<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1995
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 1-8993
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The 1820 House, Main Street, Norwich, Vermont 05055-0850
(Address of principal executive offices including zip code)
(802) 649-3633
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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
----- ------
As of May 12, 1995, 7,662,208 shares of Common Stock with a par value of $1.00
per share were outstanding.
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, March 31, 1995
(Unaudited), and December 31, 1994 3
Condensed Consolidated Income Statements (Unaudited),
Three Months Ended March 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
PART II. OTHER INFORMATION
Items 1 through 6 10
SIGNATURES 11
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- -----------
(Unaudited)
<S> <C> <C>
Assets
Common equity securities, at market value (cost: $227.1 and $294.2) $ 268.8 $ 332.4
Other investments (cost: $204.2 and $163.6) 200.4 157.3
Short-term investments, at amortized cost (which approximated market value) 186.0 119.2
---------- ----------
Total investments 655.2 608.9
Cash 7.1 1.5
Capitalized mortgage servicing, net of accumulated amortization 359.7 530.5
Mortgage loans held for sale 188.4 210.5
Other mortgage origination and servicing assets 212.0 213.7
Investment in unconsolidated affiliate 83.5 69.7
Other assets 171.9 172.5
---------- ----------
Total Assets $ 1,677.8 $ 1,807.3
========== ==========
Liabilities
Short-term debt $ 251.6 $ 254.1
Long-term debt 467.9 547.0
Accounts payable and other liabilities 220.1 245.1
---------- ----------
Total liabilities 939.6 1,046.2
---------- ----------
Minority Interest - preferred stock of subsidiary 100.0 100.0
---------- ----------
Shareholders' Equity
Preferred stock - authorized 10,000,000 shares:
Series D - voting preferred stock; $1 par value per share -
20,833 shares outstanding 75.0 75.0
Common stock at $1 par value per share - authorized 125,000,000 shares;
issued 32,847,147 and 33,597,147 shares 32.8 33.6
Common paid-in surplus 330.6 338.1
Retained earnings 1,077.3 1,098.2
Net unrealized gains on investment securities 26.1 19.7
Common stock in treasury, at cost - 25,184,939 and 25,187,210 shares (878.4) (878.5)
Loan for common stock issued (25.2) (25.0)
---------- ----------
Total shareholders' equity 638.2 661.1
---------- ----------
Total Liabilities, Minority Interest and Shareholders' Equity $ 1,677.8 $ 1,807.3
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited
(millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Revenues:
Mortgage servicing revenue $ 41.2 $ 43.7
Amortization of capitalized servicing 13.7 26.6
-------- --------
Net servicing revenue 27.5 17.1
Net gain (loss) on sales on mortgages (1.3) 12.2
Gain on sale of mortgage servicing 28.2 -
Other mortgage operations revenue 3.5 7.9
Equity in earnings of unconsolidated affiliate 1.6 -
Net investment income and other revenue 12.9 33.8
-------- --------
Total revenues 72.4 71.0
-------- --------
Expenses:
Interest expense 12.0 25.4
Compensation and benefits 17.8 13.2
General expenses 13.6 19.0
-------- --------
Total expenses 43.4 57.6
-------- --------
Pretax operating earnings 29.0 13.4
Net realized investment gains 17.0 1.5
-------- --------
Pretax earnings 46.0 14.9
Income tax provision 16.9 5.9
-------- --------
After tax earnings 29.1 9.0
Loss on early extinguishment of debt, after tax (.2) -
Cumulative effect of accounting change-
purchased mortgage servicing, after tax - (44.3)
-------- --------
Net Income (loss) 28.9 (35.3)
Less dividends on preferred stock 1.6 3.0
-------- --------
Net income (loss) applicable to common stock $ 27.3 $ (38.3)
======== ========
Primary earnings per share:
After tax earnings $ 3.10 $ .60
Net income (loss) 3.08 (3.86)
Fully diluted earnings per share:
After tax earnings $ 2.94 $ .60
Net income (loss) 2.93 (3.86)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ 28.9 $ (35.3)
Charges (credits) to reconcile net income to cash flows from operations:
Net realized investment gains (17.0) (1.5)
Loss on early extinguishment of debt, after tax .2 -
Cumulative effect of accounting change - purchased mortgage servicing, after tax - 44.3
Decrease in mortgage loans held for sale 22.1 380.5
Gain on sale of mortgage servicing (28.2) -
Depreciation and amortization 15.1 29.6
Capitalized excess mortgage servicing income (1.0) (8.0)
Changes in current income taxes receivable and payable 15.9 2.7
Deferred income tax provision 1.0 2.2
Other, net 5.1 9.9
--------- ---------
Net cash flows provided from operating activities 42.1 424.4
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in short-term investments (66.8) 11.3
Sales and maturities of common equity securities and other investments 97.6 52.2
Purchases of common equity securities and other investments (.7) (30.3)
Investments in unconsolidated affiliates (33.8) -
Funding of revolving credit agreement (40.0) -
Collections on mortgage origination and servicing assets 42.5 75.4
Additions to capitalized mortgage servicing (24.6) (14.9)
Proceeds from sale of mortgage servicing 170.7 -
Additions to other mortgage origination and servicing assets (42.1) (75.2)
Sales (purchases) of fixed assets, net .5 (1.4)
--------- ---------
Net cash provided from investing activities 103.3 17.1
--------- ---------
Cash flows from financing activities:
Net decrease in short-term debt (2.5) (535.6)
Proceeds from issuances of preferred stock by subsidiary - 96.9
Repayments of long-term debt (79.6) -
Proceeds from issuances of common stock from treasury .1 -
Purchases of common stock retired (56.4) (4.8)
Dividends received from affiliates .2 -
Cash dividends paid to preferred shareholder (1.6) (3.0)
--------- ---------
Net cash used for financing activities (139.8) (446.5)
--------- ---------
Net increase (decrease) in cash during period 5.6 (5.0)
Cash balance at beginning of period 1.5 10.7
--------- ---------
Cash balance at end of period $ 7.1 $ 5.7
========= =========
Supplemental cash flows information:
Interest paid $ (7.3) $ (19.4)
Net income tax payments $ (.2) $ (.2)
Non-cash exchanges of investment securities $ - $ -
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements include the
accounts of Fund American Enterprises Holdings, Inc. (the "Company") and its
subsidiaries (collectively, "Fund American"). Fund American's primary business
is conducted through Source One Mortgage Services Corporation and its
subsidiaries ("Source One"). Source One is one of the nation's largest mortgage
banks.
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). These statements include all
adjustments (consisting of normal recurring adjustments) considered necessary by
management to fairly present the financial position, results of operations and
cash flows of Fund American. These financial statements should be read in
conjunction with the Company's 1994 Annual Report to Shareholders. These
interim financial statements may not be indicative of financial results for the
full year.
Note 2. Earnings Per Share
- ---------------------------
Primary earnings per share amounts are based on the weighted average number of
common and dilutive common equivalent shares outstanding of 8,849,625 and
9,921,802 for the three-month periods ended March 31, 1995 and 1994,
respectively. Fully diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, assuming full dilution, of
9,889,470 and 9,921,802 for the three-month periods ended March 31, 1995 and
1994, respectively.
Item 2. Management's Discussion and Analysis
- --------------------------------------------
Results of Operations -- Three-Month Periods Ended March 31, 1995 and 1994
Net income was $28.9 million for the first quarter of 1995 which compares to a
net loss of $35.3 million for the first quarter of 1994. The 1994 net loss
reflects a $44.3 million after tax charge related to a change in accounting
methodology adopted by Source One.
Book value per common and equivalent share increased $3.34 per share to $72.29
at March 31, 1995 from $68.95 at December 31, 1994. This increase reflects net
investment gains (realized and unrealized) totalling $17.5 million after tax and
a $28.2 million pretax gain ($18.3 million after tax) resulting from the March
31, 1995 sale of $9.9 billion of Source One's mortgage servicing portfolio to a
third party (the "Servicing Sale").
Mortgage Origination and Servicing. Source One's mortgage loan production
decreased to $.3 billion for the first quarter of 1995 from $2.1 billion for the
comparable prior year quarter. The decrease in production was primarily due to
higher market interest rates for mortgage loans resulting in reduced refinancing
activity. Mortgage loan payoffs decreased to $.4 billion for the first quarter
of 1995 from $2.2 billion for the comparable prior year quarter. A summary of
Source One's mortgage loan production and mortgage servicing portfolio
activities follows:
-6-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three Months
Ended March 31,
-----------------------
<S> <C> <C>
Millions 1995 1994
- ------------------------------------------------------------------------------
Mortgage loan production:
Retail originations $ 193 $ 1,295
Wholesale originations 136 800
-----------------------
Total $ 329 $ 2,095
-----------------------
- ------------------------------------------------------------------------------
Mortgage loan servicing
portfolio (c):
Beginning balance $ 39,568 $ 38,403
Mortgage loan production 329 2,095
Servicing acquisitions -- 1,046
Regular Payoffs (384) (2,183)
Servicing sale, servicing released,
principal amortization and foreclosures (10,543) (877)
-----------------------
Ending balance $ 28,970 $ 38,484
==============================================================================
</TABLE>
Additional information regarding Source One's mortgage loan servicing portfolio
is shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
March 31, Dec. 31,
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan servicing
portfolio (a):
Number of loans 446,489 543,428
Weighted average interest rate 8.28% 8.14%
Percent delinquent (b) 4.89% 4.84%
==============================================================================
</TABLE>
(a) Excludes $1,651 million of interim servicing as of December 31, 1994.
(b) Includes loans in process of foreclosure.
(c) Includes loans subserviced for others of $4,252 million and $4,294 million
as March 31, 1995 and December 31, 1994, respectively.
Mortgage servicing revenue, net of amortization of the capitalized servicing
asset, increased $10.4 million to $27.5 million for the first quarter of 1995
from $17.1 million for the comparable prior year quarter. The improvement
reflects decreased amortization of the capitalized mortgage servicing asset due
to a decrease in actual and anticipated mortgage loan prepayments.
Source One experienced a net loss on sales of mortgages of $1.3 million in the
1995 first quarter versus a net gain of $12.2 million for the comparable 1994
period. The deterioration is attributable to lower mortgage loan sales volume,
particularly sales of premium refinance products, due to the reduction in
mortgage loan production and continued industry-wide price competition.
The capitalized mortgage servicing asset declined to $359.7 million at March 31,
1995, from $530.5 million at December 31, 1994. The decline is primarily due to
the Servicing Sale.
-7-
<PAGE>
Investment Operations. Fund American's investment income is comprised primarily
of interest income earned on mortgage loans originated by Source One.
Investment income and other revenue decreased to $12.9 million for the first
quarter of 1995 from $33.8 million for the comparable prior year quarter. The
decrease resulted from a lower average size of Source One's inventory of
mortgage loans held for sale.
Total net investment gains and losses, before tax, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three Months
Ended March 31,
-----------------------
Millions 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Net realized gains $ 17.0 $ 1.5
Net unrealized gains (losses) 9.8 (57.1)
-----------------------
Total net investment gains (losses), before tax $ 26.8 $ (55.6)
==============================================================================
</TABLE>
During the 1995 first quarter, Fund American sold 1,901,000 shares of common
stock of American Express Company for $59.0 million. As of March 31, 1995, Fund
American's largest holdings of common equity securities, at market value, were
The Louisiana Land & Exploration Company ($109.4 million) and San Juan Basin
Royalty Trust ($75.6 million).
Expenses. Source One finances its inventory of mortgage loans held for sale
primarily with debt. Accordingly, the decrease in mortgage loans held for sale
resulted in a decrease in interest expense for the first quarter of 1995 as
compared to the first quarter of 1994.
Fund American's general expenses decreased $5.3 million to $13.6 million for the
first quarter of 1995 versus $19.0 million for the comparable prior year
quarter. The decline was primarily due to a decrease in mortgage loan
production expenses resulting from lower production levels experienced during
the 1995 period.
Compensation and benefits expense increased to $17.8 million for the first
quarter of 1995 from $13.2 million for the comparable prior year quarter. In
accordance with generally accepted accounting principals, Source One nets
mortgage loan origination fees, less certain direct costs, against compensation
and benefits expense. The high level of originations experienced by Source One
during early 1994 as compared to 1995 resulted in significantly higher
origination fees offsetting compensation and benefits for the 1994 first quarter
than were experienced in the 1995 first quarter. Excluding the effects of such
loan origination fees, compensation and benefits decreased $7.1 million from
1994 to 1995.
Liquidity and Capital Resources
Parent Company. During January 1995 the Company purchased an additional 460,200
common shares of Financial Security Assurance Holdings Ltd. ("FSA"). FSA, a
leading Aaa/AAA writer of financial guarantee insurance, is Fund American's
newest operating affiliate. The shares were purchased on the open market for
$8.8 million and raised the Company's voting control of FSA to approximately
23%.
On February 7, 1995 the Company capitalized its newly formed subsidiary, White
Mountains Insurance Company ("White Mountains"), with $25.0 million in cash. In
March 1995 White Mountains received its license from the Insurance Commissioner
of the State of New Hampshire to engage in the sale of property casualty
insurance. White Mountains is expected to expand its operations to other states
as additional approvals are obtained.
On February 28, 1995 the Company repurchased $8.8 million in principal amount of
its medium-term notes.
-8-
<PAGE>
Pursuant to the terms of a credit agreement among the Company and White River
Corporation ("White River"), the Company provided White River with a $50.0
million term loan (the "Term Loan") which becomes due on March 24, 1996 and a
$40.0 million revolving credit facility (the "Revolver"). On March 23, 1995
White River borrowed $40.0 million under the Revolver which becomes due on
September 25, 1995. The credit agreement provides White River with the right to
use certain of its investment securities to repay its borrowings under the Term
Loan and the Revolver.
On March 27, 1995 the Company accepted for purchase 750,000 shares of its Common
Stock ("Shares") that had been tendered pursuant to its cash offer to purchase
up to 750,000 Shares at $75.00 per Share. All Shares tendered have since been
retired. The tender offer fully exhausted the Company's remaining Share
repurchase authorization.
In connection with the Servicing Sale, on April 14, 1995 Source One transferred
$90.0 million in cash and $19.7 million in equity securities to its parent Fund
American Enterprises, Inc. ("FAE", a subsidiary of the Company) in exchange for
shares of Source One common stock held by FAE.
Prospectively, the primary sources of cash inflows for the Company will be sales
of investment securities, investment income and distributions received from its
operating subsidiaries.
Source One. Source One's investments, mortgage loans held for sale and mortgage
loan servicing portfolio provide a liquidity reserve since they may be sold to
meet cash needs.
Source One's working capital requirements have historically been funded through
its revolving credit and commercial paper programs. These borrowings are used
to fund mortgage loan production until the sale of such mortgage loans in the
secondary market. Declines in mortgage loan production have led to a reduction
in the balance of mortgage loans held for sale during 1995, resulting in a
decrease in Source One's short-term borrowings.
In March 1995 Source One consolidated its three credit facilities into a new
single credit facility in the amount of $500.0 million. The new facility, which
could be further increased to $1.0 billion, matures in March 1998 and contains
restrictions and covenants which are similar to those contained in the previous
credit facilities.
Source One repurchased $70.7 million in principal amount of its long-term debt
during the first quarter of 1995. Source One expects to make additional long-
term debt repurchases during 1995.
At March 31, 1995 Source One had $128.2 million of short-term borrowings
outstanding under committed bank credit agreements and $83.4 million of
outstanding commercial paper.
-9-
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote by Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 - Statement Re Computation of Per Share Earnings*
(b) Reports on Form 8-K
None.
*Filed herewith.
-10-
<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.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
----------------------------------------
(Registrant)
Date: May 12, 1995 By: /s/
--------------------------------
Michael S. Paquette
Vice President and
Controller
-11-
<PAGE>
EXHIBIT 11
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share earnings)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1995 1994
---------- ----------
<S> <C> <C>
Primary earnings per share
Earnings per share numerator:
After tax earnings $ 29,113 $ 9,045
Preferred stock dividends (1,641) (3,042)
---------- ----------
After tax earnings for per share computation 27,472 6,003
Loss on early extinguishment of debt, after tax (172) -
Cumulative effect of accounting change-
purchased mortgage servicing, after tax - (44,296)
---------- ----------
Net income (loss) for per share computation $ 27,300 $ (38,293)
========== ==========
Earnings per share denominator:
Average common shares outstanding 8,369 9,354
Dilution for options, warrants and performance shares 481 568
---------- ----------
Shares for per share computation 8,850 9,922
========== ==========
Per share earnings :
After tax earnings $ 3.10 $ .60
Net income (loss) 3.08 (3.86)
Fully diluted earnings per share
Earnings per share numerator:
After tax earnings $ 29,113 $ 9,045
Preferred stock dividends, if applicable - (3,042)
---------- ----------
After tax earnings for per share computation 29,113 6,003
Loss on early extinguishment of debt, after tax (172) -
Cumulative effect of accounting change-
purchased mortgage servicing, after tax - (44,296)
---------- ----------
Net income (loss) for per share computation $ 28,941 $ (38,293)
========== ==========
Earnings per share denominator:
Average common shares outstanding 8,369 9,354
Dilution for options, warrants and performance shares 481 568
Dilution for preferred stock 1,040 -
---------- ----------
Shares for per share computation 9,890 9,922
========== ==========
Per share earnings :
After tax earnings $ 2.94 $ .60
Net income (loss) 2.93 (3.86)
</TABLE>
NOTE: The Voting Preferred Stock Series D is not a common stock equivalent.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-01-1995
<CASH> 7
<SECURITIES> 655
<RECEIVABLES> 42
<ALLOWANCES> 13
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,678
<CURRENT-LIABILITIES> 252
<BONDS> 468
<COMMON> 563
75
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,678
<SALES> 0
<TOTAL-REVENUES> 72
<CGS> 0
<TOTAL-COSTS> (31)
<OTHER-EXPENSES> 17
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12)
<INCOME-PRETAX> 46
<INCOME-TAX> (17)
<INCOME-CONTINUING> 29
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29
<EPS-PRIMARY> 3.08
<EPS-DILUTED> 2.93
</TABLE>
