries. Accordingly, beginning January 1, 2000, and to a larger
extent April 1, 2000, the Company's unallocated corporate interest expense is,
and will continue to be, higher. After these conversions, there is no affiliate
debt due from the Company's downstream holding company subsidiaries.
On March 17, 1999, Fremont General Corporation issued $425 million of
Senior Notes consisting of $200 million of 7.7% 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 a 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
23
<PAGE>
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. As
of June 11, 1999, the closing date for the exchange offer, all outstanding
Senior Notes had been exchanged for Series B Senior Notes. During the three
months ended June 30, 2000 the Company purchased $6.3 million principal amount
of its 7.7% Series B Senior Notes. The cost to the Company was approximately
$2.6 million, resulting in an extraordinary gain before taxes of $3.7 million
($2.2 million after taxes). The after-tax gain is reported as an extraordinary
item in the accompanying Consolidated Statements of Operations.
On February 28, 2000, Fremont reached an agreement with one of its
reinsurers, Reliance Insurance Company ("Reliance"), to settle all obligations
between the Company and Reliance under a contract of reinsurance which was in
effect for the period January 1, 1998 through December 31, 1999. Under the terms
of the settlement agreement, the Company received approximately $102 million in
cash on March 29, 2000 and no longer has any involvement with the Reliance
workers' compensation reinsurance programs brokered for Reliance by Unicover
Managers, Inc. In recognition of this settlement, the Company recorded a charge
to its operating results in the quarter ended December 31, 1999 of approximately
$48.8 million after taxes, consisting primarily of the adjustment necessary to
bring the estimated unpaid reinsurance recoverables under the reinsurance
contract to a present value basis at December 31, 1999. (See "Results of
Operations - Property and Casualty Insurance Operation - Loss and Loss
Adjustment Expense.")
In December 1999, the Company discontinued its commercial finance lending
activities through the sale on December 20, 1999 of Fremont Financial
Corporation, its commercial finance subsidiary, to FINOVA Capital Corporation, a
subsidiary of The FINOVA Group, Inc. for approximately $708 million in cash
including the refinancing and assumption of existing debt.
During 1999, an aggregate $3.7 million principal amount at maturity of
Liquid Yield Option (TM) Notes due October 12, 2013 (Zero Coupon-Subordinated)
("LYONs") were converted into 141,000 shares of Fremont General Corporation'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. During 1998, an
aggregate $21.0 million principal amount at maturity of LYONs were converted
into 809,000 shares of Fremont General Corporation's common stock. The effect of
the conversions was an increase in stockholders' equity and a decrease in
long-term debt of $10 million. There were no conversions of LYONs in the six
months ended June 30, 2000.
Net cash provided by (used in) operating activities was $37.3 million and
$(153.2) million in the six months ended June 30, 2000 and 1999, respectively.
The increase in net cash provided by operating activities was due primarily to
an increase in claims and policy liabilities, net of reinsurance recoverables in
the first six months of 2000 versus a decrease in these net liabilities in the
first six months of 1999, and a smaller change in residual interests in
securitized loans resulting from the fact that no securitizations were completed
in the six months ended June 30, 2000. (See "Results of Operations - Financial
Services - Residential Real Estate Loan Securitizations.") Offsetting these
increases in cash provided by operating activities was mainly the decrease in
income from continuing operations and an increase in deferred income tax
benefits.
As discussed earlier, the increase in net claims and policy liabilities is
due mainly to the $450 gross loss and LAE reserve actions in the quarter ended
June 30, 2000. Also, to a lesser extent, this increase is attributable to a
reduction in reinsurance recoverables in the six months ended June 30, 2000 as
compared to an increase in the first six months of 1999. (See "Results of
Operations - Property and Casualty Insurance Operation - Premiums," and "Loss
and Loss Adjustment Expense.")
Net cash used in investing activities was $186.6 million and $657.0 million
in the six months ended June 30, 2000 and 1999, respectively. The decrease net
cash used in investing activities was due primarily to a reduction in loan
originations and bulk purchases funded, net of receipts from repayments of loans
and bulk sales of loans. The decrease in net loan originations is consistent
with the Company's flat loan portfolio growth in the six months ended June 30,
2000 as compared to strong loan portfolio growth in the same period of 1999.
Partially offsetting this decrease was a decrease in investment securities sold,
matured, or called, net of purchases and short-term investment activity. This
decrease was due primarily to a reduction in cash requirements within the
property and casualty insurance operation during the six months ended June 30,
2000 resulting from the receipt in March 2000 of approximately $102 million from
Reliance in settlement of all obligations under a low-level reinsurance contract
24
<PAGE>
which expired December 31, 1999. (See "Results of Operations - Property and
Casualty Insurance Operation - Loss and Loss Adjustment Expense.")
Net cash provided by financing activities was $154.8 million and $822.6
million for the six months ended June 30, 2000 and 1999, respectively. The
decrease in net cash provided by financing activities was due mainly to the
combined effects of: i) a decrease in short-term borrowings, net of repayments,
under the thrift's financing facility with the FHLB; ii) a reduction in
long-term debt proceeds, net of repayments, which results mainly from the
Company's issuance in the first quarter of 1999 of Senior Notes; and iii) a
reduction in the growth of time deposits, which is consistent with the
previously described flat loan portfolio growth versus strong loan portfolio
growth in the quarters ended June 30, 2000 and 1999, respectively.
The amortized cost of the Company's invested assets was $2.30 billion and
$2.31 billion at June 30, 2000 and December 31, 1999, respectively. The modest
decrease in invested assets is due primarily to the cash requirements within the
property and casualty insurance operation, offset partially by an increase in
the financial services operation's liquidity investment portfolio and the
previously discussed receipt in March 2000 of approximately $102 million from
Reliance. (See "Subsequent Events.")
The FDIC has established certain capital and liquidity standards for its
member institutions, and the Company's thrift was in compliance with these
standards as of December 31, 1999.
The Company believes that its existing cash, revenues from operations and
other available sources of liquidity will be sufficient to satisfy its liquidity
needs for at least the next twelve months.
IMPACT OF YEAR 2000 READINESS
In prior years, the Company discussed the nature and progress of its Year
2000 readiness plans. In late 1999, the Company completed its remediation and
testing of those systems considered at risk for potential failure from a Year
2000 problem. As a result of its planning and implementation efforts, the
Company experienced no significant disruptions in critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company expensed
approximately $5 million through December 31, 1999 in connection with
remediating its systems, of which approximately $4.5 million was expensed
through December 31, 1998. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its critical computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
SUBSEQUENT EVENTS
REINSURANCE TRANSACTIONS
In an effort to mitigate the impact on the Company's property and casualty
insurance operation of the gross loss and LAE reserve action in the three months
ended June 30, 2000, the Company has entered into a letter of intent with XL
Capital Ltd ("XL") which includes, among other things, an agreement to establish
an adverse development reinsurance agreement between an insurance subsidiary of
XL and the Company's workers' compensation insurance subsidiaries. The
reinsurance agreement is expected to provide reinsurance coverage for workers'
compensation losses occurring primarily in 1999 and prior years. The attachment
point of the agreement is expected to be set at a point which will enable the
Company to recover $400 million of the $450 million in loss and LAE reserves
recognized by the Company in the three months ended June 30, 2000. (See "Results
of Operations - Property and Casualty Insurance Operation - Loss and Loss
Adjustment Expense.")
In addition to the adverse development reinsurance agreement, the letter of
intent includes an agreement to establish a second reinsurance agreement between
the same insurance subsidiaries on a prospective basis. This second reinsurance
agreement is intended to be of the quota share type, wherein XL will have the
option for a period of four years to share at a specified percentage in the
insurance premiums earned, losses and certain loss adjustment expenses incurred,
and certain underwriting expenses under the Company's workers' compensation
insurance policies issued after the reinsurance agreement's effective date.
Accordingly, after inception of this agreement, the Company expects that
premiums earned, policy acquisition costs, and loss and loss adjustment expenses
incurred will be lower.
25
<PAGE>
Final terms and conditions of the reinsurance agreements, including pricing
and profit sharing provisions for the benefit of the Company, have yet to be
finalized and are subject, among other things, to the completion of due
diligence procedures by XL. Furthermore, the reinsurance agreements will be
subject to regulatory approval by the applicable state insurance authorities.
While pricing is yet to be finalized, the Company expects that the final
premium for the adverse development reinsurance agreement will result in a
significant reduction in the Company's investment portfolio, which will also
result in lower levels of investment income within the property and casualty
insurance operation. Furthermore, the Company expects this adverse development
reinsurance agreement to receive either retroactive reinsurance or deposit
accounting treatment under generally accepted accounting principles. Under
either of these accounting treatments, any reinsurance gain at the inception of
the agreement is deferred and amortized into income over the future settlement
period of the liabilities reinsured. Additionally, under these accounting
treatments, premiums earned and loss and loss adjustment expenses incurred are
not affected at the inception of the agreement.
The letter of intent also includes an agreement for Fremont General
Corporation to issue both common stock warrants and senior non-callable
convertible debentures (the "debentures") to XL. The common stock warrants
provide XL the option to purchase up to 7 million shares of common stock of
Fremont General Corporation at an exercise price not to exceed $5.00 per share.
With respect to the debentures, the Company is expected to issue, at XL's
discretion, between $15 and $25 million in principal amount of debentures, which
will carry a coupon rate of 10%, a maturity of ten years, and be convertible
into the common stock of Fremont General Corporation at a price not to exceed
$5.00 per share. Final terms of the debentures have yet to be determined by the
Company and XL. The transaction was structured by XL Financial Solutions, a
division of XL. XL's common stock is traded on the New York Stock Exchange under
the symbol "XL."
RATING CHANGE
On August 10, 2000 A.M. Best changed the rating for the Company's workers'
compensation insurance subsidiaries to "B" (Fair). This is a change of two
notches from the previous rating of "B++" (Very Good) and resulted from both
company specific issues, as well as to A.M. Best's general concerns relating to
workers' compensation market conditions in California. A "B" rating is A.M.
Best's seventh highest rating category out of fifteen rating categories ranging
from "A++" (Superior) to "F" (In Liquidation).
THIS MD&A CONTAINS "FORWARD LOOKING STATEMENTS" WHICH ARE MADE PURSUANT TO
THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THE FORWARD LOOKING STATEMENTS ARE BASED ON THE COMPANY'S CURRENT
EXPECTATIONS AND BELIEFS CONCERNING FUTURE DEVELOPMENTS AND THEIR POTENTIAL
EFFECTS ON THE COMPANY. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND THERE CAN BE NO ASSURANCE THAT ACTUAL DEVELOPMENTS WILL BE THOSE
ANTICIPATED BY THE COMPANY. ACTUAL RESULTS MAY DIFFER MATERIALLY AND ADVERSELY
FROM THOSE PROJECTED AS A RESULT OF SIGNIFICANT RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT, INCLUDING: INABILITY TO SECURE
REQUISITE REGULATORY APPROVALS OR FAILURE TO OTHERWISE CONSUMMATE FINAL TERMS
AND CONDITIONS OF THE AGREEMENTS WITH XL, UNANTICIPATED DEVELOPMENT OF CLAIMS
AND THE EFFECT ON LOSS RESERVES AND OVERALL FINANCIAL PERFORMANCE OF THE
COMPANY, ACCURACY OF PROJECTED LOSS RESERVES, THE IMPACT OF COMPETITION AND
PRICING ENVIRONMENTS, CHANGES IN DEMAND FOR THE COMPANY'S PRODUCTS, CHANGES IN
INTEREST RATES, EFFECT OF THE PERFORMANCE OF FINANCIAL MARKETS ON INVESTMENT
INCOME AND FAIR VALUES OF INVESTMENTS, THE EFFECT OF GENERAL ECONOMIC
CONDITIONS, ADVERSE STATE AND FEDERAL LEGISLATION AND REGULATIONS, CHANGES IN
ASSET VALUATIONS, THE EFFECTS OF NATURAL DISASTERS AND OTHER EVENTS BEYOND OUR
CONTROL AND OTHER FACTORS. FOR A MORE DETAILED DISCUSSION OF RISKS AND
UNCERTAINTIES, SEE THE COMPANY'S PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD
LOOKING STATEMENTS.
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.
26
<PAGE>
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.
a) The Annual Meeting of Stockholders was held on May 16, 2000.
b) The following directors were elected to serve until the next Annual Meeting
of Stockholders or until their successors have been elected and qualified:
J.A. McIntyre D.W. Morrisroe
W.R. Bailey L.J. Rampino
H.I. Flournoy D.C. Ross
C.D. Kranwinkle
c) The directors named in (b) above were elected. The results of the voting of
the 63,141,220 shares represented at the meeting are summarized in the
following table:
VOTES
FOR WITHHELD
J.A. McIntyre 61,638,476 1,502,744
W.R. Bailey 61,654,235 1,486,985
H.I. Flournoy 61,853,502 1,287,718
C.D. Kranwinkle 61,660,628 1,480,592
D.W. Morrisroe 61,865,543 1,275,677
L.J. Rampino 61,506,554 1,634,666
D.C. Ross 61,840,955 1,300,265
d) The appointment of the accounting firm of Ernst & Young LLP as the
Corporation's Independent Auditors was ratified. The results of the voting
of the 63,141,220 shares represented at the meeting are summarized in the
following table:
FOR AGAINST ABSTAINED
62,768,650 303,693 68,877
Item 5: Other Information.
None.
27
<PAGE>
Item 6: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
2.1 Stock Purchase Agreement, dated as of December 7, 1999
pertaining to the acquisition of FINOVA Capital Corporation of
all the outstanding shares of Fremont Financial Corporation
(Incorporated by reference to Exhibit No. 2.1 to Current
Report on Form 8-K, as of December 20, 1999, Commission File
Number 1-8007.)
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 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.)
28
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
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.)
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.)
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.)
29
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
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.)
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 Retirement Plan. (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* 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.)
10.10* The 1999 Long Term Incentive Compensation Plan of the
Company. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1999, Commission File Number 1-8007.)
30
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.11* 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.)
10.12(a)* 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.)
10.12(b)* November 11, 1999 Amendment to 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. (Incorporated by reference to
Exhibit 10.13 (a) to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1999, Commission File
Number 1-8007.)
10.13(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.)
10.13(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.)
10.13(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.)
10.14* Employment Agreement between the Company and Louis J. Rampino
dated February 25, 2000.
10.15* Employment Agreement between the Company and Wayne R. Bailey
dated February 25, 2000.
10.16* Employment Agreement between the Company and Raymond G. Meyers
dated February 25, 2000.
10.17* Management Continuity Agreement between the Company and John
Donaldson dated April 1, 2000.
10.18* Management Continuity Agreement between the Company and
Patrick E. Lamb dated April 1, 2000.
10.19* Management Continuity Agreement between the Company and Alan
Faigin dated April 1, 2000.
10.20* Management Continuity Agreement between the Company and
Eugene E. McNany, Jr. dated April 1, 2000.
31
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.21* Management Continuity Agreement among the Company, Fremont
Investment & Loan and Murray L. Zoota dated May 15, 2000.
10.22* Management Continuity Agreement among the Company, Fremont
Investment & Loan and Gwyneth E. Colburn dated May 15, 2000.
10.23* Management Continuity Agreement among the Company, Fremont
Investment & Loan and Kyle R. Walker dated May 15, 2000.
10.24* Management Incentive Compensation Plan of Fremont General
Corporation and Affiliated Companies. (Incorporated by
reference to Exhibit 10.16 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended March 31, 2000,
Commission File Number 1-8007.)
10.25 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.)
10.26(a) 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.)
10.26(b) First and Second Amendments to Amended and Restated Credit
Agreement. (Incorporated by reference to Exhibit 10.18 (b) to
the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1999, Commission File Number 1-8007.)
10.27 Credit Agreement by and among Merrill Lynch Trust Company of
California as trustee for the Fremont General Corporation
Employee Stock Ownership Trust, the Plan Committee on behalf
of the Fremont General Corporation Employee Stock Ownership
Plan, Fremont General Corporation, and First Interstate Bank
of California dated 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.)
27 Financial Data Schedule
----------------------------------
* Management or compensatory plans or arrangements.
With respect to long-term debt instruments, the Company undertakes to
provide copies of such agreements upon request by the Commission.
(b) Report on Form 8-K. None.
32
<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: August 14, 2000 /s/ LOUIS J. RAMPINO
------------------------------
Louis J. Rampino, President,
Chief Operating Officer and
Director
Date: August 14, 2000 /s/ JOHN A. DONALDSON
------------------------------
John A. Donaldson, Senior
Vice President, Controller and
Chief Accounting Officer
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- -------------------------------------------------------------- -------------
<S> <C> <C>
2.1 Stock Purchase Agreement, dated as of December 7, 1999
pertaining to the acquisition of FINOVA Capital Corporation of
all the outstanding shares of Fremont Financial Corporation
(Incorporated by reference to Exhibit No. 2.1 to Current
Report on Form 8-K, as of December 20, 1999, Commission File
Number 1-8007.)
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 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.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- -------------------------------------------------------------- -------------
<S> <C> <C>
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.)
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.)
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.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- -------------------------------------------------------------- -------------
<S> <C> <C>
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.)
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 Retirement Plan. (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* 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.)
10.10* The 1999 Long Term Incentive Compensation Plan of the
Company. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1999, Commission File Number 1-8007.)
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10.11* 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.)
10.12(a)* 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.)
10.12(b)* November 11, 1999 Amendment to 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. (Incorporated by reference to
Exhibit 10.13 (a) to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1999, Commission File
Number 1-8007.)
10.13(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.)
10.13(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.)
10.13(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.)
10.14* Employment Agreement between the Company and Louis J. Rampino
dated February 25, 2000.
10.15* Employment Agreement between the Company and Wayne R. Bailey
dated February 25, 2000.
10.16* Employment Agreement between the Company and Raymond G. Meyers
dated February 25, 2000.
10.17* Management Continuity Agreement between the Company and John
Donaldson dated April 1, 2000.
10.18* Management Continuity Agreement between the Company and
Patrick E. Lamb dated April 1, 2000.
10.19* Management Continuity Agreement between the Company and Alan
Faigin dated April 1, 2000.
10.20* Management Continuity Agreement between the Company and
Eugene E. McNany, Jr. dated April 1, 2000.
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10.21* Management Continuity Agreement among the Company, Fremont
Investment & Loan and Murray L. Zoota dated May 15, 2000.
10.22* Management Continuity Agreement among the Company, Fremont
Investment & Loan and Gwyneth E. Colburn dated May 15, 2000.
10.23* Management Continuity Agreement among the Company, Fremont
Investment & Loan and Kyle R. Walker dated May 15, 2000.
10.24* Management Incentive Compensation Plan of Fremont General
Corporation and Affiliated Companies. (Incorporated by
reference to Exhibit 10.16 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended March 31, 2000,
Commission File Number 1-8007.)
10.25 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.)
10.26(a) 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.)
10.26(b) First and Second Amendments to Amended and Restated Credit
Agreement. (Incorporated by reference to Exhibit 10.18 (b) to
the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1999, Commission File Number 1-8007.)
10.27 Credit Agreement by and among Merrill Lynch Trust Company of
California as trustee for the Fremont General Corporation
Employee Stock Ownership Trust, the Plan Committee on behalf
of the Fremont General Corporation Employee Stock Ownership
Plan, Fremont General Corporation, and First Interstate Bank
of California dated 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.)
27 Financial Data Schedule
<FN>
* Management or compensatory plans or arrangements.
</FN>
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