<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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) (Zip Code)
Registrant's telephone number, including area code: (802) 649-3633
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
per share
Securities registered pursuant to section 12(g) of the Act:
None
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting shares (based on the closing price of
those shares listed on the New York Stock Exchange and the consideration
received for those shares not listed on a national or regional exchange) held by
non-affiliates of the registrant as of March 27, 1995, was $629,386,740.
As of March 27, 1995, 7,659,937 shares of Common Stock with a par value of
$1.00 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1994 Annual Report to Shareholders (Parts II and
IV). Portions of the registrant's Notice of Annual Meeting of Shareholders and
Proxy Statement dated March 30, 1995 (Part III)
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business........................................................ 1
a. General................................................... 1
b. Mortgage Origination and Servicing Operations............. 1
c. Investment Portfolio Management........................... 6
d. Certain Business Conditions............................... 7
d. Competition............................................... 7
e. Regulation................................................ 7
f. Employees................................................. 8
Item 2. Properties...................................................... 8
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............. 8
a. Executive Officers of the Registrant and its Subsidiaries... 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................... 10
Item 6. Selected Financial Data......................................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10
Item 8. Financial Statements and Supplementary Data..................... 10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 10
PART III
Item 10. Directors and Executive Officers................................ 10
Item 11. Executive Compensation.......................................... 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 10
Item 13. Certain Relationships and Related Transactions.................. 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 11
<PAGE>
PART I
Item 1. Business
GENERAL
Fund American Enterprises Holdings, Inc., (the "Company"), is a Delaware
corporation which was organized in 1980. Within this report, the consolidated
organization is referred to as "Fund American." The Company's principal
operating activities are conducted through its wholly owned subsidiary, Source
One Mortgage Services Corporation, and its subsidiaries ("Source One"). The
Company added two operating affiliates during 1994: (i) a 23% voting interest
in Financial Security Assurance Holdings Ltd. ("FSA"), a leading Aaa/AAA writer
of financial guarantee insurance, and (ii) a 33% stake in Main Street America
Holdings ("MSA"), a unit of National Grange Mutual Insurance Company, a New
Hampshire-based property and casualty insurer. Fund American also owns a
portfolio of common equity securities and other investments totalling $489.7
million as of December 31, 1994. The Company's principal office is located at
The 1820 House, Main Street, Norwich, Vermont, 05055-0850, and its telephone
number is (802) 649-3633.
MORTGAGE ORIGINATION AND SERVICING OPERATIONS
General
Source One is one of the largest mortgage banking companies in the United
States based on the size of its mortgage loan servicing portfolio. As of
December 31, 1994 Source One had a mortgage loan servicing portfolio totalling
$39.6 billion, including $4.3 billion of loans subserviced for others, which is
serviced on behalf of approximately 350 institutional investors and numerous
other security holders. As of December 31,1994 Source One had 161 retail branch
offices in 28 states and originated $4.6 billion in mortgage loans for the year
then ended.
Source One engages primarily in the business of producing, selling and
servicing residential mortgage loans. Its sources of revenue are net mortgage
servicing revenue, net interest revenue, net gain on sales of mortgages and
other revenue (including underwriting and appraisal fees). Through
subsidiaries, Source One also sells credit-related insurance products (such as
life, disability, health, accidental death and property-casualty insurance) and
provides bi-weekly mortgage payment services.
Source One was incorporated in 1972 and is the successor to Citizens Mortgage
Corporation which was organized in 1946. Source One is a wholly-owned
subsidiary of Fund American Enterprises, Inc. ("FAE") which is a wholly-owned
subsidiary of the Company. Source One's principal executive offices are located
in Farmington Hills, Michigan.
Industry Overview
Mortgage banking is the business of serving as a financial intermediary in
the: (i) origination and purchase of mortgage loans; (ii) holding of such loans
while aggregating sufficient loans to form appropriate mortgage-backed security
pools; (iii) subsequent sale of such loans through pools or directly to
investors; and (iv) ongoing management or servicing of such loans during the
repayment period. Mortgage bankers generate revenue in each of the four stages
of the mortgage banking process.
The origination process involves providing competitive mortgage loan rates,
soliciting loan applications, reviewing title and credit matters, and funding
loans at closing. Mortgage loans are often purchased from the originators
thereof, who may receive a premium for releasing the right to service such
purchased mortgage loans. The purchase price and any premium paid for servicing
rights are greatly influenced by existing market conditions.
When interest rates on long-term mortgage loans exceed average interest rates
incurred on total borrowings by Source One, as is generally the case, the
holding of mortgage loans generates net interest income. In periods when
borrowing rates exceed long-term mortgage lending rates, the holding of mortgage
loans can generate net interest expense.
1
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Marketing or selling mortgage loans requires matching the needs of the
production market (consisting of homebuyers and homeowners seeking new
mortgages) with the needs of the secondary market for mortgage loans (consisting
of securities broker-dealers, depository institutions, insurance companies,
pension funds and other investors). Conventional mortgage loans (i.e., those
not guaranteed or insured by agencies of the Federal government) which are
secured by one- to four-family residential properties, and which comply with
applicable requirements, are packaged for direct sale or conversion to a
mortgage-backed security, generally in pools of $1.0 million or more. Such
mortgage-backed securities are guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA").
Mortgage-backed securities are sold by mortgage banking companies primarily to
securities broker-dealers. Federal Housing Administration ("FHA") insured
mortgage loans and Veterans Administration ("VA") partially guaranteed mortgage
loans are packaged in the form of modified pass-through mortgage-backed
securities guaranteed by the Government National Mortgage Association ("GNMA")
for sale primarily to securities broker-dealers. In addition, private entities
may pool mortgage loans in the form of collateralized mortgage obligations or
pass-through certificates, which may or may not qualify as real estate mortgage
investment conduits ("REMICs") under the Internal Revenue Code of 1986, as
amended, and offer the resulting mortgage-backed securities to the public
through securities broker-dealers. There is also a limited private market for
mortgage loans which have not been pooled or securitized.
Servicing involves: (i) collecting principal, interest and funds to be
escrowed for tax and insurance payments from mortgage loan borrowers; (ii)
remitting principal and interest to mortgage loan investors; (iii) paying
property taxes and insurance premiums on mortgaged property; (iv) in some cases,
advancing uncollected payments to mortgage loan investors; (v) administering
delinquent loans; (vi) supervising foreclosures in the event of unremedied
defaults; and (vii) performing all related accounting and reporting activities.
Servicing generates cash income in the form of fees, which represent a
percentage of the declining outstanding principal amount of the loans serviced
and are collected from each mortgage loan payment received plus any late
charges.
Mortgage Loan Production
Source One produces residential mortgage loans through a system of retail
branch offices, a correspondent network of banks, thrift institutions and other
mortgage lenders, mortgage brokers and a specialized marketing program. The
existence of these mortgage production sources gives Source One the flexibility
to shift its production between those sources as market conditions warrant and
allows Source One to emphasize the production mode which is most economically
advantageous.
Loans produced, whether through origination or purchase, include conventional
residential mortgage loans as well as mortgage loans which are either insured by
the FHA or partially guaranteed by the VA. In evaluating loans purchased
through its correspondent network and loans originated through its broker
network, Source One applies the same quality standards as those required for
loans originated by Source One itself. Source One's quality control department
reviews a random sample of the loans purchased to determine compliance with
Source One's standards.
It is a policy of Source One to primarily produce fixed rate mortgage loans.
As of December 31, 1994 approximately 3% of Source One's total mortgage loan
servicing portfolio consisted of adjustable rate mortgage loans.
2
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The following table sets forth selected information regarding Source One's
mortgage loan production:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------
Millions 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan production by type of loan:
FHA/VA insured $ 2,065 $ 3,453 $ 1,927 $ 1,641 $ 1,818
Conventional 2,521 7,999 5,664 2,386 1,376
-------------------------------------------------
Total $ 4,586 $ 11,452 $ 7,591 $ 4,027 $ 3,194
------------------------------------------=================================================
Loan production by
origination source:
Retail branch office originations $ 2,005 $ 4,922 $ 3,326 $ 1,695 $ 1,021
Correspondent network acquisitions 1,081 2,643 2,578 1,908 1,874
Mortgage broker originations 696 1,708 1,026 290 143
Refinance division originations 804 2,179 661 134 156
-------------------------------------------------
Total $ 4,586 $ 11,452 $ 7,591 $ 4,027 $ 3,194
===========================================================================================
</TABLE>
Retail Branch Offices. As of December 31, 1994 Source One had 161 retail
branch offices in 28 states. Each office has sales representatives who originate
mortgage loans through contacts with real estate brokers, builders and
developers, and others, as well as through direct contact with homebuyers.
As a result of a contracting mortgage loan origination market, Source One
implemented a restructuring plan in 1994 to bring its mortgage loan production
network in line with anticipated levels of mortgage loan production. As a
result of this downsizing, Source One closed several retail branch offices
during 1994.
As of December 31, 1994 Source One's retail branch offices were located in the
following states:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Number of Number of Number of
State offices State offices State offices
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Washington 31 New York 5 Rhode Island 2
California 28 Maryland 4 Tennessee 2
Texas 18 Virginia 4 Alaska 1
Arizona 7 Kentucky 3 Connecticut 1
Colorado 7 Missouri 3 Iowa 1
Florida 7 Kansas 2 Montana 1
Illinois 7 Massachusetts 2 Oklahoma 1
Michigan 6 New Jersey 2 Wisconsin 1
Ohio 6 Oregon 2
Nevada 5 Pennsylvania 2
--------------------------------------------------------------------------------
</TABLE>
Mortgage loans originated by Source One are subject to a defined underwriting
process in order to assess each prospective borrower's ability to repay the loan
requested and the adequacy of each property as collateral. In addition, Source
One is subject to the underwriting guidelines of FHA, VA, FHLMC and FNMA, as
well as specific contractual requirements of institutional investors who have
agreed to acquire mortgage loans originated by Source One. Most branch office
originations are referred to regional operating centers for preparation of loan
documentation, evaluation of compliance with Source One's underwriting
conditions and closing of the loans.
Correspondent Network. Source One conducts a program through which it agrees
to purchase mortgage loans from a network of banks, thrift institutions and
other mortgage lenders. The funding price for such loans is set by Source One
on a daily basis. In addition, Source One pays a premium for the release of
servicing rights which is negotiated on a case-by-case basis. As of December
31, 1994 there were approximately 200 participants in Source One's correspondent
network.
3
<PAGE>
Mortgage Brokers. In 1989 Source One commenced a program through which it
closes loans originated by a network of mortgage brokers. The funding price for
such loans is set by Source One on a daily basis. The mortgage broker receives
compensation equivalent to the difference between Source One's pricing schedule
and the closing price. Source One maintains offices to service this network in
Arizona, California, Colorado, Illinois, Oregon, Virginia and Washington. As of
December 31, 1994 there were approximately 1,000 active participants in Source
One's mortgage broker network.
Specialized Marketing Program. Source One also generates mortgage loan
originations through an operation which responds to refinancings requests from
the population of loans currently serviced by Source One.
Sales of Loans
Source One sells loans either through mortgage-backed securities issued
pursuant to programs of GNMA, FNMA and FHLMC, or to institutional investors.
Most loans are aggregated in pools of $1.0 million or more, which are purchased
by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
During 1994 approximately 41%, 41% and 16% of the principal amount of Source
One's loans were sold in pools through GNMA, FNMA and FHLMC, respectively.
During 1993 approximately 29%, 45% and 25% of the principal amount of Source
One's loans were sold in pools through GNMA, FNMA and FHLMC, respectively.
Substantially all GNMA securities are sold without recourse to Source One for
loss of principal in the event of a subsequent default by the mortgage borrower
due to the underlying FHA and VA insurance. Servicing agreements relating to
mortgage-backed securities issued pursuant to the programs of GNMA, FNMA or
FHLMC require Source One to advance funds to make the required payments to
investors in the event of a delinquency by the borrower. Source One expects
that it would recover most funds advanced upon cure of default by the borrower
or at foreclosure. However, in connection with VA partially guaranteed loans
and certain conventional loans (which may be partially insured by private
mortgage insurers), funds advanced may not cover losses due to potential
declines in collateral value. In addition, most of Source One's servicing
agreements for mortgage-backed securities typically require the payments to
investors of a full month's interest on each loan although the loan may be paid
off (by optional prepayment or foreclosure) other than on a month-end basis. In
this instance, Source One is obligated to pay the investor interest at the note
rate from the date of the loan payoff through the end of that calendar month
without reimbursement.
Source One, through private placements and public offerings, has also sold
mortgage loans through issuance of its mortgage pass-through certificates.
Source One has issued $521.7 million of REMIC certificates from 1986 through
1994. Source One is the primary servicer for these REMIC certificates, which
were sold pursuant to five separate trusts which have no recourse provisions.
Source One may offer additional mortgage-backed securities in the future if
economic and market conditions warrant.
Historically, Source One's sales of loans have generated net gains. However,
if secondary market interest rates decline after Source One obtains a mandatory
forward commitment for a loan, the loan may not close and Source One may incur a
loss from the cost of covering its obligations under such commitment. If
secondary market interest rates increase after Source One commits to an interest
rate for a loan, and Source One has not obtained a forward commitment, Source
One may incur a loss when the loan is subsequently sold. To minimize this risk,
Source One obtains mandatory forward commitments of up to 120 days to sell
mortgage-backed securities with respect to all loans which have been funded and
a substantial portion of loans in process (pipeline) which it believes will
close.
Source One's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily basis.
In addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers, with no dealer
having in excess of 20% of current commitments. Source One currently transacts
business with seven approved dealers.
4
<PAGE>
Loan Servicing
Source One currently retains the rights to service the majority of the
mortgage loans it produces. In addition, Source One may acquire the rights to
service or subservice a mortgage loan portfolio without originating or acquiring
the underlying mortgage loans. Source One customarily makes such purchases of
servicing rights from banks, thrift institutions and other mortgage lenders.
The fees paid to acquire such servicing rights are negotiated on a case-by-case
basis.
During the second quarter of 1994 Source One sold the rights to service $3.9
billion of mortgage loans to a third party. Source One has continued to service
these loans pursuant to a five-year subservicing agreement. In February 1995
Source One reached a definitive agreement to sell $9.8 billion of its mortgage
servicing portfolio to a third party. The sale is expected to close in the
first quarter of 1995, subject to required approvals. The sale of mortgage
servicing was undertaken by Source One to take advantage of the substantial
increase in the value of servicing rights that has been created by the rise in
interest rates during 1994.
Mortgage loan servicing consists primarily of collecting monthly loan payments
and remitting amounts due to investors, collecting property tax and insurance
escrow deposits, and making tax and insurance premium payments when due. Source
One retains a servicing fee from each monthly loan payment equal to a fixed
percentage of the outstanding principal balance of each loan, plus any late
charges.
The following table summarizes the changes in Source One's mortgage loan
servicing portfolio:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
Billions 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $38.4 $37.3 $41.0 $35.6 $29.7
---------------------------------
Mortgage loan production 4.6 11.4 7.6 4.0 3.2
Servicing acquisitions 3.7 6.4 2.3 6.8 5.9
---------------------------------
Total servicing in 8.3 17.8 9.9 10.8 9.1
---------------------------------
Payoffs 4.7 13.5 11.5 3.9 2.0
Principal amortization, servicing released and foreclosures 2.4 3.2 2.1 1.5 1.2
---------------------------------
Total servicing out 7.1 16.7 13.6 5.4 3.2
---------------------------------
Balance at end of year $39.6 $38.4 $37.3 $41.0 $35.6
==================================================================================================
</TABLE>
Source One closely monitors the rate of delinquencies and foreclosures
incident to its servicing portfolio. The following table summarizes delinquency
and foreclosure experience with respect to the residential mortgage loans
serviced by Source One:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Percent of total residential loans serviced:
Past due:
31-59 days 3.15% 3.41% 3.26% 3.56% 3.38%
60-89 days .54 .58 .65 .61 .59
90 days or more .38 .45 .48 .41 .35
--------------------------------
Total delinquencies 4.07% 4.44% 4.39% 4.58% 4.32%
-----------------------------------------------================================
Foreclosures .77% .92% .77% .74% .70%
===============================================================================
</TABLE>
5
<PAGE>
Related Activities
In conjunction with its origination activities and portfolio servicing, Source
One sells certain credit-related insurance products (such as life, disability,
health, accidental death, and property-casualty insurance) and provides bi-
weekly mortgage payment services.
Insurance Revenue. Source One acts as an agent and receives fees based on
premium value but does not assume any insurance risk. Insurance products are
sold through (i) solicitation at the time of mortgage application, (ii) direct
mail solicitation by Source One shortly after mortgage loan closing, (iii)
solicitation by direct solicitors and (iv) resolicitation of Source One's
mortgage loan servicing portfolio on an annual basis. At certain locations,
personal solicitation by Source One staff is permitted by state regulations
which determine allowable insurance sales practices. Total fees recognized under
these programs for 1994 were $4.6 million.
Bi-Weekly Mortgage Payment Services Revenue. Source One provides bi-weekly
mortgage payment services to new and existing mortgagors. For a one-time
enrollment fee, Source One collects payments from a mortgagor on a bi-weekly
basis. This arrangement does not involve refinancing or any change to the
mortgage documents. Total bi-weekly fee revenue was $1.1 million for the year
ended December 31, 1994.
INVESTMENT PORTFOLIO MANAGEMENT
Fund American's investment portfolio is primarily managed by a small group of
employees located in Norwich, Vermont. Beginning August 29, 1994, pursuant to a
Discretionary Investment Advisory Agreement between the Company and Warburg,
Pincus Counsellors, Inc. ("Warburg Pincus"), Warburg Pincus is providing
discretionary investment advisory services to Fund American with respect to a
portfolio of investment securities totalling $50.2 million as of December 31,
1994. Warburg Pincus is a registered investment advisor.
Between September 24, 1993 and July 31, 1994, pursuant to an Investment
Management Agreement between the Company and Hanover Advisors, Inc. ("Hanover"),
a wholly-owned subsidiary of White River Corporation, Hanover provided
discretionary and non-discretionary investment advisory and investment
accounting services to Fund American. Hanover and White River Corporation were
formerly wholly-owned subsidiaries of the Company. Prior to September 24, 1993
Fund American's investment portfolio was managed by a small group of employees
located in White Plains, New York.
6
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Fund American's philosophy is to invest all assets to maximize their total
return over a three- to five-year time frame. Under this approach, each dollar
of after tax investment income, realized capital gains and unrealized
appreciation is valued equally. Management believes in focusing its efforts and
the entity's funds on a small number of quality companies selling at reasonable
prices in the marketplace. While such an approach leads to a high concentration
in a few securities, management believes it will provide superior returns over a
three- to five-year horizon. However, management does not believe that owning a
large portfolio of passive investment securities in a taxable corporation format
will maximize shareholder returns over the long-term. Therefore, Fund
American's long-term goal is to reinvest at least a portion of its investment
securities (or proceeds from sales thereof) into operating businesses in which
management has knowledge and experience.
CERTAIN BUSINESS CONDITIONS
Changes in the economy or prevailing interest rates can have significant
effects, including material adverse effects, on the mortgage banking business
and Source One.
During periods of economic growth, when the demand for housing is strong,
mortgage originations and loan production income can be expected to increase,
and foreclosures and loan losses may decline. Conversely, in periods of rising
interest rates and/or economic slowdown or recession, mortgage originations and
loan production income can be expected to decline, and foreclosures and loan
losses may increase.
Inflation and changes in interest rates can have differing effects on various
aspects of Source One's business, particularly with respect to marketing gains
and losses on the sale of mortgage loans, mortgage loan production, the value of
Source One's servicing portfolio and net interest revenue. Historically, Source
One's loan originations and loan production income have increased in response to
falling interest rates and have decreased during periods of rising interest
rates. Periods of low inflation and falling interest rates tend to reduce loan
servicing income and the value of Source One's mortgage loan servicing portfolio
because prepayments of mortgages are greater and the average life of loan
servicing rights is shortened. Conversely, periods of increasing inflation and
rising interest rates tend to increase loan servicing income and the value of
Source One's mortgage loan servicing portfolio because prepayments of mortgages
are lower and the average life of loan servicing rights is lengthened.
COMPETITION
Source One competes nationally and locally for loan production with other
mortgage bankers, state and national banks, thrift institutions and insurance
companies. National banks and thrift institutions have substantially more
flexibility in their loan origination programs than Source One, which must
originate loans meeting the standards of the secondary market. Mortgage lenders
compete primarily with respect to price and service. Competition may also occur
on mortgage terms and closing costs. Source One competes, in part, by using its
commissioned sales force to maintain close relationships with real estate
brokers, builders and developers and members of its correspondent network. In
the opinion of management of Source One, no single mortgage lender dominates the
industry.
REGULATION
Source One is subject to the rules and regulations of, and examinations by,
FNMA, FHLMC, GNMA, FHA and VA with respect to originating, processing, selling
and servicing mortgage loans. These rules and regulations, among other things,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers and, in some cases, establish
maximum interest rates, fees and loan amounts. Lenders are required to submit
audited financial statements annually. FNMA and GNMA require the maintenance of
specified net worth levels which vary depending on the amount of FNMA loans
serviced and GNMA mortgage-backed securities issued by Source One. Mortgage
loan origination activities are also subject to fair housing laws, the Equal
Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage
Disclosure Act, and regulations promulgated thereunder which, among other
things, prohibit discrimination in residential lending and require disclosure of
certain information to borrowers.
7
<PAGE>
Certain conventional mortgage loans are also subject to state usury statutes;
FHA and VA loans are exempt from the effects of such statutes. In addition,
there are various state laws and regulations affecting Source One's mortgage
banking and insurance operations. Source One's audit and quality control
departments monitor compliance with all these laws and regulations. Statutory
limitations have occasionally constrained the activities of the FHA, VA and
GNMA. To date, Congress has in each case extended the agencies' authority
either before or shortly after the agencies have been forced to suspend their
activities. Thus, there has been little or no adverse effect on the processing,
closing and marketing of FHA and VA loans. There can be no assurance, however,
that Congress will continue to make such extensions. In the event such
extensions are not forthcoming in the future, the processing, closing and
marketing of FHA and VA loans could be adversely affected.
EMPLOYEES
As of December 31, 1994 the Company employed 12 persons and Source One
employed 2,055 persons (of whom 420 were engaged in loan servicing activities
and 1,635 were engaged in residential loan production activities, appraisal
functions, and administrative and managerial responsibilities). None of Fund
American's employees is covered by a collective bargaining agreement.
Management believes that Fund American's employee relations are good.
Item 2. Properties
The Company rents 1,800 square feet of space for use as its principal office
at The 1820 House, Norwich, Vermont, under a lease expiring in 1995. Source One
owns its principal office in Farmington Hills, Michigan, which houses the
majority of its employees. Source One also owns an office building in West
Bloomfield, Michigan. Source One leases several other office facilities and
operating equipment under cancelable and noncancelable agreements. Most of such
leases contain renewal clauses.
Item 3. Legal Proceedings
Various claims have been made against Fund American in the normal course of
its business. In management's opinion, the outcome of such claims will not, in
the aggregate, have a material effect on Fund American's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of Fund American's shareholders
during the fourth quarter of 1994.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT AND ITS SUBSIDIARIES (as of March 27, 1995)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Executive
officer
Name Position Age since
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Terry L. Baxter President and Secretary of FAE 49 1994
Dennis P. Beaulieu Corporate Secretary 47 1995
John J. Byrne Chairman, President and Chief Executive Officer 62 1985
James A. Conrad President and Chief Executive Officer of Source One 53 1985
K. Thomas Kemp Executive Vice President 54 1991
Michael S. Paquette Vice President and Controller 31 1993
Robert W. Richards Chairman of Source One 52 1979
Allan L. Waters Senior Vice President and Chief Financial Officer 37 1990
=========================================================================================================
</TABLE>
All executive officers are elected by the Company's Board of Directors for
a term of one year or until their successors have been elected and have duly
qualified.
Mr. Baxter was elected President and Secretary of FAE in January 1994.
Prior to joining the Company in 1994, Mr. Baxter was Managing Director of the
National Transportation Safety Board from 1990. Prior to that, he was the
Assistant Director of OMB in the Reagan Administration. Mr. Baxter is a
director of FAE, MSA, Source One and White Mountains Insurance Holdings, Inc., a
wholly owned subsidiary of the Company ("White Mountains").
Mr. Beaulieu was elected Corporate Secretary in February 1995 and also
serves as Vice President and Secretary of White Mountains. Prior to joining
Fund American in 1995, Mr. Beaulieu was Senior Vice President and Chief
Financial Officer of New Dartmouth Bank. Mr. Beaulieu is a director of White
Mountains.
Mr. Byrne has served as Chairman, President and Chief Executive Officer
since 1990, as Chairman and Chief Executive Officer from 1985 to 1990 and was
Chairman and Chief Executive Officer of Fireman's Fund Insurance Company
("Fireman's Fund") from 1989 through January 2, 1991. Mr. Byrne is also
Chairman of FSA, Chairman of FAE, Chairman of White Mountains and a director of
Source One.
Mr. Conrad has served as President and Chief Executive Officer of Source
One since 1990, as Executive Vice President of its Production Division from 1987
to 1989, and as Corporate Vice President of its Wholesale Division from 1985 to
1987. Mr. Conrad is a director of Source One.
Mr. Kemp has served as Vice President, Treasurer and Secretary since 1991,
was elected Executive Vice President in 1993 and became a director of the
Company in 1994. He is also President and Chief Executive Officer of White
Mountains. Mr. Kemp was a Vice President of Fireman's Fund from 1990 to January
2, 1991. Prior to joining Fireman's Fund, Mr. Kemp was President of Resolute
Reinsurance Company. Mr. Kemp is also a director of FSA, FAE, MSA, Source One
and White Mountains.
Mr. Paquette was elected Vice President and Chief Accounting Officer in
1993 and was appointed Vice President and Controller in February 1995. Mr.
Paquette is also Vice President and Controller of White Mountains. He was
formerly Secretary of FAE from 1990 to 1993 and has been a member of the Fund
American organization since 1989. Mr. Paquette is a director of FAE and White
Mountains.
Mr. Richards has served as Chairman of Source One since 1989, as its
President from 1987 to 1989, and as its Executive Vice President from 1985 to
1987.
Mr. Waters was elected Senior Vice President and Chief Financial Officer in
1993. Mr. Waters is also Senior Vice President and Chief Financial Officer of
White Mountains. He was formerly Vice President and Controller of FAE from 1991
to 1993; was Vice President, Controller and Assistant Secretary of the Company
from 1990 to 1991, and was Vice President, Finance of the Company from 1988 to
1990. Mr. Waters is a director of FSA, FAE, Source One and White Mountains.
9
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 27, 1995 there were 666 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").
The Company does not currently pay regular cash dividends to holders of
Shares. The Company's Board of Directors may reconsider from time to time its
policy with respect to payment of regular periodic dividends on Shares.
The remaining information called for by this item is reported as "Quarterly
trading range for shares of common stock" and "Stock Exchange Information"
appearing on pages 52 and 56, respectively, of the Company's 1994 Annual Report
to Shareholders, herein incorporated by reference.
Item 6. Selected Financial Data
Reported on page 10 of the Company's 1994 Annual Report to Shareholders,
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reported on pages 11 through 21 of the Company's 1994 Annual Report to
Shareholders, herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Reported in the consolidated financial statements of Fund American and the
notes thereto and the report thereon of Ernst & Young LLP, independent auditors,
appearing on pages 22 through 49 and 51 of the Company's 1994 Annual Report to
Shareholders, herein incorporated by reference.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
a. Directors (as of March 27, 1995)
Reported under the caption "Election of Directors" on pages 3 through 5 of
the Company's 1995 Proxy Statement, herein incorporated by reference.
b. Executive Officers (as of March 27, 1995)
Reported in Part I pursuant to General Instruction G to Form 10-K.
Item 11. Executive Compensation
Reported under the captions "Compensation of Executive Officers" on pages 9
through 11, "Reports of the Compensation Committee on Executive Compensation" on
pages 11 though 14, "Shareholder Return Graph" on page 15, and "Compensation
Plans" on page 16 through 17 of the Company's 1995 Proxy Statement, herein
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reported under the caption "Voting Securities and Principal Holders
Thereof" on pages 6 through 8 of the Company's 1995 Proxy Statement, herein
incorporated by reference.
10
<PAGE>
Item 13. Certain Relationships and Related Transactions
Reported under the captions "Certain Transactions" on page 11, and
"Compensation Committee Interlocks and Insider Participation in Compensation
Decisions" on page 17 of the Company's 1995 Proxy Statement, herein incorporated
by reference.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. (1) Financial Statements
The financial statements applicable to the Company and its consolidated
affiliates have been incorporated by reference herein from the Company's 1994
Annual Report to Shareholders as they appear in the Index to Financial
Statements and Financial Statement Schedules shown on page 12 of this report.
(2) Financial Statement Schedules
The financial statement schedules and report of independent auditors have
been filed as part of this Annual Report on Form 10-K as indicated in the Index
to Financial Statements and Financial Statement Schedules appearing on page 12
of this report.
b. Reports on Form 8-K
No reports on Form 8-K were issued by the Company during the fourth quarter
of 1994.
11
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Index to Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Annual Form
Report 10-K
page(s)* page(s)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial statements:
Consolidated balance sheets as of December 31, 1994 and 1993..................... 22
Consolidated income statements for each of the years ended
December 31, 1994, 1993 and 1992............................................... 23
Consolidated statements of shareholders' equity for each of the years ended
December 31, 1994, 1993 and 1992............................................... 24
Consolidated statements of cash flows for each of the years ended
December 31, 1994, 1993 and 1992............................................... 25
Notes to consolidated financial statements....................................... 26-49
Other financial information:
Report of independent auditors................................................... 51
Selected quarterly financial data (unaudited).................................... 52
Financial statement schedules:
III. Condensed financial information of registrant............................. 13-14
======================================================================================================
</TABLE>
* The Company's 1994 Annual Report to Shareholders.
All other schedules are omitted as they are not applicable or the information
required is included in the financial statements or notes thereto.
12
<PAGE>
SCHEDULE III
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company only)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
December 31,
---------------------
(Millions) 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Common equity securities and other investments $ 148.7 $ 165.5
Short-term investments, at amortized cost 58.2 127.8
Cash .1 2.1
Other assets 23.9 27.7
Investments in unconsolidated affiliates, at equity 69.7 --
Investments in wholly-owned subsidiaries, at equity 679.2 873.5
---------------------
Total assets $ 979.8 $ 1,196.6
---------------------------------------------------------------------------------------------=====================
Liabilities:
Debt $ 153.8 $ 178.4
Accounts payable and other liabilities 164.9 113.2
---------------------
Total liabilities 318.7 291.6
Shareholders' equity 661.1 905.0
---------------------
Total liabilities and shareholders' equity $ 979.8 $ 1,196.6
==================================================================================================================
</TABLE>
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------
(Millions) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 14.2 $ 11.1 $ 22.6
Expenses 21.2 29.6 15.2
----------------------------------
Pretax operating earnings (loss) (7.0) (18.5) 7.4
----------------------------------
Net realized investment gains 22.7 68.9 48.6
Change in net unrealized investment gains and losses -- (61.3) 4.1
----------------------------------
Net investment gains 22.7 7.6 52.7
----------------------------------
Pretax earnings (loss) 15.7 (10.9) 60.1
Income tax provision 7.6 14.3 21.8
----------------------------------
Parent company only operating income (loss) 8.1 (25.2) 38.3
Equity in operating income of subsidiaries 13.0 95.6 15.9
Gain from sale of discontinued operations, after tax -- -- .7
Cumulative effect of accounting change -- purchased mortgage
servicing, after tax (44.3)
Cumulative effect of accounting change -- postretirement benefits, after tax -- -- (1.9)
Cumulative effect of accounting change -- income taxes -- -- (23.8)
----------------------------------
Consolidated net income $ (23.2) $ 70.4 $ 29.2
==================================================================================================================
</TABLE>
13
<PAGE>
SCHEDULE III
(continued)
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company only)
CONDENSED CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
(Millions) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (23.2) $ 70.4 $ 29.2
Charges (credits) to reconcile net income to net cash from operations:
Net realized investment gains (22.7) (68.9) (48.6)
Change in net unrealized investment gains and losses -- 61.3 (4.1)
Equity in operating income of subsidiaries and affiliates (15.6) (95.6) (15.9)
Dividends received and returns of capital from subsidiaries and affiliates 121.3 114.6 --
Gain from sale of discontinued operations, after tax -- -- (.7)
Cumulative effect of accounting change -- purchased
mortgage servicing, after tax 44.3
Cumulative effect of accounting change -- postretirement benefits, after tax -- -- 1.9
Cumulative effect of accounting change -- income taxes -- -- 23.8
Decrease (increase) in current income taxes receivable 35.1 (10.3) 98.8
Deferred income tax provision 2.8 21.0 4.1
Other, net 10.1 1.9 15.1
---------------------------------
Net cash provided from operations 152.1 94.4 103.6
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments 69.6 (28.3) 133.7
Sales and maturities of common equity securities and other investments 73.3 216.7 229.9
Purchases of common equity securities and other investments (60.3) (314.6) (.3)
Investments in unconsolidated affiliates (44.0) -- --
Sale of discontinued operations -- -- (7.9)
Other -- (1.7) --
---------------------------------
Net cash provided from (used for) investing activities 38.6 (127.9) 355.4
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Decrease) increase in short-term debt -- (100.0) 100.0
Proceeds from issuances of long-term debt -- 178.0 --
Repayments of long-term debt (23.9) -- --
Redemption of preferred stock (82.0) -- (185.0)
Proceeds from issuances of common stock from treasury 2.8 2.1 29.4
Purchases of common stock retired (78.8) (41.8) (371.7)
Dividends paid to preferred shareholders (10.8) (12.2) (22.2)
---------------------------------
Net cash (used for) provided from financing activities (192.7) 26.1 (449.5)
--------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash during year (2.0) (7.4) 9.5
Cash balance at beginning of year 2.1 9.5 --
--------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ .1 $ 2.1 $ 9.5
====================================================================================================================
</TABLE>
14
<PAGE>
c. Exhibits
--------------------------------------------------------------------------------
Exhibit
number Name
--------------------------------------------------------------------------------
2 - Distribution Agreement, effective September 24, 1993 among the
Company and White River Corporation (incorporated by reference to
Exhibit (2.1) of the Company's Report on Form 8-K dated December 6,
1993)
3(i) - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3(a) of the Company's 1993
Annual Report on Form 10-K)
(ii) - Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3(b) of the Company's 1993 Annual Report on Form
10-K)
4 - Indenture dated January 1, 1993, with The First National Bank of
Chicago, as trustee, pursuant to the Company's offering of $150
million of medium-term notes (incorporated by reference to Exhibit
(4) of the Company's Report on Form 8-K dated January 15, 1993)
9 - Voting Trust Agreement dated September 2, 1994 between the Company,
U S West Capital Corporation and First Chicago Trust Company of New
York (filed pursuant to Exhibit 10(a) herein)
10 - Material Contracts:
(a) - Credit Agreement dated June 2, 1994 among the Company, Fund American
Enterprises, Inc., FFOG, Inc., the banks named therein and The Chase
Manhattan Bank (*)
(b) - Securities Purchase Agreement dated April 10, 1994 between the
Company, U S West, Inc., U S West Capital Corporation and Financial
Security Assurance Holdings Ltd. (incorporated by reference to
Exhibit 10(a) of the Company's Report on Form 8-K dated April 10,
1994)
(c) - Common Stock Warrant Agreement with respect to shares of the
Company's Common stock between the Company and John J. Byrne
(incorporated by reference to Exhibit 10(v) of the Company's
Registration Statement on Form S-1 (No. 33-0199)) (**)
(d) - Loan Agreement between the Company and its Chairman, John J. Byrne,
dated December 30, 1992 (incorporated by reference to Exhibit 10(s)
of the Company's 1992 Annual Report on Form 10-K) (**)
(e) - The Company's Retirement Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10(aa) of the Company's 1992
Annual Report on Form 10-K) (**)
(f) - The Company's Voluntary Deferred Compensation Plan (incorporated by
reference to Exhibit 10(bb) of the Company's 1992 Annual Report on
Form 10-K) (**)
(g) - The Company's Deferred Benefit Plan (incorporated by reference to
Exhibit 10(cc) of the Company's 1992 Annual Report on Form 10-K)
(**)
(h) - The Company's Amended 1985 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10(i) of the Company's 1990 Annual Report on
Form 10-K) (**)
(i) - Source One Mortgage Services Corporation's Long-Term Incentive Plan
(*) (**)
(j) - Source One Mortgage Services Corporation's Voluntary Deferred
Compensation Plan (incorporated by reference to Exhibit 10(s) of the
Company's 1993 Annual Report on Form 10-K) (**)
(k) - Source One Mortgage Services Corporation's Amended and Restated
Executive Phantom Stock Plan (incorporated by reference to Exhibit
10(t) of the Company's 1993 Annual Report on Form 10-K) (**)
(l) - Source One Mortgage Services Corporation's Stock Appreciation Rights
Plan (incorporated by reference to Exhibit 10(u) of the Company's
1993 Annual Report on Form 10-K) (**)
(m) - Investment Contract by and between Source One Mortgage Services
Corporation and James A. Conrad (incorporated by reference to Exhibit
10(v) of the Company's 1993 Annual Report on Form 10-K) (**)
(n) - Investment Contract by and between Source One Mortgage Services
Corporation and Robert W. Richards (incorporated by reference to
Exhibit 10(w) of the Company's 1993 Annual Report on Form 10-K) (**)
(o) - Credit Agreement, dated December 13, 1993, among the Company and
White River Corporation (incorporated by reference to Exhibit 10(x)
of the Company's 1993 Annual Report on Form 10-K) (**)
15
<PAGE>
11 - Statement Re Computation of Per Share Earnings (*)
13 - Fund American Enterprises Holdings, Inc. 1994 Annual Report to
Shareholders. Such report, except portions which are expressly
incorporated by reference in this report on Form 10-K, is furnished
only for the information of the Securities and Exchange Commission
and is not being "filed" as part hereof (*)
21 - Subsidiaries of the Registrant (*)
23 - Consent of Independent Auditors (*)
24 - Powers of Attorney (*)
================================================================================
(*) filed herewith.
(**) management contracts or compensation plans/arrangements required to be
filed as an exhibit pursuant to Item 14(a)3 of Form 10-K.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ MICHAEL S. PAQUETTE
--------------------------------------
Michael S. Paquette
Vice President and Controller
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
JOHN J. BYRNE* Chairman, President and March 30, 1995
-------------------------------- Chief Executive Officer
John J. Byrne
HOWARD L. CLARK* Director March 30, 1995
--------------------------------
Howard L. Clark
HOWARD L. CLARK, JR.* Director March 30, 1995
--------------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 30, 1995
--------------------------------
Robert P. Cochran
GEORGE J. GILLESPIE, III* Director March 30, 1995
--------------------------------
George J. Gillespie, III
K. THOMAS KEMP* Executive Vice President and March 30, 1995
-------------------------------- Director
K. Thomas Kemp
GORDON S. MACKLIN* Director March 30, 1995
--------------------------------
Gordon S. Macklin
MICHAEL S. PAQUETTE* Vice President and Controller March 30, 1995
--------------------------------
Michael S. Paquette
ALLAN L. WATERS* Senior Vice President and March 30, 1995
-------------------------------- Chief Financial Officer
Allan L. Waters
ARTHUR ZANKEL* Director March 30, 1995
--------------------------------
Arthur Zankel
*By: /s/ K. THOMAS KEMP
--------------------------------
K. Thomas Kemp, Attorney-in-Fact
17
<PAGE>
EXECUTION COPY
______________________
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
FUND AMERICAN ENTERPRISES, INC.
and
FFOG, INC.
_____________________________
CREDIT AGREEMENT
Dated as of June 2, 1994
______________________________
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Agent
___________________________
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience only.
<TABLE>
Page
<S> <C>
Section 1. Definitions and Accounting Matters - 1 -
----------------------------------
1.01 Certain Defined Terms - 1 -
---------------------
1.02 Accounting Terms and Determinations - 13 -
-----------------------------------
1.03 Classes and Types of Loans - 14 -
--------------------------
Section 2. Commitments - 14 -
-----------
2.01 Syndicated Loans - 14 -
----------------
2.02 Borrowings of Syndicated Loans - 15 -
------------------------------
2.03 Money Market Loans - 15 -
------------------
2.04 Changes of Commitments - 19 -
----------------------
2.05 Fees - 19 -
----
2.06 Lending Offices - 20 -
---------------
2.07 Several Obligations; Remedies Independent - 20 -
-----------------------------------------
2.08 Notes - 20 -
-----
2.09 Prepayments and Conversions or Continuations of Loans - 21 -
-----------------------------------------------------
Section 3. Payments of Principal and Interest - 21 -
----------------------------------
3.01 Repayment of Loans - 21 -
------------------
3.02 Interest - 22 -
--------
Section 4. Payments; Pro Rata Treatment; Computations; Etc. - 22 -
------------------------------------------------
4.01 Payments - 22 -
--------
4.02 Pro Rata Treatment - 23 -
------------------
4.03 Computations - 24 -
------------
4.04 Minimum Amounts - 24 -
---------------
4.05 Certain Notices - 24 -
---------------
4.06 Non-Receipt of Funds by the Agent - 25 -
---------------------------------
4.07 Sharing of Payments, Etc. - 26 -
-------------------------
Section 5. Yield Protection, Etc. - 27 -
----------------------
5.01 Additional Costs - 27 -
----------------
5.02 Limitation on Types of Loans - 29 -
----------------------------
5.03 Illegality - 30 -
----------
5.04 Treatment of Affected Loans - 30 -
---------------------------
5.05 Compensation - 31 -
------------
5.06 Replacement Banks - 31 -
-----------------
5.07 U.S. Taxes - 32 -
----------
Section 6. Guarantee - 33 -
---------
6.01 Guarantee - 33 -
---------
6.02 Obligations Unconditional - 33 -
-------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.03 Reinstatement - 34 -
-------------
6.04 Subrogation - 34 -
-----------
6.05 Remedies - 35 -
--------
6.06 Continuing Guarantee - 35 -
--------------------
6.07 Limitation on Guarantee Obligations of Enterprises - 35 -
--------------------------------------------------
Section 7. Conditions Precedent - 36 -
--------------------
7.01 Initial Loan - 36 -
------------
7.02 Initial and Subsequent Loans - 37 -
----------------------------
Section 8. Representations and Warranties - 37 -
------------------------------
8.01 Corporate Existence - 37 -
-------------------
8.02 Financial Condition - 38 -
-------------------
8.03 Litigation - 38 -
----------
8.04 No Breach - 38 -
---------
8.05 Action - 38 -
------
8.06 Approvals - 39 -
---------
8.07 Use of Loans - 39 -
------------
8.08 ERISA - 39 -
-----
8.09 Taxes - 39 -
-----
8.10 Investment Company Act - 39 -
----------------------
8.11 Public Utility Holding Company Act - 39 -
----------------------------------
8.12 Credit Agreements - 39 -
-----------------
8.13 Hazardous Materials - 39 -
-------------------
8.14 Material Subsidiaries. - 40 -
---------------------
8.15 True and Complete Disclosure - 40 -
----------------------------
Section 9. Covenants of the Borrowers - 41 -
--------------------------
9.01 Financial Statements - 41 -
--------------------
9.02 Litigation - 43 -
----------
9.03 Existence, Etc. - 43 -
---------------
9.04 Insurance - 44 -
---------
9.05 Prohibition of Fundamental Changes - 44 -
----------------------------------
9.06 Limitation on Liens - 44 -
-------------------
9.07 Use of Proceeds - 45 -
---------------
9.08 Financial Covenants - 45 -
-------------------
Section 10. Events of Default - 46 -
-----------------
Section 11. The Agent - 48 -
---------
11.01 Appointment, Powers and Immunities - 48 -
----------------------------------
11.02 Reliance by Agent - 48 -
-----------------
11.03 Defaults - 49 -
--------
11.04 Rights as a Bank - 49 -
----------------
11.05 Indemnification - 49 -
---------------
11.06 Non-Reliance on Agent and Other Banks - 49 -
-------------------------------------
11.07 Failure to Act - 50 -
--------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
11.08 Resignation or Removal of Agent - 50 -
-------------------------------
Section 12. Miscellaneous - 50 -
-------------
12.01 Waiver - 50 -
------
12.02 Notices - 51 -
-------
12.03 Expenses, Etc. - 51 -
--------------
12.04 Amendments, Etc. - 51 -
----------------
12.05 Successors and Assigns - 52 -
----------------------
12.06 Assignments and Participations - 52 -
------------------------------
12.07 Survival - 53 -
--------
12.08 Captions - 54 -
--------
12.09 Counterparts - 54 -
------------
12.10 Governing Law; Submission to Jurisdiction - 54 -
-----------------------------------------
12.11 Waiver of Jury Trial - 54 -
--------------------
12.12 Treatment of Certain Information; Confidentiality - 54 -
-------------------------------------------------
12.13 Integration - 55 -
-----------
</TABLE>
SCHEDULE I - Material Agreements
SCHEDULE II - Material Subsidiaries
EXHIBIT A-1 Form of Syndicated Note
EXHIBIT A-2 Form of Money Market Note
EXHIBIT B-1 Form of Money Market Quote Request
EXHIBIT B-2 Form of Money Market Quote
EXHIBIT C Form of Opinion of Counsel to the Borrowers
EXHIBIT D Calculation of Finance Asset to Debt Coverage Ratios
<PAGE>
CREDIT AGREEMENT dated as of June 2, 1994, between: FUND AMERICAN
ENTERPRISES HOLDINGS, INC., a corporation duly organized and validly existing
under the laws of the State of Delaware (together with its successors and
assigns, "Holdings"); FUND AMERICAN ENTERPRISES, INC., a corporation duly
--------
organized and validly existing under the laws of the State of Delaware and a
Wholly Owned Subsidiary of Holdings (together with its successors and assigns,
"Enterprises") and FFOG, INC., a corporation duly organized and validly existing
------------
under the laws of the State of Delaware and a Wholly Owned Subsidiary of
Holdings (together with its successors and assigns, "FFOG" and together with
----
Holdings and Enterprises, the "Borrowers"); each of the lenders that is a
---------
signatory hereto or which, pursuant to Section 12.06(b) hereof, shall become a
"Bank" hereunder (individually, a "Bank" and, collec tively, the "Banks"); and
---- -----
THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), a national banking association,
as agent for the Banks (in such capacity, together with its successors in such
capacity, the "Agent").
-----
The Borrowers have requested that the Banks make loans to them in
an aggregate principal amount not exceeding $75,000,000 at any one time
outstanding (and each Borrower has agreed to guarantee the direct obligations of
each other Borrower hereunder) and the Banks are prepared to make such loans
upon the terms hereof. Accordingly, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters.
----------------------------------
1.01 Certain Defined Terms. As used herein, the following terms
---------------------
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):
---- -----
"Acquisition" shall mean any transaction, or any series of related
-----------
transactions, by which Holdings and/or any of its Subsidiaries (a) acquires any
ongoing business or all or substantially all of the assets of any corporation or
other entity or any division thereof, whether through purchase of assets, merger
or otherwise; (b) directly or indirectly acquires ownership or control of at
least a majority (in number of votes) of the securities of a corporation which
have ordinary voting power for the election of directors; or (c) directly or
indirectly acquires control of a majority ownership interest in any partnership
or joint venture.
"Affiliate" shall mean any Person which directly or indirectly
---------
controls, or is under common control with, or is controlled by, Holdings. As
used in this definition, "control" (including, with its correlative meanings,
-------
"controlled by" and "under common control with") shall mean possession, directly
------------- -------------------------
or indirectly, of power to direct or cause the direction of management or
policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise), provided that, in any event, any
Person which owns directly or indirectly 5% or more of the securities having
ordinary voting power for the election of directors or other governing body of a
corporation or 5% or more of the partnership or
<PAGE>
other ownership interests of any other Person (other than as a limited partner
of such other Person) will be deemed to control such corporation or other
Person. Notwithstanding the foregoing, no individual shall be deemed to be an
Affiliate solely by reason of his or her being a director, officer or employee
of Holdings or any of its Subsidiaries and Holdings and its Subsidiaries shall
not be deemed to be Affiliates of each other.
"Applicable Lending Office" shall mean, for each Bank and for each
-------------------------
Type of Loan, the "Lending Office" of such Bank (or of an affiliate of such
Bank) designated for such Type of Loan on the signature pages hereof or such
other office of such Bank (or of an affiliate of such Bank) as such Bank may
from time to time specify to the Agent and Holdings as the office by which its
Loans of such Type are to be made and maintained.
"Applicable Margin" shall mean, with respect to each Type of
-----------------
Syndicated Loan, for any day, the percentage set forth below which corresponds
to the Borrower's Rating Level for such day:
<TABLE>
<CAPTION>
Borrower's Rating Level Percentage
----------------------- ----------
<S> <C>
1 through 7 0.2500%
8 through 10 0.3500%
11 0.8750%
</TABLE>
"Bankruptcy Code" shall mean Title 11 of the United States Code
---------------
entitled "Bankruptcy" as now or hereafter in effect, or any successor thereto.
"Base Rate" shall mean, for any day, the higher of (a) the Federal
---------
Funds Rate for such day plus 1/2 of 1% per annum and (b) the Prime Rate for such
day. Each change in any interest rate provided for herein based upon the Base
Rate resulting from a change in the Base Rate shall take effect at the time of
such change in the Base Rate.
"Base Rate Loans" shall mean Syndicated Loans which bear interest
---------------
at rates based upon the Base Rate.
"Borrower's Rating Level" shall mean the number set forth in the
-----------------------
column "Borrower's Rating Level" which corresponds to a Borrower's Debt Ratings
assigned by Moody's and S&P. In the event that there is a difference in the
Borrower's Debt Ratings assigned by Moody's and S&P of one level, then if the
better of the Borrower's Debt Ratings is BBB- or Baa3 or better, the Borrower's
Rating Level shall be the number which corresponds with the better of the
Borrower's Debt Ratings, except that if either of the Borrower's Debt Ratings
shall be BB+ or Ba1 or lower, then the Borrower's Rating Level shall be the
number which corresponds with the lower of the Borrower's Debt Ratings. In the
event there is a difference in the Borrower's Debt Ratings assigned by Moody's
and S&P of two or more levels, then if the better of the Borrower's Debt Ratings
is BBB- or Baa3 or better, the Borrower's Ratings Level shall be the number
which
- 2 -
<PAGE>
corresponds with the level one below the better of the Borrower's Debt Ratings
except that if either of the Borrower's Debt Ratings shall be BB+ or Ba1 or
lower, then the Borrower's Rating Level shall be the number which corresponds
with the lower of the Borrower's Debt Ratings. Each change in the Borrower's
Rating Level shall take effect at the time of such change in the Borrower's Debt
Ratings.
<TABLE>
<CAPTION>
Borrower's Debt Ratings
Borrower's Rating Level Moody's S&P
------- ---
<S> <C> <C>
1 Aaa AAA
2 Aa1 AA+
3 Aa2 AA
4 Aa3 AA-
5 A1 A+
6 A2 A
7 A3 A-
8 Baa1 BBB+
9 Baa2 BBB
10 Baa3 BBB-
11 Ba1 or lower BB+ or lower
</TABLE>
"Business Day" shall mean any day on which commercial banks are
------------
not authorized or required to close in New York City and, if such day relates to
the giving of notices or quotes in connection with a LIBOR Auction or to a
borrowing of, a payment or prepayment of principal of or interest on, or a
Conversion of or into, or an Interest Period for, a Eurodollar Loan or a LIBOR
Market Loan or a notice by a Borrower with respect to any such borrowing,
payment, prepayment, Conversion or Interest Period, which is also a day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Capital Lease Obligations" shall mean, with respect to any
-------------------------
Person, the obligations of such Person to pay rent or other amounts under a
lease of (or other agreement conveying the right to use) real and/or personal
Property which obligations are required to be classified and accounted for as a
capital lease on a balance sheet of such Person under GAAP and, for purposes of
this Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"Change of Control" shall mean an event or series of events by
-----------------
which (a) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended) (other than John
Byrne or American Express Company and its affiliates) becomes, whether by means
of any issuance or direct or indirect transfer of securities, merger,
consolidation, liquidation, dissolution or otherwise, the "beneficial owner" (as
such term is used in Rule 13d-3 under such Act except that a Person shall be
deemed to be a "beneficial" owner of all shares that any such Person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly through one or more intermediaries,
of more than 30% of the total voting rights attached to the then-outstanding
- 3 -
<PAGE>
securities of any class or classes of Holdings the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for corporate
directors; (b) during any period of 12 months, individuals who at the beginning
of such period constituted Holdings Board of Directors (together with any new
directors whose election by Holdings Board of Directors or whose nomination for
election by Holdings' stockholders, was approved by a vote of at least 66% of
the directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the directors then in
office; or (c) Holdings' stockholders approve any plan or proposal for the
liquidation or dissolution of Holdings.
"Chase" shall mean The Chase Manhattan Bank (National
-----
Association).
"Class" shall have the meaning assigned to such term in Section
-----
1.03 hereof.
"Closing Date" shall mean the date upon which this Agreement has
------------
been executed by the Borrowers, the Agent and the Banks and the conditions
precedent to the initial Loans hereunder set forth in Section 7 hereof have been
satisfied.
"Code" shall mean the Internal Revenue Code of 1986, as amended
----
from time to time.
"Commitment" shall mean, as to each Bank, the obligation of such
----------
Bank to make Syndicated Loans pursuant to Section 2.01 hereof in an aggregate
amount at any one time outstanding up to but not exceeding (a) in the case of a
Bank that is a party to this Agreement as of the date hereof, the amount set
opposite such Bank's name on the signature pages hereof under the caption
"Commitment" and (b) in the case of any other Bank, the aggregate amount of the
Commitments of other Banks acquired by it pursuant to Section 12.06(b) hereof
(in each case, as the same may be reduced at any time or from time to time
pursuant to Section 2.04 hereof or increased or reduced at any time or from time
to time pursuant to said Section 12.06(b)).
"Commitment Termination Date" shall mean the 364th day following
---------------------------
the Closing Date.
"Consolidated Debt" shall mean, at any time, the aggregate
-----------------
outstanding principal amount of all Indebtedness of Holdings and the
Consolidated Subsidiaries at such time determined on a consolidated basis in
accordance with GAAP.
"Consolidated Subsidiary" shall mean each Subsidiary of Holdings
-----------------------
(whether now existing or hereafter created or acquired) the financial statements
of which shall be (or should be) consolidated with the financial statements of
Holdings in accordance with GAAP.
"Consolidated Tangible Net Worth" shall mean, at any time, the
-------------------------------
shareholders equity of Holdings and its Consolidated Subsidiaries determined on
a consolidated basis in accordance with GAAP, minus Intangible Assets.
- 4 -
<PAGE>
"Continue", "Continuation" and "Continued" shall refer to the
-------- ------------ ---------
continuation pursuant to Section 2.09 hereof of a Fixed Rate Loan of one Type as
a Fixed Rate Loan of the same Type from one Interest Period to the next Interest
Period.
"Convert", "Conversion" and "Converted" shall refer to a
------- ---------- ---------
conversion pursuant to Section 2.09 hereof of Base Rate Loans into Eurodollar
Loans or of Eurodollar Loans into Base Rate Loans.
"Credit Documents" shall mean, collectively, this Agreement and
----------------
the Notes.
"Default" shall mean an Event of Default or an event which with
-------
notice or lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States of
------- -
America.
"Environmental Laws" shall mean any and all Federal, state, local
------------------
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
---------------
which is a member of the same controlled group of corporations (within the
meaning of Section 414(b) of the Code) as Holdings or is under common control
(within the meaning of Section 414(c) of the Code) with Holdings.
"Eurodollar Loans" shall mean Syndicated Loans the interest rates
----------------
on which are determined on the basis of rates referred to in the definition of
"Fixed Base Rate" in this Section 1.01.
"Event of Default" shall have the meaning assigned to such term in
----------------
Section 10 hereof.
"Facility Fee Rate" shall mean for any day, the percentage set
-----------------
forth below which corresponds to the Borrower's Rating Level for such day:
- 5 -
<PAGE>
<TABLE>
<CAPTION>
Borrower's Rating Level Percentage
----------------------- ----------
<S> <C>
1 through 7 0.1500%
8 through 10 0.1500%
11 0.3750%
</TABLE>
"Federal Funds Rate" shall mean, for any day, the rate per annum
------------------
equal to the overnight Federal funds asked price ("ASK") effective rate set
forth on page 5 of the Telerate screen at approximately 10:00 a.m. (New York
City time) on such day, as determined by the Agent, provided that (a) if the day
for which such rate is to be determined is not a Business Day, the Federal Funds
Rate for such day shall be such rate on the next preceding Business Day as so
set forth at approximately such time on such Telerate screen on such next
preceding Business Day, and (b) if such rate is not so set forth on such
Telerate screen for any day, the Federal Funds Rate for such day shall be the
average rate charged to the Agent on such day on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day as determined by the Agent.
"Finance Assets" shall mean (i) United States Government
--------------
obligations (other than cash equivalents); (ii) debt securities or debt
instruments with a rating of BBB- or higher from S&P, Baa3 or higher by Moody's,
class (2) or higher by the National Association of Insurance Commissioners, or
if none of the foregoing entities or their successors shall exist the equivalent
of such rating by any other nationally recognized securities rating agency (but
excluding any debt securities constituting loans or advances among the Borrower
and its wholly-owned Subsidiaries); (iii) any fund investing exclusively in
investments described in clauses (i) and (ii) which fund may also hold
immaterial amounts of cash pending investment or distribution; (iv) equity
securities listed and traded on the New York Stock Exchange, on the American
Stock Exchange, or among the National Market Issues reported on NASDAQ; and (v)
U S West Preferred Stock so long as such stock is subject to the put right
contained in Section 9.3 of the U.S. West Securities Purchase Agreement;
provided, that Finance Assets shall not include any securities pledged to
--------
secure any obligation (contingent or otherwise) and provided, further, that the
--------- -------
total value of Finance Assets calculated with respect to FFOG
shall be reduced by the amount of any contingent obligation of FFOG pursuant to
the Stock Purchase Agreement dated as of February 28, 1994 and as subsequently
amended, between Source One Mortgage Services Corporation and FFOG.
"Final Maturity Date" shall mean the date 15 months following the
-------------------
Closing Date.
"Fixed Base Rate" shall mean, with respect to any Fixed Rate Loan
---------------
for any Interest Period therefor, the arithmetic mean (rounded upwards, if
necessary, to the nearest 1/100 of 1%) of the rates per annum quoted by the
respective Reference Banks at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) on the date two Business Days prior to the first day
of such Interest Period for the offering by the respective Reference Banks to
leading banks in the London interbank market of Dollar deposits having a term
comparable to such Interest Period and in an amount comparable to the principal
amount of the Eurodollar Loan or LIBOR Market Loan to be made by the respective
Reference Banks for such Interest Period.
- 6 -
<PAGE>
If any Reference Bank is not participating in any Fixed Rate Loan during any
Interest Period therefor, the Fixed Base Rate for such Loan for such Interest
Period shall be determined by reference to the amount of the Loan which such
Reference Bank would have made or had outstanding had it been participating in
such Loan during such Interest Period; provided that in the case of any LIBOR
Market Loan, the Fixed Base Rate for such Loan shall be determined with
reference to deposits of $25,000,000. If any Reference Bank does not timely
furnish such information for determination of any Fixed Base Rate, the Agent
shall determine such Fixed Base Rate on the basis of information timely
furnished by the remaining Reference Banks.
"Fixed Rate" shall mean, for any Fixed Rate Loan for any Interest
----------
Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) determined by the Agent to be equal to the Fixed Base Rate for such
Loan for such Interest Period divided by 1 minus the Reserve Requirement for
such Loan for such Interest Period.
"Fixed Rate Loans" shall mean Eurodollar Loans and, for the
----------------
purposes of the definition of "Fixed Base Rate" in this Section 1.01 and for
purposes of Section 5 hereof, LIBOR Market Loans.
"GAAP" shall mean generally accepted accounting principles applied
----
on a basis consistent with those which, in accordance with the last sentence of
Section 1.02(a) hereof, are to be used in making the calculations for purposes
of determining compliance with the terms of this Agreement.
"Guarantee" shall mean a guarantee, an endorsement, a contingent
---------
agreement to purchase or to furnish funds for the payment or maintenance of, or
otherwise to be or become contingently liable under or with respect to, the
Indebtedness, other obligations, net worth, working capital or earnings of any
Person, or a guarantee of the payment of dividends or other distributions upon
the stock or equity interests of any Person, or an agreement to purchase, sell
or lease (as lessee or lessor) Property, products, materials, supplies or
services primarily for the purpose of enabling a debtor to make payment of his,
her or its obligations or an agreement to assure a creditor against loss, and
including, without limitation, causing a bank or other financial institution to
issue a letter of credit or other similar instrument for the benefit of another
Person, but excluding endorsements for collection or deposit in the ordinary
course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall
--------- ----------
have a correlative meaning.
"Indebtedness" shall mean, for any Person: (a) indebtedness
------------
created, issued or incurred by such Person for borrowed money (whether by loan
or the issuance and sale of debt securities or the sale of Property to another
Person subject to an understanding or agreement, contingent or otherwise, to
repurchase such Property from such Person, except such short-term repurchase
agreements as may be characterized as assets under GAAP); (b) obligations of
such Person to pay the deferred purchase or deferred acquisition price of
Property or services, other than trade accounts payable (other than for borrowed
money) arising, and accrued expenses incurred, in the ordinary course of
business so long as such trade accounts payable are payable within 90 days of
the date the respective goods are delivered or the respective services are
- 7 -
<PAGE>
rendered; (c) Indebtedness of others secured by a Lien on the Property of such
Person, whether or not the respective indebtedness so secured has been assumed
by such Person; (d) obligations of such Person in respect of letters of credit
or similar instruments issued or accepted by banks and other financial
institutions for account of such Person; (e) Capital Lease Obligations of such
Person; and (f) Indebtedness of others Guaranteed by such Person; provided that
(i) financial guarantees entered into in the ordinary course of business by
Financial Security Assurance Holdings Ltd. or its subsidiaries shall not be
included within "Indebtedness" for purposes of Section 9.08(b) (if Financial
Security Assurance Holdings Ltd. shall become a Subsidiary), and (ii) the
obligations described in the provisos to the definition of "Finance Assets"
herein shall not be included as "Indebtedness" for purposes of Section 9.08(c).
"Information Memorandum" shall mean the Confidential Information
----------------------
Memorandum relating to the credit facility provided for hereby distributed with
a letter from Chase and Chase Securities, Inc. to prospective participants in
such facility dated April 18, 1994.
"Intangible Assets" shall mean, at any time, the book value of all
-----------------
Properties of Holdings and the Consolidated Subsidiaries that would be treated
as intangibles under GAAP (determined on a consolidated basis in accordance with
GAAP), including, without limitation, goodwill, purchased deposit premiums,
patents, trademarks, service marks, trade names, copyrights, charters,
franchises, licenses, minority interests in Consolidated Subsidiaries,
organization, reorganization and developmental expense and any write-up in the
book value of such Properties resulting from a revaluation thereof subsequent to
March 31, 1993; provided that purchased and capitalized servicing rights shall
not be treated as intangibles.
"Interest Period" shall mean:
---------------
(a) with respect to any Eurodollar Loan, each period commencing
on the date such Loan is made or Converted from a Loan of another Type or
the last day of the next preceding Interest Period for such Loan and
ending on the numerically corresponding day in the first, second, third
or sixth calendar month thereafter, as the Borrower of such Loan may
select as provided in Section 4.05 hereof, except that each Interest
Period which commences on the last Business Day of a calendar month (or
on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Business Day
of the appropriate subsequent calendar month;
(b) With respect to any Set Rate Loan, the period commencing on
the date such Loan is made and ending on any Business Day up to 180 days
thereafter, as the Borrower of such Loan may select as provided in
Section 2.03(b) hereof; and
(c) With respect to any LIBOR Market Loan, the period commencing
on the date such Loan is made and ending on the numerically corresponding
day in the first, second, third or sixth calendar month thereafter, as
the Borrower of such Loan may select as provided in Section 2.03(b)
hereof, except that each Interest Period which commences on the last
Business Day of a calendar month (or any day for which there is no
numerically
- 8 -
<PAGE>
corresponding day in the appropriate subsequent calendar month) shall end
on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) if any Interest Period for any Loan would
otherwise end after the Final Maturity Date, such Interest Period shall end on
the Final Maturity Date; (ii) each Interest Period which would otherwise end on
a day which is not a Business Day shall end on the next succeeding Business Day
(or, in the case of an Interest Period for a Eurodollar Loan or a LIBOR Market
Loan, if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day); and (iii) no Interest Period for any
Loan (other than a Set Rate Loan) shall have a duration of less than one month
(in the case of a Eurodollar Loan or a LIBOR Market Loan) and, if the Interest
Period for any Fixed Rate or LIBOR Market Loan would otherwise be a shorter
period (by reason of clause (i) above or otherwise), such Loan shall not be
available hereunder.
"LIBO Margin" shall have the meaning assigned to such term in
-----------
Section 2.03(c)(ii)(C) hereof.
"LIBO Rate" shall mean, for any LIBOR Market Loan, a rate per
---------
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by
the Agent to be equal to the rate of interest specified in the definition of
"Fixed Base Rate" in this Section 1.01 for the Interest Period for such Loan
divided by 1 minus the Reserve Requirement for such Loan for such Interest
Period.
"LIBOR Auction" shall mean a solicitation of Money Market Quotes
-------------
setting forth LIBO Margins based on the LIBO Rate pursuant to Section 2.03
hereof.
"LIBOR Market Loans" shall mean Money Market Loans the interest
------------------
rates on which are determined on the basis of LIBO Rates pursuant to a LIBOR
Auction.
"Lien" shall mean, with respect to any Property, any mortgage,
----
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such Property. For purposes of this Agreement, a Borrower shall be deemed to own
subject to a Lien any Property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement (other than an operating lease)
relating to such Property.
"Loans" shall mean Money Market Loans and Syndicated Loans.
-----
"Majority Banks" shall mean Banks having at least 66% of the
--------------
aggregate amount of the Commitments or, if the Commitments shall have
terminated, Banks holding at least 66% of the aggregate unpaid principal amount
of the Loans, provided that for such purpose there shall be excluded any
Commitments directly or indirectly held by Holdings, any of its Subsidiaries or
any of its Affiliates following an assignment or participation as contemplated
by Section 12.06 hereof.
- 9 -
<PAGE>
"Margin Stock" shall mean margin stock within the meaning of
------------
Regulations G, U and X.
"Material Adverse Effect" shall mean a material adverse effect on
-----------------------
(a) the Property, business, operations, financial condition, liabilities or
capitalization of Holdings and its Subsidiaries taken as a whole, (b) the
ability of any of the Borrowers to perform its obligations under any of the
Credit Documents, (c) the validity or enforceability of any of the Credit Docu
ments, (d) the rights and remedies of the Banks and the Agent under any of the
Credit Documents or (e) the timely payment of the principal of or interest on
the Loans or other amounts payable in connection therewith.
"Material Subsidiary" shall mean at any time each Subsidiary of
-------------------
Holdings which is a Borrower and each Subsidiary of Holdings which would be a
significant subsidiary under Regulation S-X of the Securities and Exchange
Commission or any entity succeeding to any or all of its functions.
"Money Market Borrowing" shall have the meaning assigned to such
----------------------
term in Section 2.03(b) hereof.
"Money Market Loans" shall mean the loans provided for by Section
------------------
2.03 hereof.
"Money Market Notes" shall mean the promissory notes provided for
------------------
by Section 2.08(b) hereof.
"Money Market Quote" shall mean an offer in accordance with
------------------
Section 2.03(c) hereof by a Bank to make a Money Market Loan with one single
specified interest rate.
"Money Market Quote Request" shall have the meaning assigned to
--------------------------
such term in Section 2.03(b) hereof.
"Money Market Investments" shall mean:
------------------------
(a) direct obligations of the United States of America, or of any
agency thereof, or obligations guaranteed as to principal and interest by
the United States of America, or of any agency thereof, in either case
maturing not more than one year from the date of acquisition thereof;
(b) certificates of deposit issued by any bank or trust company
organized under the laws of the United States of America or any state
thereof and having capital, surplus and undivided profits of at least
$500,000,000, maturing not more than 90 days from the date of acquisition
thereof; and
(c) commercial paper rated A-1 or better or P-1 or better by S&P
or Moody's, respectively, maturing not more than 90 days from the date of
acquisition thereof.
- 10 -
<PAGE>
"Moody's" shall mean Moody's Investors Service, Inc. or any
-------
successor thereto which is engaged in the business of rating securities.
"Multiemployer Plan" shall mean a multiemployer plan defined as
------------------
such in Section 3(37) of ERISA to which contributions have been made by Holdings
or any ERISA Affiliate and which is covered by Title IV of ERISA.
"Notes" shall mean the promissory notes provided for by Section
-----
2.08 hereof, and shall include the Syndicated Notes and the Money Market Notes.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
----
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company,
------
voluntary association, partnership, joint venture, trust, unincorporated
organization or government (or any agency, instrumentality or political
subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
----
maintained by Holdings or any ERISA Affiliate and which is covered by Title IV
of ERISA, other than a Multiemployer Plan.
"Post-Default Rate" shall mean, in respect of any principal of any
-----------------
Loan or any other amount under this Agreement or any Note that is not paid when
due (whether at stated maturity, by acceleration or otherwise), a rate per annum
during the period from and including the due date to but excluding the date on
which such amount is paid in full equal to 2% above the Base Rate as in effect
from time to time (provided that, if the amount so in default is principal of a
Fixed Rate Loan or a Money Market Loan and the due date thereof is a day other
than the last day of an Interest Period therefor, the "Post-Default Rate" for
such principal shall be, for the period from and including such due date to but
excluding the last day of such Interest Period, 2% above the interest rate for
such Loan as provided in Section 3.02 hereof and, thereafter, the rate provided
for above in this definition).
"Prime Rate" shall mean the rate of interest from time to time
----------
announced by Chase at the Principal Office as its prime commercial lending rate.
"Principal Office" shall mean the principal office of the Agent
----------------
and Chase, presently located at 1 Chase Manhattan Plaza, New York, New York
10081.
"Property" shall mean any right or interest in or to property of
--------
any kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Quarterly Dates" shall mean the last day of March, June,
---------------
September and December in each year, the first of which shall be the first such
day after the date of this Agreement.
- 11 -
<PAGE>
"Reference Banks" shall mean Chase, Credit Lyonnais and Shawmut
---------------
Bank Connecticut, N.A. (or their Applicable Lending Offices, as the case may
be).
"Regulation D", "Regulation G", "Regulation U" and "Regulation X"
------------ ------------ ------------ ------------
shall mean, respectively, Regulations D, G, U and X of the Board of Governors of
the Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
"Regulatory Change" shall mean, with respect to any Bank, any
-----------------
change after the date of this Agreement in United States Federal, state or
foreign law or regulations (including, without limitation, Regulation D) or the
adoption or making after such date of any interpretation, directive or request
applying to a class of banks including such Bank of or under any United States
Federal, state or foreign law or regulations (whether or not having the force of
law and whether or not failure to comply therewith would be unlawful) by any
court or governmental or monetary authority charged with the interpretation or
administration thereof.
"Reserve Requirement" shall mean, for any Interest Period for any
-------------------
Fixed Rate Loan or LIBOR Market Loan, the average maximum rate at which reserves
(including any marginal, supplemental or emergency reserves) are required to be
maintained during such Interest Period under Regulation D by member banks of the
Federal Reserve System in New York City with deposits exceeding one billion
Dollars against "Eurocurrency liabilities" (as such term is used in Regulation
D). Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any Regulatory Change against (i) any category of liabilities which
includes deposits by reference to which the Fixed Base Rate for Eurodollar Loans
or LIBOR Market Loans (as the case may be) is to be determined as provided in
the definition of "Fixed Base Rate" in this Section 1.01 or (ii) any category of
extensions of credit or other assets which includes Eurodollar Loans or LIBOR
Market Loans.
"S&P" shall mean Standard & Poors Corporation, or any successor
---
thereto which is engaged in the business of rating securities.
"Set Rate" shall have the meaning assigned to such term in
--------
Section 2.03(c)(ii)(D) hereof.
"Set Rate Auction" shall mean a solicitation of Money Market
----------------
Quotes setting forth Set Rates pursuant to Section 2.03 hereof.
"Set Rate Loans" shall mean Money Market Loans the interest rates
--------------
on which are determined on the basis of Set Rates pursuant to a Set Rate
Auction.
"Subsidiary" shall mean, for any Person, any corporation,
----------
partnership (other than any limited partnership of which such Person is solely a
limited partner) or other entity of which at least a majority of the securities
or other ownership interests having by the terms thereof ordinary voting power
to elect a majority of the board of directors or other persons performing
- 12 -
<PAGE>
similar functions of such corporation, partnership or other entity (irrespective
of whether or not at the time securities or other ownership interests of any
other class or classes of such corporation, partnership or other entity shall
have or might have voting power by reason of the happening of any contingency)
is at the time directly or indirectly owned or controlled by such Person or one
or more Subsidiaries of such Person or by such Person and one or more
Subsidiaries of such Person. "Wholly Owned Subsidiary" shall mean, for any
-----------------------
Person, any Subsidiary of which all of such shares or ownership interests, other
than (in the case of a corporation) directors' qualifying shares, are so owned
or controlled by such Person.
"Syndicated Loans" shall mean the loans provided for by Section
----------------
2.01 hereof.
"Syndicated Notes" shall mean the promissory notes provided for
----------------
by Section 2.08(a) hereof.
"Type" shall have the meaning assigned that term in Section 1.03
----
hereof.
"U S West Preferred Stock" shall mean the U S West Series B
------------------------
cumulative redeemable preferred stock $1.00 par value per share purchased by
Holdings pursuant to the and subject to the terms of the U S West Securities
Purchase Agreement.
"U S West Securities Purchase Agreement" shall mean the Securities
--------------------------------------
Purchase Agreement dated April 10, 1994 among Holdings, U S West, Inc. U S West
Capital Corporation and Financial Security Assurance Holdings Ltd., as it may be
amended from time to time, subject to Section 9.08(d).
1.02 Accounting Terms and Determinations.
-----------------------------------
(a) Except with respect to calculations made for purposes of
determining compliance with the terms of this Agreement and certificates and
reports respecting compliance with the terms of this Agreement (as to which the
next sentence of this Section 1.02 (a) sets forth the applicable requirement)
and except as otherwise expressly provided herein, all accounting terms used
herein shall be interpreted, and all financial statements and certificates and
reports as to financial matters required to be delivered to the Banks hereunder
shall (unless otherwise disclosed to the Banks in writing at the time of
delivery thereof in the manner described in subsection (b) below) be prepared,
in accordance with GAAP applied on a basis consistent with that used in the
preparation of the latest financial statements furnished to the Banks hereunder
(which, prior to the first financial statements delivered under Section 9.01
hereof, shall mean the financial statements referred to in Section 8.02 hereof).
All calculations made for the purposes of determining compliance with the terms
of this Agreement shall (except as otherwise expressly provided herein) be made
by application of GAAP applied on a basis consistent with that used in the
preparation of the annual or quarterly financial statements furnished to the
Banks pursuant to Section 9.01 hereof unless (i) Holdings shall have notified
the Agent of its objection to determining such compliance on such basis at the
time of delivery of such financial statements or (ii) the Majority Banks shall
have notified Holdings (through the Agent) of their objection to
- 13 -
<PAGE>
determining such compliance on such basis within 30 days after delivery of such
financial statements, in either of which events such calculations shall be made
on a basis consistent with those used in the preparation of the latest financial
statements as to which such objection shall not have been made (which, if
objection is made in respect of the first financial statements delivered under
Section 9.01 hereof, shall mean the financial statements referred to in Section
8.02 hereof).
(b) Holdings shall deliver to the Banks at the same time as the
delivery of any annual or quarterly financial statement under Section 9.01
hereof a description in reasonable detail of any material variation between the
application of accounting principles employed in the preparation of such
statement and the application of accounting principles employed in the
preparation of the next preceding annual or quarterly financial statements as to
which no objection has been made in accordance with the last sentence of
subsection (a) above, and reasonable estimates of the difference between such
statements arising as a consequence thereof.
(c) No Borrower will change the last day of its fiscal year from
December 31 of each year, or the last days of the first three fiscal quarters in
each of its fiscal years from March 31, June 30, and September 30 of each year,
respectively.
1.03 Classes and Types of Loans. Loans hereunder are
--------------------------
distinguished by "Class" and by "Type". The "Class" of a Loan refers to whether
such Loan is a Money Market Loan or a Syndicated Loan, each of which constitutes
a Class. The "Type" of a Loan refers to whether such Loan is a Base Rate Loan, a
Eurodollar Loan, a Set Rate Loan or a LIBOR Market Loan, each of which
constitutes a Type. Loans may be identified by both Class and Type.
Section 2. Commitments
-----------
2.01 Syndicated Loans. Each Bank severally agrees, on the terms
----------------
of this Agreement, to make loans to the Borrowers in Dollars during the period
from and including the Closing Date to but not including the Commitment
Termination Date in an aggregate principal amount at any one time outstanding up
to but not exceeding the amount of the Commitment of such Bank as in effect from
time to time. Subject to the terms of this Agreement, during such period the
Borrowers may borrow, repay and reborrow the amount of the Commitments by means
of Base Rate Loans and Eurodollar Loans and may Convert Syndicated Loans of one
Type into Syndicated Loans of the other Type (as provided in Section 2.09
hereof) or Continue Loans of one Type as Loans of the same Type (as provided in
Section 2.09 hereof); provided that:
(i) there may be no more than 10 different Interest Periods for
both Syndicated Loans and Money Market Loans outstanding at the same time
(for which purpose Interest Periods described in different lettered
clauses of the definition of the term "Interest Period" shall be deemed
to be different Interest Periods even if they are coterminous); and
(ii) the aggregate principal amount of all Money Market Loans,
together with the
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<PAGE>
aggregate principal amount of all Syndicated Loans, at any one time
outstanding shall not exceed the aggregate amount of the Commitments at
such time.
2.02 Borrowings of Syndicated Loans. Each Borrower shall give the
------------------------------
Agent (which shall promptly notify the Banks) notice of each borrowing by such
Borrower hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m.
New York time on the date specified for each borrowing of Syndicated Loans
hereunder, each Bank shall make available the amount of the Syndicated Loan to
be made by it on such date to the Agent, at account number NYAO-DI-900-9-000002
maintained by the Agent with Chase at the Principal Office, in immediately
available funds, for account of the relevant Borrower. The amount so received by
the Agent shall, subject to the terms and conditions of this Agreement, be made
available to the relevant Borrower by depositing the same, in immediately
available funds, in an account of such Borrower maintained with Chase at the
Principal Office designated by such Borrower.
2.03 Money Market Loans.
------------------
(a) In addition to borrowings of Syndicated Loans, at any time
prior to the Commitment Termination Date each Borrower may, as set forth in this
Section 2.03, request the Banks to make offers to make Money Market Loans to
such Borrower in Dollars. The Banks may, but shall have no obligation to, make
such offers and such Borrower may, but shall have no obligation to, accept any
such offers in the manner set forth in this Section 2.03. Money Market Loans may
be LIBOR Market Loans or Set Rate Loans, provided that:
(i) there may be no more than 10 different Interest Periods
for both Syndicated Loans and Money Market Loans outstanding at the same
time (for which purpose Interest Periods described in different lettered
clauses of the definition of the term "Interest Period" shall be deemed
to be different Interest Periods even if they are coterminous); and
(ii) the aggregate principal amount of all Money Market Loans,
together with the aggregate principal amount of all Syndicated Loans, at
any one time outstanding shall not exceed the aggregate amount of the
Commitments at such time.
(b) When a Borrower wishes to request offers to make Money Market
Loans under this Section 2.03, it shall give the Agent (which shall promptly
notify the Banks) notice (a "Money Market Quote Request") so as to be received
--------------------------
no later than 11:00 a.m. New York time on (x) the fourth Business Day prior to
the date of borrowing proposed therein, in the case of a LIBOR Auction or (y)
the Business Day next preceding the date of borrowing proposed therein, in the
case of a Set Rate Auction (or, in any such case, such other time and date as
such Borrower and the Agent, with the consent of the Majority Banks, may agree).
A Borrower may request offers to make Money Market Loans for up to three
different Interest Periods in a single notice (for which purpose Interest
Periods in different lettered clauses of the definition of the term "Interest
Period" shall be deemed to be different Interest Periods even if they are
coterminous); provided that the request for each separate Interest Period shall
be deemed to be a separate Money Market Quote Request for a separate borrowing
(a "Money Market Borrowing"), but only
----------------------
- 15 -
<PAGE>
one fee specified in Section 2.05(b) shall be payable if not more than three
Interest Periods are requested in the same Money Market Quote Request. Each
such notice shall be substantially in the form of Exhibit B-1 hereto and shall
specify as to each Money Market Borrowing:
(i) the relevant Borrower and the proposed date of such
borrowing, which shall be a Business Day;
(ii) the aggregate amount of such Money Market Borrowing, which
shall be at least $10,000,000 (or in a larger multiple of $1,000,000) but
shall not cause the limits specified in Section 2.03(a) hereof to be
violated;
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition in Section 1.01 hereof of the
term "Interest Period";
(iv) whether the Money Market Quotes requested for a
particular Interest Period are seeking quotes for LIBOR Market Loans or
Set Rate Loans; and
(v) if the Money Market Quotes requested are seeking quotes
for Set Rate Loans, the date on which the Money Market Quotes are to be
submitted if it is before the proposed date of borrowing (the date on
which such Money Market Quotes are to be submitted is called the
"Quotation Date").
--------------
Except as otherwise provided in this Section 2.03(b), no Money Market Quote
Request shall be given within five Business Days (or such other number of days
as the relevant Borrower and the Agent, with the consent of the Majority Banks,
may agree) of any other Money Market Quote Request.
(c)(i) Each Bank may submit one or more Money Market Quotes, each
containing an offer to make a Money Market Loan in response to any Money
Market Quote Request; provided that, if the relevant Borrower request
under Section 2.03(b) hereof specified more than one Interest Period,
such Bank may make a single submission containing one or more Money
Market Quotes for each such Interest Period. Each Money Market Quote must
be submitted to the Agent not later than (x) 2:00 p.m. New York time on
the fourth Business Day prior to the proposed date of borrowing, in the
case of a LIBOR Auction or (y) 10:00 a.m. New York time on the Quotation
Date, in the case of a Set Rate Auction (or, in any such case, such other
time and date as the relevant Borrower and the Agent, with the consent of
the Majority Banks, may agree); provided that any Money Market Quote
submitted by the Bank which is acting as Agent (or its Applicable Lending
Office) may be submitted, and may only be submitted, if such Bank (or
such Applicable Lending Office) notifies the relevant Borrower of the
terms of the offer contained therein not later than (x) 1:00 p.m. New
York time on the fourth Business Day prior to the proposed date of
borrowing, in the case of a LIBOR Auction or (y) 9:45 a.m. New York time
on the Quotation Date, in the case of a Set Rate Auction. Subject to
Sections 5.02(b) (in the case of a LIBOR Auction only), 5.03, 7.02 and 10
hereof, any
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<PAGE>
Money Market Quote so made shall be irrevocable except with the consent
of the Agent given on the instructions of the relevant Borrower.
(ii) Each Money Market Quote shall be substantially in the
form of Exhibit B-2 hereto and shall specify:
(A) the relevant Borrower and the proposed date of
borrowing and the Interest Period therefor;
(B) the principal amount of the Money Market Loan for
which each such offer is being made, which principal amount shall
be at least $10,000,000 or a larger multiple of $1,000,000;
provided that the aggregate principal amount of all Money Market
Loans for which a Bank submits Money Market Quotes (x) may be
greater or less than the Commitment of such Bank but (y) may not
exceed the principal amount of the Money Market Borrowing for a
particular Interest Period for which offers were requested;
(C) in the case of a LIBOR Auction, the margin above or
below (or equal to) the applicable LIBO Rate (the "LIBO Margin")
-----------
offered for each such Money Market Loan, expressed as a
percentage (rounded upwards, if necessary, to the nearest
1/10,000th of 1%) to be added to or subtracted from the
applicable LIBO Rate;
(D) in the case of a Set Rate Auction, the rate of
interest per annum (rounded upwards, if necessary, to the nearest
1/10,000th of 1%) offered for each such Money Market Loan (the
"Set Rate"); and
--------
(E) the identity of the quoting Bank (and whether such
Bank is a U.S. Person (as that term is defined in Section 5.07(a)
hereof) and, if such Bank is not a U.S. Person, whether such Bank
is entitled to submit a Form 1001 (as so defined) or a Form 4224
(as so defined).
Unless otherwise agreed by the Agent and the relevant Borrower, no Money
Market Quote shall contain qualifying, conditional or similar language or
propose terms other than or in addition to those set forth in the
applicable Money Market Quote Request and, in particular, no Money Market
Quote may be conditioned upon acceptance by the relevant Borrower of all
(or some specified minimum) of the principal amount of the Money Market
Loan for which such Money Market Quote is being made.
(d) The Agent shall (x) in the case of a Set Rate Auction, as
promptly as practicable after the Money Market Quote is submitted (but in any
event not later than 10:15 a.m. New York time on the Quotation Date) or (y) in
the case of a LIBOR Auction, by 4:00 p.m. New York time on the day a Money
Market Quote is submitted, notify the relevant Borrower of the terms (i) of any
Money Market Quote submitted by a Bank that is in accordance with
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<PAGE>
Section 2.03(c) hereof and (ii) of any Money Market Quote that amends, modifies
or is otherwise inconsistent with a previous Money Market Quote submitted by
such Bank with respect to the same Money Market Quote Request. Any such
subsequent Money Market Quote shall be disregarded by the Agent unless such
subsequent Money Market Quote is submitted solely to correct a manifest error in
such former Money Market Quote. Such notice by the Agent shall specify (A) the
aggregate principal amount of the Money Market Borrowing for which offers have
been received and (B) the respective principal amounts and LIBO Margins or Set
Rates, as the case may be, so offered by each Bank (identifying the Bank that
made each Money Market Quote).
(e) Not later than 11:00 a.m. New York time on (x) the third
Business Day prior to the proposed date of borrowing, in the case of a LIBOR
Auction or (y) the Quotation Date, in the case of a Set Rate Auction (or, in any
such case, such other time and date as the relevant Borrower and the Agent, with
the consent of the Majority Banks, may agree), such Borrower shall notify the
Agent of acceptance or nonacceptance of the offers so notified to it pursuant to
Section 2.03(d) hereof (and the failure of such Borrower to give such notice by
such time shall constitute nonacceptance) and the Agent shall promptly notify
each affected Bank. In the case of acceptance, such notice shall specify the
aggregate principal amount of offers for each Interest Period that are accepted.
The relevant Borrower may accept any Money Market Quote in whole or in part
(provided that any Money Market Quote accepted in part shall be at least
$10,000,000 or in a larger multiple of $1,000,000); provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request;
(ii) the aggregate principal amount of each Money Market
Borrowing shall be at least $10,000,000 (or in a larger multiple of
$1,000,000) but shall not cause the limits specified in Section 2.03(a)
hereof to be violated;
(iii) acceptance of offers may be made only in ascending
order of LIBO Margins or Set Rates, as the case may be, in each case
beginning with the lowest rate so offered (except that such Borrower need
not accept any offer from a Bank that is not a U.S. Person (as that term
is defined in Section 5.07(a) hereof) and is not entitled, as of the date
of such offer, to submit a Form 1001 (as so defined) or a Form 4224 (as
so defined)); and
(iv) such Borrower may not accept any offer if the Agent has
advised such Borrower that such offer fails to comply with Section
2.03(c)(ii) hereof or otherwise fails to comply with the requirements of
this Agreement (including, without limitation, Section 2.03(a) hereof).
If offers are made by two or more Banks with the same LIBO Margins or Set Rates,
as the case may be, for a greater aggregate principal amount than the amount in
respect of which offers are accepted for the related Interest Period, the
principal amount of Money Market Loans in respect
- 18 -
<PAGE>
of which such offers are accepted shall be allocated by the relevant Borrower
among such Banks as nearly as possible (in multiples of $1,000,000) in
proportion to the aggregate principal amount of such offers and determinations
by such Borrower of the amounts of Money Market Loans shall be conclusive in the
absence of manifest error.
(f) Any Bank whose offer to make any Money Market Loan has been
accepted shall, not later than 1:00 p.m. New York time on the date specified for
the making of such Loan, make the amount of such Loan available to the Agent at
account number NYAO-DI-900-9-000002 maintained by the Agent with Chase at the
Principal Office in immediately available funds, for account of the relevant
Borrower. The amount so received by the Agent shall, subject to the terms and
conditions of this Agreement, be made available to the relevant Borrower on such
date by depositing the same, in immediately available funds, in an account of
such Borrower maintained with Chase at the Principal Office designated by such
Borrower.
(g) Except for the purpose and to the extent expressly stated in
Section 2.04(b) hereof, the amount of any Money Market Loan made by any Bank
shall not constitute a utilization of such Bank's Commitment.
2.04 Changes of Commitments.
----------------------
(a) On the Commitment Termination Date undrawn Commitments shall
expire, and any amounts paid or prepaid may not be reborrowed.
(b) Holdings shall have the right at any time or from time to
time (i) so long as no Syndicated Loans or Money Market Loans are outstanding,
to terminate the Commitments and (ii) to reduce the aggregate unused amount of
the Commitments (for which purpose use of the Commitments shall be deemed to
include the aggregate principal amount of all Money Market Loans); provided that
(x) Holdings shall give notice of each such termination or reduction as provided
in Section 4.05 hereof, and (y) each partial reduction of unused Commitments
shall be in an aggregate amount at least equal to $10,000,000 and in multiples
of $1,000,000 in excess thereof.
(c) All Loans shall mature on the Final Maturity Date.
(d) The Commitments once terminated or reduced may not be
reinstated.
2.05 Fees.
----
(a) (i) Prior to the Commitment Termination Date, Holdings shall
pay to the Agent for account of each Bank a facility fee on the amount of such
Bank's Commitment (as in effect from time to time), whether or not utilized, for
each day during the period from and including the date hereof to but not
including the earlier of (A) the date such Commitment is terminated in full and
(B) the Commitment Termination Date, at a rate per annum equal to the
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<PAGE>
Facility Fee Rate for such day; (ii) following the Commitment Termination Date,
Holdings shall pay to the Agent for account of each Bank a facility fee on the
amount of such Bank's pro rata share of any outstanding Loans (which shall be
computed as if such loans were Syndicated Loans) for each day during the period
from and including the Commitment Termination Date to but not including the date
all Loans are repaid in full, at a rate per annum equal to the Facility Fee Rate
for such day. Accrued facility fee shall be payable in arrears on each
Quarterly Date and on the earlier of (i) the date such Commitment is terminated
in full and (ii) the Final Maturity Date (or, if the principal of all Loans and
all interest thereon shall not be paid in full on the Final Maturity Date, the
date all such amounts shall be paid in full).
(b) Each Borrower shall pay to the Agent for account of the Agent
a fee in an amount equal to $1,500 upon the making of each Money Market Quote
Request by such Borrower.
(c) A utilization fee shall be paid to the Agent for the account
of each Bank with respect to each day on which the aggregate outstanding
principal amount of all Loans of all Banks exceeds $37,500,000 on such day and
shall be equal to 0.10% of such excess amount. Accrued utilization fee shall be
payable in arrears on each Quarterly Date and on the earlier of (i) the date the
Commitments are terminated in full and (ii) the Final Maturity Date (or, if the
principal of all Loans and all interest thereon shall not be paid in full on the
Final Maturity Date, the date all such amounts shall be paid in full).
2.06 Lending Offices. The Loans of each Type made by each Bank
---------------
shall be made and maintained at such Bank's Applicable Lending Office for Loans
of such Type.
2.07 Several Obligations; Remedies Independent. The failure of
-----------------------------------------
any Bank to make any Loan to be made by it on the date specified therefor shall
not relieve any other Bank of its obligation to make its Loan on such date, but
neither any Bank nor the Agent shall be responsible for the failure of any other
Bank to make a Loan to be made by such other Bank. The amounts payable by each
Borrower at any time hereunder and under the Notes to each Bank shall be a
separate and independent debt and each Bank shall be entitled to protect and
enforce its rights arising out of this Agreement and the Notes, and it shall not
be necessary for any other Bank or the Agent to consent to, or be joined as an
additional party in, any proceedings for such purposes.
2.08 Notes.
-----
(a) The Syndicated Loans made by each Bank to each Borrower shall
be evidenced by a single promissory note of such Borrower substantially in the
form of Exhibit A-1 hereto, dated the date hereof, payable to such Bank in a
principal amount equal to the amount of its Commitment as originally in effect
and otherwise duly completed.
(b) The Money Market Loans made by any Bank to each Borrower
shall be evidenced by a single promissory note of such Borrower substantially in
the form of Exhibit A-2
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<PAGE>
hereto, dated the date hereof, payable to such Bank and otherwise duly
completed.
(c) The date, amount, Type, interest rate, and duration of
Interest Period (if applicable) of each Loan of each Class made by each Bank to
any Borrower, and each payment made on account of the principal thereof, shall
be recorded by such Bank on its books and, prior to any transfer of the relevant
Note of such Borrower evidencing the Loans of such Class held by it, endorsed by
such Bank on the schedule attached to such Note or any continuation thereof;
provided that the failure of such Bank to make any such recordation or
endorsement shall not affect the obligations of such Borrower to make a payment
when due of any amount owing under such Note.
(d) No Bank shall be entitled to have its Notes subdivided, by
exchange for promissory notes of lesser denominations or otherwise, except in
connection with a permitted assignment of all or any portion of such Bank's
Commitment, Loans and Notes pursuant to Section 12.06(b) hereof.
2.09 Prepayments and Conversions or Continuations of Loans.
-----------------------------------------------------
Subject to Section 4.04 hereof, each Borrower shall have the right to prepay its
Syndicated Loans, or to Convert its Syndicated Loans of one Type into Syndicated
Loans of the other Type or Continue its Syndicated Loans of one Type as
Syndicated Loans of the same Type, at any time or from time to time, provided
that: (i) such Borrower shall give the Agent notice of each such prepayment,
Conversion or Continuation as provided in Section 4.05 hereof; and (ii) Fixed
Rate Loans may be prepaid or Converted only on the last day of an Interest
Period for such Loans. Money Market Loans may not be prepaid under this Section
2.09. Notwithstanding the foregoing, and without limiting the rights and
remedies of the Banks under Section 10 hereof, in the event that any Event of
Default shall have occurred and be continuing, the Agent may (and at the request
of the Majority Banks shall) suspend the right of the Borrowers to borrow any
Syndicated Loan as a Fixed Rate Loan, to Convert any Syndicated Loan into a
Fixed Rate Loan, and to Continue any Syndicated Loan as a Fixed Rate Loan, in
which event all Syndicated Loans shall be Converted into Base Rate Loans (on the
last day(s) of the respective Interest Periods therefor) or (if outstanding as
Base Rate Loans) Continued as Base Rate Loans.
Section 3. Payments of Principal and Interest.
----------------------------------
3.01 Repayment of Loans.
------------------
(a) Subject to clause (b) below, each Borrower hereby promises to
pay to the Agent for account of each Bank the entire outstanding principal
amount of each Loan made by such Bank to such Borrower, and each Loan shall
mature, on the Final Maturity Date .
(b) Each Borrower hereby promises to pay to the Agent for account
of each Bank that makes any Money Market Loan to such Borrower the principal
amount of such Money Market Loan, and such Money Market Loan shall mature, on
the last day of the Interest Period
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<PAGE>
for such Money Market Loan.
3.02 Interest. Each Borrower hereby promises to pay to the Agent
--------
for account of each Bank interest on the unpaid principal amount of each Loan
made by such Bank to such Borrower for the period from and including the date of
such Loan to but excluding the date such Loan shall be paid in full, at the
following rates per annum:
(a) during such periods as such Loan is a Base Rate Loan, the
Base Rate (as in effect from time to time) plus the Applicable Margin (if
any);
(b) during such periods as such Loan is a Fixed Rate Loan, for
each Interest Period relating thereto, the Fixed Rate for such Loan for
such Interest Period plus the Applicable Margin;
(c) if such Loan is a LIBOR Market Loan, the LIBO Rate for such
Loan for the Interest Period therefor plus (or minus) the LIBO Margin
quoted by the Bank making such Loan in accordance with Section 2.03
hereof; and
(d) if such Loan is a Set Rate Loan, the Set Rate for such Loan
for the Interest Period therefor quoted by the Bank making such Loan in
accordance with Section 2.03 hereof.
Notwithstanding the foregoing, each Borrower hereby promises to pay to the Agent
for account of each Bank interest at the applicable Post-Default Rate on any
principal of any Loan made by such Bank to such Borrower and on any other amount
payable by such Borrower hereunder or under the Notes of such Borrower held by
such Bank to or for account of such Bank, which shall not be paid in full when
due (whether at stated maturity, by acceleration or otherwise), for the period
from and including the due date thereof to but excluding the date the same is
paid in full. Accrued interest on each Loan shall be payable (i) in the case of
a Base Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a Fixed
Rate Loan or a Money Market Loan, on the last day of each Interest Period
therefor and, if such Interest Period is longer than three months, at three
month intervals, and (iii) in the case of any Loan, upon the payment or
prepayment thereof or the Conversion of such Loan to a Loan of another Type (but
only on the principal amount so paid, prepaid or Converted), except that
interest payable at the Post-Default Rate shall be payable from time to time on
demand. Promptly after the determination of any interest rate provided for
herein or any change therein, the Agent shall give notice thereof to the Banks
to which such interest is payable and to the relevant Borrower or Borrowers.
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<PAGE>
Section 4. Payments; Pro Rata Treatment; Computations; Etc.
------------------------------------------------
4.01 Payments.
--------
(a) Except to the extent otherwise provided herein, all payments
of principal, interest and other amounts to be made by each Borrower under this
Agreement and its Notes (including, without limitation, all fees referred to
herein) shall be made in Dollars, in immediately available funds, without
deduction, set-off or counterclaim, to the Agent at account number
NYAO-DI-900-9-000002 maintained by the Agent with Chase at the Principal
Office, not later than 1:00 p.m. New York time on the date on which such
payment shall become due (each such payment made after such time on such due
date to be deemed to have been made on the next succeeding Business Day).
(b) Any Bank for whose account any such payment is to be made,
may (but shall not be obligated to) debit the amount of any such payment which
is not made by such time to any ordinary deposit account of any Borrower with
such Bank (with notice to such Borrower).
(c) Each Borrower shall, at the time it makes any payment under
this Agreement or any Note, specify to the Agent (which shall so notify the
intended recipient(s) thereof) the Loans or other amounts payable hereunder to
which such payment is to be applied in which case such payment shall, subject to
Section 4.02 hereof and unless an Event of Default has occurred and is
continuing, be applied as so specified (and in the event that such Borrower
fails to so specify, or if an Event of Default has occurred and is continuing,
such Bank shall, subject to Section 4.02 hereof, apply the amount of such
payment received by it from the Agent in such manner as the Majority Banks (or,
in the absence of a determination by the Majority Banks, the Agent) may
determine to be appropriate).
(d) Each payment received by the Agent under this Agreement or
any Note for account of any Bank shall be paid by the Agent promptly to such
Bank, in immediately available funds, for account of such Bank's Applicable
Lending Office for the Loan or other obligation in respect of which such payment
is made.
(e) If the due date of any payment under this Agreement or any
Note would otherwise fall on a day which is not a Business Day such date shall
be extended to the next succeeding Business Day and interest shall be payable
for any principal so extended for the period of such extension.
4.02 Pro Rata Treatment. Except to the extent otherwise provided
------------------
herein: (a) each borrowing under Section 2.01 hereof shall be made from the
Banks, each payment of facility fee under Section 2.05 hereof shall be made for
account of the Banks, and each termination or reduction of the amount of the
Commitments under Section 2.04 hereof shall be applied to the respective
Commitments of the Banks, pro rata according to the amounts of their respective
Commitments; (b) the making, Conversion and Continuation of Syndicated Loans of
a
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<PAGE>
particular Type (other than Conversions provided for by Section 5.04 hereof)
shall be made pro rata among the Banks according to the amounts of their
respective Commitments (in the case of making of Syndicated Loans) or Syndicated
Loans (in the case of Conversions and Continuations of Syndicated Loans) and the
then current Interest Period for each Syndicated Loan of such Type shall be
coterminous; (c) each payment or prepayment of principal of Syndicated Loans by
any Borrower shall be made for account of the Banks pro rata in accordance with
the respective unpaid principal amounts of the Syndicated Loans held by them;
and (d) each payment of interest on Syndicated Loans by any Borrower shall be
made for account of the Banks pro rata in accordance with the amounts of
interest on such Loans then due and payable to the respective Banks.
4.03 Computations. Interest on Money Market Loans, Fixed Rate
------------
Loans and Base Rate Loans that bear interest based on the Federal Funds Rate and
facility fees shall be computed on the basis of a year of 360 days and actual
days elapsed (including the first day but excluding the last day) occurring in
the period for which payable and interest on Base Rate Loans that bear interest
based on the Prime Rate shall be computed on the basis of a year of 365 or 366
days, as the case may be, and actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
4.04 Minimum Amounts. Except for Conversions or prepayments made
---------------
pursuant to Section 5.04 hereof, each borrowing, Conversion and prepayment of
principal of Eurodollar Loans shall be in an amount at least equal to
$10,000,000 and in multiples of $1,000,000 in excess thereof, each borrowing,
Conversion and prepayment of principal of Base Rate Loans shall be in an amount
at least equal to $5,000,000 and in multiples of $1,000,000 in excess thereof
and each borrowing and Conversion of Money Market Loans shall be in an aggregate
principal amount at least equal to $10,000,000 and in multiples of $1,000,000 in
excess thereof (borrowings, Conversions or prepayments of or into Loans of
different Types or, in the case of Fixed Rate Loans, having different Interest
Periods at the same time hereunder to be deemed separate borrowings, Conversions
and prepayments for purposes of the foregoing, one for each Type or Interest
Period). Anything in this Agreement to the contrary notwithstanding, the
aggregate principal amount of each Type of Fixed Rate Loans which are Syndicated
Loans and have the same Interest Period shall be in an amount at least equal to
$10,000,000 and in multiples of $1,000,000 in excess thereof and, if any such
Fixed Rate Loans would otherwise be in a lesser principal amount for any period,
such Loans shall be Base Rate Loans during such period.
4.05 Certain Notices. Except as otherwise provided in
---------------
Section 2.03 hereof with respect to Money Market Loans, notices by Holdings to
the Agent of terminations or reductions of the Commitments, and by any Borrower
of borrowings, Conversions, Continuations and optional prepayments of Loans, of
Types of Loans and of the duration of Interest Periods shall be irrevocable and
shall be effective only if received by the Agent not later than 10:00 a.m. New
York time on the number of Business Days prior to the date of the relevant
termination, reduction, borrowing, Conversion, Continuation or prepayment or the
first day of such Interest Period specified below:
- 24 -
<PAGE>
<TABLE>
<CAPTION>
Number of
Business
Notice Days Prior
------ ----------
<S> <C>
Termination or reduction
of the Commitments 4
Borrowing or prepayment of,
or conversion into, Base
Rate Loans
same day
Borrowing or prepayment of,
Conversions into, Continuations
as, or duration of Interest
Period for, Eurodollar Loans 3
</TABLE>
Each such notice of termination or reduction shall specify the amount of the
Commitments to be terminated or reduced. Each such notice of borrowing,
Conversion, Continuation or optional prepayment shall specify the Loans to be
borrowed, Converted, Continued or prepaid (and the Borrower of such Loans) and
the amount (subject to Section 4.04 hereof) and Type of each Loan to be
borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the
Type of Loan to result from such Conversion) and the date of borrowing,
Conversion, Continuation or optional prepayment (which shall be a Business Day).
Each such notice of borrowing or Continuation of, or Conversion into, Fixed Rate
Loans shall specify the duration of the Interest Period therefor. The Agent
shall promptly notify the Banks of the contents of each such notice. In the
event that the Borrower of a Fixed Rate Loan fails to select the Type of Loan,
or the duration of any Interest Period, for such Loan within the time period and
otherwise as provided in this Section 4.05, such Loan (if outstanding as a Fixed
Rate Loan) will be automatically Converted into a Base Rate Loan on the last day
of the then current Interest Period for such Loan or (if outstanding as a Base
Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base
Rate Loan.
4.06 Non-Receipt of Funds by the Agent. Unless the Agent shall
---------------------------------
have been notified by a Bank or any Borrower (the "Payor") prior to the date on
-----
which the Payor is to make payment to the Agent of (in the case of a Bank) the
proceeds of a Loan to be made by it hereunder or (in the case of such Borrower)
a payment to the Agent for account of one or more of the Banks hereunder (such
payment being herein called the "Required Payment"), which notice shall be
----------------
effective upon receipt, that the Payor does not intend to make the Required
Payment to the Agent, the Agent may assume that the Required Payment has been
made and may, in reliance upon such assumption (but shall not be required to),
make the amount thereof available to the intended recipient(s) on such date and,
if the Payor has not in fact made the Required Payment to the Agent, the
recipient(s) of such payment shall, on demand, repay to the Agent the amount so
made available together with interest thereon in respect of each day during the
period commencing on the date such amount was so made available by the Agent
until the date the
- 25 -
<PAGE>
Agent recovers such amount at a rate per annum equal to the Federal Funds Rate
for such day and, if such recipient(s) shall fail promptly to make such payment,
the Agent shall be entitled to recover such amount, on demand, from the Payor,
together with interest as aforesaid.
4.07 Sharing of Payments, Etc.
------------------------
(a) Each Borrower agrees that, in addition to (and without
limitation of) any right of set-off, banker's lien or counterclaim a Bank may
otherwise have, each Bank shall be entitled, at its option, to offset balances
held by it for account of such Borrower at any of its offices, in Dollars or in
any other currency, against any principal of or interest on any of such Bank's
Loans to such Borrower or any other amount owing by such Borrower to such Bank
hereunder (including, without limitation, under Section 6 hereof) or under any
Note held by such Bank, that is not paid when due (regardless of whether such
balances are then due to such Borrower), in which case it shall promptly notify
such Borrower and the Agent thereof, provided that such Bank's failure to give
such notice shall not affect the validity thereof.
(b) If any Bank shall obtain from any Borrower payment of any
principal of or interest on any Loan of any Class owing to it from such Borrower
or payment of any other amount owing by such Borrower hereunder (including,
without limitation, under Section 6 hereof) or under any Note held by such Bank
through the exercise of any right of set-off, banker's lien or counterclaim or
similar right or otherwise (other than from the Agent as provided herein and
other than an amount paid to a Bank pursuant to Section 5.01), and, as a result
of such payment, such Bank shall have received a greater percentage of the
principal of or interest on the Loans of such Class then due hereunder by such
Borrower to such Bank or such other amounts then due hereunder by such Borrower
to such Bank than the percentage received by any other Banks, it shall promptly
purchase from such other Banks participations in (or, if and to the extent
specified by such Bank, direct interests in) the Loans of such Class or such
other amounts, respectively, owing to such other Banks (or in interest due
thereon, as the case may be) in such amounts, and make such other adjustments
from time to time as shall be equitable, to the end that all the Banks shall
share the benefit of such excess payment (net of any expenses which may be
incurred by such Bank in obtaining or preserving such excess payment) pro rata
in accordance with the unpaid principal of and/or interest on the Loans of such
Class or such other amounts, respectively, owing to each of the Banks. To such
end all the Banks shall make appropriate adjustments among themselves (by the
resale of participations sold or otherwise) if such payment is rescinded or must
otherwise be restored.
(c) Each Borrower agrees that any Bank so purchasing such a
participation (or direct interest) may exercise all rights of set-off, banker's
lien, counterclaim or similar rights with respect to such participation as fully
as if such Bank were a direct holder of Loans or other amounts (as the case may
be) owing to such Bank in the amount of such participation.
(d) Nothing contained herein shall require any Bank to exercise
any such right or shall affect the right of any Bank to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of any Borrower. If, under any applicable
- 26 -
<PAGE>
bankruptcy, insolvency or other similar law, any Bank receives a secured claim
in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the
extent practicable, exercise its rights in respect of such secured claim in a
manner consistent with the rights of the Banks entitled under this Section 4.07
to share in the benefits of any recovery on such secured claim.
Section 5. Yield Protection, Etc.
----------------------
5.01 Additional Costs.
----------------
(a) Each Borrower shall pay directly to each Bank from time to
time such amounts as such Bank may determine to be necessary to compensate it
for any costs which such Bank determines are attributable to its making or
maintaining of any Fixed Rate Loans to such Borrower or its obligation to make
any Fixed Rate Loans to such Borrower hereunder, or any reduction in any amount
receivable by such Bank hereunder in respect of any of such Loans or such
obligation (such increases in costs and reductions in amounts receivable being
herein called "Additional Costs"), resulting from any Regulatory Change which:
----------------
(i) changes the basis of taxation of any amounts payable to
such Bank by such Borrower under this Agreement or its Notes in respect
of any of such Loans (other than taxes imposed on or measured by the
overall net income of such Bank or of its Applicable Lending Office for
any of such Loans by a jurisdiction in which such Bank has its principal
office or such Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit or
similar requirements (other than the Reserve Requirement utilized in the
determination of the Fixed Rate or LIBO Rate, as the case may be, for
such Loan) relating to any extensions of credit or other assets of, or
any deposits with or other liabilities of, such Bank (including any of
such Loans or any deposits referred to in the definition of "Fixed Base
Rate" in Section 1.01 hereof), or any commitment of such Bank (including
the Commitment of such Bank hereunder); or
(iii) imposes any other condition affecting this Agreement or
its Notes (or any of such extensions of credit or liabilities) or its
Commitment.
If any Bank requests compensation from any Borrower under this Section 5.01(a),
Holdings may, by notice to such Bank (with a copy to the Agent), suspend the
obligation of such Bank to make or Continue Loans to the Borrowers of the Type
with respect to which such compensation is requested, or to Convert Loans of any
other Type into Loans of such Type, until the Regulatory Change giving rise to
such request ceases to be in effect (in which case the provisions of Section
5.04 hereof shall be applicable).
(b) Without limiting the effect of the provisions of paragraph
(a) of this Section 5.01, in the event that, by reason of any Regulatory
Change, any Bank either (i) incurs
- 27 -
<PAGE>
Additional Costs based on or measured by the excess above a specified level of
the amount of a category of deposits or other liabilities of such Bank which
includes deposits by reference to which the interest rate on Eurodollar Loans is
determined as provided in this Agreement or a category of extensions of credit
or other assets of such Bank which includes Eurodollar Loans or (ii) becomes
subject to restrictions on the amount of such a category of liabilities or
assets which it may hold, then, if such Bank so elects by notice to Holdings
(with a copy to the Agent), the obligation of such Bank to make or Continue, or
to Convert Loans of any other Type into, Loans of such Type hereunder shall be
suspended until such Regulatory Change ceases to be in effect (in which case the
provisions of Section 5.04 hereof shall be applicable).
(c) Without limiting the effect of the foregoing provisions of
this Section 5.01 (but without duplication), Holdings shall pay directly to each
Bank from time to time on request such amounts as such Bank may determine to be
necessary to compensate such Bank (or, without duplication, the bank holding
company of which such Bank is a subsidiary) for any costs which it determines
are attributable to the maintenance by such Bank (or any Applicable Lending
Office or such bank holding company), pursuant to any law or regulation or any
interpretation, directive or request (whether or not having the force of law) of
any court or governmental or monetary authority,
(i) following any Regulatory Change, or
(ii) implementing any risk-based capital guideline or requirement
(whether or not having the force of law and whether or not the failure to
comply therewith would be unlawful) hereafter issued by any government or
governmental or supervisory authority implementing at the national level
the Basle Accord (including, without limitation, any amendment to, or
modification or interpretation of, the Final Risk-Based Capital
Guidelines of the Board of Governors of the Federal Reserve System (12
CFR Part 208, Appendix A; 12 CFR Part 225, Appendix A) and any amendment
to, or modification or interpretation of, the Final Risk-Based Capital
Guidelines of the Office of the Comptroller of the Currency (12 CFR Part
3, Appendix A)),
of capital in respect of its Commitment or Loans (such compensation to include,
without limitation, an amount equal to any reduction of the rate of return on
assets or equity of such Bank (or any Applicable Lending Office or such bank
holding company) to a level below that which such Bank (or any Applicable
Lending Office or such bank holding company) could have achieved but for such
law, regulation, interpretation, directive or request). For purposes of this
Section 5.01(c), "Basle Accord" shall mean the proposals for risk-based capital
------------
framework described by the Basle Committee on Banking Regulations and
Supervisory Practices in its paper entitled "International Convergence of
Capital Measurement and Capital Standards" dated July 1988, as amended, modified
and supplemented and in effect from time to time or any replacement thereof.
(d) If any Bank does not give notice to Holdings of any event
occurring after the date of this Agreement that will entitle such Bank to
compensation under Section 5.01 (a) hereof
- 28 -
<PAGE>
within 45 days after it obtains actual knowledge of such an event, such Bank
shall, with respect to compensation payable pursuant to said Section 5.01(a) in
respect of any costs resulting from such event, only be entitled to payment
under said Section 5.01(a) for costs incurred from and after the date 45 days
prior to the date that such Bank does give such notice. Each Bank will
designate a different Applicable Lending Office for the Loans of such Bank
affected by such event if such designation will avoid the need for, or reduce
the amount of, such compensation and will not, in the sole opinion of such Bank,
be disadvantageous to such Bank. Each Bank will furnish to Holdings a statement
setting forth the basis and amount of each request by such Bank for compensation
under paragraph (a) or (c) of this Section 5.01. Determinations and allocations
by any Bank for purposes of this Section 5.01 of the effect of any Regulatory
Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect
of capital maintained pursuant to paragraph (c) of this Section 5.01, on its
costs or rate of return of maintaining Loans or its obligation to make Loans, or
on amounts receivable by it in respect of Loans, and of the amounts required to
compensate such Bank under this Section 5.01, shall be conclusive, provided that
such determinations and allocations are made on a reasonable basis.
5.02 Limitation on Types of Loans. Anything herein to the
----------------------------
contrary notwithstanding, if, on or prior to the determination of any Fixed
Base Rate for any Interest Period:
(a) the Agent determines, which determination shall be
conclusive, that quotations of interest rates for the relevant deposits
referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof
are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining rates of interest for any Type of
Fixed Rate Loans as provided herein; or
(b) the Majority Banks determine (or any Bank that has
outstanding a Money Market Quote with respect to a LIBOR Market Loan
determines), which determination shall be conclusive, and notify (or
notifies, as the case may be) the Agent that the relevant rates of
interest referred to in the definition of "Fixed Base Rate" in Section
1.01 hereof upon the basis of which the rate of interest for Eurodollar
Loans (or LIBOR Market Loans, as the case may be) for such Interest
Period is to be determined are not likely adequately to cover the cost to
such Banks (or to such quoting Bank) of making or maintaining such Type
of Loans for such Interest Period and such shortfall is an amount
determined by such Banks (or such quoting Bank) to be material;
then the Agent shall give Holdings and each Bank prompt notice thereof, and so
long as such condition remains in effect, the Banks (or such quoting Bank) shall
be under no obligation to make additional Loans of such Type, to Continue Loans
of such Type or to Convert Loans of any other Type into Loans of such Type and
each Borrower shall, on the last day(s) of the then current Interest Period(s)
for its outstanding Loans of such Type, either prepay such Loans or Convert such
Loans into another Type of Loan in accordance with Section 2.09 hereof.
5.03 Illegality. Notwithstanding any other provision of this
----------
Agreement, in the
- 29 -
<PAGE>
event that it becomes unlawful for any Bank or its Applicable Lending Office to
honor its obligation to make or maintain Eurodollar Loans or LIBOR Market Loans
hereunder, then such Bank shall promptly notify Holdings thereof (with a copy to
the Agent) and such Bank's obligation to make or Continue, or to Convert Loans
of any other Type into, Eurodollar Loans shall be suspended until such time as
such Bank may again make and maintain Eurodollar Loans (in which case the
provisions of Section 5.04 hereof shall be applicable), and such Bank shall no
longer be obligated to make any LIBOR Market Loan that it has offered to make.
5.04 Treatment of Affected Loans. If the obligation of any Bank
---------------------------
to make a particular Type of Fixed Rate Loans or Continue, or to Convert Loans
of any other Type into, Loans of a particular Type shall be suspended pursuant
to Section 5.01 or 5.03 hereof (Loans of such Type being herein called "Affected
--------
Loans" and such Type being herein called the "Affected Type"), such Bank's
----- -------------
Affected Loans shall be automatically Converted into Base Rate Loans on the last
day(s) of the then current Interest Period(s) for Affected Loans (or, in the
case of a Conversion required by Section 5.01(b) or 5.03 hereof, on such earlier
date as such Bank may specify to Holdings with a copy to the Agent) and, unless
and until such Bank gives notice as provided below that the circumstances
specified in Section 5.01 or 5.03 hereof which gave rise to such Conversion no
longer exist:
(a) to the extent that such Bank's Affected Loans have been so
Converted, all payments and prepayments of principal which would
otherwise be applied to such Bank's Affected Loans shall be applied
instead to its Base Rate Loans;
(b) all Loans which would otherwise be made or Continued by such
Bank as Loans of the Affected Type shall be made or Continued instead as
Base Rate Loans and all Loans of such Bank which would otherwise be
Converted into Loans of the Affected Type shall be Converted instead (or
shall remain as) Base Rate Loans; and
(c) if Loans of other Banks of the Affected Type are subsequently
Converted into Loans of another Type (other than Base Rate Loans), such
Bank's Base Rate Loans shall be automatically Converted on the Conversion
date for such Loans of the other Banks into Loans of such other Type to
the extent necessary so that, after giving effect thereto, all Loans held
by such Bank and the Banks whose Loans are so Converted are held pro rata
(as to principal amounts, Types and Interest Periods) in accordance with
their respective Commitments.
If such Bank gives notice to Holdings with a copy to the Agent that the
circumstances specified in Section 5.01 or 5.03 hereof which gave rise to the
Conversion of such Bank's Affected Loans pursuant to this Section 5.04 no longer
exist (which such Bank agrees to do promptly upon such circumstances ceasing to
exist) at a time when Loans of the Affected Type are outstanding, such Bank's
Base Rate Loans shall be automatically Converted, on the first day(s) of the
next succeeding Interest Period(s) for such outstanding Loans of the Affected
Type, to the extent necessary so that, after giving effect thereto, all Loans
held by the Banks holding Loans of the Affected Type and by such Bank are held
pro rata (as to principal amounts, Types and Interest
- 30 -
<PAGE>
Periods) in accordance with their respective Commitments.
5.05 Compensation. Each Borrower shall pay to the Agent for
------------
account of each Bank, upon the request of such Bank through the Agent, such
amount or amounts as shall be sufficient (in the reasonable opinion of such
Bank) to compensate it for any loss, cost or expense which such Bank determines
is attributable to:
(a) any payment, prepayment or Conversion of a Fixed Rate Loan or
a Set Rate Loan of such Bank to such Borrower for any reason (including,
without limitation, the acceleration of the Loans pursuant to Section 10
hereof or a Conversion of Loans pursuant to Section 5.04 hereof) on a
date other than the last day of the Interest Period for such Loan; or
(b) any failure by such Borrower for any reason (including,
without limitation, the failure of any of the conditions precedent
specified in Section 7 hereof to be satisfied) to borrow a Fixed Rate
Loan or a Set Rate Loan (with respect to which, in the case of a Money
Market Loan, such Borrower has accepted a Money Market Quote) from such
Bank on the date for such borrowing specified in the relevant notice of
borrowing given pursuant to Section 2.02 or 2.03(b) hereof.
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which otherwise would have accrued on the principal amount so paid, prepaid or
Converted or not borrowed for the period from the date of such payment,
prepayment, Conversion or failure to borrow to the last day of the then current
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan which would have commenced on the date specified
for such borrowing) at the applicable rate of interest (less the Applicable
Margin) for such Loan provided for herein over (ii) the amount of interest which
otherwise would have accrued on such principal amount at a rate per annum equal
to the interest component of the amount such Bank would have received in the
London interbank market (if such Loan is a Eurodollar Loan or a LIBOR Market
Loan) or the United States secondary certificate of deposit market (if such Loan
is a Set Rate Loan) for Dollar deposits placed with leading banks in amounts
comparable to such principal amount and with maturities comparable to such
period (as reasonably determined by such Bank).
- 31 -
<PAGE>
5.06 Replacement Banks. Provided that no Default shall have
-----------------
occurred and be continuing, Holdings may, at any time, replace any Bank that has
requested compensation from any Borrower pursuant to Section 5.01 or 5.07 hereof
or whose obligation to make additional Loans has been suspended pursuant to
Section 5.03 hereof (any such bank being herein called an "Affected Bank") by
-------------
giving not less than 10 Business Days' prior notice to the Agent (which shall
promptly notify such Affected Bank and each other Bank) that it intends to
replace such Affected Bank with one or more assignees selected by Holdings and
acceptable to the Agent. The method (whether by assignment or otherwise) of and
documentation for such replacement shall be in accordance with Section 12.06(b)
or otherwise acceptable to the Affected Bank and the Agent. Upon the effective
date of any replacement under this Section 5.06 (and as a condition thereto)
Holdings shall, or shall cause the replacement lender(s) to, pay to the Affected
Bank being replaced any amounts owing to such Affected Bank hereunder
(including, without limitation, interest, facility fees, compensation and
additional amounts under this Section 5, in each case accrued to the effective
date of such replacement), whereupon each replacement lender shall become a
"Bank" for all purposes of this Agreement having a Commitment in the amount of
such Affected Bank's Commitment assumed by it, and such Commitment of the
Affected Bank being replaced shall be terminated upon such effective date and
all of such Affected Bank's rights and obligations under this Agreement shall
terminate (provided that the obligations of the Borrowers under Sections 5.01,
--------
5.05, 5.07 and 12.03 hereof to such Affected Bank shall survive such replacement
as provided in Section 12.07 hereof).
5.07 U.S. Taxes.
----------
(a) Each Borrower agrees to pay to the Agent for account of each
Bank that is not a U.S. Person such additional amounts as are necessary in order
that the net payment of any amount due to such Bank hereunder after deduction
for or withholding in respect of any U.S. Tax imposed with respect to such
payment (or in lieu thereof, payment of such U.S. Tax by such Bank), will not be
less than the amount provided herein to be then due and payable to or for
account of such Bank, provided that the foregoing obligation to pay such
additional amounts shall not apply:
(i) to any payment to such Bank hereunder if such Bank is, on the
date hereof (or on the date it becomes a Bank as provided in Section
12.06(b) hereof) and on the date of any change in the Applicable Lending
Office of such Bank, either entitled to submit a Form 1001 (relating to
such Bank and entitling it to a complete exemption from withholding on
all interest to be received by it hereunder in respect of the Loans) or
Form 4224 (relating to all interest to be received by such Bank hereunder
in respect of its Loans), or
(ii) to any U.S. Tax that would not have been imposed but for
the failure by such Bank to comply with applicable certification,
information, documentation or other reporting requirements concerning the
nationality, residence, identity or connections with the United States of
America of such Bank if such compliance is required by statute or
- 32 -
<PAGE>
regulation of the United States of America as a precondition to relief or
exemption from such U.S. Tax.
For the purposes of this Section 5.07(a), (w) "Form 1001" shall mean Form 1001
---------
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (x) "Form 4224" shall mean Form 4224
---------
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related forms as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates), (y) "U.S. Person" shall mean a citizen, national or
-----------
resident of the United States of America, a corporation, partnership or other
entity created or organized in or under any laws of the United States of
America, or any estate or trust that is subject to United States Federal income
taxation regardless of the source of its income and (z) "U.S. Taxes" shall mean
----------
any present or future tax, assessment or other charge or levy imposed by or on
behalf of the United States of America or any taxing authority thereof or
therein.
(b) Within 30 days after a Borrower pays any amount to the Agent
for account of any Bank from which it is required by law to make any deduction
or withholding, and within 30 days after it is required by law to remit such
deduction or withholding to any relevant taxing or other authority, such
Borrower shall deliver to the Agent for delivery to such Bank evidence
satisfactory to such Bank of such deduction, withholding or payment (as the case
may be).
- 33 -
<PAGE>
Section 6. Guarantee.
---------
6.01 Guarantee. The Borrowers acknowledge and agree that each Loan
---------
made under this Agreement shall be for the benefit of all Borrowers and the
proceeds thereof shall be utilized by any or all of the Borrowers in such
amounts and at such times as they may agree between themselves from time to
time. Each of the Borrowers further acknowledges and agrees that it directly
benefits from the financial accomodations hereby extended to the other
Borrowers. Neither the Agent, nor any Bank shall have any responsibility to
ascertain whether or in what amounts the proceeds of the Loans have been
utilized by any of the Borrowers. Each Borrower hereby guarantees to each Bank
and the Agent and their respective successors and assigns the prompt payment in
full when due (whether at stated maturity, by acceleration or otherwise) of the
principal of and interest on the Loans made by the Banks to any other Borrower
and the Notes held by each Bank of any other Borrower and all other amounts from
time to time owing to the Banks or the Agent by any other Borrower under this
Agreement and under any other Borrower's Notes, in each case strictly in
accordance with the terms hereof or thereof. As used in this Section 6: (a) the
term "Guarantor" refers to a Borrower in its capacity as a guarantor hereunder;
---------
and (b) the term "Guaranteed Obligations", when used with respect to a
----------------------
Guarantor, refers to the obligations of any other Borrower guaranteed by such
Guarantor hereunder. Each Guarantor hereby further agrees that upon default in
the payment when due (whether at stated maturity, by acceleration or otherwise)
of any of its Guaranteed Obligations, such Guarantor will promptly pay the same,
without any demand or notice whatsoever, and that in the case of any extension
of time of payment or renewal of any of such Guaranteed Obligations, the same
will be promptly paid in full when due (whether at extended maturity, by
acceleration or otherwise) in accordance with the terms of such extension or
renewal.
6.02 Obligations Unconditional. The obligations of each Guarantor
-------------------------
under Section 6.01 hereof are absolute and unconditional irrespective of the
value, genuineness, validity, regularity or enforceability of the obligations of
any other Borrower or Borrowers under this Agreement and Notes of any other
Borrower or Borrowers, or any substitution, release or exchange of any other
guarantee of or security for its Guaranteed Obligations, and, to the fullest
extent permitted by applicable law, irrespective of any other circumstance
whatsoever which might otherwise constitute a legal or equitable discharge or
defense of a surety or guarantor, it being the intent of this Section 6.02 that
the obligations of such Guarantor under this Section 6 shall be absolute and
unconditional under any and all circumstances. Without limiting the generality
of the foregoing, it is agreed that the occurrence of any one or more of the
following shall not alter or impair the liability of any Guarantor under this
Section 6 which shall remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice to such
Guarantor, the time for any performance of or compliance with any of its
Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of this
Agreement or the Notes
- 34 -
<PAGE>
or any other agreement or instrument referred to herein or therein shall
be done or omitted;
(iii) the maturity of any of its Guaranteed Obligations shall be
accelerated, or any of its Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under this Agreement
or the Notes of any other Borrower shall be waived or any other guarantee
of any of its Guaranteed Obligations or any security therefor shall be
released or exchanged in whole or in part or otherwise dealt with; or
(iv) any lien or security interest granted to, or in favor of,
the Agent or any Bank or Banks as security for any of its Guaranteed
Obligations shall fail to be perfected.
Each Guarantor hereby expressly waives diligence, presentment, demand of
payment, protest and all notices whatsoever, and any requirement that the Agent
or any Bank exhaust any right, power or remedy or proceed against any other
Borrower under this Agreement or the Notes or any other agreement or instrument
referred to herein or therein, or against any other Person under any other
guarantee of, or security for, any of such Guarantor's Guaranteed Obligations.
6.03 Reinstatement. The obligations of each Guarantor under this
-------------
Section 6 shall be automatically reinstated if and to the extent that for any
reason any payment by or on behalf of any other Borrower in respect of such
Guarantor's Guaranteed Obligations is rescinded or must be otherwise restored by
any holder of any of such Guaranteed Obligations, whether as a result of any
proceedings in bankruptcy or reorganization or otherwise, and such Guarantor
agrees that it will indemnify the Agent and each Bank on demand for all
reasonable costs and expenses (including, without limitation, fees of counsel)
incurred by the Agent or such Bank in connection with such rescission or
restoration, including any such costs and expenses incurred in defending against
any claim alleging that such payment constituted a preference, fraudulent
transfer or similar payment under any bankruptcy, insolvency or similar law.
6.04 Subrogation. Each Guarantor hereby waives all rights of
-----------
subrogation or contribution, whether arising by contract or operation of law
(including, without limitation, any such right arising under the Bankruptcy
Code) or otherwise by reason of any payment by it pursuant to the provisions of
this Section 6. Enterprises and FFOG further agree with Holdings for the
benefit of each of Enterprises's and FFOG's creditors (including, without
limitation, each Bank and the Agent) that any such payment by it as a Guarantor
hereunder shall constitute, to the fullest extent permitted by applicable law, a
dividend on the common stock of Enterprises or FFOG, respectively, owned by
Holdings or a return of capital paid by Holdings to Enterprises or FFOG,
respectively and, thereafter, an equity investment in Holdings by Enterprises or
FFOG, as the case may be. Holdings further agrees for the benefit of each of
its creditors (including, without limitation, each Bank and the Agent) that any
such payment by it as a Guarantor hereunder shall constitute, to the fullest
extent permitted by applicable law, a contribution of capital by Holdings to
Enterprises or FFOG, as the case may be or, if evidenced by an instrument in
form and substance (and containing terms of subordination) satisfactory to the
Majority Banks, indebtedness subordinated in right of payment to the principal
of and interest (including post-
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<PAGE>
petition interest) on the Loans.
6.05 Remedies. Each Guarantor agrees that, as between it and the
--------
Banks, the obligations of any other Borrower under this Agreement and the Notes
of any other Borrower may be declared to be forthwith due and payable as
provided in Section 10 hereof (and shall be deemed to have become automatically
due and payable in the circumstances provided in said Section 10) for purposes
of Section 6.01 hereof notwithstanding any stay, injunction or other prohibition
preventing such declaration (or such obligations from becoming automatically due
and payable) as against any other Borrower and that, in the event of such
declaration (or such obligations being deemed to have become automatically due
and payable), such obligations (whether or not due and payable by any other
Borrower) shall forthwith become due and payable by any other Borrower for
purposes of said Section 6.01.
6.06 Continuing Guarantee. The guarantee of each Guarantor in
--------------------
this Section 6 is a continuing guarantee, and shall apply to all of its
Guaranteed Obligations whenever arising.
6.07 Limitation on Guarantee Obligations of Enterprises. In any
--------------------------------------------------
action or proceeding involving any state corporate law, or any state or Federal
bankruptcy, insolvency, reorganization or other law affecting the rights of
creditors generally, if the obligations of Enterprises or FFOG under Section
6.01 hereof would otherwise be held or determined to be void, invalid or
unenforceable, or subordinated to the claims of any other creditors of
Enterprises or FFOG, on account of the amount of its liability under said
Section 6.01, then, notwithstanding any other provision hereof to the contrary,
the amount of such liability shall, without any further action by Enterprises or
FFOG, any Bank, the Agent or any other Person, be automatically limited and
reduced to the highest amount which is valid and enforceable and not
subordinated to the claims of other creditors of Enterprises or FFOG as
determined in such action or proceeding.
Section 7. Conditions Precedent.
---------- ---------
7.01 Initial Loan. The obligation of each Bank to make its
------------
initial Loan hereunder is subject to the receipt by the Agent of the following
documents and evidence, each of which shall be satisfactory to the Agent in form
and substance (the Agent to furnish each Bank with a copy of each such document
received by it reasonably promptly after the Closing Date):
(a) Notes. The Notes of the Borrowers described in Section 2.08,
------
duly executed by each of the Borrowers.
(b) Corporate Documents. The following documents, each certified
-------------------
as indicated below:
(i) a copy of the charter, as amended, of each of the Borrowers
certified by the Secretary of State of the State of Delaware, and a
certificate as to the good standing of and charter documents filed by each
of the Borrowers from such
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<PAGE>
Secretary of State, dated as of a recent date;
(ii) a certificate of the Secretary or an Assistant Secretary
of each of the Borrowers, dated the Closing Date and certifying
(A) that attached thereto is a true and complete copy of the by-
laws of such Borrower as in effect on the date of such
certificate, (B) that attached thereto is a true and complete copy
of resolutions duly adopted by the board of directors of such
Borrower authorizing the execution, delivery and performance of
such of the Credit Documents to which such Borrower is or is
intended to be a party and borrowings by it hereunder, and that
such resolutions have not been modified, rescinded or amended and
are in full force and effect, (C) that the charter of such
Borrower has not been amended since the date of the certification
thereof furnished pursuant to clause (i) above, and (D) as to the
incumbency and specimen signature of each officer of such Borrower
executing such of the Credit Documents to which such Borrower is
or is intended to be a party and each other document to be
delivered by such Borrower from time to time in connection
therewith (and the Agent and each Bank may conclusively rely on
such certificate until it receives notice in writing from such
Borrower); and
(iii) a certificate of another officer of each Borrower, dated
the Closing Date, as to the incumbency and specimen signature of
the Secretary or Assistant Secretary, as the case may be, of such
Borrower.
(c) Officer's Certificate. A certificate of a senior officer of
---------------------
each Borrower, dated the Closing Date, to the effect set forth in clauses
(a) and (b)(i) of Section 7.02 hereof (both immediately prior to the
Closing Date and after giving effect to the Loan or Loans to be made on
the Closing Date).
(d) Opinion of Counsel to the Borrowers. An opinion of Brobeck,
-----------------------------------
Phleger & Harrison, counsel to the Borrowers, substantially in the form
of Exhibit C hereto.
(e) Fees and Expenses. Evidence (including, without limitation,
-----------------
payment instructions given by Holdings) satisfactory to the Agent that
the fees and expenses referred to in Section 12.03 hereof, to the extent
that statements or bills, in reasonable detail, and all other fees
payable by Holdings or any Borrower to the Agent or any or all of the
Banks in connection with the transactions contemplated hereby, to the
extent then due and payable, have been paid.
(f) Other Documents. Such other documents as the Agent or any
---------------
Bank or counsel to the Agent may reasonably request.
7.02 Initial and Subsequent Loans. The obligation of any Bank to
----------------------------
make any Loan (including any Money Market Loan and such Bank's initial Loan,
whether a Money Market Loan or a Syndicated Loan) to any Borrower upon the
occasion of each borrowing hereunder is subject
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<PAGE>
to the further conditions precedent that, both immediately prior to the making
of such Loan and also after giving effect thereto: (a) no Default shall have
occurred and be continuing or would result therefrom; and (b) unless such
borrowing will not increase the aggregate outstanding principal amount of the
Loans, (i) the representations and warranties made by each of the Borrowers in
Section 8 hereof shall be true in all material respects on and as of the date of
the making of such Loan with the same force and effect as if made on and as of
such date; and (ii) the Borrower shall have delivered a certificate of a senior
financial officer in the form of Exhibit D hereto attesting to compliance with
the covenant contained in Section 9.08(c) after giving effect to such borrowing
and attesting to the nature and value of such Borrower's Finance Assets. Each
notice of borrowing delivered by a Borrower hereunder shall constitute a
certification by such Borrower to the effect set forth in the preceding sentence
(both as of the date of such notice and, unless any Borrower otherwise notifies
the Agent prior to the date of such borrowing, as of the date of such
borrowing).
Section 8. Representations and Warranties. The Borrowers hereby
------------------------------
jointly and severally represent and warrant to the Banks and the Agent that:
8.01 Corporate Existence. Each of Holdings and its Subsidiaries:
-------------------
(a) is a corporation, partnership or other entity duly organized and validly
existing under the laws of the jurisdiction of its organization; (b) has all
requisite corporate or other power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on
its business as now being or as proposed to be conducted; and (c) is qualified
to do business in all jurisdictions in which the nature of the business
conducted by it makes such qualification necessary and where failure so to
qualify would have a Material Adverse Effect.
8.02 Financial Condition. The consolidated balance sheets of
-------------------
Holdings and its Consolidated Subsidiaries as at December 31, 1993 and the
related consolidated statements of income, retained earnings and cash flow of
Holdings and its Consolidated Subsidiaries for the fiscal year ended on said
date, with the opinion thereon of Ernst & Young, heretofore furnished to each of
the Banks, are complete and correct and fairly present the consolidated
financial condition of Holdings and its Consolidated Subsidiaries and the
consolidated results of their operations for the fiscal year ended on said date,
all in accordance with GAAP applied on a consistent basis. Neither Holdings nor
any of its Subsidiaries had on said dates any material contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments, except as referred to or
reflected or provided for in said balance sheets or in the notes thereto as at
said dates. Since December 31, 1993, there has been no material adverse change
in the consolidated financial condition, operations, business or prospects taken
as a whole of Holdings and its Consolidated Subsidiaries from that set forth in
said financial statements as at said date.
8.03 Litigation. There are no lawsuits or other proceedings
----------
pending, or to the knowledge of any Borrower threatened against or affecting,
Holdings or any of its Subsidiaries or any of their respective properties or
assets before any court or arbitrator or by or before any
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<PAGE>
governmental commission, bureau or other regulatory authority (including,
without limitation, the Securities and Exchange Commission) which would be
likely, individually or in the aggregate, to have a Material Adverse Effect.
8.04 No Breach. None of the execution and delivery of this
---------
Agreement and the Notes, the consummation of the transactions herein and therein
contemplated and compliance with the terms and provisions hereof and thereof
will conflict with or result in a breach of, or require any consent under, the
charter or by-laws of Holdings or any of its Subsidiaries, or any applicable law
or regulation (including, without limitation, Regulations G, U and X), or any
order, writ, injunction or decree of any court or governmental authority or
agency, or any agreement or instrument to which Holdings or any of its
Subsidiaries is a party or by which any of them is bound or to which any of them
is subject, which consent shall have been duly obtained on or prior to the
Closing Date, or constitute a default under any such agreement or instrument, or
result in the creation or imposition of any Lien upon any Property of Holdings
or any of its Subsidiaries pursuant to the terms of any such agreement or
instrument.
8.05 Action. Each Borrower has all necessary corporate power and
------
authority to execute, deliver and perform its obligations under each of the
Credit Documents to which it is or is intended to be a party; the execution,
delivery and performance by each Borrower of each of the Credit Documents to
which it is or is intended to be a party have been duly authorized by all
necessary corporate action on its part; and this Agreement has been duly and
validly executed and delivered by each Borrower and constitutes, and each of the
Notes when executed and delivered for value will constitute, the legal, valid
and binding obligation of such Borrower as is or is intended to be a party
thereto, enforceable in accordance with its terms.
8.06 Approvals. No authorizations, approvals or consents of,
---------
and no filings or registrations with, any governmental or regulatory authority
or agency are necessary for the execution, delivery or performance by any
Borrower of the Credit Documents to which it is or is intended to be a party or
for the validity or enforceability thereof.
8.07 Use of Loans. Neither Holdings nor any of its Subsidiaries
------------
is engaged principally, or as one of its important activities, in the business
of extending credit for the purpose, whether immediate, incidental or ultimate,
of buying or carrying Margin Stock.
8.08 ERISA. Holdings and the ERISA Affiliates have fulfilled
-----
their respective obligations under the minimum funding standards of ERISA and
the Code with respect to each Plan and are in compliance in all material
respects with the presently applicable provisions of ERISA and the Code, and
have not incurred any liability to the PBGC or any Plan or Multiemployer Plan
(other than to make contributions in the ordinary course of business).
8.09 Taxes. United States Federal income tax returns of Holdings
-----
and its Subsidiaries have been examined and closed through the fiscal year of
Holdings ended December 31, 1983. Holdings and its Subsidiaries have filed all
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes
-39-
<PAGE>
due pursuant to such returns or pursuant to any assessment received by Holdings
or any of its Subsidiaries. The charges, accruals and reserves on the books of
Holdings and its Subsidiaries in respect of taxes and other governmental charges
are, in the opinion of each Obligor, adequate. If Holdings is a member of an
affiliated group of corporations filing consolidated returns for United States
Federal income tax purposes, it is the "common parent" of such group.
8.10 Investment Company Act. No Borrower is an "investment
----------------------
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
8.11 Public Utility Holding Company Act. No Borrower is a
----------------------------------
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended.
8.12 Credit Agreements. Schedule I hereto is a complete and
-----------------
correct list, as of the date of this Agreement, of each credit agreement, loan
agreement, indenture, purchase agreement, guarantee or other arrangement
providing for or otherwise relating to any Indebtedness of or any extension of
credit (or commitment for any extension of credit) to, or guarantee by, any
Borrower the aggregate principal or face amount of which equals or exceeds (or
may equal or exceed) $20,000,000 and the aggregate principal or face amount
outstanding or which may become outstanding under each such arrangement is
correctly described in said Schedule I.
8.13 Hazardous Materials. Holdings and each of its Subsidiaries
-------------------
have obtained all permits, licenses and other authorizations which are required
under all Environmental Laws, except to the extent failure to have any such
permit, license or authorization would not have a Material Adverse Effect.
Holdings and each of its Subsidiaries are in compliance with the terms and
conditions of all such permits, licenses and authorizations, and are also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any applicable Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except to the extent failure to comply would
not have a Material Adverse Effect.
8.14 Material Subsidiaries. Set forth in Schedule II hereto is a
---------------------
complete and correct list, as of the date of this Agreement, of all Material
Subsidiaries (and the respective jurisdiction of incorporation of each such
Material Subsidiary). Except as disclosed in Schedule II hereto Holdings owns,
free and clear of Liens, all outstanding shares of such Material Subsidiaries
indicated on said Schedule II as being owned by it, other than directors'
qualifying shares (and each Material Subsidiary owns, free and clear of Liens,
all outstanding shares of any Material Subsidiaries indicated on said Schedule
II as being owned by it, other than directors' qualifying shares), and all such
shares are validly issued, fully paid and non-assessable.
8.15 True and Complete Disclosure. No information, report, financial
----------------------------
statement, exhibit, schedule or disclosure letter (including, without
limitation, the Information
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<PAGE>
Memorandum, and in light of any subsequent corrections or modifications thereto
delivered to the Banks prior to the date hereof) furnished in writing by or on
behalf of Holdings or any of its Subsidiaries the Agent or any Bank in
connection with the negotiation, preparation or delivery of this Agreement and
the Notes or included therein or delivered pursuant thereto contains any untrue
statement of material fact or omits or omitted to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. All written information furnished after
the date hereof by Holdings and its Subsidiaries to the Agent and the Banks in
connection with this Agreement and the Notes and the transactions contemplated
hereby and thereby will be true, complete and accurate in every material
respect, or (in the case of projections) based on reasonable estimates, on the
date as of which such information is stated or certified. There is no fact
known to Holdings that could have a Material Adverse Effect that has not been
disclosed herein or in a report, financial statement, exhibit, schedule,
disclosure letter or other writing furnished to the Banks for use in connection
with the transactions contemplated hereby. The foregoing provisions of this
Section 8.15, insofar as they relate to the Information Memorandum, are
qualified as follows:
(a) the information contained therein is subject to the
disclaimers set forth therein; and
(b) any information therein regarding the terms of the credit
facility described therein is qualified by the terms of this Agreement.
Section 9. Covenants of the Borrowers. The Borrowers hereby agree
--------------------------
with the Banks and the Agent that, so long as any Commitment or Loan is
outstanding and until payment in full of all amounts of principal of, and
interest on, the Loans and all fees payable under Section 2.05 hereof:
9.01 Financial Statements. Holdings shall deliver to the Agent
--------------------
(with sufficient copies for each of the Banks):
(a) as soon as available and in any event within 45 days after
the end of each of the first three quarterly fiscal periods of each
fiscal year of Holdings the consolidated statements of income, retained
earnings and cash flow of Holdings and the Consolidated Subsidiaries for
such period and for the period from the beginning of the respective
fiscal year to the end of such period, and the related consolidated
balance sheets as at the end of such period, setting forth in each case
in comparative form the corresponding consolidated figures for the
corresponding period in the preceding fiscal year, accompanied by a
certificate of a senior financial officer of Holdings, which certificate
shall state that said financial statements fairly present the
consolidated financial condition and results of operations of Holdings
and the Consolidated Subsidiaries in accordance with GAAP, as at the end
of, and for, such period (subject to normal year-end audit adjustments);
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<PAGE>
(b) as soon as available and in any event within 90 days after
the end of each fiscal year of Holdings, consolidated statements of
income, retained earnings and cash flow of Holdings and the Consolidated
Subsidiaries for such year and the related consolidated balance sheets as
at the end of such year, setting forth in each case in comparative form
the corresponding consolidated figures for the preceding fiscal year, and
accompanied by an opinion thereon of independent certified public
accountants of recognized national standing, which opinion shall state
that said consolidated financial statements fairly present the
consolidated financial condition and results of operations of Holdings
and the Consolidated Subsidiaries as at the end of, and for, such fiscal
year in accordance with GAAP;
(c) within 90 days after the end of each fiscal year of
Holdings, Enterprises and FFOG, statements of income, retained earnings
and cash flow of each such Borrower for such year and the related balance
sheets as at the end of such year, setting forth in each case in
comparative form the corresponding figures for the preceding fiscal year,
and accompanied by a certificate of a senior financial officer of each
such Borrower, which shall state that said financial statements fairly
present the financial condition and results of operations of such
Borrower as at the end of, and for, such fiscal year in accordance with
GAAP;
(d) upon the reasonable request of the Agent or any Bank, and in
any event at the end of each month during which loans to any Borrower are
outstanding, a certificate of a senior financial officer of each Borrower
as to which loans are outstanding in the form of Exhibit D hereto
attesting to compliance with the covenant contained in Section 9.08(c)
and the nature and value of such Borrower's Finance Assets;
(e) promptly upon their becoming available, copies of all
registration statements and regular periodic reports, if any, which
Holdings shall have filed with the Securities and Exchange Commission (or
any governmental agency substituted therefor) or any national securities
exchange;
(f) promptly upon the mailing thereof to the shareholders of
Holdings generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) as soon as possible, and in any event within ten days after
Holdings knows or has reason to believe that any of the events or
conditions specified below with respect to any Plan or Multiemployer Plan
have occurred or exist, a statement signed by a senior financial officer
of Holdings setting forth details respecting such event or condition and
the action, if any, which Holdings or the relevant ERISA Affiliate
proposes to take with respect thereto (and a copy of any report or notice
required to be filed with or given to PBGC by Holdings or such ERISA
Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of ERISA
and the regulations issued thereunder, with respect to a Plan, as to
which PBGC has not
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<PAGE>
by regulation waived the requirement of Section 4043(a) of ERISA
that it be notified within 30 days of the occurrence of such event
(provided that a failure to meet the minimum funding standard of
Section 412 of the Code or Section 302 of ERISA shall be a
reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a notice of
intent to terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by Holdings or any
ERISA Affiliate of a notice from a Multiemployer Plan that such
action has been taken by PBGC with respect to such Multiemployer
Plan;
(iv) the complete or partial withdrawal by Holdings or any
ERISA Affiliate under Section 4201 or 4204 of ERISA from a
Multiemployer Plan, or the receipt by Holdings or any ERISA
Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of
ERISA or that it intends to terminate or has terminated under
Section 4041A of ERISA; and
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against Holdings or any ERISA Affiliate to
enforce Section 515 of ERISA, which proceeding is not dismissed
within 30 days;
(h) promptly after any Borrower knows or has reason to believe
that any Default has occurred, a notice of such Default describing the
same in reasonable detail and, together with such notice or as soon
thereafter as possible, a description of the action that Holdings has
taken and proposes to take with respect thereto; and
(i) from time to time such other information regarding the
financial condition, operations, business or prospects of either Holdings
or any of its Subsidiaries (including, without limitation, any Plan or
Multiemployer Plan, and any reports or other information required to be
filed under ERISA) as any Bank or the Agent may reasonably request.
Holdings will furnish to each Bank, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of Holdings (i) to the effect that no Default has
occurred and is continuing (or, if any Default has occurred and is continuing,
describing the same in reasonable detail and describing the action that the
Borrowers have taken and propose to take with respect thereto) and (ii) setting
forth in reasonable detail the computations necessary to determine whether the
Borrowers are in compliance with Sections 9.08(a), (b) and (c) hereof, as of the
end of the respective fiscal quarter or fiscal year.
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<PAGE>
9.02 Litigation. Holdings will promptly give to each Bank notice
----------
in writing of all litigation and of all proceedings before any courts,
arbitrators or governmental or regulatory agencies (including, without
limitation, the Securities and Exchange Commission and the insurance commission
or other similar regulatory body of any state) affecting Holdings or any of its
Subsidiaries except litigation or proceedings which are not likely to have a
Material Adverse Effect.
9.03 Existence, Etc. Each Borrower will, and will cause each of
---------------
its Subsidiaries that are Material Subsidiaries to: preserve and maintain its
legal existence and all of its material rights, privileges and franchises
(provided that nothing in this Section 9.03 shall prohibit any transaction
expressly permitted under Section 9.05 hereof); comply with the requirements of
all applicable laws, rules, regulations and orders of governmental or regulatory
authorities if failure to comply with such requirements would have a Material
Adverse Effect; pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any of its
Property prior to the date on which penalties attach thereto, except for any
such tax, assessment, charge or levy the payment of which is being contested in
good faith and by proper proceedings and against which adequate reserves are
being maintained and except where the failure to pay such tax, assessment,
charge or levy would not have a Material Adverse Effect; maintain all of its
Properties used or useful in its business in good working order and condition,
ordinary wear and tear excepted, except where the failure to so maintain such
Properties would not have a Material Adverse Effect; and permit representatives
of any Bank or the Agent, during normal business hours, to examine, copy and
make extracts from its books and records, to inspect its Properties, and to
discuss its business and affairs with its officers, all to the extent reasonably
requested by such Bank or the Agent (as the case may be).
9.04 Insurance. Each Borrower will, and will cause each of its
---------
Material Subsidiaries to, maintain insurance (including self-insurance) in such
amounts and against such risks as is usually carried by owners of similar
businesses and properties in the same general areas in which such Borrower or
such Subsidiary (as the case may be) operates.
9.05 Prohibition of Fundamental Changes. No Borrower will, nor
----------------------------------
will it permit any of its Material Subsidiaries to: (a) enter into any
transaction of merger or consolidation or amalgamation (a "Combination"), or
-----------
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), (b) be a party to any Acquisition, or (c) convey, sell, lease,
transfer or otherwise dispose of all or any substantial part of its business or
Property, whether now owned or hereafter acquired (other than in the ordinary
course of business as presently conducted), except for any Combination, any
Acquisition or any such disposition provided that:
(i) no Default shall have occurred and be continuing or
would result therefrom;
(ii) in the case of any Combination, Holdings or one of its
Subsidiaries that is a corporation organized under the laws of the
United States or any State thereof shall be the surviving
corporation (and, if any Borrower shall be a party to any
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<PAGE>
Combination and shall not be the surviving corporation, the
surviving corporation shall have expressly assumed, by an
instrument in writing satisfactory to the Agent, all of the
obligations of such Borrower hereunder and under such Borrower's
Notes); and
(iii) in the case of any Acquisition of the type referred
to in clause (b) or (c) of the definition of such term in Section
1.01 hereof, the board of directors (or other body performing
similar functions) of such Person (or the owner of such Person)
shall have approved such Acquisition.
Notwithstanding the foregoing, no Borrower will, nor will it permit any of its
Subsidiaries to, convey, sell, transfer or otherwise dispose of (including by
way of a Combination) any capital stock of any of its Subsidiaries (or permit
any of its Subsidiaries to issue any additional capital stock) if, after giving
effect thereto, such Subsidiary would no longer be a Subsidiary of Holdings.
9.06 Limitation on Liens. If any Borrower shall create, incur,
-------------------
assume or suffer to exist any Lien in upon any of its Finance Assets, whether
now owned or hereafter acquired, it will simultaneously grant the Agent, on
behalf of the Banks, a Lien pari passu with such Lien upon the Finance Assets
subject to such Lien, and shall not thereafter release such lien without
compliance with the provisions of Regulation U, including, without limitation,
its withdrawal and substitution provisions.
9.07 Use of Proceeds. Each Borrower will use the proceeds of the
---------------
Loans made to it hereunder for its general corporate purposes in compliance with
all applicable legal and regulatory requirements, including, without limitation,
Regulations G, U and X, the Securities Act of 1933 and the Securities Exchange
Act of 1934 and the regulations thereunder. No Borrower shall, nor will any of
their Subsidiaries, use the proceeds of the Loans hereunder to acquire the stock
or assets of any Person except with the prior written consent of the Board of
Directors (or other body performing similar functions) of such Person (or the
owner of such Person). Neither the Agent nor any Bank shall have any
responsibility as to the use of any of such proceeds.
9.08 Financial Covenants.
-------------------
(a) Minimum Consolidated Tangible Net Worth. Holdings will not
---------------------------------------
permit Consolidated Tangible Net Worth to be less than $525,000,000 at any time.
(b) Maximum Consolidated Debt to Consolidated Tangible Net Worth
------------------------------------------------------------
Ratio. Holdings will not permit the ratio of Consolidated Debt to Consolidated
-----
Tangible Net Worth to exceed 4.5:1 at any time.
(c) Minimum Finance Assets to Debt Ratio. At any time any Loans
------------------------------------
made to any Borrower are outstanding hereunder and the sum of such Borrower's
cash and Money Market
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Investments is not greater than or equal to its Indebtedness (including its
Indebtedness in respect of Loans made to it hereunder but excluding its
Indebtedness under its Guarantee in Section 6 hereof of the Loans made to any
other Borrower hereunder), such Borrower will not permit the ratio of (a) the
aggregate value of its Finance Assets to (b) the outstanding aggregate principal
amount of its Indebtedness (including its Indebtedness in respect of Loans made
to it hereunder but excluding its Indebtedness under its Guarantee in Section 6
hereof of the Loans made to any other Borrower hereunder) minus its cash and
-----
Money Market Investments, to be less than 1.5:1. For purposes of this Section
9.08(c), the value of Finance Assets shall be the closing prices on the exchange
on which such securities are listed and traded on the day prior to the day of
determination, and in the case of U S West Preferred Stock, the value at which
it may be put to U S West pursuant to Section 9.3 of the U.S. West Securities
Purchase Agreement.
(d) U S West Securities Purchase Agreement. No Borrower holding
--------------------------------------
U S West Preferred Stock will waive or agree to any modification of the U S West
Securities Purchase Agreement that affects the put rights under Section 9.3
thereof. At any time that there has occurred and is continuing an Event of
Default of the type described in clause (a) of Section 10 hereof, any Borrower
having Loans outstanding and holding U S West Preferred Stock agrees that, upon
the request of the Agent acting at the direction of the Majority Banks, it will
either (i) exercise all of its put rights under Section 9.3 of the U S West
Securities Purchase Agreement, or (ii) replace the U S West Preferred Stock with
cash equal the value at which the U S West Preferred Stock it holds may be put
to U S West pursuant to Section 9.3 of the U S West Securities Purchase
Agreement, or (iii) replace the U S West Preferred Stock with a sufficient
amount of Finance Assets other than such stock such that the covenant contained
in clause (c) of this Section 9.08 is satisfied.
Section 10. Events of Default. If one or more of the following
-----------------
events (herein called "Events of Default") shall occur and be continuing:
-----------------
(a) Any Borrower shall default in the payment or prepayment when
due of any principal of or interest on any Loan (and one Business Day
shall have elapsed in the case of a default in the payment of interest);
or any Borrower shall default for any period of five consecutive Business
Days in the payment when due of any fee or any other amount payable by it
hereunder or under any Note; or
(b) Holdings or any of its Subsidiaries shall default in the
payment when due of any principal of or interest on any of its other
Indebtedness (the aggregate principal amount of which is $15,000,000 or
more), or any event specified in any note, agreement, indenture or other
document evidencing or relating to any such Indebtedness shall occur
(after giving effect to any applicable grace period) if the effect of
such event is to cause, or (with the giving of any notice) to permit the
holder or holders of such Indebtedness (or a trustee or agent on behalf
of such holder or holders) to cause, such Indebtedness to become due, or
to be prepaid in full (whether by redemption, purchase, offer to purchase
or otherwise), prior to its stated maturity; or
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(c) Any representation, warranty or certification made or deemed
made in any Credit Document (or in any modification or supplement
thereto) by any Borrower, or any certificate furnished to any Bank or the
Agent pursuant to the provisions thereof, shall prove to have been false
or misleading as of the time made or furnished in any material respect;
or
(d) Any Borrower shall default in the performance of any of its
obligations under any of Sections 9.01(h) hereof, and Sections 9.05
through 9.08 hereof (inclusive) hereof; or any Borrower shall fail to
deliver the certificate called for by Section 9.01(d) hereof within 2
Business Days of the date such certificate is due; or any Borrower shall
default in the performance of any of its other obligations in this
Agreement and such default shall continue unremedied for a period of ten
days after notice thereof to Holdings by the Agent or any Bank (through
the Agent); or
(e) Any Borrower or any of its Subsidiaries shall admit in
writing its inability to, or be generally unable to, pay its debts as
such debts become due; or
(f) Any Borrower or any of its Subsidiaries shall (i) apply for
or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a
substantial part of its Property, (ii) make a general assignment for the
benefit of its creditors, (iii) commence a voluntary case under the
Bankruptcy Code (as now or hereafter in effect), (iv) file a petition
seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or readjustment of
debts, (v) fail to controvert in a timely and appropriate manner, or
acquiesce in writing to, any petition filed against it in an involuntary
case under the Bankruptcy Code, or (vi) take any corporate action for the
purpose of effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the
application or consent of any Borrower or any of its Subsidiaries, in any
court of competent jurisdiction, seeking (i) its liquidation,
reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of such Borrower or such Subsidiary or
of all or any substantial part of its assets, or (iii) similar relief in
respect of such Borrower or such Subsidiary under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect, for a
period of 60 or more days; or an order for relief against such Borrower
or such Subsidiary shall be entered in an involuntary case under the
Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money in
excess of $15,000,000 in the aggregate shall be rendered by a one or more
courts, administrative tribunals or other bodies having jurisdiction
against any Borrower and/or any of its
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Subsidiaries and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and such Borrower
or the relevant Subsidiary shall not, within said period of 60 days, or
such longer period during which execution of the same shall have been
stayed, appeal therefrom and cause the execution thereof to be stayed
during such appeal; or
(i) An event or condition specified in Section 9.01(g) hereof
shall occur or exist with respect to any Plan or Multiemployer Plan and,
as a result of such event or condition, together with all other such
events or conditions, any Borrower or any ERISA Affiliate shall incur or
in the opinion of the Majority Banks shall be reasonably likely to incur
a liability to a Plan, a Multiemployer Plan or PBGC (or any combination
of the foregoing) which would constitute, in the determination of the
Majority Banks, a Material Adverse Effect; or
(j) A Change of Control shall occur;
THEREUPON: (1) in the case of an Event of Default other than one referred to in
clause (f) or (g) of this Section 10 with respect to any Borrower, (A) the Agent
may and, upon request of the Majority Banks, shall, by notice to Holdings,
terminate the Commitments and they shall thereupon terminate, and (B) the Agent
may and, upon request of Banks holding at least 51% of the aggregate unpaid
principal amount of the Loans shall, by notice to Holdings, declare the
principal amount then outstanding of, and the accrued interest on, the Loans and
all other amounts payable by each of the Borrowers hereunder and under the Notes
(including, without limitation, any amounts payable under Section 5.05 hereof)
to be forthwith due and payable, whereupon such amounts shall be immediately due
and payable without presentment, demand, protest or other formalities of any
kind, all of which are hereby expressly waived by each Borrower; and (2) in the
case of the occurrence of an Event of Default referred to in clause (f) or (g)
of this Section 10 with respect to any Borrower, the Commitments shall
automatically be terminated and the principal amount then outstanding of, and
the accrued interest on, the Loans and all other amounts payable by each of the
Borrowers hereunder and under the Notes (including, without limitation, any
amounts payable under Section 5.05 hereof) shall automatically become
immediately due and payable without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by each of the
Borrowers.
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Section 11. The Agent.
---------
11.01 Appointment, Powers and Immunities. Each Bank hereby
----------------------------------
irrevocably appoints and authorizes the Agent to act as its agent hereunder with
such powers as are specifically delegated to the Agent by the terms of this
Agreement, together with such other powers as are reasonably incidental thereto.
The Agent (which term as used in this sentence and in Section 11.05 and the
first sentence of Section 11.06 hereof shall include reference to its affiliates
and its own and its affiliates' officers, directors, employees and agents): (a)
shall have no duties or responsibilities except those expressly set forth in
this Agreement, and shall not by reason of this Agreement be a trustee for any
Bank; (b) shall not be responsible to the Banks for any recitals, statements,
representations or warranties contained in this Agreement, or in any certificate
or other document referred to or provided for in, or received by any of them
under, this Agreement, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any Note or any other
document referred to or provided for herein or therein or for any failure by any
Borrower or any other Person to perform any of its obligations hereunder or
thereunder; (c) shall not be required to initiate or conduct any litigation or
collection proceedings hereunder; and (d) shall not be responsible for any
action taken or omitted to be taken by it hereunder or under any other document
or instrument referred to or provided for herein or therein or in connection
herewith or therewith, except for its own gross negligence or willful
misconduct. The Agent may employ agents and attorneys-in-fact and shall not be
responsible for the negligence or misconduct of any such agents or attorneys-in-
fact selected by it in good faith. The Agent may deem and treat the payee of
any Note as the holder thereof for all purposes hereof unless and until a notice
of the assignment or transfer thereof shall have been filed with the Agent,
together with the consent of Holdings to such assignment or transfer.
11.02 Reliance by Agent. The Agent shall be entitled to rely upon
-----------------
any certification, notice or other communication (including any thereof by
telephone, telex, telegram or cable) believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or Persons,
and upon advice and statements of legal counsel, independent accountants and
other experts selected by the Agent. As to any matters not expressly provided
for by this Agreement, the Agent shall in all cases be fully protected in
acting, or in refraining from acting, hereunder in accordance with instructions
given by the Majority Banks, and such instructions of the Majority Banks and any
action taken or failure to act pursuant thereto shall be binding on all of the
Banks.
11.03 Defaults. The Agent shall not be deemed to have knowledge
--------
or notice of the occurrence of a Default (other than the non-payment of
principal of or interest on Loans or of facility fees) unless the Agent has
received notice from a Bank or a Borrower specifying such Default and stating
that such notice is a "Notice of Default". In the event that the Agent receives
such a notice of the occurrence of a Default, the Agent shall give prompt notice
thereof to the Banks (and shall give each Bank prompt notice of each such non-
payment). The Agent shall (subject to the other provisions of this Section 11)
take such action with respect to such Default as shall be directed by the
Majority Banks, provided that, unless and until the Agent shall have
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received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default as
it shall deem advisable in the best interest of the Banks except to the extent
that this Agreement expressly requires that such action be taken, or not be
taken, only with the consent or upon the authorization of the Majority Banks or
all of the Banks.
11.04 Rights as a Bank. With respect to its Commitment and the
----------------
Loans made by it, Chase (and any successor acting as Agent) in its capacity as a
Bank hereunder shall have the same rights and powers hereunder as any other Bank
and may exercise the same as though it were not acting as the Agent, and the
term "Bank" or "Banks" shall, unless the context otherwise indicates, include
the Agent in its individual capacity. Chase (and any successor acting as Agent)
and its affiliates may (without having to account therefor to any Bank) accept
deposits from, lend money to and generally engage in any kind of banking, trust
or other business with any Borrower (and any of its Subsidiaries or Affiliates)
as if it were not acting as the Agent, and Chase and its affiliates may accept
fees and other consideration from any Borrower for services in connection with
this Agreement or otherwise without having to account for the same to the Banks.
11.05 Indemnification. The Banks agree to indemnify the Agent (to
---------------
the extent not reimbursed under Section 12.03 hereof, but without limiting the
obligations of the Borrowers under said Section 12.03) ratably in accordance
with their respective Commitments, for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Agent (including by any Bank) arising out of
or by reason of any investigation or any way relating to or arising out of this
Agreement or any other documents contemplated by or referred to herein or
therein or the transactions contemplated hereby (including, without limitation,
the costs and expenses which the Borrowers are obligated to pay under Section
12.03 hereof, but excluding, unless a Default has occurred and is continuing,
normal administrative costs and expenses incident to the performance of its
agency duties hereunder) or the enforcement of any of the terms hereof or
thereof or of any such other documents, provided that no Bank shall be liable
for any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the party to be indemnified.
11.06 Non-Reliance on Agent and Other Banks. Each Bank agrees
-------------------------------------
that it has, independently and without reliance on the Agent or any other Bank,
and based on such documents and information as it has deemed appropriate, made
its own credit analysis of the Borrowers and their respective Subsidiaries and
decision to enter into this Agreement and that it will, independently and
without reliance upon the Agent or any other Bank, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own analysis and decisions in taking or not taking action under this Agreement.
The Agent shall not be required to keep itself informed as to the performance or
observance by any Borrower of this Agreement or any other document referred to
or provided for herein or therein or to inspect the Properties or books of such
Borrower or any of its Subsidiaries. Except for notices, reports and other
documents and information expressly required to be furnished to the Banks by the
Agent hereunder, the Agent shall not have any duty or responsibility to provide
any Bank with any
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credit or other information concerning the affairs, financial condition or
business of any Borrower or any of its Subsidiaries (or any of their affiliates)
which may come into the possession of the Agent or any of its affiliates.
11.07 Failure to Act. Except for action expressly required of the
--------------
Agent hereunder, the Agent shall in all cases be fully justified in failing or
refusing to act hereunder and thereunder unless it shall receive further
assurances to its satisfaction from the Banks of their indemnification
obligations under Section 11.05 hereof against any and all liability and expense
which may be incurred by it by reason of taking or continuing to take any such
action.
11.08 Resignation or Removal of Agent. Subject to the appointment
-------------------------------
and acceptance of a successor Agent as provided below, the Agent may resign at
any time by giving notice thereof to the Banks, and the Agent may be removed at
any time with or without cause by the Majority Banks. Upon any such resignation
or removal, the Majority Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Majority Banks
and shall have accepted such appointment within 30 days after the retiring
Agent's giving of notice of resignation or the Majority Banks' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be a bank with a combined capital and surplus of at
least $500,000,000. Upon the acceptance of any appointment as Agent hereunder
by a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation or removal hereunder as Agent,
the provisions of this Section 11 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Agent.
Section 12. Miscellaneous.
-------------
12.01 Waiver. No failure on the part of the Agent or any Bank to
------
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under this Agreement or any Note shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power
or privilege under this Agreement or any Note preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
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12.02 Notices. All notices and other communications provided for
-------
herein (including, without limitation, any modifications of, or waivers or
consents under, this Agreement) shall be given or made in writing (including,
without limitation, by telex or telecopy), or, with respect to notices given
pursuant to Section 2.03 hereof, by telephone, confirmed in writing by
telecopier by the close of business on the day the notice is given, delivered
(or telephoned, as the case may be) to the intended recipient at the "Address
for Notices" specified below its name on the signature pages hereof; or, as to
any party, at such other address as shall be designated by such party in a
notice to each other party. Except as otherwise provided in this Agreement, all
such communications shall be deemed to have been duly given when transmitted by
telex or telecopier or personally delivered or, in the case of a mailed notice,
upon receipt, in each case given or addressed as aforesaid.
12.03 Expenses, Etc. The Borrowers jointly and severally agree to
--------------
pay or reimburse each of the Banks and the Agent for paying: (a) all reasonable
out-of-pocket costs and expenses of the Agent, in connection with (i) the
negotiation, preparation, execution and delivery of this Agreement and the Notes
and the making of the initial Loans hereunder and (ii) any amendment,
modification or waiver of any of the terms of this Agreement; (b) all reasonable
costs and expenses of the Banks and the Agent (including reasonable counsels'
fees and expenses) in connection with (i) any Default and any enforcement or
collection proceedings resulting therefrom and (ii) the enforcement of this
Section 12.03; and (c) all transfer, stamp, documentary or other similar taxes,
assessments or charges levied by any governmental or revenue authority in
respect of this Agreement or any of the Notes or any other document referred to
herein or therein and all costs, expenses, taxes, assessments and other charges
incurred in connection with any filing, registration or recording contemplated
by this Agreement or any other document referred to herein or therein.
The Borrowers hereby jointly and severally agree to indemnify the
Agent and each Bank and their respective directors, officers, employees and
agents for, and hold each of them harmless against, any and all losses,
liabilities, claims, damages or expenses incurred by any of them (including any
and all losses, liabilities, claims, damages or expenses incurred by the Agent
to any Bank) arising out of or by reason of any investigation or litigation or
other proceedings (including any threatened investigation or litigation or other
proceedings) relating to any actual or proposed use by any Borrower or any of
its Subsidiaries of the proceeds of any of the extensions of credit hereunder,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation or litigation or other
proceedings (but excluding any such losses, liabilities, claims, damages or
expenses incurred by reason of the gross negligence or willful misconduct of the
Person to be indemnified).
12.04 Amendments, Etc. Except as otherwise expressly provided in
----------------
this Agreement, any provision of this Agreement may be amended or modified only
by an instrument in writing signed by each of the Borrowers and the Majority
Banks, or by each Borrower and the Agent acting with the consent of, or upon the
direction of, the Majority Banks, and any provision of this Agreement may be
waived by the Majority Banks or by the Agent acting with the consent of the
Majority Banks; provided that no amendment, modification or waiver shall, unless
by an
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instrument signed by all of the Banks or by the Agent acting with the consent of
all of the Banks: (i) increase or extend the term, or extend the time or waive
any requirement for the reduction or termination, of the Commitments, (ii)
extend the date fixed for the payment of principal of or interest on any Loan or
any fee hereunder, (iii) reduce the amount of any such payment of principal,
(iv) reduce the rate at which interest is payable thereon or any fee is payable
hereunder, (v) alter the terms of this Section 12.04 or any other express
requirement contained in this Agreement to the effect that the consent of or
other action by all of the Banks be obtained for any provision of, or any other
action hereunder (vii) amend the definition of the term "Majority Banks", or
(viii) amend, modify or waive any provision of Section 6 hereof; provided that
any amendment of Section 11 hereof, and any other amendment which affects the
rights or obligations of the Agent hereunder, shall require the consent of the
Agent.
12.05 Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
12.06 Assignments and Participations.
------------------------------
(a) No Borrower may assign its rights or obligations hereunder or
under the Notes without the prior consent of all of the Banks and the Agent.
(b) Each Bank may assign all or any part of its Loans, its Notes,
and its Commitment (but only with the consent of Holdings and the Agent, such
consent not to be unreasonably withheld); provided that: (i) no such consent by
the Agent shall be required in the case of any assignment to another Bank; (ii)
any such partial assignment shall be in an amount at least equal to $10,000,000
unless such partial assignment is made to another Bank; (iii) each such
assignment by a Bank of its Loans, Notes or Commitment shall be made in such
manner so that the same portion of its Loans, Notes and Commitment is assigned
to the respective assignee; and (iv) any such assignment to a Person that is not
a U.S. Person (as that term is defined in Section 5.07(a) hereof) and that is
not, as of the date of such assignment, entitled to submit a Form 1001 or a Form
4224 (as these terms are defined in Section 5.07(a) hereof) shall require the
prior consent of Holdings (which consent shall not be unreasonably withheld or
delayed). Upon execution and delivery by the assignee to Holdings and the Agent
of an instrument in writing pursuant to which such assignee agrees to become a
"Bank" hereunder (if not already a Bank) having the Commitment and Loans
specified in such instrument, and upon consent thereto by the Agent and Holdings
to the extent required above, the assignee shall have, to the extent of such
assignment (unless otherwise provided in such assignment with the consent of the
Agent), the obligations, rights and benefits of a Bank hereunder holding the
Commitment and Loans (or portions thereof) assigned to it (in addition to the
Commitment and Loans, if any, theretofore held by such assignee) and the
assigning Bank shall, to the extent of such assignment, be released from the
Commitment (or portion thereof) so assigned. Each assigning Bank shall pay the
Agent an assignment fee of $2,500 as a further condition to effectiveness of
such assignment.
(c) A Bank may sell or agree to sell to one or more other Persons
a participation in all or any part of any Loans held by it, or in its
Commitment, in which event each purchaser of
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a participation (a "Participant") shall not have, except as otherwise provided
-----------
in Section 4.07(c) hereof, any rights or benefits under this Agreement or any
Note (the Participant's rights against such Bank in respect of such
participation to be those set forth in the agreements executed by such Bank in
favor of the Participant). All amounts payable by the Borrowers to any Bank
under Section 5 hereof in respect of Loans held by it, and its Commitment, shall
be determined as if such Bank had not sold or agreed to sell any participations
in such Loans and Commitment, and as if such Bank were funding and maintaining
each of such Loans and such Commitment in the same way that it is funding the
portion of such Loan and such Commitment in which no participations have been
sold. In no event shall a Bank that sells a participation agree with the
Participant to take or refrain from taking any action hereunder or under such
Bank's Notes except that such Bank may agree with the Participant that it will
not, without the consent of the Participant, agree to (i) increase or extend the
term, or extend the time or waive any requirement for the reduction or
termination, of such Bank's Commitment, (ii) extend the date fixed for the
payment of principal of or interest on the related Loan or Loans or any portion
of any fee hereunder payable to the Participant, (iii) reduce the amount of any
such payment of principal, (iv) reduce the rate at which interest is payable
thereon, or any fee hereunder payable to the Participant, to a level below the
rate at which the Participant is entitled to receive such interest or fee, or
(v) consent to any modification, supplement or waiver hereof to the extent that
the same requires the consent of each Bank.
(d) Anything in this Section 12.06 to the contrary
notwithstanding, any Bank may assign and pledge all or any portion of its Loans
and its Notes to any Federal Reserve Bank as collateral security pursuant to
Regulation A of the Board of Governors of the Federal Reserve System and any
Operating Circular issued by such Federal Reserve Bank. No such assignment shall
release the assigning Bank from its obligations hereunder.
(e) A Bank may furnish any information concerning Holdings or any
of its Subsidiaries in the possession of such Bank from time to time to
assignees and participants (including prospective assignees and participants),
subject, however, to the provisions of Section 12.12(b) hereof.
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12.07 Survival. The obligations of each Borrower under Sections
--------
5.01, 5.05, 5.07, and 12.03 hereof and the obligations of the Banks under
Section 11.05 hereof shall survive the repayment of the Loans and the
termination of the Commitments. In addition, each representation and warranty
made, or deemed to be made by a notice of any borrowing hereunder, herein or
pursuant hereto shall survive the making of such representation and warranty,
and no Bank shall be deemed to have waived, by reason of making any extension of
credit hereunder, any Default which may arise by reason of such representation
or warranty proving to have been false or misleading, notwithstanding that such
Bank or the Agent may have had notice or knowledge or reason to believe that
such representation or warranty was false or misleading at the time such
extension of credit was made.
12.08 Captions. The table of contents and captions and section
--------
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
12.09 Counterparts. This Agreement may be executed in any number
------------
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
12.10 Governing Law; Submission to Jurisdiction. This Agreement
-----------------------------------------
and the Notes shall be governed by, and construed in accordance with, the law of
the State of New York. Each Borrower hereby submits to the nonexclusive
jurisdiction of the United States District Court for the Southern District of
New York and of any New York state court sitting in New York City for the
purposes of all legal proceedings arising out of or relating to this Agreement
or the transactions contemplated hereby. Each Borrower irrevocably waives, to
the fullest extent permitted by law, any objection which it may now or hereafter
have to the laying of the venue of any such proceeding brought in such a court
and any claim that any such proceeding brought in such a court has been brought
in an inconvenient forum.
12.11 Waiver of Jury Trial. EACH OF THE BORROWERS, THE AGENT AND
--------------------
THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
12.12 Treatment of Certain Information; Confidentiality.
-------------------------------------------------
(a) Each Borrower acknowledges that (i) services may be offered
or provided to it (in connection with this Agreement or otherwise) by each Bank
or by one or more subsidiaries or affiliates of such Bank and (ii) information
delivered to each Bank by such Borrower and its Subsidiaries may be provided to
each such subsidiary and affiliate, it being understood that any such subsidiary
or affiliate receiving such information shall be bound by the provisions of
clause (b) below as if it were a Bank hereunder.
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(b) Each Bank and the Agent agrees (on behalf of itself and each
of its affiliates, directors, officers, employees and representatives) to use
reasonable precautions to keep confidential, in accordance with their customary
procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices, any non-public information
supplied to it by any Borrower pursuant to this Agreement, provided that nothing
herein shall limit the disclosure of any such information (i) to the extent
required by statute, rule, regulation or judicial process, (ii) to counsel for
any of the Banks or the Agent, (iii) to bank examiners, auditors or accountants,
(iv) to the Agent or any other Bank (or to Chase Securities, Inc.), (v) in
connection with any litigation to which any one or more of the Banks or the
Agent is a party, (vi) to a subsidiary or affiliate of such Bank as provided in
clause (a) above, (vii) to any assignee or participant (or prospective assignee
or participant) so long as such assignee or participant (or prospective assignee
or participant) agrees with the respective Bank to keep such information
confidential on substantially the terms set forth in this Section 12.12(b),
(viii) to any other Person in the course of the enforcement of any Bank's rights
or remedies hereunder or under any of such Bank's Notes, or (ix) to any other
creditor of any Borrower or any of its Subsidiaries at any time during the
continuance of a Default; provided that in no event shall any Bank or the Agent
be obligated or required to return any materials furnished by either Borrower.
12.13 Integration. The Facility Documents set forth the entire
-----------
agreement between the parties hereto relating to the transactions contemplated
thereby and supersede any prior oral or written statements or agreements with
respect to such transactions, except with respect to certain amounts payable to
Chase which are set forth in a letter dated March 17, 1994.
-56-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
THE BORROWERS
-------------
FUND AMERICAN ENTERPRISES
HOLDINGS, INC.
By_________________________
Title:
Address for Notices:
Fund American Enterprises
Holdings, Inc.
The 1820 House
Main Street
Norwich, Vermont 05055-0850
Telecopier No.: (802)649-2240
Telephone No.: (802)649-3633
Attention: Chief Financial Officer
-57-
<PAGE>
FUND AMERICAN ENTERPRISES, INC.
By_________________________
Title:
Address for Notices:
Fund American Enterprises, Inc.
The 1820 House
Main Street
Norwich, Vermont 05055-0850
Telecopier No.: (802)649-2240
Telephone No.: (802)649-3633
Attention: President
-58-
<PAGE>
FFOG, INC.
By_________________________
Title:
Address for Notices:
FFOG, Inc.
c/o Delaware Corporate Management
1105 North Market Street
Suite 1300, P.O. Box 8985
Wilmington, Delaware 19899
Telecopier No.: (302) 427-7663
Telephone No.: (302) 427-7650
Attention: Edward J. Jones, Secretary
with a copy to:
--------------
Fund American Enterprises Holdings, Inc.
The 1820 House
Main Street
Norwich, Vermont 05055-0850
Telecopier No.: (802)649-2240
Telephone No.: (802)649-3633
Attention: Chief Financial Officer
-59-
<PAGE>
THE BANKS
---------
Commitment THE CHASE MANHATTAN BANK (NATIONAL
----------
ASSOCIATION)
$25,000,000
By_________________________
Title:
Lending Office for all Loans:
The Chase Manhattan Bank
(National Association)
1 Chase Manhattan Plaza
New York, New York 10081
Address for Notices:
The Chase Manhattan Bank
(National Association)
1 Chase Manhattan Plaza
New York, New York 10081
Telecopier No.: (212) 552-3651
Telephone No.: (212) 552-3671
Attention: Ms. Sarah L. Martin
Vice President
-60-
<PAGE>
Commitment CIBC, INC.
----------
$10,000,000
By_________________________
Title:
Lending Office for all Loans:
CIBC, INC.
Two Paces West
2727 Paces Ferry Road
Suite 1200
Atlanta, Georgia 30339
Address for Notices:
CIBC, INC.
Two Paces West
2727 Paces Ferry Road
Suite 1200
Atlanta, Georgia 30339
Telecopier No.: (404) 319-4950
Telephone No.: (404) 319-4852
Attention: Vickie Summey
-61-
<PAGE>
Commitment CREDIT LYONNAIS NEW YORK BRANCH
----------
$15,000,000
By
______________________
Title:
CREDIT LYONNAIS CAYMAN ISLAND
BRANCH
By
______________________
Title:
Lending Office for all Loans:
Credit Lyonnais New York Branch
Credit Lyonnais Cayman Island Branch
Credit Lyonnais Building 1301
Avenue of the Americas
New York, New York 10019
Address for Notices:
Credit Lyonnais
Credit Lyonnais Building
1301 Avenue of the Americas
New York, New York 10019
Telecopier No.: (212) 261-3401
Telephone No.: (212) 261-7367
Attention: Gregory H. Raue
-62-
<PAGE>
Commitment SHAWMUT BANK CONNECTICUT, N.A.
----------
$15,000,000
By
______________________
Title:
Lending Office for all Loans:
Shawmut Bank Connecticut, N.A.
777 Main Street
Hartford, Connecticut 06115
Address for Notices:
Shawmut Bank Connecticut, N.A.
777 Main Street
Hartford, Connecticut 06115
Telecopier No.: (203) 240-1264
Telephone No.: (203) 728-2678
Attention: Daniel P. Towle
-63-
<PAGE>
Commitment SOCIETE GENERALE, NEW YORK BRANCH
----------
$10,000,000
By
______________________
Title:
Lending Office for all Loans:
Societe Generale, New York Branch
50 Rockefeller Plaza
New York, New York 10020
Address for Notices:
Societe Generale, New York Branch
50 Rockefeller Plaza
New York, New York 10020
Telecopier No.: (212) 830-7153
Telephone No.: (212) 830-6138
Attention: Dorene Randall
-64-
<PAGE>
THE AGENT
---------
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Agent
By
______________________
Title:
Address for Notices to
Chase as Agent:
The Chase Manhattan Bank
(National Association)
4 Chase MetroTech Center
Brooklyn, New York 11245
Telecopier No.: (718) 242-6909
Telephone No.: (718) 242-7945
Attention: Lucy D'Orazio
New York Agency
Telex No.: 6720516
(Answerback: CMB NYA UW)
-65-
<PAGE>
SCHEDULE I
Material Agreements
-------------------
[See Sections 8.12 and 9.07(c)]
-66-
<PAGE>
SCHEDULE II
Material Subsidiaries
---------------------
[See Section 8.14]
-67-
<PAGE>
EXHIBIT A-1
[Form of Note for Syndicated Note]
PROMISSORY NOTE
$_____________ _______ ,1994
New York, New York
FOR VALUE RECEIVED, [NAME OF BORROWER], a corporation organized
under the laws of the State of Delaware (the "Company"), hereby promises to pay
-------
to [NAME OF BANK] (the "Bank"), for the account of its respective Applicable
----
Lending Offices provided for by the Credit Agreement referred to below, at the
principal office of The Chase Manhattan Bank (National Association) at 1 Chase
Manhattan Plaza, New York, New York 10081, the principal sum of ________________
DOLLARS (or such lesser amount as shall equal the aggregate unpaid principal
amount of the Syndicated Loans made by the Bank to the Company under the Credit
Agreement), in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of each
such Syndicated Loan, at such office, in like money and funds, for the period
commencing on the date of such Syndicated Loan until such Syndicated Loan shall
be paid in full, at the rates per annum and on the date provided in the Credit
Agreement.
The date, amount, type, interest rate and maturity date of each
Syndicated Loan made by the Bank to the Company, and each payment made on
account of the principal thereof, shall be recorded by the Bank on its books
and, prior to any transfer of this Note, endorsed by the Bank on the schedule
attached hereto or any continuation thereof.
This Note is one of the Notes referred to in the Credit Agreement
(as at any time amended, the "Credit Agreement") dated as of _______, 1994 among
------ ---------
the Company, the Guarantors named therein, the Banks named therein (including
the Bank) and The Chase Manhattan Bank (National Association), as Agent, and
evidences Syndicated Loans made by the Bank thereunder. Capitalized terms used
in this Note have the respective meanings assigned to them in the Credit
Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events and for prepayments of
Syndicated Loans upon the terms and conditions specified therein.
Except as permitted by Section 12.06(b), (c) and (d) of the Credit
Agreement, this Note may not be assigned by the Bank to any other Person.
<PAGE>
This Note shall be governed by and construed in accordance with
the laws of the State of New York.
[NAME OF BORROWER]
By______________________________
Name:
Title:
This Note is guaranteed as provided by Section 6 of the Credit
Agreement.
[NAME OF GUARANTOR]
By______________________________
Name:
Title:
[NAME OF GUARANTOR]
By______________________________
Name:
Title:
<PAGE>
SCHEDULE OF LOANS
This Note evidences Syndicated Loans made under the within
described Credit Agreement to the Company, on the dates, in the principal
amounts, of the types, bearing interest at the rates and maturing on the dates
set forth below, subject to the payments and prepayments of principal set forth
below:
<TABLE>
<CAPTION>
Principal
Date Amount Type Maturity Amount Unpaid
of of of Date of Paid or
Principal Notation
Loan Loan Loan Loan Prepaid A m o u n t
---- ------ ---- ---- ------- -----------
Made By
-------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT A-2
[Form of Note for Money Market Note]
PROMISSORY NOTE
_______, 1994
New York, New York
FOR VALUE RECEIVED, [NAME OF BORROWER], a corporation organized
under the laws of the State of Delaware (the "Company"), hereby promises to pay
-------
[NAME OF BANK] (the "Bank"), for account of its respective Applicable Lending
----
Offices provided for by the Credit Agreement referred to below, at the principal
office of The Chase Manhattan Bank (National Association) at 1 Chase Manhattan
Plaza, New York, New York 10081, the aggregate unpaid principal amount of the
Money Market Loans made by the Bank to the Company under the Credit Agreement,
in lawful money of the United States of America and in immediately available
funds, on the dates and in the principal amounts provided in the Credit
Agreement, and to pay interest on the unpaid principal amount of each such Money
Market Loan, at such office, in like money and funds, for the period commencing
on the date of such Money Market Loan until such Money Market Loan shall be paid
in full, at the rates per annum and on the dates provided in the Credit
Agreement.
The date, amount, type, interest rate and maturity date of each
Money Market Loan made by the Bank to the Company, and each payment made on
account of the principal thereof, shall be recorded by the Bank on its books
and, prior to any transfer of this Note, endorsed by the Bank on the schedule
attached hereto or any continuation thereof.
This Note is one of the Notes referred to in the Credit Agreement
(as modified and supplemented and in effect from time to time, the "Credit
------
Agreement") dated as of ______, 1994 among the Company, the Guarantors named
therein, the Banks named therein (including the Bank) and The Chase Manhattan
Bank (National Association), as Agent, and evidences Money Market Loans made by
the Bank thereunder. Capitalized terms used in this Note have the respective
meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events conditions specified therein.
Except as permitted by Section 12.06(b), (c) and (d) of the Credit
Agreement, this Note may not be assigned by the Bank to any other Person.
<PAGE>
This Note shall be governed by, and construed in accordance with,
the law of the State of New York.
[NAME OF BORROWER]
By_______________________
Name:
Title:
This Note is guaranteed as provided by Section 6 of the Credit
Agreement.
[NAME OF GUARANTOR]
By________________________
Name:
Title:
[NAME OF GUARANTOR]
By________________________
Name:
Title:
<PAGE>
SCHEDULE OF LOANS
This Note evidences Syndicated Loans made under the within
described Credit Agreement to the Company, on the dates, in the principal
amounts, of the types, bearing interest at the rates and maturing on the dates
set forth below, subject to the payments and prepayments of principal set forth
below:
<TABLE>
<CAPTION>
Principal
Date Amount Type Maturity Amount Unpaid
of of of Date of Paid or
Principal Notation
Loan Loan Loan Loan Prepaid A m o u n t
---- ---- ---- ---- ------- -----------
Made By
--------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT B-1
[Form of Money Market Quote Request]
[Date]
To: The Chase Manhattan Bank, N.A., as Agent
From: [Name of Borrower]
Re: Money Market Quote Request
Pursuant to Section 2.03 of the Credit Agreement (the "Credit
------
Agreement") dated as of _______, 1994 among Fund American Enterprises Holdings,
---------
Inc., Fund American Enterprises, Inc., and FFOG, Inc., the Banks referred to
therein and The Chase Manhattan Bank, N.A., Agent, we hereby give notice that we
request Money Market Quotes for the following proposed Money Market
Borrowing(s):
<TABLE>
<CAPTION>
Borrowing Quotation Interest
Date Date 1/ Amount 2/ Type 3/ Period 4/
------ ---- ------ ---- ------
<S> <C> <C> <C> <C>
</TABLE>
Terms used herein have the meanings assigned to them in the Credit
Agreement.
[Name of Borrower]
By ___________________________
Title:
________________________
1/ For use if a Money Market Rate in a Set Rate Auction is requested to be
submitted before the Borrowing Date.
2/ Each amount must be $10,000,000 or a larger multiple of $1,000,000.
3/ Insert either "Margin" (in the case of LIBOR Market Loans) or "Rate" (in
the case of Set Rate Loans).
4/ 1, 2, 3 or 6 months, in the case of a LIBOR Market Loan or, in the case of
a Set Rate Loan, a period of up to 180 days after the making of such Set
Rate Loan and ending on a Business Day.
<PAGE>
EXHIBIT B-2
[Form of Money Market Quote]
The Chase Manhattan Bank, N.A., as Agent
2 Chase Manhattan Plaza, 4th Floor
New York, New York 10081
Attention:
Re: Money Market Quote to [Name of Borrower] (the "Borrower")
--------
This Money Market Quote is given in accordance with Section
2.03(c) of the Credit Agreement (the "Credit Agreement") dated as of _______,
----------------
1994 among Fund American Enterprises Holdings, Inc., Fund American Enterprises,
Inc., and FFOG, Inc., the Banks referred to therein and The Chase Manhattan
Bank, N.A., as Agent. Terms defined in the Credit Agreement are used herein as
defined therein.
In response to the Borrower's invitation dated _________, 19__, we
hereby make the following Money Market Quote(s) on the following terms:
1. Quoting Bank:
2. Person to contact at Quoting Bank:
3. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at the following
rates:
<TABLE>
<CAPTION>
Borrowing Quotation Interest
Date Date 1/ Amount 2/ Type 3/ Period 4/ Rate 5/
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
</TABLE>
4. The aggregate principal amount of such Money Market Loans for
which such offers are being made is _________.
5. The undersigned is [a U.S. Person] [entitled to submit a [Form
1001] [Form 4224]].
We understand and agree that the offer(s) set forth above, subject
to the satisfaction of the applicable conditions set forth in the Credit
Agreement, irrevocably obligate(s) us to make the Money Market Loan(s) for which
any offer(s) [is] [are] accepted, in whole or in part (subject to the third
sentence of Section 2.03(e) of the Credit Agreement).
Very truly yours,
[Name of Bank]
Dated: By:___________________________
<PAGE>
Authorized Officer
____________
1/ As specified in the related Money Market Quote Request.
2/ The principal amount bid for each Interest Period may not exceed the
principal amount requested. Bids must be made for at least $10,000,000 or
a larger multiple of $1,000,000.
3/ Indicate "Margin" (in the case of LIBOR Market Loans) or "Rate" (in the
case of Set Rate Loans).
4/ 1, 2, 3 or 6 months in the case of a LIBOR Market Loan or, in the case of a
Set Rate Loan, a period of up to 180 days after the making of such Set Rate
Loan and ending on a Business Day, as specified in the related Money Market
Quote Request.
5/ For a LIBOR Market Loan, specify margin over or under the London interbank
offered rate determined for the applicable Interest Period. Specify
percentage (rounded upward to the nearest 1/10,000 of 1%) and specify
whether "PLUS" or "MINUS". For a Set Rate Loan, specify rate of interest
per annum (rounded upward to the nearest 1/10,000 of 1%).
<PAGE>
EXHIBIT C
[Form of Opinion of Counsel to the Company]
June __, 1994
To: the Banks party to the Credit
Agreement referred to below
and The Chase Manhattan Bank
(National Association), as Agent
Gentlemen:
I have acted as counsel to Fund American Enterprises Holdings,
Inc. ("Holdings"), Fund American Enterprises, Inc. ("Enterprises") and FFOG,
Inc. ("FFOG" and collectively with Holdings and Enterprises the "Borrowers") in
connection with the Credit Agreement (the "Credit Agreement" dated as of June
__, 1994, between the Borrowers, the banks named therein and The Chase Manhattan
Bank (National Association), as Agent, providing for loans to be made by said
banks to the Borrowers in an aggregate principal amount not exceeding
$75,000,000. Terms defined in the Credit Agreement are used herein as defined
therein.
In rendering the opinions expressed below, I have examined the
originals or conformed copies of such corporate records, agreements and
instruments of each of the Borrowers, certificates of public officials and of
officers of the Borrowers, and such other documents and records, and such
matters of law, as I have deemed appropriate as a basis for the opinions
hereinafter expressed.
Based upon the foregoing, I am of the opinion that:
1. Each of the Borrowers is a corporation duly
incorporated, validly existing and in good standing under the laws
of the State of Delaware and has the necessary corporate power to
make and perform each of the Credit Documents to which it is or is
intended to be a party, to borrow under the Credit Agreement and
to give the guaranty contained in Section 6 of the Credit
Agreement. Each Material Subsidiary of the Holdings is a
corporation duly incorporated, validly existing and in good
standing under the laws of the respective State indicated opposite
its name in Schedule II to the Credit Agreement. Holdings is duly
qualified to transact business in the State of Vermont and the
other Borrowers and Holdings are duly qualified to transact
business in such other jurisdictions, and the Subsidiaries of
Holdings are duly qualified to transact business in all such
jurisdictions, where failure so to qualify would have a material
adverse effect on the consolidated financial condition,
operations, business or prospects taken as a whole of the Holdings
and its Consolidated Subsidiaries.
<PAGE>
2. The making and performance by each of the Borrowers of
the Credit Documents to which it is or is intended to be a party
and the borrowings by the Borrowers under the Credit Agreement and
the guaranty contained in Section 6 of the Credit Agreement, have
been duly authorized by all necessary corporate action, and do not
and will not violate any provision of law or regulation (provided
that no opinion is made herein with respect to Regulations G, U
and X) or any provision of its charter or by-laws or result in the
breach of, or constitute a default or require any consent (other
than _________ which consent[s] has been duly obtained) under, or
result in the creation of any Lien upon any of the Properties,
revenues or assets of the Borrowers or any Subsidiary pursuant to,
any indenture or other agreement or instrument to which any
Borrower or any Subsidiary is a party or by which any Borrower or
any Subsidiary or its Properties may be bound.
3. Except for litigation arising out of the issuance of
insurance policies and reinsurance contracts in the ordinary
course of the insurance business and the adjustment or settlement
of claims in respect thereof, to the best of my knowledge, there
are no lawsuits or other proceedings pending, or threatened
against or affecting, any of the Borrowers or any of their
Subsidiaries or any of their respective properties or assets
before any court or arbitrator or by or before any governmental
commission, bureau or other regulatory authority (including,
without limitation, the Securities and Exchange Commission and the
insurance commission or other similar regulatory body of any
State) which would be likely, individually or in the aggregate, to
have a Material Adverse Effect.
4. No authorizations, consents, approvals, licenses,
filings or registrations with, any governmental or regulatory
authority or agency of the State of [________] or, to the best of
my knowledge, of any other governmental or regulatory authority or
agency, are required in connection with the execution, delivery or
performance by each of the Borrowers of the Credit Documents to
which it is or is intended to be a party. All consents and
approvals of, and filings and registrations with, and all other
actions in respect of, any governmental or regulatory authority or
agency of the State of [__________] and, to the best of my
knowledge, of any other governmental or regulatory authority or
agency, required have been obtained, given, filed or taken and are
in full force and effect.
5. The Credit Agreement, the Notes, and each document to be
delivered pursuant to the Credit Agreement is, or when delivered
under the Credit Agreement will be, a legal, valid and binding
obligation of the Borrower, enforceable against the Borrower in
accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency
and other similar laws affecting creditors' rights generally.
Very truly yours,
<PAGE>
-3-
<PAGE>
EXHIBIT D
CALCULATION OF FINANCE ASSET TO DEBT COVERAGE RATIOS AS OF [Date]
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Borrower: Fund American Enterprises Holdings, Inc.
Finance Assets
<C> <S> <C>
A Marketable Equity & Debt Securities (See P. 2, Schedule X) $
B Pledged Securities (See P. 2, Schedule X) $
-------
C(A-B) Aggregate Value of Finance Assets
$0
Debt
D Indebtedness (See P. 2, Schedule X) $
E Cash & Money Market Instruments $
-------
F(D-E) Total Adjusted Funded Debt
$0
G(C/F) Finance Asset to Debt Ratio $
---------------------------
Borrower: FFOG, Inc.
Finance Assets
A Marketable Equity & Debt Securities (See P. 3, Schedule X) $
B Pledged Securities, (See P. 3, Schedule X) $
C Stock Purchase Agreement Obligations $
-------
D(A-(B+C)) Aggregate Value of Finance Assets
$0
Debt
E Indebtedness (See P. 3, Schedule X) $
F Cash & Money Market Instruments $
------
G(E-F) Total Adjusted Funded Debt
$0
H(D/G) Finance Asset to Debt Ratio $
---------------------------
Borrower: Fund American Enterprises, Inc.
Finance Assets
A Marketable Equity & Debt Securities (See P. 4, Schedule X) $
B Contingent Liabilities or Pledged Securities
(See P. 4, Schedule X) $
------
C(A-B) Aggregate Value of Finance Assets $0
Debt
D Indebtedness (See P.4, Schedule X) $
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
E Cash & Money Market Instruments $
-----
F(D-E) Total Adjusted Funded Debt $0
G(C/F) Finance Asset to Debt Ratio $
---------------------------
</TABLE>
<PAGE>
EXHIBIT D, continued -2
CALCULATION OF FINANCE ASSET TO DEBT COVERAGE RATIOS AS OF [Date]
-----------------------------------------------------------------
Borrower: Fund American Enterprises Holdings, Inc.
A. Schedule of Finance Assets as of [date].
[Marketable Securities as defined within sections (i),(ii),(iii),(iv) and
(v) of the Finance Assets definition.
Exchange or
Date Security Description Rating Quantity Price Value
---- -------------------- ------ -------- ----- -----
1 $ $
____________________________________________________________
2
____________________________________________________________
3
____________________________________________________________
4
____________________________________________________________
5
____________________________________________________________
6
____________________________________________________________
7
____________________________________________________________
8
____________________________________________________________
Borrower Total Finance Assets $
B. Pledged Securities as of [date].
Exchange or
Date Security Description Rating Quantity Price Value
---- -------------------- ------ -------- ----- -----
1 $ $
____________________________________________________________
2
____________________________________________________________
3
____________________________________________________________
4
____________________________________________________________
5
____________________________________________________________
Borrower Securities Pledged $
D. Schedule of Indebtedness as of [date].
Third Party Indebtedness as of [date]: $
__________
Outstandings under the Credit Agreement: $
__________
Proposed Outstandings under the Credit Agreement: $
__________
Borrower Total Indebtedness $
<PAGE>
EXHIBIT D, continued -3
CALCULATION OF FINANCE ASSET TO DEBT COVERAGE RATIOS AS OF [Date]
-----------------------------------------------------------------
Borrower: FFOG, Inc.
A. Schedule of Finance Assets as of [date].
[Marketable Securities as defined within sections (i),(ii),(iii),(iv) and
(v) of the Finance Assets definition.
Exchange or
Date Security Description Rating Quantity Price Value
---- -------------------- ------ -------- ----- -----
1 $ $
____________________________________________________________
2
____________________________________________________________
3
____________________________________________________________
4
____________________________________________________________
5
____________________________________________________________
6
____________________________________________________________
7
____________________________________________________________
8
____________________________________________________________
Borrower Total Finance Assets $
B. Pledged Securities as of [date].
Exchange or
Date Security Description Rating Quantity Price Value
---- -------------------- ------ -------- ----- -----
1 $ $
____________________________________________________________
2
____________________________________________________________
3
____________________________________________________________
4
____________________________________________________________
5
____________________________________________________________
Borrower Securities Pledged $
E. Schedule of Indebtedness as of [date].
Third Party Indebtedness as of [date]: $
__________
Outstandings under the Credit Agreement: $
__________
Proposed Outstandings under the Credit Agreement: $
__________
Borrower Total Indebtedness $
<PAGE>
EXHIBIT D, continued -4
CALCULATION OF FINANCE ASSET TO DEBT COVERAGE RATIOS AS OF [Date]
-----------------------------------------------------------------
Borrower: Fund American Enterprises, Inc.
A. Schedule of Finance Assets as of [date].
[Marketable Securities as defined within sections (i),(ii),(iii),(iv) and
(v) of the Finance Assets definition.
Exchange or
Date Security Description Rating Quantity Price Value
---- -------------------- ------ -------- ----- -----
1 $ $
____________________________________________________________
2
____________________________________________________________
3
____________________________________________________________
4
____________________________________________________________
5
____________________________________________________________
6
____________________________________________________________
7
____________________________________________________________
8
____________________________________________________________
Borrower Total Finance Assets $
B. Pledged Securities as of [date].
Exchange or
Date Security Description Rating Quantity Price Value
---- -------------------- ------ -------- ----- -----
1 $ $
____________________________________________________________
2
____________________________________________________________
3
____________________________________________________________
4
____________________________________________________________
5
____________________________________________________________
Borrower Securities Pledged $
D. Schedule of Indebtedness as of [date].
Third Party Indebtedness as of [date]: $
__________
Outstandings under the Credit Agreement: $
__________
Proposed Outstandings under the Credit Agreement: $
__________
Borrower Total Indebtedness $
<PAGE>
Exhibit 10 (i)
SOURCE ONE MORTGAGE SERVICES CORPORATION
LONG TERM INCENTIVE PLAN
(effective as of January 1, 1994)
<PAGE>
SOURCE ONE MORTGAGE SERVICES CORPORATION
1994 LONG TERM INCENTIVE PLAN
-----------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Purposes and Effective Date of the Plan ................................ 1
2. Definitions ............................................................ 1
3. Administration of Plan ................................................. 3
4. Participation .......................................................... 4
5. Allocation of Phantom Shares ........................................... 4
6. Valuation of Phantom Shares, Accounting
Treatment, Dividends, Adjustments ...................................... 5
7. Terms and Conditions of the
Allocation of Phantom Shares ........................................... 6
8. Performance Criteria; Earning Periods .................................. 7
9. Vesting ............................................................... 10
10. Change in Control ..................................................... 12
11. Payment for Phantom Shares ............................................ 14
12. Miscellaneous Provisions .............................................. 16
13. Claims and Disputes; Arbitration ...................................... 17
14. Amendment ............................................................. 19
15. Termination ........................................................... 19
</TABLE>
2
<PAGE>
SOURCE ONE MORTGAGE SERVICES CORPORATION
1994 LONG TERM INCENTIVE PLAN
-----------------------------
I. Purposes and Effective Date of the Plan
---------------------------------------
The purposes of the Source One Mortgage Services Corporation 1994 Long Term
Incentive Plan (the "Plan") are to provide a means to attract, reward and retain
strong management, to encourage teamwork among members of management and
excellence in the performance of their individual responsibilities, and to align
the interests of key managers participating in the Plan with the interests of
shareholders by offering an incentive compensation vehicle that is based upon
the growth in shareholders' equity and the value and profitability of Source One
Mortgage Services Corporation. The Plan shall be effective as of January 1,
1994.
2. Definitions
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In the Plan, the following terms shall have the meanings set forth below:
(a) "Base Portion" means a portion of the value of a Phantom Share
allocated to the Account of a Participant for an Earning Period equal to
(i) in the case of a Base Share provisionally allocated to the
Participant's Account for the Earning Period, its value as of the time of
its provisional allocation provided such Base Share becomes Earned and
Vested for the Earning Period and (ii) in the case of an Additional Share
or a Supplemental Share allocated to the Participant's Account for the
Earning Period, its value as of the end of the Earning Period. The Base
Portion of a Phantom Share shall remain constant and shall not include at
any time (i) any appreciation in the value of the Phantom Share after its
provisional allocation (in the case of a Base Share) or after the end of
the Earning Period for which it is allocated (in the case of an Additional
Share or Supplemental Share), or (ii) any amounts corresponding to
dividends credited to the Phantom Share under Section 6(b).
(b) "Board" means the Board of Directors of the Company.
(c) "Company" means Source One Mortgage Services Corporation, a
Delaware corporation, and its successors and assigns.
(d) "FAEH" means Fund American Enterprises Holdings, Inc. (formerly
The Fund American Companies, Inc.), a Delaware corporation, the indirect
parent of the Company.
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(e) "FAEH Share" means a share of the Common Stock, $1.00 par value,
of FAEH, as listed on the New York Stock Exchange.
(f) "Participant" means a person who is employed by the Company or a
participating subsidiary of the Company and who is named as an initial
Participant in the Plan in Exhibit A hereto or who subsequently is selected
by the Committee to participate in the Plan in accordance with Section 4.
(g) "Market Price" of a FAEH Share on any given day means the closing
price per FAEH Share listed on the New York Stock Exchange composite tape
on such day or, if FAEH Shares are not traded on a particular day, the
closing NYSE price per FAEH Share on the closest preceding date on which
FAEH Shares were traded.
(h) "Phantom Share" means a fictitious FAEH Share. Phantom Shares
shall not be considered outstanding FAEH Shares for accounting purposes. An
allocation of Phantom Shares shall confer only such rights as are specified
in the Plan. Participants who receive Phantom Share allocations shall not
(as a consequence of such allocations) be treated as shareholders under the
Articles of Incorporation or By-Laws of the Company or FAEH or under
applicable law. The term Phantom Shares includes Base Shares, Additional
Shares, if any, and Supplemental Shares, if any. Each Phantom Share shall
be divided into a Base Portion and an SAR Portion both as defined in this
Section 2.
(i) "SAR Portion" means that portion of the value of a Phantom Share
allocated to the Account of any Participant for an Earning Period,
including any amounts corresponding to dividends credited to the Phantom
Share under Section 6(b), which exceeds the Base Portion of the value of
such Phantom Share. The SAR Portion of a Phantom Share shall include at any
given time (i) any appreciation in the value of the Phantom Share after its
provisional allocation (in the case of a Base Share) or after the end of
the Earning Period for which it is allocated (in the case of an Additional
Share or Supplemental Share), and (ii) any amounts corresponding to
dividends credited to the Phantom Share under Section 6(b).
(j) The following terms are defined elsewhere in the Plan:
Section
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Account 5
Actual Rate 8(a)(i)
Additional Shares 8(a)(ii)
Adverse Change in Plan 10(d)
Base Rate 8(a)(iii)
Base Shares 8(a)(iv)
Change in Control of the Company 10(b)
Code 11(d)
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Committee 3(a)
Constructive Termination 10(c)
Continuing Director 10(e)
Earned 8(c)
Earning Period 8(a)(v)
Economic Value of a Share of
the Company's Common Stock 8(a)(vi)
Estimated Number 9(d) and 10(a)
GAAP 8(a)
Plan 1
Subsidiary 4(b)
Supplemental Shares 8(d)
Termination for Cause 9(g)
Vested 8(a)
3. Administration of Plan
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(a) The Plan shall be administered by the Human Resources Committee (the
"Committee") of the Board, as such Committee is from time to time
constituted. No member of the Committee shall participate in any decision
or recommendation involving such Committee member's own participation in
the Plan. If and when a subsidiary is participating in the Plan, the word
Company as used in the Plan shall include such subsidiary unless the
context otherwise requires.
(b) The Committee shall have all the powers vested in it by the terms of the
Plan, such powers to include exclusive authority (within the limitations
described herein) to prescribe the form of the instruments, if any,
embodying allocations of Phantom Shares under the Plan. The Committee shall
be authorized to interpret the Plan and any other written instruments
issued or adopted pursuant to the Plan, including but not limited to
instruments allocating Phantom Shares under the Plan, to establish, amend
and rescind any rules and regulations relating to the Plan, and to make any
other determinations which it believes necessary or advisable for the
administration of the Plan. The Committee may correct any defect or supply
any omission or reconcile any inconsistency in the Plan or in any written
instrument issued or adopted pursuant to the Plan in the manner and to the
extent the Committee deems desirable to carry it into effect. Subject to
Section 13 relating to claims and disputes and arbitration, any decision of
the Committee in the administration of the Plan, as described herein, shall
be final and conclusive, unless otherwise determined by the Board. However,
no determination by the Committee or the Board shall operate to
unreasonably deny a Participant the opportunity to Vest in allocated
Phantom Shares in accordance with the terms of the Plan. The Committee may
act only by a majority of its members in office, except that the members
thereof may authorize any one or more of their number or any officer of the
Company to execute and deliver documents on behalf of the Committee. No
member of the Committee shall be liable for anything done or
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omitted to be done by him or by any other member of the Committee in
connection with the Plan, except for his own willful misconduct or as
expressly provided by statute.
(c) The Committee may employ or retain agents and may designate one or more
employees of the Company, by name or by position, to perform such clerical,
accounting, and other services as the Committee may require in carrying out
the provisions of the Plan.
4. Participation
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(a) The initial Participants in the Plan shall consist of the key employees of
the Company listed in Exhibit A attached hereto. If any position held by
any Participant becomes vacant, the Committee may select the key employee
who fills such position to be a Participant in the Plan on such terms as
the Committee deems advisable. Only employees who hold the position of
Senior Vice-President or a higher position shall be eligible to be selected
as Participants in the Plan.
(b) If a subsidiary of the Company wishes to participate in the Plan and its
participation shall have been approved by the Board, the board of directors
of the subsidiary shall adopt a resolution in form and substance
satisfactory to the Committee authorizing participation by the subsidiary
in the Plan with respect to its employees. As used in this subsection (b),
the term "subsidiary" means any corporation at least one-half of whose
outstanding voting stock is owned, directly or indirectly, by the Company.
A subsidiary participating in the Plan may cease to be a participating
company at any time by action of the Board or by action of the board of
directors of such subsidiary, which latter action shall be effective not earlier
than the date of delivery to the Secretary of the Company of a certified copy of
a resolution of the subsidiary's board of directors taking such action. If the
participation in the Plan of the subsidiary shall terminate, such termination
shall not relieve it of any obligations theretofore incurred by it under the
Plan except with the approval of the Board.
5. Allocation of Phantom Shares
----------------------------
Phantom Shares awarded under the Plan shall be allocated to Accounts
maintained by the Company in the name of each Participant receiving an
allocation. Separate Accounts shall be maintained for Phantom Shares allocated
for each Earning Period (as defined in Section 8(a)(v).
The initial aggregate number of Base Shares (as defined in Section
8(a)(iv)) which is provisionally allocated under the Plan is 79,412. The total
number of Base Shares provisionally allocated to the Accounts of the initial
Participants as of the beginning of
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each Earning Period is 19,853. The number of Base Shares provisionally allocated
to the Account of each initial Participant as of the beginning of the first
Earning Period, and as of the beginning of each of the next three Earning
Periods, provided the Participant remains employed by the Company on such
date(s) in a position of responsibility substantially equal to or greater than
his position with the Company on January 1, 1994, is set forth on Exhibit A.
At any time before the end of an Earning Period the Board in its discretion
may provisionally allocate to the Account of any Participant for the Earning
Period additional Base Shares over and above the Base Shares provisionally
allocated to such account as of the beginning of the Earning Period.
The Board in its discretion may continue the Plan beyond the first four
Earning Periods. The provisional allocation of Base Shares to the Account of any
Participant for a designated earning period beyond the first four Earning
Periods shall be deemed a continuation of the Plan on the same terms and
conditions herein set forth.
6. Valuation of Phantom Shares, Accounting Treatment, Dividends, Adjustments
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Accounts shall be valued as follows:
(a) Each Phantom Share allocated or provisionally allocated to an Account shall
have a value on any given date equal to the Market Price of a FAEH Share on
such date plus the aggregate of any amounts corresponding to dividends
credited to the Phantom Share under Section 6(b).
(b) Each Phantom Share which has been allocated or provisionally allocated as
of the date on which a cash dividend on FAEH Shares is paid, shall be
credited with the amount of such per-share cash dividend.
(c) In addition to the crediting of amounts corresponding to dividends pursuant
to Section 6(b), the Committee has the discretion to make appropriate
adjustments to the number of Phantom Shares allocated or provisionally
allocated to a Participant's Account where a "capital transaction" or
"corporate reorganization" has the effect of changing the economic
equivalent number of Phantom Shares that have been allocated or
provisionally allocated to a Participant's Account under the Plan. The
Committee shall make an adjustment, either positive or negative as the case
may be, to the number of Phantom Shares allocated to the Participant's
Account to ensure that neither unintended economic benefits nor detriments
are conferred on a Participant solely by reason of such "capital
transaction" or "corporate reorganization." Solely for purposes of this
Section 6(c) and Section 8(d), a capital transaction or corporate
reorganization shall not be
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limited to its ordinary meaning if in fact a Participant would be conferred
an economic benefit or detriment by some other corporate transaction which
is not literally considered a capital transaction or corporate
reorganization under common business usage of said terms.
7. Terms and Conditions of the Allocation of Phantom Shares
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Each Phantom Share allocated or provisionally allocated to an Account in
the name of a Participant under this Plan shall be subject to the following
terms and conditions:
(a) Each Phantom Share shall (if it is not forfeited before it becomes Vested
under Section 9) continue in effect for an indefinite period from the
applicable date it was allocated or provisionally allocated until the date
both the Base Portion and the SAR Portion of the Phantom Share is paid to
the Participant (or to the Participant's designated beneficiary or legal
representative) pursuant to Section 11.
(b) The Company shall maintain a record of each Account established in the name
of a Participant showing the number of Phantom Shares allocated or
provisionally allocated to the Account from time to time. The Company also
shall maintain a record of the Base Portion of each such Phantom Share and
the aggregate of any amounts corresponding to dividends credited to each
such Phantom Share under Section 6(b). As of each December 31st the Company
shall furnish each Participant who becomes Vested in his Account with a
summary of the Account, including the number of Phantom Shares allocated to
the Account, the total value of such Phantom Shares, and with respect to
each such Phantom Share the aggregate of all amounts corresponding to
dividends credited to the Phantom Share under Section 6(b), the Base
Portion of the Phantom Share, if any, and the SAR Portion of the Phantom
Share.
(c) Except as provided herein, a Participant's interest in the Account in his
name shall not be transferable other than by will or the laws of descent
and distribution. During the Participant's lifetime, a Phantom Share shall
be exercised only by the Participant, except as otherwise provided herein.
Each Participant may designate a beneficiary or beneficiaries, including a
trust, to receive any amount payable under the Plan on account of the
Participant's death. Such designation shall be in a form authorized by the
Committee and may permit the exercise of Phantom Shares, during the
Participant's lifetime, by the Participant's guardian or legal
representative. In the absence of an effective designation of beneficiary
at the time of a Participant's death, any amount payable under the Plan on
account of the Participant's death shall be paid to the Participant's
estate.
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8. Performance Criteria; Earning Periods
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(a) For purposes of this Section 8, the following terms shall have the meanings
set forth below:
(i) "Actual Rate" for an Earning Period means the average annual rate
of return (rounded to the nearest one-hundredth of a percent) on a share of
the Company's common stock during the Earning Period calculated in
accordance with the following formula:
AR = 100 [(EVE + D\\1\\ (1 + AR/100)TO THE N POWER + D\\2\\ (1+ AR/100)TO THE N
POWER ***) TO THE 1/3 POWER - 1]
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EVE
Where AR = The Actual Rate for the Earning Period.
Where D = A dividend paid on a share of the Company's common stock
during the Earning Period, with D\\1\\ representing the
first dividend paid during the Earning Period, D\\2\\
representing the second dividend paid during the Earning
Period, etc., until all dividends paid during the Earning
Period are counted.
Where EVB = The Economic Value of a share of the Company's common stock
at the beginning of the Earning Period.
Where EVE = The Economic Value of a share of the Company's common stock
at the end of the Earning Period.
Where N = The number of years (rounded to the nearest tenth) from the
date of payment of a dividend during an Earning Period to
the end of the Earning Period.
(ii) "Additional Shares" means any Phantom Shares in addition to Base
Shares allocated to the Account of a Participant for an Earning Period
under Section 8(c) because the Actual Rate for the Earning Period is more
than 700 basis points more than the Base Rate for the Earning Period.
(iii) "Base Rate" for an Earning Period means the average yield on 10
year U.S. Treasury bonds over the last five trading days of the year
preceding the Earning Period and the first five trading days of the first
year
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in the Earning Period (rounded to the nearest one-hundredth of a
percent).
(iv) "Base Shares" means the number of Phantom Shares
provisionally allocated to the Account of a Participant as of the
beginning of an Earning Period and any additional Base Shares
provisionally allocated to such Account by the Board for the Earning
Period after the initial allocation of Base Shares and before the end
of the Earning Period.
(v) "Earning Period" means a period of three consecutive years
beginning January 1, 1994, January 1, 1995, January 1, 1996 or
January 1, 1997.
(vi) "Economic Value of a share of the Company's common stock"
as of any given date shall be calculated in accordance with the
following formula:
EV = A - B
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OS
Where EV = The economic value of a share of the Company's common
stock.
Where A = The sum of (i) the common shareholders' equity in the
Company determined in accordance with generally
accepted accounting principles ("GAAP"), (ii) the
economic value of the Company's mortgage servicing and
subservicing portfolio, (iii) the economic value of the
Company's projected production for the next twelve
months, and (iv) the Company's GAAP residential loan
loss reserve, all as determined in accordance with
Exhibit B.
Where B = The sum of (i) the Company's GAAP capitalized servicing
asset and (ii) the Company's GAAP goodwill, both as
determined in accordance with Exhibit B.
Where OS = The number of shares of the Company's common stock
outstanding on the date as of which the Economic Value
of a share of the Company's common stock is determined.
(b) A Participant who has received a provisional allocation of Base Shares at
the beginning of an Earning Period will earn Phantom Shares if certain
performance criteria for the Earning Period are met. The performance
criteria for the Earning Period will be met if the Company achieves a
specified economic return on common equity over the Earning Period. The
number of Phantom Shares, if any, which a Participant will
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earn for an Earning Period depends on the extent to which the Company meets
or exceeds the specified economic return on equity for the Earning Period
as described in subsection (c) below.
(c) The number of Phantom Shares, if any, which will be allocated to a
Participant's Account and be earned ("Earned") by the Participant for an
Earning Period shall be determined by the application of the following
formula:
SE = BS X (AR - BR) X P
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7 100
Where SE = The number of Phantom Shares allocated and Earned for
the Earning Period (This number may not exceed
twice BS).
Where BS = The number of Base Shares provisionally allocated to
the Participant for the Earning Period.
Where AR = The Actual Rate for the Earning Period.
Where BR = The Base Rate for the Earning Period
Where P = The applicable percentage determined in accordance
with the following schedule:
<TABLE>
<CAPTION>
================================================================================
Number of Basis Points by Which Applicable
Actual Rate for Earning Period Percentage
Exceeds Base Rate for Earning Period
--------------------------------------------------------------------------------
<S> <C>
0-99 0
100-299 25
300-499 50
500-699 75
700-1400 100
================================================================================
</TABLE>
If for an Earning Period the Actual Rate exceeds the Base Rate by more than
1400 basis points, the difference between the two rates for purposes of
this subsection (c) shall be deemed to be 1400 basis points.
(d) In addition to any Phantom Shares allocated to the Account of a Participant
for an Earning Period pursuant to subsections (b) and (c) of this Section
8, the Board in its discretion may award and allocate additional Phantom
Shares ("Supplemental Shares") to the Account of the Participant for the
Earning
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Period. Any such allocation shall be made as of the last day of the
Earning Period.
(e) In the event of a change in the number of outstanding shares of common
stock of the Company during an Earning Period by reason of a "capital
transaction" or "corporate reorganization", the Committee shall make such
adjustment in the Economic Value of a share of the Company's common stock
for purposes of this Section 8, either positive or negative as the case may
be, as of the beginning of the Earning Period or as of any other date
during the Earning Period, which in the exercise of its discretion, is
equitably required to ensure that neither unintended economic benefits nor
detriments are conferred on Participants solely by reason of such "capital
transaction" or "corporate reorganization". Solely for purposes of this
Section 8(e) and Section 6(c), a capital transaction or corporate
reorganization shall not be limited to its ordinary meaning if in fact
Participants would be conferred an economic benefit or detriment by some
other corporate transaction which is not literally considered a capital
transaction under common business usage of said terms.
9. Vesting.
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(a) A Participant's interest in any Phantom Shares allocated to his Account and
Earned for an Earning Period under Section 8(c) and 8(d) will become fully
vested ("Vested") as of the January 1st immediately following the Earning
Period provided that the Participant has been in the continuous employ of
the Company through the last day of the Earning Period.
(b) Any amounts corresponding to dividends credited to a Base Share under
Section 6(b) shall be Vested only when and if the Base Share to which the
dividend is credited shall Vest. Any amounts corresponding to dividends
credited to Additional Shares or Supplemental Shares, or to Base Shares
after the Base Shares are Vested, shall be Vested when credited.
(c) A Participant's interest in Base Shares provisionally allocated to the
Account in the name of the Participant and any amounts corresponding to
dividends under Section 6(b) credited to such Base Shares during an Earning
Period will be forfeited upon that Participant's voluntary termination or
involuntary termination for Cause if such interest, including amounts
corresponding to dividends, has not Vested at the time of termination.
(d) Notwithstanding the provisions of Sections (a), (b) and (c) above of this
Section 9, upon the Participant's (i) involuntary termination of employment
other than for Cause; (ii) death or disability while in the employ of the
Company; or (iii) retirement from the Company after attaining age sixty-one
(61), if the Board determines that it is likely that a specific number of
Phantom Shares (the "Estimated
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Number") would under Section 8(c) be allocated to the Participant's Account
and be Earned for an Earning Period in which the event described in (i),
(ii) or (iii) above occurs if the Participant should continue in the employ
of the Company through the end of the Earning Period, then a portion of the
Estimated Number of Phantom Shares shall be Vested. The number of Phantom
Shares in which the Participant will be Vested is that number which is in
the same proportion to the Estimated Number as (x) the number of full
months which have elapsed since the first day of the Earning Period to the
end of the first month in which occurs one of the events described above in
this subsection (d) is to (y) the total number of months in the Earning
Period.
(e) In the event a Participant who is not terminated for Cause or Disability is
no longer employed by the Company as a result of the removal of the
Participant from an office which the Participant held (i) on January 1,
1994 or (ii) on the later date as of which he is selected as a Participant
by the Committee (provided that a promotion or lateral transfer shall not
be deemed to constitute such a removal, except for a lateral transfer or
promotion to a more senior title but to a job which has less
responsibilities and duties), a significant reduction in the nature or
scope of the authorities, powers, functions, or duties attached to such
Participant's position or a reduction in the compensation (exclusive of
bonuses or other incentive compensation) of such Participant which is not
remedied within 30 calendar days after receipt by the Company of written
notice from such Participant, the Committee in its sole discretion acting
in good faith may treat such termination in the same manner as an
involuntary termination other than for Cause under subsection (d) above.
(f) Phantom Shares which have Vested cease to be subject to forfeiture under
the Plan. The Base Portion and the SAR Portion of such Vested Phantom
Shares shall be paid in accordance with, and subject to the terms and
conditions of, Section 11.
(g) For purposes of the Plan, an involuntary termination other than for Cause
occurs with respect to a Participant if the Company terminates the
Participant's employment with the Company for any reason other than for
Cause (as defined below) or disability (as defined in Section 9(h)). The
termination of a Participant's employment with the Company shall be deemed
to have been for "Cause" if such termination shall have been the result of
the material failure of such person, in the Committee's reasonable
judgment, to perform competently the Participant's duties; the
Participant's conviction of a crime involving acts of moral turpitude,
dishonesty, theft, unethical or unlawful business conduct or conduct which,
in the Committee's judgment, impairs the reputation or standing of the
Company (provided, that if the Participant is arrested or indicted for such
a crime, the Company shall have the right
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to suspend the Participant without pay until the matter is judicially
resolved); the failure of the Participant to devote his full time and
attention exclusively to the business and affairs of the Company as herein
provided; or the material violation by the Participant of any term,
provision or condition of any employment agreement between the Participant
and the Company.
(h) For purposes of this Section 9 of the Plan, a Participant shall be deemed
to be disabled if such Participant has been declared to be permanently and
totally disabled after examination by an independent physician satisfactory
to the Company and the Committee has reasonably determined that the
physical or mental condition of the Participant was such as would entitle
the Participant to payment of monthly disability benefits under the
Company's Long-Term Disability Plan.
10. Change in Control
-----------------
(a) In the event there occurs a Change in Control of the Company as defined in
Section 10(b), the Board shall determine for each Participant, on the basis
of the most recent information available, on or before the date of such
Change in Control, whether it is likely that a specific number of Phantom
Shares (the "Estimated Number") would under Section 8(c) be allocated to
the Participant's Account and be Earned for any Earning Period in which the
Change in Control of the Company occurs assuming the Participant will
continue in the employ of the Company through the end of the Earning
Period, and if within 24 months after the Change in Control:
(i) There is an involuntary termination other than for Cause of the
employment of the Participant;
(ii) There is a Constructive Termination, as defined in Section
10(c), of the employment of the Participant; or
(iii) There occurs an Adverse Change in the Plan, as defined in
Section 10(d), in respect of the Participant;
then, if the determination of the Board, made on or prior to the date of
the Change in Control as provided above in this Section 10(a), was that it
was likely that an Estimated Number of Phantom Shares would be allocated to
the Participant's Account for the Earning Period, the Participant shall be
Vested in such Estimated Number of Phantom Shares. However, if the
determination of the Board was that it was not likely that any Phantom
Shares would under Section 8(c) be allocated to the Participant's Account
and be Earned for the Earning Period, the Participant shall be Vested in
that number of Base Shares provisionally allocated to the Participant at
the start of the Earning Period which is in the same proportion to such
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total number of Base Shares as (x) the number of full months which have
elapsed since the first day of the Earning Period to the end of the first
month in which occurs one of the events described in clauses (i) or (ii)
above of this subsection (a) is to (y) the total number of months in the
Earning Period.
If the Change of Control occurs only within one Earning Period during which
an employee is a Participant, for purposes of this Section 10 the number of
Base Shares provisionally allocated to the Participant's Account for the
Earning Period shall be deemed to be increased by the number of Base Shares
provisionally allocated to his Account for the next Earning Period.
(b) For purposes of Section 10(a) relating to a change in control of the
Company, a "Change in Control of the Company" shall occur if:
(i) Any person or group (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act), other than Fund American Enterprises
Holdings, Inc. (formerly The Fund American Companies, Inc.) Fund American
Enterprises, Inc. or the Company, becomes the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of thirty-five percent (35%)
or more of the Company'S then outstanding capital stock;
(ii) The Continuing Directors, as defined in Section 10(e), cease for
any reason to constitute a majority of the Board of the Company; or
(iii) The business of the Company for which the Participant's services
are principally performed is disposed of by the Company pursuant to a sale
or other disposition of all or substantially all of the business or
business related assets of the Company (including stock of a subsidiary of
the Company).
(c) For purposes of Section 10(a) relating to a Change in Control of the
Company, "Constructive Termination" shall mean a termination of employment
with the Company or any of its subsidiaries at the initiative of the
Participant that the Participant declares by prior written notice delivered
to the Secretary of the Company to be a Constructive Termination by the
Company and which follows (i) a material decrease in his salary, or (ii) a
material diminution in the authority, duties or responsibilities of his
position with the result that the Participant makes a determination in good
faith that he cannot continue to carry out his job in substantially the
same manner as it was intended to be carried out immediately before such
diminution. Notwithstanding anything herein to the contrary, Constructive
Termination shall not occur within the meaning of this Section 10(c) until
and unless 30 days have elapsed from
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the date the Company receives such written notice without the Company
curing or causing to be cured the circumstance or circumstances described
in this Section 10(c) on the basis of which the declaration of Constructive
Termination is given.
(d) For purposes of Section 10(a) relating to a Change in Control of the
Company, an "Adverse Change in the Plan" shall mean:
(i) Termination of the Plan pursuant to Section 15;
(ii) Amendment of the Plan pursuant to Section 14 that
materially diminishes the value of the Phantom Shares that have been
allocated or provisionally allocated under the Plan, either to
individual Participants or in the aggregate, unless there is
substituted concurrently authority to grant long term incentive
awards of comparable value, to individual Participants or in the
aggregate, as the case may be; or
(iii) In respect of any Participant a material diminution in his
rights in connection with such Phantom Shares (except as may occur
under the terms of the Plan applicable to such Phantom Shares as
originally allocated or provisionally allocated) unless there is
substituted concurrently a long term incentive award with a value at
least comparable to the loss in value attributable to such diminution
in his rights.
(e) For purposes of Section 10(b)(ii) of the Plan, "Continuing Directors" shall
mean those individuals who, as of January 1, 1994, constituted the Board
or, alternatively, those members elected or nominated after January 1, 1994
who were approved for such election or nomination by a vote of at least a
majority of the directors then comprising the Continuing Directors.
Further, individuals shall be excluded whose initial assumption of office
is or was in connection with an actual or threatened election contest
relating to the election of the directors of the Company (as used in rule
14a-11 under the Securities Exchange Act of 1934).
11. Payment for Phantom Shares
--------------------------
Subject to the Company's Voluntary Deferred Compensation Plan:
(a) Automatic Payment of Base Portion Only. The Base Portion of all Phantom
--------------------------------------
Shares allocated to the Account of a Participant for an Earning Period
which become Vested at the end of the Earning Period under Section 9(a)
shall be paid to the Participant in a single sum as soon as
administratively feasible after the Committee has determined the amount of
such Base Portion and not later than 90 days after the end of the Earning
Period.
-14-
<PAGE>
(b) Automatic Payment of Full Value. The full value of all Phantom Shares
-------------------------------
allocated to the Account of a Participant for an Earning Period which
become Vested before the end of the Earning Period under Section 9(d), 9(e)
or 10(a) shall be paid to the Participant (or to the Participant's
designated beneficiary or legal representative) in a single sum within 30
days after the Committee determines in accordance with Section 9(d), 9(e)
or 10(a) that the Participant is Vested in a specific number of Phantom
Shares, provided, however, that:
(i) If the Participant dies before the end of an Earning Period
and there is no effective designation of the Participant's
beneficiary at the time of his death, any amount payable under the
Plan on account of the Participant's death shall be paid to his legal
representative by the later of: (A) 30 days after the Committee's
determination referred to above in this subsection (b), or (B) 30
days after the qualification of the legal representative.
(ii) If the Participant becomes Vested in any Phantom Shares
before the end of an Earning Period on account of a Change in Control
of the Company and a subsequent Adverse Change in the Plan and
remains employed by the Company, only the Base Portion of such Vested
Phantom Shares shall be paid to him pursuant to this subsection (b).
The SAR Portion of such Vested Phantom Shares shall be paid in
accordance with subsection (c) below.
(iii) The value of any Phantom Shares payable under this
subsection (b) shall be determined as of the date on which the
Committee determines that a specific number of Phantom Shares are
Vested in the Participant.
(c) Exercise and Payment of SAR Portion. A Participant may exercise the SAR
-----------------------------------
Portion of all or any Phantom Shares allocated to his Account for an
Earning Period and not paid in full pursuant to subsection (b) above, at
any time after he becomes Vested in such Phantom Shares and while he is
employed by the Company, subject, however, to the following terms and
conditions:
(i) If at the time of his termination of employment, or on the
last day of the year in which the Participant attains age 65,
whichever is earlier, he has not exercised the SAR Portion of all of
such Phantom Shares, the unexercised portion will be deemed to be
exercised on the day of the termination of his employment or on the
last day of the year in which he attains age 65, as the case may be.
(ii) If the Participant dies before he has exercised all of the
SAR Portion of such Phantom Shares,
-15-
<PAGE>
the unexercised portion shall be deemed to be exercised on the day of
the Participant's death.
(iii) The SAR portion of such Phantom Shares, or the unexercised
portion thereof, may be exercised by the Participant or by his legal
representative in the event of the Participant's incapacity, by
written request to the Secretary of the Company requesting the
exercise of the SAR Portion of a specific number of such Phantom
Shares.
(iv) The value of the SAR Portion of any Phantom Shares
exercised or deemed to be exercised pursuant to this subsection (c)
shall be determined as of the date the SAR Portion of such Phantom
Shares is exercised or deemed to be exercised. The amount payable on
account of the exercise or deemed exercise of the SAR Portion of any
Phantom Shares shall be the value of the SAR Portion on the date of
exercise or deemed exercise. Such amount shall be paid to the
Participant or to the Participant's designated beneficiary in a
single sum within 30 days after the SAR Portion of such Phantom
Shares is exercised or deemed to be exercised, provided that if there
is no effective designation of the Participant's beneficiary at the
time of the Participant's death, any amount payable on account of the
Participant's death shall be paid to his legal representative by the
later of (A) 60 days after the Participant's death, or (B) 30 days
after the qualification of the legal representative. If less than the
SAR Portion of all of such Phantom Shares is exercised at any time,
unless the Participant designates the SAR Portion of specific Phantom
Shares to be exercised, the SAR Portions of the Phantom Shares with
the largest SAR Portions shall be deemed exercised first.
(d) Notwithstanding any provision of the Plan other than this subsection (d),
if part of a payment under the Plan resulting from the operation of Section
10 (relating to a Change in Control of the Company) and this Section 11
would be an "excess parachute payment" under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), such payment shall be
reduced by the smallest amount required so that no part of the payment is
not deductible under Section 280G of the Code. However, prior to making any
such reduction the Committee shall request the Company's independent
certified public accountants to determine whether it would be in the best
interest of the Participant to make the reduction. If such accountants
determine that it is not in the best interest of the Participant to make
the reduction, the reduction shall not be made.
-16-
<PAGE>
12. Miscellaneous Provisions
------------------------
(a) Except as otherwise provided in the Plan, no employee or other person shall
have any claim or right to be granted any Phantom Shares under the Plan.
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee any right to be retained in the employ of the Company
or any subsidiary.
(b) A Participant's interest under the Plan may not be assigned or transferred
in whole or in part either directly or by operation of law or otherwise
(except in the event of a Participant's death), including but not limited
to, sale, execution, levy, garnishment, attachment, pledge, bankruptcy or
any other transfer and no such interest of any Participant in the Plan
shall be subject to any obligation or liability of such Participant or any
beneficiary of such Participant.
(c) The Company shall have the right to deduct from any payment made under the
Plan any federal, state or local income or other taxes required by law to
be withheld with respect to such payment.
(d) The Company has only a contractual obligation to make payments under
Section 11. Participants have the status of general unsecured creditors of
the Company. The satisfaction of Phantom Share Base Portion and SAR Portion
obligations is to be made solely out of the general corporate funds of the
Company, which shall at all times remain subject to the claims of the
Company's creditors. Further, amounts credited to a Participant's Account
shall neither be segregated for the purpose of securing the Company's
liability nor be held by the Company in trust for the Participant. It is
the intention of the Company and the Participants that the amounts payable
under the Plan be unfunded for tax purposes and for purposes of the
Employee Retirement Income Security Act of 1974, as amended.
(e) By accepting an allocation or provisional allocation of Phantom Shares or
other benefit under the Plan, each Participant and each person claiming
under or through each Participant shall, subject to the Plan, be deemed to
have indicated such Participant's or claimant's acceptance and ratification
of, and consent to, any action taken under the Plan by the Company, the
Board or the Committee.
13. Claims and Disputes; Arbitration
--------------------------------
(a) Claims for benefits under the Plan shall be made in writing to the
Committee. If a claim for benefits is wholly or partially denied, the
Committee shall, within a reasonable period of time but not later than
ninety (90) days after receipt of the claim, provide the claimant who was
denied a benefit written notice setting forth in a manner calculated to be
understood by the claimant:
-17-
<PAGE>
(i) The specific reason or reasons for denial;
(ii) Specific reference to the pertinent provisions of the Plan on
which the denial is based;
(iii) A description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(iv) An explanation of the Plan's claim review procedure.
A person whose claim for benefits under the Plan has been denied, or his
duly authorized representative, may request a review upon written
application to the Committee, may review pertinent documents, and may
submit issues and comments in writing. The claimant's written request for
review must be submitted to the Committee within sixty (60) days after
receipt by the claimant of written notification of the denial of a claim. A
decision by the Committee shall be made promptly, and not later than sixty
(60) days after the Committee's receipt of a request for review, unless
special circumstances require an extension of time for proceeding, in which
cases a decision shall be rendered as soon as possible, but not later than
one hundred twenty (120) days after receipt of the request for review. The
decision on review shall be in writing and shall include specific reasons
for the decision, specific reference to the pertinent provision of the Plan
on which the decision is based, and be written in a manner calculated to be
understood by the claimant.
(b) Unless otherwise required by law, any controversy or claim arising out of
(i) the denial of a claim for benefits by the Committee under (a) above or
any action taken by the Committee under Section 3, or otherwise relating to
the Plan or the breach thereof, shall be settled by binding arbitration in
the City of Farmington Hills in accordance with the laws of the State of
Michigan by three arbitrators, one of whom shall be appointed by the
Company, one by the Participant (or in the event of his prior death, his
beneficiary(ies) or other distributee), and the third of whom shall be
appointed by the first two arbitrators. If the selected (third) arbitrator
declines or is unable to serve for any reason, the appointed arbitrators
shall select another arbitrator. Upon their failure to agree on another
arbitrator, the jurisdiction of the Circuit Court of Oakland County,
Michigan shall be invoked to make such selection. The arbitration shall be
conducted in accordance with the commercial arbitration rules of the
American Arbitration Association except as hereinabove provided in
subsection (c) below. Judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof. Review by the
arbitrators of any decision, action or interpretation of the Board or
Committee
-18-
<PAGE>
shall be limited to a determination of whether it was arbitrary and
capricious or constituted an abuse of discretion, within the guidelines of
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). In the event the
------------------------------------
Participant or his beneficiary shall retain legal counsel and/or incur
other costs and expenses in connection with enforcement of any of the
Participant's rights under the Plan, the Participant or beneficiary shall
not be entitled to recover from the Company any attorneys fees, costs or
expenses in connection with the enforcement of such rights (including
enforcement of any arbitration award in court) regardless of the final
outcome; except that the arbitrators in their discretion may award
reasonable attorneys fees and reasonable costs to the Participant in an
arbitration initiated by the Participant following a Company Change in
Control, to enforce the Participant's rights under the Plan, provided the
Participant is the prevailing party in such arbitration.
(c) Any arbitration shall be conducted as follows:
(i) The arbitrators shall follow the Commercial arbitration Rules of
the American Arbitration Association, except as otherwise provided herein.
The arbitrators shall substantially comply with the rules of evidence;
shall grant essential but limited discovery; shall provide for the exchange
of witness lists and exhibit copies; and shall conduct a pretrial and
consider dispositive motions. Each party shall have the right to request
the arbitrators to make findings of specific factual issues.
(ii) The arbitrators shall complete their proceedings and render their
decision within 40 days after submission of the dispute to them, unless
both parties agree to an extension. Each party shall cooperate with the
arbitrators to comply with procedural time requirements and the failure of
either to do so shall entitle the arbitrators to extend the arbitration
proceedings accordingly and to impose sanctions on the party responsible
for the delay, payable to the other party. In the event the arbitrators do
not fulfill their responsibilities on a timely basis, either party shall
have the right to require a replacement and the appointment of new
arbitrators.
(iii) The decision of the arbitrator shall be final and binding upon
the parties and accordingly a judgment by any Circuit Court of the State of
Michigan or any other court of competent jurisdiction may be entered in
accordance therewith.
(iv) Subject to the provisions of subsection (b) relating to
reasonable attorneys fees and costs in an arbitration following a Company
Change in Control, the costs of the arbitration shall be borne equally by
the parties to such arbitration, except that each party shall bear its own
legal and accounting expenses relating to its participation in the
arbitration.
-19-
<PAGE>
14. Amendment
---------
The Plan may be amended at any time and from time to time by the Board, but
no amendment which increases the aggregate number of Phantom Shares which may be
allocated pursuant to the Plan shall be effective unless and until the same is
approved by a majority vote of the shareholders of the Company. No amendment of
the Plan shall adversely affect any right of any Participant with respect to any
Phantom Shares theretofore allocated without such Participant's written consent.
15. Termination
-----------
This Plan shall terminate upon the adoption of a resolution of the Board
terminating the Plan. No termination of the Plan shall alter or impair any of
the rights or obligations of any person, without that person's consent, with
respect to any Phantom Shares theretofore allocated under the Plan.
-20-
<PAGE>
EXHIBIT A
1994 LONG TERM INCENTIVE PLAN PARTICIPANTS
------------------------------------------
[Master List Held by Board of Directors]
<PAGE>
EXHIBIT B
[Attach copy of methodology for determining the
value of A and B in Section 8(a)(vi) of the Plan.]
<PAGE>
EXHIBIT B
Source One Mortgage Services Corporation
Economic ROE Methodology
------------------------
Economic ROE Overview:
---------------------
This write-up serves to document the methodology by which the internal
measurement of economic return on equity (ROE) will be computed for Source One
Mortgage Services Corporation. This performance measurement will be computed at
the end of each quarter and will represent an estimation of the Company's
economic return on its common shareholders' equity.
Economic ROE will be the change in the Company's economic value plus common
dividends, divided by the beginning period economic value. Economic value at
the end of a period will be equal to the following:
* The Company's GAAP common shareholders' equity.
* Add the economic value of the servicing and sub-servicing portfolios.
* Subtract the capitalized servicing GAAP book value.
* Add the economic value of the projected production for the next twelve
months. This is the assumed economic value of the production network.
* Add the GAAP residential loss reserve net of deferred taxes. (Servicing
economic value is net of loan losses.)
* Subtract the GAAP goodwill and various other intangible assets net of
applicable deferred taxes.
Economic value and common dividends will be measured per common share. Economic
ROE will be calculated as the sum of the change in economic value per share and
dividends per share, divided by the beginning period economic value per share.
Dividends will be compounded at the economic ROE for the period.
SERVICING AND SUB-SERVICING PORTFOLIO VALUATION OVERVIEW:
--------------------------------------------------------
The economic value of servicing and sub-servicing is computed by using the
Company's valuation model which employs a discounted cash flow methodology. The
economic value of servicing equals the present value of the future after-tax net
servicing revenues expected to be received over the life of the servicing
portfolio. The cash flows are discounted to their present values using the
<PAGE>
Company's after-tax weighted average cost of capital. The net servicing cash
flows will equal the following revenue and expense components:
* The net servicing fee revenues expected to be received over the life of the
portfolio.
* Add the float benefit of T&I and P&I escrow balances which earn an interest
credit at the escrow funding credit rate.
* Add the ancillary fee revenues such as late charges which are computed as a
percentage of the outstanding principal balance over the life of portfolio.
* Add the insurance fee revenues which are computed on a dollar per loan
basis over the life of the portfolio.
* Subtract the annual loan servicing expense which increases annually based
on the servicing cost growth rate.
* Subtract the cost of foreclosure losses which is applied to the future
projected number of foreclosures that Source One should experience over the
life of the portfolio.
* Subtract the interest expense paid to mortgagors for escrow balances in
certain states.
The economic value of sub-servicing equals the present value of the future
after-tax sub-servicing revenues expected to be received over the life of the
sub-servicing contract. The sub-servicing cash flows will equal the following
revenue components:
* The sub-servicing profit margin per loan that Source One receives over and
above the actual cost of servicing.
* Add the ancillary fee revenues such as late charges that Source One retains
per the sub-servicing contract.
* Add the insurance fee revenues that Source One retains per the sub-
servicing contract.
The servicing portfolio will be valued at each period-end and will be segregated
into the major product divisions: GNMA pool loans, Conventional loans, Insured
Private loans and Commercial loans. The basic six pieces of mortgage loan
information (principal balance, loan count, weighted average net servicing fee,
weighted average note rate, weighted average remaining life, and average escrow
balance) will be extracted from the Company's mortgage database using the Data
Analyzer query system.
SERVICING VARIABLE DEFINITIONS:
------------------------------
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<PAGE>
1) PREPAYMENT RATE: This rate is the annual percentage of the servicing
portfolio that is expected to prepay each year in the future. This rate
will be based on the period-end Knight Ridder PSA prepayment forecasts that
are developed by the six Wall Street investment banking firms with whom
Source One does business. For each note rate the stated Knight Ridder
median prepayment speed forecast of the six firms will be used. The GNMA 30
year tables and the Conventional 30 day tables are the two Knight Ridder
tables used for the respective product types. The Company's servicing
portfolio will be stratified into 50 basis point increments so that each
segment is paid off at the appropriate prepayment speed for that note rate
at each period-end.
2) SERVICING COST: This cost represents the average annual expense incurred
for each mortgage loan serviced or sub-serviced by Source One. The annual
servicing cost per loan will be based on a 12 month average derived from
the Company's Cost Accounting System. The costs used for the servicing
valuation are 100% fully loaded and include all direct fixed and variable
costs along with all overhead costs attributed to the Servicing Division.
3) AFTER-TAX DISCOUNT RATE: This rate represents the Company's weighted
average cost of capital which will be used to discount the net servicing
and sub-servicing cash flows. This discount rate will be computed by
weighting together the various components of the Company's capital base at
the end of each period. The capital mix is based on a four quarter average
while the capital costs are based on the average of the most recent month.
The escrow funding credit value is excluded from this calculation since it
is already taken into consideration in the present value of the servicing
cash flows. All other components of debt and equity are included in this
rate. The cost of debt and preferred equity is the after-tax actual cost
and the after-tax cost of common equity is assumed to be 700 basis points
over the average 10 day period-end 10 year treasury constant maturity yield
from the prior year-end.
4) ESCROW FUNDING CREDIT RATE: This rate represents the annual rate that
Source One effectively earns on its T&I and P&I escrow balances. While
interest is not paid directly to Source One by the custodian banks on the
escrow balances, the interest costs of borrowing lines are reduced to
compensate for the value of these escrow funds. This rate will be based on
a 12 month average of the Federal Reserve published rate for 30 day
commercial paper. To this gross earning rate will be added the cost of a
back-up line of credit and dealer costs for commercial paper since these
will not be incurred. From this gross rate will be subtracted the actual
interest cost of escrow available lines of credit.
-3-
<PAGE>
5) SERVICING COST GROWTH RATE: This rate represents the annual estimated
percentage by which the servicing cost per loan should increase each year
over the life of the servicing portfolio. This growth rate will equal the
MBA's forecast of the Consumer Price Index (CPI) increase for the next one
year and will remain constant over the life of the servicing portfolio.
6) ESCROW GROWTH RATE: This rate represents the annual estimated percentage by
which the average escrow balance per loan should increase each year over
the life of the servicing portfolio. This growth rate will be equal to the
MBA's estimation of the national existing home price increase of the past
year and will remain constant over the life of the servicing portfolio.
7) AVERAGE ESCROW BALANCE: This balance relates to the T&I payments which are
collected each month from mortgagors in anticipation of coming tax and
insurance payments. The average escrow balance is based on the latest 12
monthly escrow balances relating to each loan in the Company's servicing
portfolio. The average escrow balance per loan is then applied to the
ending loan count for the total servicing portfolio as of the end of the
period in order to derive the beginning total escrow balance for the
valuation calculation.
8) CORPORATE INCOME TAX RATE: This rate is the effective current tax rate in
effect by law or the expected rate if corporate taxes are scheduled to
change in the near future.
9) RESERVE REQUIREMENT RATE: This rate represents the reserves that the banks
are required by law to maintain on Source One's escrow accounts. To the
extent that reserves must be maintained, escrow funds cannot be profitably
invested by the banks. Consequently, no escrow funding credit is available
on this portion of our Company's escrow balances. This reserve requirement
is the actual rate that Source One is currently experiencing.
10) P&I FLOAT USAGE RATE: This rate is the percentage of the days of each
month that Source One has on average to use the P&I payments that have been
collected before they must be remitted to the mortgage investors. This
usage rate will be based on the various actual remittance cycles of the
mortgage pools that Source One currently services. This gross usage rate
is reduced for the servicing valuation due to the required fund advances
that the Company must make to security holders of certain agency pools that
contain delinquent loans.
11) ESCROW INTEREST COST RATE: This rate is the annual interest expense that
Source One as the servicer must pay to mortgagors in certain states on
funds held in escrow for property taxes and insurance. There are currently
about 12 states that require the payment of interest on escrow funds. The
rates of
-4-
<PAGE>
interest range from 1% to 5%. Currently, the average overall rate of
interest that Source One pays on all T&I escrow balances is less than 1%.
12) MISCELLANEOUS FEE INCOME RATE: This rate represents the expected fee
income to be received from five miscellaneous servicing fee accounts over
the life of the servicing portfolio. These miscellaneous accounts are as
follows: late charges, NSF fees, assumption fees, application fees, and
other servicing income. This annual rate will be developed based on the
Company's actual experience over the preceding 12 months.
13) PAYOFF FLOAT INCOME RATE: This rate is the float earning rate that
Source One earns on payoff funds that the Company holds in escrow prior to
remitting them to the security holders. The period of time during which
mortgage prepayment funds are available for Source One's use depends on the
remittance cycle of the pools or loans involved. This rate is a weighted
average of the various remittance cycles that are currently in the
servicing portfolio. Again, this gross float rate will be reduced to
offset the interest expense that must be advanced by Source One to the
security holders through the end of the month on certain agency pool loans
that prepay before the end of the month.
14) INSURANCE INCOME: This value relates to the annual expected dollar
amount of insurance commission revenue per loan that Source One should
receive over the life of the servicing portfolio. This revenue variable
will be based on the Company's actual experience over the preceding 12
months.
15) BI-WEEKLY FLOAT INCOME: This revenue item represents the float that
Source One should earn on bi-weekly payment mortgage loans over the life of
the servicing portfolio. For loans in the Company's bi-weekly program,
one-half of the monthly mortgage payment is automatically withdrawn from
the mortgager's checking account twice each month. These funds earn float
for the Company until they must be passed on to the Cashier department on
the first of the next month. This income variable is based on the
Company's actual average experience over the past 12 months.
16) FORECLOSURE LOSSES: This loss variable represents the future dollar loss
per foreclosed loan that is expected to be incurred over the life of the
servicing portfolio. This information is based on the loan loss reserve
schedule in the Board Report. Separate loss figures are used for GNMA pool
loans and conventional recourse pool loans. The GNMA savings program will
reduce the GNMA loss per foreclosure.
17) NUMBER OF FUTURE MORTGAGE FORECLOSURES: This figure refers to the number
of expected future mortgages which will go into
-5-
<PAGE>
foreclosure over the life of the servicing portfolio. The foreclosure loss
per loan is applied to each of the expected mortgage foreclosures. This
estimate is based on the most recent FHA Survivorship & Decrement tables
for GNMA loans. The estimate for conventional loans is based on using LTV
information to adjust the FHA statistics for the conventional loans.
18) SETUP COST ON INTERIM LOANS: This item refers to the expected expense
per loan of setting up newly purchased loans on our servicing system that
currently are being serviced by the seller prior to transfer. This expense
often ranges from $15 to $20 per loan and is part of the capitalized
purchase price for the new portfolio.
19) PV OF TAX BENEFIT OF AMORTIZATION: This additional component of value
for the servicing portfolio is due to the tax benefit that the scheduled
amortization of the capitalized book value will produce over the life of
the servicing portfolio. The tax benefit of amortization is discounted at
the after-tax weighted average cost of capital.
PRODUCTION CAPABILITY VALUATION OVERVIEW:
----------------------------------------
The production capability value represents the estimated economic value of
Source One's projected production for the next twelve months. The following
summarizes the valuation of the projected production:
* The present value of the servicing rights created over the estimated life
of the loans (calculated in the same manner as the servicing portfolio
valuation).
* Add the net marketing gains.
* Add the net interest breakage.
* Subtract the net cost of production.
* Subtract the capitalized purchased servicing related to the production
(Whole Loan SRPs and Brokerage capitalizations).
* Subtract all overhead expenses applicable to the production areas.
The production projection for the next twelve months will be based on the
Company's actual experience for the most recent twelve months. The Company's
retail, broker, and whole loan production of the last 12 months will be adjusted
proportionally based on the Mortgage Bankers' Association's (MBA) forecast of
total industry production for the next 12 months compared to the latest 12
months actual. The Company's refinance production will be adjusted based on the
MBA's forecast of refinance activity for the next 12 months.
-6-
<PAGE>
Both calculations assume that Source One's market share for the next 12 months
will remain the same as that of the past 12 months.
PRODUCTION VALUATION VARIABLE DEFINITIONS:
-----------------------------------------
1) VALUE OF PRODUCTION SERVICING RIGHTS: This component equals the present
value of the projected production mortgage servicing rights over the
expected life of the loans. This value will be based on the actual average
loan characteristics of the production for the last twelve months for each
production source. The assumptions and methodology used to value the
production servicing rights will be consistent with the valuation of the
Company's servicing portfolio. However, only variable servicing costs will
be used in valuing this incremental servicing production.
2) NET MARKETING GAINS: This component represents the gain or loss on the sale
of mortgage loans into the secondary market. Marketing gains vary by source
of loan production and depend on the note rate, pricing, and mortgage
product under consideration. The average marketing gains for the last
twelve months will be the basis for the projected marketing gains of the
next twelve months.
3) NET INTEREST BREAKAGE: This production revenue represents the difference
between the mortgage note rate and the Company's funding cost during the
time the loan is in inventory. From the time the loan is banked to the
time it is sold into the secondary market, Source One earns the interest
spread on the mortgage loan. The period of time during which the loan is
earning interest breakage varies between 30 and 60 days on average. The
average net interest breakage for the last twelve months will be the basis
for determining the interest breakage for the next twelve months.
4) NET COST OF PRODUCTION: This expense component represents the overall net
expense that is incurred for each mortgage produced through the Company's
production network. The net expense is comprised of total operating
expenses per loan less any operating revenues collected in the production
process. This net cost of production varies by production source and
depends on the process employed in generating the mortgage loan. The
average net cost of production for the twelve months preceding the
valuation date will serve as the basis for the valuation of the next twelve
months of production.
5) PRODUCTION RELATED CAPITALIZED SERVICING: This component represents the
fees paid for the purchase of whole loans and the capitalized value of the
brokerage production. These two components are capitalized on the balance
sheet as an asset and then amortized in proportion to and over the life of
the mortgage servicing cash flows. The average SRP paid during the last
twelve months for whole loans and the average
-7-
<PAGE>
percentage of brokerage production that was capitalized for the past twelve
months will be used to estimate the future capitalized balances during the
next twelve months.
6) PRODUCTION RELATED OVERHEAD: This expense item relates to the various
production support areas which are not included in the Net Cost of
Production shown above. This expense component includes portions of areas
such as Underwriting, Appraisal, Banking, Shipping, Human Resources,
Financial, etc. The Company's Cost Accounting System will be utilized in
order to allocate the applicable costs to the production areas. Cost data
for the past 12 months will be used.
-8-
<PAGE>
EXHIBIT 11
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary earnings per share:
Per share numerator (in millions):
After tax earnings $ 21.1 $ 70.4 $ 54.2
Dividends to preferred stockholders (9.9) (12.2) (19.9)
--------------------------------
After tax earnings applicable to common stock 11.2 58.2 34.3
Gain from sale of discontinued operations, after tax -- -- .7
Cumulative effect of accounting change -
purchased mortgage servicing, after tax (44.3) -- --
Cumulative effect of accounting change - postretirement
benefits, after tax -- -- (1.9)
Cumulative effect of accounting change - income taxes -- -- (23.8)
--------------------------------
Net income (loss) for per share computation $ (33.1) $ 58.2 $ 9.3
================================
Per share denominator (in thousands):
Average common shares outstanding 8,874 9,593 11,556
Dilutive options, warrants and performance shares 531 655 1,141
--------------------------------
Shares for per share computation 9,405 10,248 12,697
================================
Per share earnings (in dollars):
After tax earnings $ 1.20 $ 5.68 $ 2.71
Net income (loss) (3.51) 5.68 .74
------------------------------------------------------------------------------------------------------
Fully Diluted earnings per share:
Per share numerator (in millions):
After tax earnings $ 21.1 $ 70.4 $ 54.2
Dividends to preferred stockholders (9.9) (12.2) (19.9)
--------------------------------
After tax earnings applicable to common stock 11.2 58.2 34.3
Gain from sale of discontinued operations, after tax -- -- .7
Cumulative effect of accounting change -
purchased mortgage servicing, after tax (44.3) -- --
Cumulative effect of accounting change - postretirement
benefits, after tax -- -- (1.9)
Cumulative effect of accounting change - income taxes -- -- (23.8)
--------------------------------
Net income (loss) for per share computation $ (33.1) $ 58.2 $ 9.3
================================
Per share denominator (in thousands):
Average common shares outstanding 8,874 9,593 11,556
Dilutive options, warrants and performance shares 534 655 1,169
--------------------------------
Shares for per share computation 9,408 10,248 12,725
================================
Per share earnings (in dollars):
After tax earnings $ 1.20 $ 5.68 $ 2.70
Net income (loss) (3.51) 5.68 .73
======================================================================================================
</TABLE>
18
<PAGE>
FUND AMERICAN
1994 ANNUAL REPORT
Fund American Enterprises Holdings, Inc. (the "Company" and, together with its
subsidiaries, "Fund American") is a Vermont-based financial services holding
company. The Company's principal operating activities are conducted through its
wholly-owned subsidiary Source One Mortgage Services Corporation and its
subsidiaries ("Source One"). Source One is one of the nation's largest mortgage
banking companies. Fund American also owns a passive investment portfolio,
consisting mainly of common equity securities and other investments.
Operating affiliates added to the Fund American family during 1994
include: (i) a 23% voting interest in Financial Security Assurance Holdings Ltd.
("FSA"), a leading Aaa/AAA writer of financial guarantee insurance, and (ii) a
33% stake in Main Street America Holdings, Inc., a unit of National Grange
Mutual Insurance Company, a New Hampshire-based property and casualty insurer.
In March 1995 the Company received its license from the Insurance
Commissioner of the State of New Hampshire to engage its newly formed
subsidiary, White Mountains Insurance Company ("White Mountains"), in the sale
of property-casualty insurance. White Mountains is expected to expand its
operations to other states as additional approvals are obtained.
Prospectively, Fund American intends to further develop or pursue
investments in or acquisitions of one or more operating businesses, primarily in
the insurance or other financial services industries in which management has
knowledge and experience.
________________________________________________________________________________
BOOK VALUE PER SHARE
[graph appears here]
<PAGE>
LETTER FROM JACK BYRNE, CHAIRMAN
Dear Shareholder,
Our 1994 reported financial results for your enterprise were terrible, primarily
due to a poor year from our investment portfolio and an accounting write-down at
Source One. We ended the year weighing $68.95 in GAAP book value per share, 11%
less than a year ago. This is not a diet we wish to repeat.
Our principal operating affiliates, Financial Security Assurance (FSA) and
Source One Mortgage Services Corporation, also encountered tough markets in
1994. Despite pretty good operating
results, FSA's adjusted book value
increased by only 1% this year, and Source
One had its third lackluster year in a
row. Moreover, we changed our method of
determining the accounting value of Source
One's $40 billion servicing portfolio,
which resulted in a $68 million write-down
of that asset. Finally, at the parent
[PHOTO 1 APPEARS HERE] company level, the market gods frowned on
our investment holdings in 1994. Our
common stocks declined 8% for the year.
Markets come and markets go; this is a
year when markets went, particularly for
our holdings. However, we repositioned the
portfolio for liquidity and in fact
liquidated over $200 million.
The future of our enterprise is in our
operating businesses and we had some
success on that front. Last year I told you Fund American's patient search for
compatible operating opportunities was like Cinderella waiting for the proper
prince. I am pleased to tell you that 1994 was the year we finally tried on some
glass slippers that fit.
In April, we joined with US West and Financial Security Assurance, the New York
City-based financial guaranty insurer, to participate in FSA's successful public
offering. We currently have a 25% economic interest in FSA. I serve as the
non-executive Chairman of the Board along with two of my Fund American
colleagues. We have found FSA to be an innovative organization, in a dynamic
business, with a strong reservoir of talented executives.
2
<PAGE>
In December, we concluded a transaction with the National Grange Mutual in
Keene, New Hampshire, to become a 33% owner of their downstream stock company,
Main Street America. Main Street has a strong local presence and is devoted to
delivering personal service and value to its insurance customers. Once again, we
found managers with a focus on underwriting who add strength to our entire
enterprise. We are pleased to be associated with Phil Koerner and his management
team.
Speaking of management strength, we were fortunate to attract Morgan Davis,
formerly President of Fireman's Fund Commercial Insurance, to direct the
formation of White Mountains Insurance Company, our property and casuality
start-up also headquartered in new Hampshire. Morgan brings more than twenty
years of major company property-casualty insurance experience.
While some of the glass slippers fit, we also endured rejection by more than one
ugly step-sister; our midyear auction for Source One collided with a meltdown in
the mortgage banking environment. We also pursued a couple of large public
acquisitions in 1994 which failed to materialize. This is not the first time we
have concluded a long, tortuous climb to the summit of a large transaction, only
to slide back down without planting a banner. On the other hand, we didn't step
off any cliffs. We will continue to search for one more special relationship
where we can bring more than money to the table. Before long, I expect our
patience and prudence will be rewarded with more potential winners like FSA,
White Mountains, and Main Street America. If we do not find such opportunities
within a reasonable period, we will continue to make our excess capital
available to shareholders, as we did in 1994 and early 1995.
We strengthened our Board this year with the addition of Bob Cochran, CEO of
FSA, and Tom Kemp, Executive Vice President of Fund American and a valued
colleague for more than two decades. Bob Cochran brings prudent judgement, a
broad background in structured finance, and a distinguished legal career. Tom
Kemp's thirty years of insurance and reinsurance expertise is an invaluable
asset to both Fund American and White Mountains, where he will be Chairman. In
the pages which follow, you will find commentary by each of our General Managers
on the growing promise of our operating businesses.
We planted some of our seed corn in 1994, but the harvest will be many years
off. Meantime, the corn in the silo lost value in 1994. On to 1995.
Respectfully submitted,
/s/John J. Byrne
John J. Byrne
Chairman
March 15, 1995
3
<PAGE>
AFFILIATE OPERATIONS
[FSA LOGO APPEARS HERE]
In 1994 municipal bond issuances declined sharply from the record levels of the
last two years, when large numbers were refinanced to take advantage of lower
interest rates.
The decline in volume led some of our competitors to cut premiums to a level
that would not produce an adequate return. We refused to join in a self-
defeating price war. As a result, we deployed less capital in this market than
we would have liked, but the capital we did deploy in 1994 will provide solid
returns for years to come.
For 1995 we expect municipal bond volume to approximate the $160 billion issued
in 1994. However, we do expect the number of insured issues to increase, in part
because the bankruptcy of Orange County, California has reminded the market of
the value of insurance.
In the last two years, other municipal bond insurers have followed us into the
asset-backed bond market. While their participation increases competition, it
also will help us broaden the market for this type of credit enhancement.
Our challenge for 1995 is to expand our business prudently and to deploy our
capital wisely. We are well-positioned to do so, with a solid foundation in the
large municipal market, a leadership position in the growing asset-backed
market, and an established track record in the rapidly expanding international
markets.
/s/ Robert P.Cochran
Robert P. Cochran, President and CEO
Financial Security Assurance
[SOURCE ONE LOGO APPEARS HERE]
During 1994 we were in a rising interest rate environment. Total industry
volume of mortgage loans plummeted from approximately $1 trillion in 1993 to
about $700 billion. Forecasts call for a further drop to around $600 billion in
1995.
This environment has had a significant, but differing, impact on the two
principal segments of our business, loan production and loan servicing.
The lower loan volume resulted in severe overcapacity throughout the industry,
causing predatory pricing as lenders stretched to maintain market share. We
chose not to chase volume this way and downsized our origination network by more
than half. We also centralized most of the sales support activities to reduce
costs and better position ourselves for the next cycle of originations.
The same business conditions that made for a difficult origination environment
created a favorable climate for servicing. As interest rates increased and
mortgage prepayments slowed, the value of our servicing portfolio increased
significantly during 1994. We opted to take advantage of this increase in value
through the sale of approximately $10 billion of servicing, which should close
by the end of the first quarter 1995. The sale will create a better balance
between our restructured origination capabilities and the anticipated run-off of
our remaining $30 billion servicing portfolio.
We expect 1995 to have many of the characteristics of 1994: reduced
originations, industry overcapacity, predatory pricing and downsizing. In this
difficult environment, we believe the actions we took in 1994 will prove to be
beneficial in achieving our 1995 goals.
/s/James A. Conrad
James A. Conrad, President and CEO
Source One Mortgage Services Corp.
4
<PAGE>
THE FUND AMERICAN FAMILY
Source One Mortgage Services Corporation has been part of the Fund American
family since 1986. Several other companies joined our small circle just this
year: Financial Security Assurance in April, and Main Street America and White
Mountains at year-end. Below, each management team discusses their enterprise.
SOURCE ONE MORTGAGE SERVICES CORPORATION
Jim Conrad, President and CEO
Bob Richards, Chairman
The company that was to become Source One was founded
in 1946. Source One originates, sells and services
residential mortgages. Built around the American dream
of home ownership, our company grew from a single office
with four employees to one of the nation's leading
mortgage bankers. Headquartered in Farmington Hills,
Michigan, Source One finished 1994 with a $40 billion
servicing portfolio. Nineteen hundred Source One
employees serve more than 550,000 customers through 161
branches around the country.
[PHOTO 2 APPEARS HERE]
We create value by (1) producing loans through a large,
multi-channeled production franchise with significant
retail origination capabilities, (2) building and
administering a large, high-quality servicing portfolio,
and (3) employing technology to drive down servicing and
production costs. We strive to be the low cost operator
on both sides of the business.
PRODUCTION
Source One's retail network is one of the most geographically diverse in the
industry, spanning 28 states. We have located our 161 branches to focus on
demographically attractive growth areas. Wholesale originations are coordinated
through the company's Whole Loan, Broker, and Correspondent sales channels and
come from a network of banks, thrift institutions, and mortgage brokers. Source
One's multiple origination channels make it possible to shift production as
market conditions warrant, emphasizing the mode which is most economically
advantageous at the time.
SERVICING
Our servicing operation has achieved cost, quality and productivity standards
significantly better than the industry. This efficiency is the result of
economies of scale, sophisticated collection and loss-mitigation techniques, and
a flexible customized in-house computer system designed to deliver superior
customer service and reduce the per-unit labor content. The exceptional
productivity of our employees is recognized throughout the industry.
5
<PAGE>
FAIR LENDING
Since the beginning, we have been committed to providing equal credit
opportunity to all of our customers. We followed fair lending principles long
before current legislation was proposed, and we continue to provide on-going
training in this important area for all employees.
In addition, we initiated an affordable
housing plan designed to help low and
moderate income people achieve their dream
of home ownership. Our counselors educate
affordable housing candidates at every step [PHOTO 3 APPEARS HERE]
of the mortgage application process, and
provide financial counseling prior to loan
application and throughout the life of the
loan.
As an example of our commitment, we were instrumental in organizing a major
homebuying fair in Detroit which drew more than 3,000 potential low and moderate
income first time homebuyers. As we told you last year, we are proud to say
that for nearly fifty years we have been financing the future for America's
homeowners.
FINANCIAL SECURITY ASSURANCE
Bob Cochran, President and CEO
Roger Taylor, Managing Director and Chief Operating Officer
A little over ten years ago, a group of us who had participated in the early
development of municipal bond insurance got together to create a new company
that would apply the same concept to the asset-backed
bond market. We had seen first-hand how financial
guarantees added efficiency and liquidity to the
municipal bond market, and we believed that insurance
could do the same in the then-emerging asset-backed bond
[PHOTO 4 APPEARS HERE] market. We established FSA in July 1985 with about $200
million of capital. FSA was the first Triple-A rated
monoline bond insurer to promote the use of financial
guaranty insurance in the taxable domestic and
international debt markets.
FSA guarantees scheduled principal and interest payments on securities. Issuers
use our guaranty to lower their cost of funds and broaden the distribution of
their securities. Investors rely on the guaranty not only for default protection
but also to enhance liquidity, mitigate the risk of issuer downgrades and
simplify the investment decision concerning complex securities.
Source One mortgage lenders explain our products to participants in the Detroit
Homebuying Fair. Source One's service was rated the best in the country by
Dalbar, Inc., an Independent, Boston-based customer satisfaction survey firm.
Bob Cochran, right and Roger Taylor head FSA's management team.
6
<PAGE>
Today we are the fourth largest financial guaranty insurer, with over half a
billion dollars in shareholders' equity. We are the recognized leader in the
asset-backed market and have developed a substantial and growing position in the
municipal bond insurance market. FSA-guaranteed securities are originated and
distributed in markets around the world.
One of the fundamental strengths of the financial guaranty insurance business is
that transactions we have already insured provide an annuity of future earnings,
because premiums are earned over the life of each insured bond. This gives us a
stable and predictable base of earnings each year going forward, regardless of
year-to-year variations in new business originations.
MUNICIPAL BOND MARKET
With Federal support for schools, hospitals, highways and other municipal
facilities in decline, municipal bonds are the primary financing tools of state
and local governments. Every year, more than 35% of newly issued long-term
municipal bonds are insured by FSA or one of the other Aaa/AAA bond insurers,
and we expect this percentage to grow. While the total market has more than
tripled in size since 1980, the amount insured has grown more than forty times
larger.
ASSET-BACKED MARKET
The asset-backed market is still in a high-growth phase and presents increasing
opportunities for financial guarantors. FSA virtually invented financial
guaranty insurance for asset-backed securities and, for a decade, has led the
market in terms of expertise, technology and the breadth of our involvement.
A large portion of this market consists of issues backed by "commodity" assets,
such as single-family mortgages, auto loans and credit card receivables. We
have succeeded in this part of the market by helping to create customized
securitization programs for issuers that come to market regularly. These
programs, which may be modified to meet issuers changing needs, are a continuing
source of reliable relationship business.
INTERNATIONAL MARKET
FSA was the first monoline guarantor to operate outside the United States,
providing a guaranty for the first U.K. residential mortgage-backed transaction
in 1987. We participated in many other "firsts" since then, including the first
Eurobonds backed by Australian and New Zealand home mortgages, and the first
securitizations of senior loans by French banks. Through our London-based U.K.
subsidiary, we have a "passport" to all the member countries of the European
Union. Our representative office in Sydney has helped FSA become the leading
private guarantor in Australia and has been a base of operations throughout the
Pacific Rim. And through our joint marketing agreement with the Tokio Marine
and Fire Insurance Company, Limited, Japan's oldest and largest property &
casualty insurer, we are supporting Tokio Marine in developing the market for
financial guarantees in Japan.
[PHOTO 5 APPEARS HERE]
Jeff Kramer, left vice president of FSA's Asset Finance Group, on-site at
Chicago's largest authorized Harley-Davidson Motorcycle dealership, with Steven
Dell, CEO of Eaglemark Financial Services, Inc., which provides loans to
purchasers of Harley-Davidson motorcycles. During 1994, FSA guaranteed three
transactions backed by Harley-Davidson motorcycle contracts totaling
approximately $86 million.
7
<PAGE>
As we enter 1995, FSA is in a strong capital position. We have the lowest ratio
of insured risk to capital of the top four bond insurers and the highest S&P
margin of safety. We believe that with our superior capital strength and the
financial expertise of our extraordinary people, FSA will continue its success
in its core markets and find new ways to build the company's value.
WHITE MOUNTAINS INSURANCE COMPANY
Tom Kemp, Chairman
Morgan Davis, President and CEO
We formed our property & casualty start-up
at the end of the year, and received our
license from the State of New Hampshire on
[PHOTO # 6 March 3, 1995. Our intention is to build a
APPEARS HERE] book of medium to large commercial business
from the ground up, "brick by brick."
White Mountains' objective is to fill the
market gaps that are developing as many old,
large, national, multiline companies
restructure. The industry has endured
extended market pressures from pricing
competition, economic pressure from
contracting bond portfolios and swelling
long-tail claims, and political pressures
from regulators and ratings agencies. In
this environment, companies are restricting
their writings by line, by geographic
distribution, and by class and risk.
As these insurers restructure and attempt to specialize, they are abandoning
profitable market areas they deem too difficult or expensive to administer from
afar. As a result, local agents are left with fewer choices to satisfy their
customer's needs. Quite often, with the dramatic contraction of suppliers,
agents and their customers have to "take what they can get."
We plan to expand the agent's options.
White Mountains will offer larger business customers the coverages and services
they need in a professional, quality manner, from a local provider who has a
better understanding of the risks involved. The agents we have shared our
concept with are enthusiastic. White Mountains will have its executive offices
in Hanover, New Hampshire, and initially a field office in Manchester, New
Hampshire. We expect to outsource much of our back office support from a third
party to keep expenses low.
We are excited to be building a company with an entrepreneurial culture that is
not encumbered by past underwriting mistakes or bureaucratic baggage.
MAIN STREET AMERICA
Phil Koerner, President and CEO
Tom Van Berkel, Senior Vice President
Over 70 years ago, National Grange Mutual Insurance Company (NGM) was founded to
provide members of the National Grange affordable auto insurance without the
cost of
Tom Kemp, left, Chairman of White Mountains Insurance Company and Morgan Davis,
CEO, show off their newly issued New Hampshire license.
8
<PAGE>
"reckless city driver's smash-ups." Clearly our industry, technologies, and the
world around us have metamorphosed dramatically. However, a common purpose and
philosophy connect our seven decades of insurance protection, providing us with
a sense of tradition and stability as we move into the next century.
We were founded to provide affordable insurance for a specific group of people
to whom we could provide value. Today, our mission is much the same: we offer
an array of insurance products and services to people whose needs we understand
and to whom we can provide outstanding service. We have built our organization
around our Mission and our customers.
[PHOTO 7 APPEARS HERE]
Primarily, we sell personal and commercial lines products to Main Street
Americans. This phrase does not describe the location of our customers, but
rather the nature of the risks and the types of insureds we seek out --
customers who are proud of what they own and take measures to protect their
possessions. Our products are geared toward these customers. We offer
homeowners, automobile, contractors and business owners insurance with broad-
based applicability. Often, we say that we have vanilla products with sizzle
endorsements; the products themselves are straightforward in serving the people
of our niche, while the sizzle endorsements contain unique coverages. Together
with our relationships and the service we provide, they help differentiate us.
We are also involved in other areas of the insurance business. Our subsidiary
Information Systems & Services Corporation (ISS) helps us to profit from the
excellent insurance processing systems we developed for NGM. Currently, ISS
provides processing and other insurance services to companies across the nation.
Guiderland Reinsurance Company is a subsidiary offering reinsurance products and
services to other insurance companies. With shared resources and one
organizational body of expertise, these companies work synergistically with NGM
to provide a multitude of insurance services.
As an organization, we have an expression
that we extend to all our insurance publics:
"We take you personally." What started as a
service slogan has become a description of
how we behave toward our customers and co-
[PHOTO # 8 workers. We know that the way we treat one
APPEARS HERE] another and meet the needs of our co-workers
sets the tone for how our customers are
treated on a daily basis, so we honor the
importance of taking one another personally.
These core beliefs are affirmed by the fact
that we have had consistently successful
results for a decade. This pattern of success
enabled us to enter a mutually rewarding
relationship with Fund American. This pattern
of success, and our new relationship, is
something for which all of us at NGM take
considerable pride.
#7
Phil Koemer,right.President and CEO of National Grange Mutual, and Torn
Van Berkel,Senior Vice President.
#8
National Grange Mutual/Main Street America home office in Keene,N.H.
9
<PAGE>
FUND AMERICAN
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
Millions, except per share amounts 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 229 $ 251 $ 214 $ 234 $ 275
Expenses 226 234 191 162 g 232
----------------------------------------------------------------------
Pretax operating earnings 3 17 23 72 43
Net investment gains 39 124 65 112 158
----------------------------------------------------------------------
Pretax earnings 42 141 88 184 201
Income tax provision 21 71 34 64 72
----------------------------------------------------------------------
After tax earnings 21 70 54 120 129
Income from discontinued operations,
after tax - - - - 24
Gain from sale of discontinued
operations, after tax - - 1 1,306 h -
Loss on early extinguishment of debt,
after tax - - - (29) g -
Cumulative effect of accounting change
- purchased mortgage servicing, after
tax (44) a - - - -
Cumulative effect of accounting change
- postretirement benefits, after tax - - (2) e - -
Cumulative effect of accounting change
- income taxes - - (24) f - -
Cumulative effect of transition
adjustment for prior
period net unrealized investment
losses, after tax - - - (84) i -
----------------------------------------------------------------------
Net income (loss) $ (23) $ 70 $ 29 $ 1,313 $ 153
--------------------------------------------------------------======================================================================
Primary earnings per share:
After tax earnings $ 1.20 $ 5.68 $ 2.71 $ 4.87 $ 2.49
Net income (loss) (3.51) a 5.68 .74 67.14 h 3.08
Fully diluted earnings per share:
After tax earnings 1.20 5.68 2.70 4.85 2.55
Net income (loss) (3.51) a 5.68 .73 53.14 h 3.03
Cash dividends per share of common stock - - - .68 .68
ENDING BALANCE SHEET DATA:
Assets of continuing operations $1,807 $ 3,305 $ 3,129 $ 2,964 $ 3,220
Total assets 1,807 3,305 3,129 2,964 h 12,432
Short-term debt 254 1,537 1,513 1,013 g 2,372
Long-term debt 547 601 423 324 g 688
Minority interest - preferred stock of
subsidiary 100 b - - - -
Shareholders' equity 661 c 905 d 988 c 1,496 1,592
Book value per common and equivalent share 68.95 a 77.27 d 80.65 75.49 h 30.65
====================================================================================================================================
</TABLE>
(a) Reflects the prior years' cumulative effect of a change in Source One's
methodology used to measure impairment of its purchased mortgage servicing
rights asset. See Note 5 of the Notes to Consolidated Financial Statements.
(b) Reflects the issuance by Source One in the first quarter of 1994 of
perpetual preferred stock. See Note 11 of the Notes to Consolidated
Financial Statements.
(c) Reflects redemptions of the Company's Voting Preferred Stock Series D, par
value $1.00 per share (the "Series D Preferred Stock") and repurchases of
shares of the Company's Common Stock, par value $1.00 per share ("Shares").
See Note 12 of the Notes to Consolidated Financial Statements.
(d) Reflects the distribution of approximately 74% of the outstanding shares of
Common Stock of White River Corporation ("White River") to shareholders on
December 22, 1993 (the "Distribution").
(e) Reflects the prior years' cumulative effect of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." See Note 1 of the Notes to
Consolidated Financial Statements.
(f) Reflects the prior years' cumulative effect of the adoption of SFAS No.
109, "Accounting for Income Taxes." See Note 1 of the Notes to
Consolidated Financial Statements.
(g) Reflects the repayment during the first quarter of 1991 of all the parent
company's debt outstanding at December 31, 1990, and the corresponding
reduction in interest expense.
(h) Reflects the sale of Fireman's Fund Insurance Company ("Fireman's Fund").
See Note 2 of the Notes to Consolidated Financial Statements.
(i) Prior to 1991, such net unrealized investment losses were recorded as a
direct adjustment to shareholders' equity, with no corresponding charge to
net income.
10
<PAGE>
FUND AMERICAN
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED RESULTS
RESULTS OF The Company reported a consolidated
OPERATIONS net loss of $23.2 million for the
YEARS ENDED year ended December 31, 1994, which
DECEMBER 31, compares to net income of $70.4
1994, 1993 million for 1993 and $29.2 million
AND 1992 for 1992. The 1994 reported loss
includes a $68.1 million pretax
charge related to the prior years'
cumulative effect of an accounting
change in the manner by which Source
One measures impairment of its
purchased mortgage servicing rights
asset. The 1992 net income amount
includes $25.7 million of charges
related to the prior years'
cumulative effect of adopting two
accounting pronouncements and $47.9
million of pretax writedowns related
to Source One's capitalized mortgage
servicing asset.
Book value per common and common
equivalent share was $68.95 at December
31, 1994, which compares to $77.27 at
December 31, 1993. The 1994 accounting
change and unrealized investment
portfolio losses combined to produce the
net decline in book value per share from
1993 to 1994.
After tax earnings for 1994 were
$21.1 million versus $70.4 million and
$54.2 million for 1993 and 1992,
respectively. The decrease from 1993 to
1994 is primarily due to $73.4 million
of pretax unrealized gains recorded in
earnings for 1993. Under an accounting
rule adopted as of December 31, 1993,
Fund American now records changes in
unrealized gains and losses as a direct
adjustment to shareholders' equity with
no credit or charge to net income. The
increase in after tax earnings from 1992
to 1993 reflects higher net investment
gains included in the income statement.
MORTGAGE ORIGINATION AND SERVICING
OPERATIONS
Effective January 1, 1994, Source One
changed the methodology used to
measure impairment of its purchased
mortgage servicing rights asset.
Previously, Source One measured the
asset's impairment on a disaggregated
basis and used a cost of capital
charge to measure the value of future
servicing cash flows. The new
accounting methodology measures the
asset's impairment on a disaggregated
basis and discounts the asset's
estimated future cash flows using
current market rates. Source One's
management believes that the use of
current market rates to discount cash
flows versus the use of a cost of
capital charge is a preferable
accounting method because it
represents a more conservative and
informative financial statement
presentation of the purchased
mortgage servicing rights asset. The
adoption of the new accounting
methodology, recorded as a cumulative
adjustment as of January 1, 1994,
resulted in a $68.1 million pretax,
$44.3 million after tax charge to
income for 1994. The prospective
effect of the accounting change was a
$2.5 million net pretax charge to
income for 1994.
Source One did not change the
methodology used to measure impairment of
its capitalized excess servicing asset.
Source One continues to measure impairment
using the original discount rate to
discount estimated future excess servicing
cash flows.
During 1993 and 1992 the entire
mortgage banking industry experienced
substantial prepayments in mortgage
servicing portfolios due to refinancings
caused by declines in market interest
rates for mortgage loans. Considering
the substantial amount of refinancing
during 1992, Source One decided to
prospectively measure the recoverability
of its purchased mortgage servicing
rights asset on a disaggregated basis
using a cost of capital charge to
measure the value of future servicing
cash flows.
11
<PAGE>
Application of this accounting methodology
resulted in a $38.2 million pretax
reduction in net mortgage servicing
revenue for 1992. In addition, during 1992
Source One recorded unscheduled
amortization totalling $9.7 million to
reflect the effect of high prepayments on
the capitalized mortgage servicing asset.
The high level of prepayments continued in
1993 due to further declines in market
interest rates for mortgage loans,
resulting in additional pretax writedowns
of the capitalized mortgage servicing
asset totalling $32.0 million during 1993.
Net servicing revenue was $82.4 million
for the year ended December 31, 1994.
Excluding the effects of the $32.0 million
and $38.2 million writedowns of the
capitalized mortgage servicing asset in
1993 and 1992, respectively, net servicing
revenue would have been $85.5 million for
1993 and $86.6 million for 1992. The
decrease in net servicing revenue for 1994
compared to 1993 reflects lower weighted
average net servicing fee rates on newly
originated loans partially offset by
slower amortization of the capitalized
mortgage servicing asset. The decrease in
1993 was primarily due to a lower average
servicing portfolio compared to 1992. A
summary of the mortgage loan servicing
portfolio activity follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Year Ended December 31,
---------------------------------
Billions 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 38.4 $ 37.3 $ 41.0
Mortgage loan production 4.6 11.5 7.6
Servicing acquisitions 3.7 6.4 2.3
Payoffs (4.7) (13.6) (11.5)
Servicing released, principal
amortization and foreclosures (2.4) (3.2) (2.1)
----------------------------------
Ending balance $ 39.6 $ 38.4 $ 37.3
=======================================================================
</TABLE>
The increase in market interest rates for
mortgage loans resulted in a sharp
decrease in loan prepayments from the
mortgage loan servicing portfolio during
1994. Source One's prepayment rates for
the years ended December 31, 1994, 1993
and 1992 were 13%, 39% and 30%,
respectively.
The payoff rate used to estimate
future servicing cash flows for measuring
impairment is based on current median
prepayment estimates by interest rate and
origination date, as compiled by several
large brokerage firms. During 1994 the
discount rate used to discount the future
cash flows of the purchased mortgage
servicing rights asset was based on
current market interest rates used for
mortgage servicing sales as quoted by
industry brokers. The discount rate ranged
from 8.59% to 12.55% for the year ended
December 31, 1994. In 1993 and 1992 the
interest component used to measure the
value of the future cash flows of the
purchased mortgage servicing rights asset
was developed based on the most recent
twelve-month average cost of capital
including the actual cost of debt and
dividends paid on Source One's equity
capital. These rates were 2.72% and 3.00%
for the years ended December 31, 1993 and
1992, respectively.
In June 1994 the Financial Accounting
Standards Board issued an exposure draft
entitled "Accounting for Mortgage
Servicing Rights and Excess Servicing
Receivables and for Securitization of
Mortgage Loans." The exposure draft, in
its current form, would require entities
to (i) capitalize originated servicing
rights and (ii) measure impairment of all
capitalized servicing on a disaggregated
basis by stratifying the capitalized
mortgage servicing asset based on the risk
characteristics of the underlying loans.
Impairment would be recognized through a
valuation allowance for an individual
stratum with a
12
<PAGE>
corresponding charge to expense. The
proposed statement would be applied
prospectively in years beginning after
December 15, 1995 to transactions
involving the capitalization of originated
servicing rights and to impairment
evaluations to all capitalized servicing
rights. Retroactive application would be
prohibited. The proposed statement, if
adopted in its current form, could have a
substantial impact on Source One's
financial condition and results of
operations in the future. However, since
no final pronouncement has been issued,
management is not able to predict with any
reliability whether such pronouncement may
ultimately be adopted and what impact, if
any, it would have on Source One's
financial condition and results of
operations.
During the second quarter of 1994
Source One sold the rights to service $3.9
billion of mortgage loans to a third party
for cash proceeds of $70.2 million. Source
One has continued to service these loans
pursuant to a subservicing agreement.
Accordingly, the related $19.9 million
gain from the sale was deferred and is
being recognized in income over the five-
year life of the subservicing agreement.
For the year ended December 31, 1994,
Source One recognized $2.7 million of the
deferred gain which is included in net
servicing revenue. The mortgage servicing
portfolio at December 31, 1994 includes
loans subserviced for others having a
principal balance totalling $4.3 billion.
In February 1995 Source One reached a
definitive agreement to sell $9.8 billion
of its mortgage servicing portfolio to a
third party for estimated proceeds of
$190.0 million. The transaction is
expected to result in a pretax gain in the
first quarter of 1995 of approximately
$28.2 million. The portion of Source One's
mortgage servicing portfolio that will be
sold consists of approximately 115,000
loans with a weighted average interest
rate of 7.72% and is representative of
the entire mortgage servicing portfolio.
The sale of mortgage servicing was
undertaken by Source One to take advantage
of the substantial increase in the value
of servicing rights that has been created
by the rise in interest rates during 1994.
The decreases in mortgage loan
production and payoffs in 1994 reflect an
increase in market interest rates and a
corresponding reduction in refinancing
activity from prior year levels.
Production related to refinance activity
represented approximately 50%, 67% and 60%
of total mortgage loan production for the
years ended December 31, 1994, 1993 and
1992, respectively.
The net gain on sales of mortgages
decreased to $29.5 million for the year
ended December 31, 1994 from $34.8 million
in 1993. The net gain on sales of
mortgages totalled $17.1 million for the
year ended December 31, 1992. The decrease
in the net gain from 1993 to 1994 reflects
lower mortgage loan sales volume due to
the reduction in mortgage loan production
and increased pricing subsidies on newly
originated loans during the second half of
1994. The increase in the net gain from
1992 to 1993 was attributable to larger
mortgage loan sales volume due to
increased mortgage loan production and a
more favorable secondary market
environment.
Other mortgage operations revenue
decreased to $23.9 million for the year
ended December 31, 1994 from $29.2 million
in 1993. Other mortgage operations revenue
was $21.0 million for the year ended
December 31, 1992. Loan processing fees,
which generally represent approximately
80% of other mortgage operations revenue,
tend to decrease or increase as mortgage
loan production decreases or increases,
respectively.
13
<PAGE>
INVESTMENT OPERATIONS
The total return from Fund American's investment
activities is shown below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------
Millions 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income and other revenue:
Source One $ 71.5 $117.0 $103.6
Other 18.7 16.5 24.0
-----------------------------
Total net investment income and other revenue 90.2 133.5 127.6
-----------------------------
Net realized investment gains 38.8 50.6 11.0
Change in net unrealized investment
gains and losses:
Included in net income - 73.4 54.3
Recorded directly to shareholders' equity (84.3) 69.9 17.9
-----------------------------
Total net investment gains (losses), before tax (45.5) 193.9 83.2
-----------------------------
Total net investment return, before tax $ 44.7 $327.4 $210.8
=====================================================================================
</TABLE>
Fund American's net investment income is comprised
primarily of interest income earned on mortgage loans
originated by Source One. The decrease in Source One's
net investment income from 1993 to 1994 is mainly
attributable to decreased interest income from mortgage
loans held for sale related to the lower mortgage loan
production experienced during 1994. The increase in
other net investment income from 1993 to 1994 resulted
from a second quarter 1994 transfer of $112.0 million of
common equity securities from Source One to its parent,
Fund American Enterprises, Inc. ("FAE", a subsidiary of
the Company), in exchange for shares of Source One's
common stock held by FAE. Prior to such transfer, the
net investment income relating to the securities
transferred was included in net investment income of
Source One. The decrease in other net investment income
from 1992 to 1993 resulted from net sales of investment
securities. Cash basis sales and maturities of common
equity securities and other investments, net of
purchases, totalled $151.9 million, $115.0 million and
$263.4 million for the years ended December 31, 1994,
1993 and 1992, respectively.
Net realized investment gains during 1994, before
tax, included $22.6 million of gains from the sale of
The Louisiana Land and Exploration Company common stock
and $21.7 million of gains from the sale of American
Express Company common stock. Net realized gains during
1993, before tax, included $14.0 million of gains from
the sale of A. H. Belo common stock and $13.2 million of
gains from the sale of San Juan Basin Royalty Trust
units. Net realized investment gains during 1992, before
tax, included $46.6 million of gains from the sale of
MBIA Inc. common stock.
Total investment gains and losses during the three
years ended December 31, 1994 have been substantially
affected by changes in market prices for crude oil and
natural gas. At December 31, 1994, 62% of Fund
American's portfolio of common equity securities was
invested in the energy, natural resources and related
industries sector. Fund American believes that the oil
and natural gas industries are highly cyclical and,
therefore, anticipates continued volatility in the value
of its investment portfolio in the future.
14
<PAGE>
Prior to December 31, 1993 Source One carried
its portfolio of common equity securities at the lower
of its aggregate cost or market value as of the balance
sheet date. Changes in Source One's market valuation
allowance for this portfolio were recorded as a direct
adjustment to shareholders' equity (net of tax) with no
credit or charge to net income. Additionally, prior to
December 31, 1993, common equity securities and other
investments held by Fund American, other than securities
held by Source One, were carried at fair value as of the
balance sheet date with related unrealized gains and
losses included in net income.
As of December 31, 1993 Fund American adopted SFAS
No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under the provisions of SFAS No.
115, substantially all of Fund American's portfolio of
common equity securities and other investments were
classified as securities available for sale. The
statement requires that investments classified as
securities available for sale be reported at fair value
as of the balance sheet date, with related unrealized
gains and losses excluded from earnings and reported as
a net amount in a separate component of shareholders'
equity. Therefore, for periods beginning after December
31, 1993, all of Fund American's net unrealized gains
and losses are reported as a direct adjustment to
shareholders' equity with no credit or charge to net
income.
A review of certain significant holdings in Fund
American's portfolio of common equity securities at
December 31, 1994 follows. Dollar amounts refer to the
aggregate market value at December 31, 1994 of Fund
American's holdings of each security discussed.
Energy, Natural Resources and Related Industries.
-------------------------------------------------
The energy and natural resources industries,
particularly the crude oil and natural gas industries,
are highly competitive, require significant capital
expenditures and are subject to extensive regulation at
both the national and local levels. Fund American
believes that the values of securities of companies
engaged in those businesses are relatively volatile due
to fluctuations in the prices of crude oil, natural gas
and other natural resources. Fund American's holdings
within the energy, natural resources and related
industries sector consist in great part of large blocks
of securities of a small number of issuers. This
concentration may make the value of Fund American's
portfolio more volatile than the value of a more
diversified portfolio.
The Louisiana Land & Exploration Company ("LLX";
$106.5 million). LLX is one of the largest independent
exploration and production companies in the nation. LLX
explores for, produces and markets crude oil and natural
gas in the United States and certain foreign countries.
Fund American believes that LLX's operations are
affected by, among other things, changes in the prices
of crude oil and natural gas, general economic
conditions and LLX's ability to successfully produce and
replace crude oil and natural gas reserves.
San Juan Basin Royalty Trust ("San Juan"; $70.1
million). San Juan units receive a 75% net overriding
royalty interest from certain of Southland Royalty
Company's leasehold and royalty interests in the San
Juan Basin of Northwestern New Mexico. Fund American
believes that changes in crude oil and natural gas
prices and in the level of development and production
expenditures by the operator of San Juan may affect the
distributions to unitholders of San Juan and, therefore,
the market prices of the units of San Juan. In addition,
Fund American believes that the tax and accounting
issues involved in owning units in San Juan may make
such units unappealing to many investors.
15
<PAGE>
Other Significant Holdings.
--------------------------
American Express Company ("AXP"; $70.9 million).
AXP is a financial services, travel and information
services company which is actively traded on the New
York Stock Exchange. Fund American believes that its
investment in the common stock of AXP is highly liquid.
EXPENSES
Interest expense decreased to $78.8 million in 1994
which compares to $103.1 million for 1993 and $77.5
million for 1992. The decrease in interest expense from
1993 to 1994 relates primarily to a decrease in short-
term borrowings. Source One's inventory of mortgage
loans held for sale, which decreased during 1994 as a
result of lower mortgage loan production, is funded
mainly with short-term debt. The increase in interest
expense from 1992 to 1993 relates primarily to the
issuance by the parent company of $150.0 million in
principal amount of medium-term notes in the first
quarter of 1993 and an increase in the average balance
of total debt outstanding at Source One. The increase in
the average balance of Source One's debt from 1992 to
1993 reflects a higher average balance of mortgage loans
held for sale related to increased mortgage loan
production.
Compensation and benefits expense increased to
$69.2 million in 1994 from $63.5 million in 1993 and
$61.1 million in 1992. Source One nets mortgage loan
origination fees, less certain direct costs, against
compensation and benefits expense. The high amount of
originations experienced by Source One during 1993
resulted in significantly more origination fees
offsetting compensation and benefits for 1993 than in
1994. Excluding the effects of such loan origination
fees, compensation and benefits expense decreased $39.0
million from 1993 to 1994, reflecting significant
reductions in production-related personnel at Source One
during 1994.
General expenses of $77.7 million for 1994 compare
to 1993 and 1992 amounts of $67.5 million and $53.0
million, respectively. The increase in general expenses
from 1993 to 1994 is due to the expansion of Source
One's mortgage loan production network throughout 1993
and early 1994. Efforts to reduce Source One's operating
expenses in response to the contraction in mortgage
originations began to take effect in the third quarter
of 1994.
Source One's provision for mortgage loan losses,
included in general expenses, was $8.2 million in 1994
which compares to $3.7 million for 1993 and $4.9 million
for 1992. The increase from 1993 to 1994 is primarily
due to charge-offs of certain commercial real estate
owned properties and higher average loss volumes
relating to certain California residential mortgage
loans.
Fund American adopted during 1992 the provisions of
SFAS No. 106 which relates to employee postretirement
benefits other than pensions. The prior years'
cumulative effect of SFAS No. 106, recorded as of
January 1, 1992, was $1.9 million and was net of a $1.0
million income tax benefit.
16
<PAGE>
INCOME TAXES
The income tax provision related to pretax earnings for
1994, 1993 and 1992 represents an effective tax rate of
49.3%, 50.1% and 38.2%, respectively. The income tax
provision for 1994, 1993 and 1992 reflects $4.6 million,
$2.4 million and $4.5 million of expense, respectively,
related to certain tax reserve adjustments. The tax
provision for 1993 also includes $13.0 million of
current income tax relating to taxable capital gains
triggered by the Distribution of approximately 74% of
the shares of Common Stock of White River to
shareholders on December 22, 1993. Such gains were not
recognized for financial reporting purposes pursuant to
generally accepted accounting principles ("GAAP"). The
1993 provision also includes $4.7 million of deferred
income tax reflecting a tax reserve established on White
River's books of record as of December 22, 1993, the
date of the Distribution. The reserve offsets White
River's deferred tax asset calculated on a stand-alone
basis as of that date.
Fund American has recorded a net deferred Federal
income tax asset of $21.4 million as of December 31,
1994. The deferred tax asset includes a $23.9 million
net benefit related to various operating items partially
offset by a $2.5 million net liability related to
unrealized gains on investment securities.
Fund American adopted during 1992 the provisions of
SFAS No. 109 which established new accounting rules for
income taxes. The catch-up charge to net income for SFAS
No. 109 was $23.8 million, or $1.88 per share for the
full year 1992. The SFAS No. 109 adjustments relate
principally to deferred tax liabilities on intangible
assets arising from Fund American's acquisition of
Source One in 1986. SFAS No. 109 requires the recording
of deferred tax liabilities as if these assets were to
be sold.
OTHER
On December 22, 1993 the Company distributed
approximately 74% of the outstanding shares of Common
Stock of White River to its shareholders. White River
commenced operations on September 24, 1993, concurrent
with the purchase and other transfer of selected assets
and the assumption of certain liabilities from Fund
American. The assets sold or otherwise transferred by
Fund American to White River included primarily $84.0
million of common equity securities, $147.1 million of
securities classified as other investments and $25.8
million of short-term investments. White River's initial
capitalization consisted of a $50.0 million demand note
payable to Fund American, $7.0 million of redeemable
preferred stock and $200.0 million of common
shareholder's equity. Of the shares of Common Stock of
White River retained by Fund American, 980,507, or
approximately 15% of the total shares of Common Stock of
White River outstanding as of September 24, 1993, were
reserved by Fund American for delivery upon exercise of
existing employee stock options and warrants.
On January 2, 1991, pursuant to an agreement
originally announced on August 2, 1990, the Company sold
its principal operating business, Fireman's Fund, to
Allianz of America, Inc. for $2,908.7 million in cash.
Fireman's Fund included substantially all Fund
American's property-casualty insurance operations. The
reported gain from the sale, calculated in accordance
with GAAP, was $1,305.7 million after tax for the year
ended December 31, 1991. An additional $.7 million gain
was recorded during 1992 as a result of adjustments to
the net proceeds of the sale related to certain employee
benefit plans. The 1991 gain includes a $75.0 million
tax benefit related to the Company's estimated tax loss
on the sale. The amount of tax benefit from the sale
ultimately realized by the Company may be significantly
more or less than the Company's current estimate due to
possible changes in or new interpretations of tax
17
<PAGE>
rules, possible amendments to Fund American's 1990 or
prior years' Federal income tax returns, the results of
Internal Revenue Service audits and other matters
affecting the amount of the deductible tax loss. The
Company has included in other liabilities an estimated
reserve related to such matters affecting the amount of
the deductible tax loss and other tax matters. Such
reserve totalled $78.6 million as of December 31, 1994.
LIQUIDITY AND PARENT COMPANY
CAPITAL
RESOURCES The primary sources of cash inflows for the Company are
investment income, sales of investment securities and
dividends received from its operating subsidiaries.
Since the sale of Fireman's Fund, the Company has been
gradually liquidating its portfolio of passive
investment securities. Management's primary strategic
goal is to reinvest the Company's passive investments
(or proceeds from sales thereof), together with other
resources available to the Company, into operating
businesses in which management has knowledge and
experience. Management believes that this strategy will,
over time, further enhance shareholder value if
appropriate opportunities can be found. Management
currently intends to develop or pursue investments in or
acquisitions of one or more businesses, primarily in the
mortgage origination and servicing, insurance or other
financial services industries. Such acquisitions could
be made by means of purchases of securities for cash or
in exchange for certain of Fund American's investment
holdings. In connection with any acquisitions, Fund
American may sell or otherwise dispose of a portion of
its assets.
In May 1994 the Company purchased 2,000,000 shares
of FSA common stock from U S WEST Capital Corp., a
wholly-owned subsidiary of U S WEST, Inc., as part of an
initial public offering of 8,082,385 shares of FSA's
common stock at the initial offering price of $20.00 per
share. The Company's initial stake represented a 7.6%
ownership of FSA. The Company's Chairman, John J. Byrne,
also became Chairman of FSA. FSA conducts operations
principally through Financial Security Assurance Inc., a
wholly-owned monoline financial guarantee insurance
subsidiary with Aaa/AAA claims-paying ratings. FSA is
principally engaged in guaranteeing municipal bonds and
residential mortgage and other asset-backed securities.
Following receipt of regulatory approvals, in
September 1994 the Company acquired additional rights
and securities whereby it substantially increased its
holdings and voting control in FSA. Such additional
rights and securities include (i) various fixed price
options and shares of convertible preferred stock which,
in total, give the Company the right to acquire over the
next five to ten years up to 4,560,607 additional shares
of FSA common stock for aggregate consideration of
$125.7 million, and (ii) a "call right" which, in
general, gives the Company the right through November
13, 1995, to acquire up to 9,000,000 additional shares
of FSA common stock for per share consideration equal to
the higher of (a) market price or (b) a fixed price
ranging from $29.00 to $30.50. The Company also has a
right of first offer through November 13, 1995, relating
to the same 9,000,000 shares of common stock. All shares
of FSA common stock owned or acquired by the Company as
described above are subject to certain restrictions on
transfer, voting provisions and other limitations and
requirements set forth in a Shareholders' Agreement, a
Registration Rights Agreement and a Voting Trust
Agreement.
The Company purchased an additional 460,200 shares
of FSA Common Stock on the open market in the first
quarter of 1995 for $8.8 million which raised its voting
control of FSA to approximately 23%.
18
<PAGE>
In December 1994 the Company purchased a 33%
interest of property-casualty insurer Main Street
America Holdings, Inc. ("MSA"), a unit of National
Grange Mutual Insurance Company ("NGM"), for $25.0
million in cash. MSA shares in 40% of NGM's business
through a reinsurance agreement.
On February 7, 1995 the Company capitalized its
newly formed subsidiary, 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.
In June 1994 the Company entered into a revolving
credit agreement with a syndicate of banks. Under the
agreement, through June 1, 1995, the Company and certain
of its subsidiaries may borrow at market interest rates
up to $75.0 million. The credit agreement contains
certain customary covenants, including a $525.0 million
minimum tangible net worth requirement and a minimum
asset coverage requirement. At December 31, 1994 the
Company had no borrowings outstanding under this
agreement.
During January and February 1993 the Company issued
$150.0 million in principal amount of medium-term notes
for net cash proceeds of $148.0 million after related
costs. Proceeds from the issuance of the notes were used
to repay an existing $100.0 million revolving credit
facility and for general corporate purposes. In June
1994 the Company repurchased $25.0 million in principal
amount of the notes. At December 31, 1994 the remaining
outstanding notes had an average maturity of 8.38 years
and an average yield to maturity of 7.82%.
On July 13, 1992 the Company redeemed 51,389 shares
of the Series D Preferred Stock for $185.0 million. In
August 1994 the Company redeemed an additional 22,778
shares of the Series D Preferred Stock for $82.0
million. The redemption price for the shares of Series D
Preferred Stock redeemed was equal to the stock's
liquidation preference. In accordance with the terms of
the Series D Preferred Stock, the redemption date for
the remaining 20,833 shares of the Series D Preferred
Stock outstanding was extended from July 31, 1994 to
July 31, 1995 and the annual dividend rate was increased
from 7.75% to 8.75% on August 1, 1994. The Company may,
at its option, extend the redemption date for the Series
D Preferred Stock for one more year, to July 31, 1996,
which would require a further increase in the dividend
rate to 9.75%.
During 1994, 1993 and 1992 the Company repurchased
1,128,057 Shares, 536,247 Shares and 5,314,518 Shares,
respectively, for $78.8 million, $41.8 million and
$371.7 million, respectively. The bulk of the Shares
repurchased during 1992 were acquired pursuant to a Plan
of Complete Liquidation which was terminated in June
1992. The Shares repurchased during 1993 and 1994
represent a return of excess capital to the Company's
shareholders.
On February 21, 1995 the Company commenced a self-
tender offer for 750,000 Shares for $75.00 per Share in
cash, or an aggregate purchase price of $56.4 million
including related costs. The tender offer expires on
March 20, 1995 and, if fully subscribed, would exhaust
the Company's remaining Share repurchase authorization.
19
<PAGE>
The Company currently does not pay regular cash
dividends to holders of Shares, and the Company's Board
of Directors (the "Board") currently does not intend to
reinstate regular periodic dividends on Shares. However,
the Board currently intends to reconsider from time to
time the declaration of regular periodic dividends on
Shares with due consideration given to the financial
characteristics of Fund American's remaining invested
assets and operations and the amount and regularity of
its cash flows at the time. There can be no assurance,
therefore, as to whether or when the Board will declare
additional dividends on Shares.
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
liquidity 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 1994,
resulting in a corresponding decrease in Source One's
short-term borrowings.
In August 1994 Source One replaced its then
existing credit agreements with three new credit
facilities totalling $900.0 million. At Source One's
request, such facilities were reduced to an aggregate
amount of $800.0 million in November 1994. The new
facilities, together with $325.0 million aggregate
principal amount of publicly issued debt securities, are
secured primarily by Source One's mortgage loans held
for sale and mortgage loan servicing portfolio. One
facility in the amount of $250.0 million matures on July
31, 1995 and the remaining two facilities in the amounts
of $150.0 million and $400.0 million mature on June 30,
1997 and July 31, 1997, respectively. At December 31,
1994 there was $195.0 million outstanding under these
secured credit facilities.
Source One's secured credit facilities currently
contain covenants which limit its ability to pay
dividends or make distributions on its capital in excess
of $9.0 million of cash dividends on preferred stock
each year. Source One is in the process of re-
negotiating this covenant to increase the
dividend/distribution capacity thereunder. The covenants
also require Source One to maintain a certain level of
total tangible net worth and a certain ratio of debt to
total tangible net worth. Source One is currently in
compliance with all such covenants.
Under the credit agreements described above, Source
One receives interest expense credits as a result of
holding escrow and custodial funds in trust accounts at
non-affiliated banks.
Source One also has a revolving credit agreement
under which it can borrow up to $10.0 million. At
December 31, 1994 and 1993, there was $3.8 million and
$2.5 million outstanding under this agreement,
respectively.
Prior to August 1994 Source One could borrow at
floating rates up to $725.0 million under revolving
credit agreements. Source One also had bid loan
facilities to augment those credit agreements which
allowed Source One to borrow additional amounts in a bid
process. At December 31, 1993 Source One had $725.0
million outstanding under the revolving credit
agreements and $236.9 million outstanding in bid loans.
20
<PAGE>
Source One has a $650.0 million domestic and Euro
commercial paper program. The weighted average number of
days to maturity of commercial paper outstanding at
December 31, 1994 was 10 days. At December 31, 1994 and
1993 there was $26.1 million and $574.0 million of
commercial paper outstanding, respectively.
In June 1992 Source One issued $100.0 million
principal amount of 9% debentures due in June 2012 under
terms of a $250.0 million shelf registration statement
filed in April 1992. The proceeds from issuance were
used for general corporate purposes.
In October 1991 Source One issued $160.0 million of
medium-term notes under terms of a $200.0 million shelf
registration statement filed in November 1988. The notes
are due in October 2001 and bear interest at a rate of
8.875%.
In 1989 Source One issued $40.0 million of medium-
term notes having a weighted average interest rate of
9.65% and due in 1996.
In 1986 Source One issued $125.0 million of 8.25%
debentures due November 1, 1996.
In March 1994 Source One issued 4,000,000 shares of
8.42% perpetual Cumulative Preferred Stock, Series A,
having an aggregate liquidation preference of $25.00 per
Share, for net cash proceeds of $96.9 million. The
Source One preferred stock is not redeemable prior to
May 1, 1999.
INFLATION Inflation affects Source One most significantly in
the area of loan originations. Interest rates normally
increase during periods of high inflation and decrease
during periods of low inflation. Historically, Source
One's loan originations have increased in response to
falling interest rates and have decreased during
periods of rising interest rates. However, higher
interest rate environments typically enhance the value
of Source One's mortgage loan servicing portfolio due
to related declines in refinancing activity. Lower
interest rates generally result in higher payoffs and,
therefore, typically reduce the value of the mortgage
loan servicing portfolio.
21
<PAGE>
FUND AMERICAN
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
Dollars in millions 1994 1993
<S> <C> <C>
ASSETS
Common equity securities, at market value (cost $294.2 and $464.3) $ 332.4 $ 585.5
Other investments (cost $163.6 and $120.3) 157.3 113.4
Short-term investments, at amortized cost (which approximated market value) 119.2 252.5
------------------------
Total investments 608.9 951.4
Cash 1.5 10.7
Capitalized mortgage servicing, net of accumulated amortization 530.5 666.7
Mortgage loans held for sale 210.5 1,298.5
Pool loan purchases 163.9 155.5
Mortgage claims receivable and real estate acquired,
less allowance for mortgage loan losses of $13.4 and $16.0 49.8 46.4
Investments in unconsolidated affiliates 69.7 -
Goodwill 28.0 30.4
Other assets 144.5 145.4
------------------------
Total assets $ 1,807.3 $ 3,305.0
============================================================================================================
LIABILITIES
Short-term debt $ 254.1 $ 1,536.8
Long-term debt 547.0 601.3
Accounts payable and other liabilities 245.1 261.9
-------------------------
Total liabilities 1,046.2 2,400.0
------------------------------------------------------------------------------------------------------------
MINORITY INTEREST - PREFERRED STOCK OF SUBSIDIARY 100.0 -
------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock - authorized 10,000,000 shares,
Series D voting preferred stock, issued 20,833 and 43,611 shares 75.0 157.0
Common stock - authorized 125,000,000 shares,
issued 33,597,147 and 34,725,204 shares 33.6 34.7
Common paid-in surplus 338.1 349.5
Retained earnings 1,098.2 1,198.6
Common stock in treasury, at cost: 25,187,210 and 25,317,210 shares (878.5) (884.9)
Net unrealized investment gains 19.7 74.5
Loan for common stock issued (25.0) (24.4)
------------------------
Total shareholders' equity 661.1 905.0
------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and shareholders' equity $ 1,807.3 $ 3,305.0
============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
FUND AMERICAN
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
Millions, except per share amounts 1994 1993 1992
<S> <C> <C> <C>
REVENUES:
Mortgage servicing revenue $169.3 $187.1 $195.8
Amortization of capitalized mortgage servicing 86.9 133.6 147.4
Net mortgage servicing revenue 82.4 53.5 48.4
Net gain on sales of mortgages 29.5 34.8 17.1
Other mortgage operations revenue 23.9 29.2 21.0
Equity in earnings of unconsolidated affiliates 2.5 - -
Net investment income and other revenue 90.2 133.5 127.6
-----------------------------
Total revenues 228.5 251.0 214.1
-------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Interest expense 78.8 103.1 77.5
Compensation and benefits 69.2 63.5 61.1
General expenses 77.7 67.5 53.0
------------------------------
Total expenses 225.7 234.1 191.6
-------------------------------------------------------------------------------------------------------------------------------
Pretax operating earnings 2.8 16.9 22.5
----------------------------
Net realized investment gains 38.8 50.6 11.0
Change in net unrealized investment gains and losses - 73.4 54.3
----------------------------
NET INVESTMENT GAINS 38.8 124.0 65.3
----------------------------
Pretax earnings 41.6 140.9 87.8
Income tax provision 20.5 70.5 33.6
----------------------------
AFTER TAX EARNINGS 21.1 70.4 54.2
Gain from sale of discontinued operations, after tax - - .7
Cumulative effect of accounting change -
purchased mortgage servicing, after tax (44.3) - -
Cumulative effect of accounting change - postretirement benefits, after tax - - (1.9)
Cumulative effect of accounting change - income taxes - - (23.8)
-----------------------------
NET INCOME (LOSS) (23.2) 70.4 29.2
Less dividends on preferred stock 9.9 12.2 19.9
-----------------------------
Net income (loss) applicable to common stock $(33.1) $ 58.2 $ 9.3
--------------------------------------------------------------------------------------------------=============================
PRIMARY EARNINGS PER SHARE:
After tax earnings $ 1.20 $ 5.68 $ 2.71
Gain from sale of discontinued operations, after tax - - .06
Cumulative effect of accounting changes (4.71) - (2.03)
------------------------------
Net income (loss) $ (3.51) $ 5.68 $ .74
-------------------------------------------------------------------------------------------------==============================
FULLY DILUTED EARNINGS PER SHARE:
After tax earnings $ 1.20 $ 5.68 $ 2.70
Gain from sale of discontinued operations, after tax - - .06
Cumulative effect of accounting changes (4.71) - (2.03)
------------------------------
Net income (loss) $ (3.51) $ 5.68 $ .73
===============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
FUND AMERICAN
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Common unrealized Loan for
stock and Common investment common
Preferred paid-in Retained stock in gains stock
Millions Total stock surplus earnings treasury (losses) issued
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991 $1,496.5 $ 342.0 $450.0 $1,687.2 $(946.9) $(35.8) $ -
Net income 29.2 - - 29.2 - - -
Dividends to preferred stockholders (18.7) - - (18.7) - - -
Redemption of preferred stock (185.0) (185.0) - - - - -
Purchases of common stock retired (371.7) - (58.8) (312.9) - - -
Stock options and warrants exercised
and performance shares awarded 50.0 - (1.1) (9.6) 60.7 - -
Loan for common stock issued (23.8) - - - - - (23.8)
Change in net unrealized investment
gains and losses, after tax 11.8 - - - - 11.8 -
-----------------------------------------------------------------------------------------
Balances at December 31, 1992 988.3 157.0 390.1 1,375.2 (886.2) (24.0) (23.8)
Net income 70.4 - - 70.4 - - -
Dividends to preferred stockholders (12.2) - - (12.2) - - -
Distribution of subsidiary to common
stockholders (146.9) - - (146.9) - - -
Purchases of common stock retired (41.8) - (5.9) (35.9) - - -
Stock options exercised and
performance shares awarded 2.0 - - .7 1.3 - -
Change in net unrealized investment
gains and losses, after tax 23.7 - - - - 23.7 -
Cumulative effect of change in
accounting for investment
securities, after tax 22.1 - - (52.7) - 74.8 -
Other (.6) - - - - - (.6)
------------------------------------------------------------------------------------------
Balances at December 31, 1993 905.0 157.0 384.2 1,198.6 (884.9) 74.5 (24.4)
Net loss (23.2) - - (23.2) - - -
Dividends to preferred stockholders (9.4) - - (9.4) - - -
Redemption of preferred stock (82.0) (82.0) - - - - -
Purchases of common stock retired (78.8) - (12.5) (66.3) - - -
Stock warrants exercised 4.9 - - (1.5) 6.4 - -
Change in net unrealized investment
gains and losses, after tax (54.8) - - - - (54.8) -
Other (.6) - - - - - (.6)
-------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 $ 661.1 $ 75.0 $371.7 $1,098.2 $(878.5) $ 19.7 $(25.0)
==============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
FUND AMERICAN
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (23.2) $ 70.4 $ 29.2
Charges (credits) to reconcile net income (loss) to cash flows from
operations:
Net realized investment gains (38.8) (50.6) (11.0)
Change in net unrealized investment gains and losses - (73.4) (54.3)
Gain from sale of discontinued operations, after tax - - (.7)
Cumulative effect of accounting change - purchased mortgage
servicing, after tax 44.3 - -
Cumulative effect of accounting change - postretirement benefits, after - - 1.9
tax
Cumulative effect of accounting change - income taxes - - 23.8
Decrease (increase) in mortgage loans held for sale 1,088.0 (182.4) (318.8)
Depreciation and amortization of mortgage origination
and servicing assets and goodwill 99.2 142.3 155.1
Capitalized excess mortgage servicing income (16.7) (58.1) (47.1)
Change in current income taxes receivable and payable 22.6 21.2 101.5
Deferred income tax provision (benefit) (1.4) 37.2 14.4
Change in other assets 24.8 (26.9) (7.0)
Change in accounts payable and other liabilities (7.3) (26.1) 9.3
Other, net 2.4 9.7 5.5
--------------------------------------
Net cash flows provided from (used for) operating activities 1,193.9 (136.7) (98.2)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments 133.3 (10.2) (2.4)
Sales and maturities of common equity securities and other investments 338.2 360.4 282.1
Purchases of common equity securities and other investments (186.3) (245.4) (18.7)
Investments in unconsolidated affiliates (44.0) - -
Collections on mortgage origination and servicing assets 232.3 213.3 179.5
Additions to capitalized mortgage servicing (90.1) (72.2) (119.6)
Proceeds from sales of mortgage servicing 70.2 - -
Additions to other mortgage origination and servicing assets (242.8) (255.9) (247.0)
Purchases of fixed assets, net (3.6) (11.2) (7.4)
Sale of discontinued operations - - (7.9)
-------------------------------------
Net cash provided from (used for) investing activities 207.2 (21.2) 58.6
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in short-term debt (1,314.5) 21.5 498.5
Proceeds from issuances of long-term debt - 178.0 98.4
Repayments of long-term debt (23.9) - -
Proceeds from issuances of preferred stock by subsidiary 96.9 - -
Redemption of preferred stock (82.0) - (185.0)
Proceeds from issuances of common stock from treasury 2.8 2.1 29.4
Purchases of common stock retired (78.8) (41.8) (371.7)
Cash dividends paid to preferred shareholders (10.8) (12.7) (22.2)
-------------------------------------
Net cash (used for) provided from financing activities (1,410.3) 147.1 47.4
-----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash during year (9.2) (10.8) 7.8
Cash balance at beginning of year 10.7 21.5 13.7
------------------------------------
Cash balance at end of year $ 1.5 $ 10.7 $ 21.5
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
FUND AMERICAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BASIS OF PRESENTATION
SIGNIFICANT The accompanying consolidated financial statements
ACCOUNTING include the accounts of Fund American Enterprises
POLICIES Holdings, Inc. (the "Company") and its subsidiaries
(collectively, "Fund American"). Fund American's
principal business is conducted through Source One
Mortgage Services Corporation and its subsidiaries
("Source One"). The financial statements have been
prepared in accordance with generally accepted
accounting principles ("GAAP"). All significant
intercompany transactions have been eliminated in
consolidation. The financial statements include all
adjustments considered necessary by management to fairly
present the financial position, results of operations
and cash flows of Fund American. Certain amounts in the
prior year financial statements have been reclassified
to conform with the current year presentation.
ACCOUNTING STANDARDS RECENTLY ADOPTED
As of December 31, 1994 Fund American adopted the
provisions of Statement of Financial Accounting
Standards ("SFAS") No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial
Instruments," which requires the disclosure of the
amount, nature, terms, purpose and fair value of
derivative financial instruments. The adoption of SFAS
No. 119 resulted only in additional disclosure
requirements and had no effect on Fund American's
financial position or results of operations.
Prior to December 31, 1993 Source One carried its
portfolio of common equity securities at the lower of
its aggregate cost or market value as of the balance
sheet date. Changes in Source One's market valuation
allowance for this portfolio were recorded as a direct
adjustment to shareholders' equity (net of tax) with no
credit or charge to net income. Common equity securities
held by the Company and its subsidiaries other than
Source One were carried at market value, with related
unrealized gains and losses included in net income. As
of December 31, 1993 Fund American adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Under the provisions of SFAS No. 115,
substantially all of Fund American's portfolio of common
equity securities and other investments were classified
as securities available for sale. The statement requires
that investments classified as securities available for
sale be reported at fair value as of the balance sheet
date, with related unrealized gains and losses excluded
from earnings and instead reported as a net amount in a
separate component of shareholders' equity (net of tax).
During 1992 Fund American adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other
Than Pensions." SFAS No. 106 requires the cost of such
benefits to be charged to expense during the years that
employees render services.
Also during 1992 Fund American adopted SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 established
new accounting rules for income taxes. It requires an
asset and liability approach for financial accounting
and reporting for income taxes.
26
<PAGE>
INVESTMENT SECURITIES
Other investments include: fixed income investments
carried at amortized cost which approximated fair value
as of December 31, 1994 and 1993; investment partnership
interests accounted for using the equity method and
carried at internally appraised fair value if such value
differs significantly from the equity basis; certain
preferred and common equity securities having no
established public market value and carried at
internally appraised fair value; certain securities
which, due to restrictions regarding resale, are carried
at a discount to the quoted market value for similar
unrestricted securities; mortgage loans held for
investment; and residual interests in real estate
mortgage investment conduits ("REMICs"). Mortgage loans
held for investment are stated at the lower of cost or
market value, determined on an individual loan basis at
the time the permanent investment decisions were made.
Related discounts, if any, are amortized to income over
the anticipated life of the investment. REMICs are
classified as held to maturity and are carried at
amortized cost using a method which approximates the
effective yield method of amortization.
Short-term investments are carried at amortized
cost which approximated market value as of December 31,
1994 and 1993. Short-term mortgage-backed securities are
classified as trading securities and are stated at fair
value with unrealized gains and losses, if any, reported
in income.
Realized gains and losses resulting from sales of
investment securities or from other than temporary
impairments of value are accounted for using the
specific identification method.
MORTGAGE ORIGINATION AND SERVICING
Fund American acquired Source One in 1986. The purchase
price in excess of historical book value allocated to
goodwill is being amortized over 20 years.
Mortgage loans held for sale are stated at the
lower of aggregate cost or market value.
Conventional residential mortgage loans are placed
on a non-accrual basis when delinquent 90 days or more
as to interest or principal. Interest on delinquent
Federal Housing Administration ("FHA") insured loans is
accrued at the insured rate beginning on the sixty-first
day of delinquency. Interest on delinquent Veterans
Administration ("VA") guaranteed loans is accrued at the
loan rate during the period of delinquency.
Gains and losses from sales of mortgage loans are
recognized when the proceeds are received. Loan
origination fees, net of certain direct costs, have been
deferred and are recognized as income when the related
mortgage loans are sold. Discounts from the origination
of mortgage loans held for sale are deferred and
recognized as adjustments to gains or losses on sales.
Capitalized mortgage servicing includes certain
costs incurred in the acquisition of mortgage servicing
contracts (purchased servicing rights) which are
deferred and amortized using a method that relates the
anticipated net servicing revenue to total projected net
servicing revenue to be received over the expected life
of the loan. The initial amount of capitalized servicing
recorded does not exceed the present value of estimated
future net servicing income. Capitalized servicing also
includes the present value of future servicing revenue
in excess of normal servicing revenue on originated
loans sold with servicing retained (excess servicing)
which is deferred and amortized under a method similar
to that which is used for purchased mortgage servicing
rights.
27
<PAGE>
Effective January 1, 1994 Source One changed the
methodology used to measure impairment of its purchased
mortgage servicing rights asset. Previously, Source One
measured the asset's impairment on a disaggregated basis
and used a cost of capital charge to measure the value
of future servicing cash flows. The new accounting
methodology measures the asset's impairment on a
disaggregated basis and discounts the asset's estimated
future cash flows using current market rates. Source One
did not change the methodology used to measure
impairment of its excess servicing asset. Source One
continues to measure impairment using the original
discount rate to discount excess servicing cash flows.
Pool loan purchases, which are carried at cost,
represent FHA insured, VA guaranteed and conventional
loans which were either delinquent or in the process of
foreclosure at the time they were purchased from
Government National Mortgage Association ("GNMA") or
Federal National Mortgage Association ("FNMA") mortgage-
backed security pools which Source One services or, to a
lesser degree, from private investors. Interest is
accrued on these purchased loans at a rate based on
expected recoveries.
Mortgage claims receivable represent claims filed
primarily with FHA and VA. These receivables are carried
at cost less an estimated allowance for amounts which
are not fully recoverable from the claims filed.
Real estate acquired is stated at the lower of net
realizable value or the recorded balance satisfied at
the date of acquisition, as determined on an individual
property basis. Costs related to holding the properties
are charged to expense as incurred.
The allowance for mortgage loan losses is based on
an analysis of the mortgage loan servicing portfolio
and, in management's judgment, is adequate to provide
for estimated losses.
Mortgage servicing revenue represents fees earned
for servicing real estate mortgage loans owned by
investors and late charge income. The servicing fees are
calculated based on the outstanding principal balances
of the loans serviced and are recognized together with
late charge income when received.
EARNINGS PER SHARE
For purposes of earnings per share, common stock
equivalents include stock options, warrants and non-cash
performance shares. The Voting Preferred Stock Series D,
par value $1.00 per share (the "Series D Preferred
Stock") is not a common stock equivalent.
Primary earnings per share amounts are based on the
weighted average number of common shares and dilutive
common stock equivalents outstanding. In the
calculation, income is adjusted for preferred stock
dividends. The weighted average shares used in the
primary computation were 9,405,093; 10,247,746 and
12,697,012 for the years ended December 31, 1994, 1993
and 1992, respectively.
Fully diluted earnings per share amounts are based
on the weighted average number of common shares
outstanding, assuming full dilution. Income is adjusted
for preferred stock dividends when the preferred shares
are anti-dilutive. The weighted average shares used in
the fully diluted computation were 9,408,785; 10,247,746
and 12,725,024 for the years ended December 31, 1994,
1993 and 1992, respectively.
28
<PAGE>
FUTURE APPLICATION OF ACCOUNTING STANDARD
In June 1994 the Financial Accounting Board issued an
exposure draft entitled "Accounting for Mortgage
Servicing Rights and Excess Servicing Receivables and
for Securitization of Mortgage Loans." The exposure
draft, in its current form, would require entities to
measure impairment on a disaggregated basis by
stratifying the capitalized mortgage servicing asset
based on the risk characteristics of the underlying
loans. Impairment would be recognized through a
valuation allowance for an individual straturn with a
corresponding charge to expense. The proposed statement
would be applied prospectively in years beginning after
December 15, 1995 to transactions involving the
capitalization of originated servicing rights and to
impairment evaluations of all capitalized servicing
rights. Retroactive application would be prohibited,
although early adoption of the standard would be
allowed. The proposed statement, if adopted in its
current form, could have a substantial impact on Source
One's financial condition and results of operations in
the future. However, since no final pronouncement has
been issued, management is not able to predict with any
reliability whether such pronouncement may ultimately be
adopted and what impact, if any, it would have on Source
One's financial condition and results of operations.
2. SALE OF On January 2, 1991, pursuant to an agreement originally
SUBSIDIARY announced on August 2, 1990, the Company sold its
principal operating business, Fireman's Fund Insurance
Company (together withits insurance subsidiaries,
"Fireman's Fund"), to Allianz of America, Inc. The 1991
gain from the sale includes a $75.0 million tax benefit
related tothe Company's estimated tax loss on the sale.
The amount of tax benefit from the sale ultimately
realized by the Company may be significantly more or
less than the Company's current estimate due to possible
changes in or new interpretations of tax rules, possible
amendments to Fund American's 1990 or prior years'
Federal income tax returns, the results of Internal
Revenue Service audits and other matters affecting the
amount of the deductible tax loss. The Company has
included in other liabilities an estimated reserve
related to such matters affecting the amount of the
deductible tax loss and other tax matters. Such reserve
totalled $78.6 million at December 31, 1994 .
3. INVESTMENT Net investment income and other revenue consisted of the
SECURITIES following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Millions 1994 1993 1992
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Mortgage loans held for sale $ 66.6 $ 88.0 $ 75.6
Short-term investments 7.8 6.4 14.8
Other 5.3 24.3 17.4
-------------------------------------
Total interest income 79.7 118.7 107.8
Dividend and royalty trust income 11.1 15.2 16.6
Other investment revenue .1 2.3 4.9
Less investment expenses (.7) (2.7) (1.7)
-------------------------------------
Net investment income and other revenue, before tax $ 90.2 $133.5 $127.6
=============================================================================================
</TABLE>
29
<PAGE>
Net realized investment gains and changes in net
unrealized investment gains and losses were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------
Millions 1994 1993 1992
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized investment gains $ 38.8 $ 50.6 $ 11.0
Net unrealized investment gains (losses):
Included in net income -- 73.4 54.3
Recorded directly to shareholders' equity (84.3) 69.9 17.9
------------------------------------------
Total net investment gains (losses), before tax $(45.5) $193.9 $ 83.2
===================================================================================================
</TABLE>
The components of ending net unrealized gains and losses
on common equity securities and other investments were
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31,
------------------------------------------
Millions 1994 1993 1992
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains $ 47.3 $145.8 $ 75.8
Unrealized losses (17.0) (31.2) (96.6)
------------------------------------------
Total net investment gains (losses), before tax $ 30.3 $114.6 $(20.6)
===================================================================================================
</TABLE>
Non-cash exchanges of investment securities totalling
$.3 million and $39.8 during 1993 and 1992,
respectively, are not reflected in the Consolidated
Statements of Cash Flows.
4. Mortgage Source One services loans throughout the United States.
Origination Source One's portfolio of mortgages serviced, including
and loans subserviced, interim servicing contracts and those
Servicing under contract to acquire, totalled $39.6 billion and $38.4
billion as of December 31, 1994 and 1993, respectively,
including GNMA guaranteed mortgage-backed securities of $11.9
billion and $11.4 billion, respectively. The following table
summarizes the mortgage loan servicing portfolio:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Weighted average
-------------------------------------------------------
Outstanding Remaining
principal Loan Net contractual
balance balance Interest servicing life
(millions) (thousands) rate fee rate (months)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan Type:
Residential:
Conventional $25,279 $ 85 7.96% .397% 257
FHA 8,127 51 8.59 .440 287
VA 4,420 51 8.37 .431 275
Commercial 91 618 7.60 .177 176
-----------
37,917 70 8.14 .410 265
Interim servicing 1,651
-----------
Total servicing portfolio $39,568
===================================================================================================
</TABLE>
30
<PAGE>
The servicing fee rates in the preceding table are shown
after deducting applicable guarantee fees and before the
effect of amortization of capitalized servicing.
Guarantee fees range from six basis points for
governmental loans to approximately 30 basis points for
certain conventional loans. Certain loans sold to
private investors have no guarantee fees.
The following tables summarize Source One's
mortgage loan servicing portfolio by interest rate range
and by location of property:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
December 31, 1994 December 31, 1993
--------------------------------- ---------------------------------
Aggregate Weighted Aggregate Weighted
Number principal average Number principal average
Interest rate of balance interest of balance interest
range loans (millions) rate loans (millions) rate
----------------- --------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
5.99% and lower 6,597 $ 318 5.37% 9,685 $ 422 5.25%
6.00%-6.49% 11,887 800 6.21 10,680 639 6.17
6.50%-6.99% 37,415 3,339 6.71 24,124 2,107 6.70
7.00%-7.49% 89,649 7,316 7.16 56,399 4,187 7.15
7.50%-7.99% 93,328 7,748 7.61 66,450 5,380 7.62
8.00%-8.49% 57,323 4,220 8.09 53,227 3,889 8.10
8.50%-8.99% 78,998 4,465 8.60 81,721 4,553 8.61
9.00%-9.49% 36,115 2,168 9.08 39,272 2,382 9.08
9.50%-9.99% 59,174 3,383 9.60 75,228 4,531 9.60
10% and above 72,942 4,160 10.52 102,186 6,123 10.52
--------------------------------- ---------------------------------
Total 543,428 $37,917 8.14% 518,972 $34,213 8.53%
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
December 31, 1994 December 31, 1993
-------------------------------------- -----------------------------------
Percentage Percentage
Aggregate of principal Aggregate of principal
Number principal balance of Number principal balance of
of balance servicing of balance servicing
State loans (millions) portfolio loans (millions) portfolio
------------- -------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 79,621 $ 7,195 19.0% 82,694 $ 7,209 21.1%
Washington 42,584 3,502 9.2 37,938 2,950 8.6
New York 35,214 2,611 6.9 36,157 2,728 8.0
Michigan 33,174 1,865 4.9 28,667 1,356 4.0
Texas 26,411 1,863 4.9 17,065 1,058 3.1
Florida 29,955 1,642 4.9 25,576 1,452 4.2
Illinois 20,984 1,580 4.2 19,972 1,369 4.0
New Jersey 18,075 1,331 3.5 18,757 1,328 3.9
Virginia 20,429 1,256 3.3 21,132 1,206 3.5
Arizona 17,570 1,104 2.9 16,631 9.63 2.8
Other 219,411 13,768 36.3 214,383 12,594 36.8
-------------------------------------- -----------------------------------
Total 543,428 $37,917 100.0% 518,972 $34,213 100.0%
===========================================================================================
</TABLE>
The tables include $4,294 million outstanding principal
balance of loans subserviced for others at December 31,
1994. The tables exclude $1,651 million and $4,190
million outstanding principal balance of interim
servicing as of December 31, 1994 and 1993,
respectively.
31
<PAGE>
Escrow funds of approximately $277.9 million and
$281.7 million as of December 31, 1994 and 1993,
respectively, relating to mortgages serviced and
subserviced, were held in non-interest bearing accounts
at non-affiliated banks and are not included in the
consolidated financial statements.
Source One has in force an errors and omissions
policy in the amount of $20.0 million. Primary fidelity
coverage up to a limit of $45.0 million is provided
under a Fund American master policy, for which Source
One pays a portion of the premium.
5. CAPITALIZED Effective January 1, 1994 Source One changed the
SERVICING methodology used to measure impairment of its purchased
mortgage servicing rights asset. Previously, Source One
measured the asset's impairment on a disaggregated basis
and used a cost of capital charge to measure the value
of future servicing cash flows. The new accounting
methodology measures the asset's impairments on a
disaggregated basis and discounts the asset's estimated
future cash flows using current market rates. Source
One's management believes that the use of current market
rates to discount cash flows versus the use of a cost of
capital charge is a preferable accounting method because
it represents a more conservative and informative
financial statement presentation of the purchased
mortgage servicing rights asset. The adoption of the new
accounting methodology, recorded as a cumulative
adjustment as of January 1, 1994, resulted in a $68.1
million pretax charge to income for 1994. The
prospective effect of the accounting change was a $2.5
million net pretax charge to income for 1994.
If this accounting change had been applied
retroactively, the pro format effect would have
decreased after tax earnings by approximately $4.7
million, or $.46 per share, for the year ended December
31, 1993. Pro forma amounts for 1992 cannot be
reasonably determined since Source One does not have the
necessary data available to stratify the mortgage
servicing portfolio on a consistent basis. The following
table summarizes changes in Source One's capitalized
mortgage servicing asset:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
Millions 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases Servicing:
Balance at beginning of year $ 570.2 $ 551.3 $ 560.0
Servicing acquisitions 69.7 117.5 119.6
Scheduled amortization (61.7) (90.1) (89.4)
Impairment and unscheduled amortization (12.8) (8.5) (38.9)
Sales of servicing (21.7) -- --
Cumulative effect of accounting change (68.1) -- --
--------------------------------
Balance at end of year 475.6 570.2 551.3
--------------------------------
Excess Servicing:
Balance at beginning of year 96.5 73.4 45.3
Additions 16.7 58.1 47.1
Scheduled amortization (12.1) (11.5) (10.0)
Impairment and unscheduled amortization (.4) (23.5) (9.0)
Sales of servicing (28.6) -- --
--------------------------------
Balance at end of year 72.1 96.5 73.4
Deferred gain on sales of servicing (17.2) -- --
--------------------------------
Total capitalized mortgage servicing $ 530.5 $ 666.7 $ 624.7
==============================================================================
</TABLE>
32
<PAGE>
During 1993 and 1992 the entire mortgage banking
industry experienced substantial prepayments in mortgage
servicing portfolios due to refinancings caused by
declines in market interest rates for mortgage loans.
Considering these substantial refinancings, in December
1992 Source One decided to prospectively measure the
recoverability of its capitalized mortgage servicing
asset on a disaggregated basis, resulting in a $38.2
million pretax reduction in net mortgage servicing
revenue for the year ended December 31, 1992. In
addition, during 1992 Source One recorded unscheduled
amortization totalling $9.7 million to reflect the
effects of high prepayments on the capitalized servicing
asset. The high level of prepayments continued in 1993
due to further declines in market interest rates for
mortgage loans, resulting in additional pretax
writedowns of the capitalized mortgage servicing asset
totalling $32.0 million during 1993.
Source One estimates the fair value of its
capitalized excess servicing asset by discounting the
anticipated cash flows to be received over the estimated
life of the related loans. Source One uses interest only
("I/O") strip interest rates as quoted by market
participants to determine the appropriate discount rate
and prepayment speed assumption rates that are based on
interest rates, loan types and maturity dates. The
discount rates used to capitalize excess servicing
ranged from 8.00% to 10.00% for the year ended December
31, 1994 and were 8.00% and 10.00% for the years ended
1993 and 1992, respectively. For the years ended
December 31, 1994, 1993 and 1992, the weighted average
discount rates inherent in the carrying amount of the
capitalized excess servicing asset were 9.12%, 9.03% and
10.82%, respectively.
The following tables summarize the remaining
unamortized purchased servicing asset by year of
origination:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
December 31, 1994
------------------------------------------------------------
Unamortized
purchased Remaining Weighted
servicing portfolio Weighted average
Year of asset balance average maturity
origination (millions) (millions) interest rate (years)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1989 and prior $ 88.1 $ 4,636 9.06% 15.7
1987 43.9 2,084 8.67 19.9
1988 22.0 1,918 8.95 20.6
1989 30.5 1,432 9.03 22.7
1990 28.3 1,322 9.01 23.7
1991 40.2 1,905 8.46 23.9
1992 90.2 3,595 8.10 20.5
1993 106.9 9,997 7.21 22.1
1994 25.5 1,781 7.74 25.2
------------------------------------------------------------
Total $475.6 $28,670 8.13% 21.0
================================================================================
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
December 31, 1993
--------------------------------------------------------------------
Unamortized
purchased Remaining Weighted
servicing portfolio Weighted average
Year of asset balance average maturity
origination (millions) (millions) interest rate (years)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1986 and prior $121.9 $ 5,790 9.55% 17.0
1987 68.6 2,628 9.29 20.9
1988 28.4 1,278 10.13 23.1
1989 38.6 1,799 10.03 24.4
1990 39.2 1,557 9.98 25.2
1991 58.5 2,134 9.06 25.0
1992 109.9 5,062 8.14 22.5
1993 105.1 12,045 7.28 23.7
--------------------------------------------------------------------
Total $570.2 $32,293 8.50% 22.2
=============================================================================================
</TABLE>
During the second quarter of 1994 Source One sold
the rights to service $3,868 million of mortgage loans
to a third party for cash proceeds of $70.2 million.
Source One has continued to service these loans pursuant
to a subservicing agreement. Accordingly, the related
$19.9 million gain from the sale was deferred and is
being recognized in income over the five-year life of
the subservicing agreement. For the year ended December
31, 1994 Source One recognized $2.7 million of the
deferred gain which is included in net servicing
revenue. At December 31, 1994 the remaining deferred
gain on the sale of servicing was $17.2 million and is
excluded from the above table. The mortgage loan
servicing portfolio at December 31, 1994 includes loans
subserviced for others having a principal balance
totalling $4,294 million.
The remaining unamortized purchased servicing asset
related to the acquisition of Source One in 1986 was
$40.7 million and $52.9 million at December 31, 1994 and
1993, respectively, and is included in "1986 & prior" on
the above table. The related remaining portfolio balance
was $2.0 billion and $2.7 billion, the weighted average
interest rate was 9.28% and 9.36%, and the weighted
average remaining maturity was 13.55 years and 14.58
years as of December 31, 1994 and 1993, respectively.
6. Mortgage The following tables summarize Source One's mortgage
Loans Held loans held for sale and pool loan purchases:
For Sale and
Pool Loan
Purchases
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
December 31,
-----------------------
Millions 1994 1993
----------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable rate mortgage loans, weighted average
interest rates of 7.86% and 5.22% $ 46.4 $ 61.4
Fixed rate 7 year through 25 year mortgage loans,
weighted average interest rates of 8.81% and 6.82% 34.0 450.7
Fixed rate 30 year mortgage loans, weighted average
interest rates of 9.27% and 7.39% 131.3 786.5
-----------------------
Total principal amount 211.7 1,298.6
Less discounts (1.2) (.1)
-----------------------
Total mortgage loans held for sale $ 210.5 $1,298.5
========================================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Principal balance
(millions) Number of loans
------------------- -----------------
<S> <C> <C> <C> <C>
December 31, 1994 1993 1994 1993
---------------------------------------------------------------------------
Loan type: FHA $102.8 $ 92.9 1,850 1,679
VA 41.9 40.7 719 658
Conventional 19.2 21.9 224 247
------------------------------------------
Total pool loan purchases $163.9 $155.5 2,793 2,582
===========================================================================
</TABLE>
7. DEBT SHORT-TERM DEBT
Short-term debt outstanding consisted of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
December 31,
-------------------------
Millions 1994 1993
--------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Loan guarantee $ 30.0 $ -
-------------------------
Source One:
Commercial paper 26.1 574.0
Credit agreement borrowings 198.8 727.5
Bid loan borrowings - 236.9
Less net premiums and discounts (.8) (1.6)
-------------------------
Total Source One 224.1 1,536.8
-------------------------
Total short-term debt $254.1 $ 1,536.8
==========================================================================
</TABLE>
The weighted average interest rates of short-term debt
outstanding during 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
==========================================================================
--------------------------------------------------------------------------
Year Ended December 31,
------------------------
1994 1993
--------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Revolving credit facility 5.11% 4.15%
Loan guarantee 5.36% 5.36%
Source One:
Commercial paper 3.92% 3.36%
Credit agreements and bid loans 5.03% 4.03%
==========================================================================
</TABLE>
In June 1994 the Company entered into a revolving credit
agreement with a syndicate of banks. Under the
agreement, through June 1, 1995 the Company and certain
of its subsidiaries may borrow at market interest rates
up to $75.0 million. The credit agreement contains
certain customary covenants, including a $525.0 million
minimum tangible net worth requirement and a minimum
asset coverage requirement. At December 31, 1994 the
Company had no borrowings outstanding under the
agreement.
In August 1993 the Company sold a $30.0 million
principal amount secured loan receivable from the
Company's Chairman to a third party. The Company has
guaranteed repayment of the loan and, therefore, in
accordance with GAAP, has reflected the sale of the loan
as indebtedness on the balance sheet. The loan matures
on October 23, 1995. As of December 31, 1993 the loan
guarantee was classified as long-term debt.
35
<PAGE>
Source One has a $650.0 million domestic and Euro
commercial paper program. The weighted average number of
days to maturity of commercial paper outstanding at
December 31, 1994 was 10 days. In August 1994 Source One
replaced its then existing credit agreements with three
new credit facilities totalling $900.0 million. At the
request of Source One, such facilities were reduced to
an aggregate amount of $800.0 million in November 1994.
The new facilities, together with $325.0 million
aggregate principal amount of publicly issued long-term
debt securities, are secured primarily by Source One's
mortgage loans receivable and the mortgage loan
servicing portfolio. One facility in the amount of
$250.0 million matures on July 31, 1995 and the
remaining two facilities in the amounts of $150.0
million mature on June 30, 1997 and July 31, 1997,
respectively.
Source One's secured credit agreement currently
contain convenants which limit its ability to pay
dividends or make distributions on its capital in excess
of $9.0 million of cash dividends on preferred stock
each year. Source One is in the process of renegotiating
this covenant to increase the dividend/distribution
capacity thereunder. These covenants also require Source
One to maintain a certain level of total tangible net
worth and a certain ratio of debt to total tangible net
worth. Source One is currently in compliance with all
such covenants.
Under the credit agreements described above,
Source One receives interest expense credits as a result
of holding escrow and custodial funds in trust accounts
at non-affiliated banks.
Source One also has a revolving credit agreement
under which it can borrow up to $10.0 million. As of
December 31, 1994 and 1993, there was $3.8 million and
$2.5 million outstanding under this agreement,
respectively.
Prior to August 1994 Source One could borrow at
floating rates up to $725.0 million under various
revolving credit agreements. Source One also had bid
loan facilities to augment these credit agreements which
allowed Source One to borrow additional amounts in a bid
process.
LONG-TERM DEBT
Long-term debt outstanding consisted of the following:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
December 31,
-----------------------
Millions 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Medium-term notes $125.0 $150.0
Loan guarantee - 30.0
Less net premiums and discounts
on notes (1.2) (1.5)
-----------------------
Total Parent Company 123.8 178.5
-----------------------
Source One:
Debentures, 8.25% due in 1996 125.0 125.0
Medium-term notes, due in 1996 40.0 40.0
Medium-term notes, 8.75% due in 2001 160.0 160.0
Debentures, 9% due in 2012 100.0 100.0
Less net premiums and discounts
on notes and debentures (1.8) (2.2)
------------------------
Total Source One 423.2 422.8
------------------------
Total long-term debt $547.0 $601.3
=============================================================================
</TABLE>
36
<PAGE>
During January and February 1993 the Company issued
$150.0 million in principal amount of medium-term notes
for net cash proceeds of $148.0 million after related
costs. Proceeds from the issuance of the notes were used
to repay an existing $100.0 million revolving credit
facility and for general corporate purposes. In June
1994 the Company repurchased $25.0 milion in principal
amount of its medium-term notes due February 2003. At
December 31, 1994 the remaining outstanding notes had an
average maturity of 8.38 years and an average yield to
maturity of 7.82%.
In 1986 Source One issued $125.0 million of 8.25%
debentures due November 1, 1996.
In 1989 Source One issued $40.0 million of
medium-term notes having a weighted average interest
rate of 9.65% and due in 1996.
In October 1991 Source One issued $160.0 million of
medium-term notes under terms of a $200.0 million shelf
registration statement filed in November 1988. The
notes are due in October 2001 and bear interest at a
rate of 8.875%.
In June 1992 Source One issued $100.0 million in
principal amount of 9% debentures due in June 2012 under
terms of a $250.0 million shelf registration statement.
The proceeds from issuance were used for general
corporate purposes.
Total interest paid by Fund American for both
short-term and long-term debt was $80.1 million, $98.1
million and $75.4 million in 1994, 1993 and 1992,
respectively.
8. INCOME TAXES The Company and its qualifying subsidiaries file a
consolidated Federal Income tax return. The Federal
Income tax provision is computed on the consolidated
taxable income of the Company and those subsidiaries.
The total income tax provision (benefit) consisted
of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------
Millions 1994 1993 1992
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax on income before accounting changes:
Federal $ 20.2 $ 67.8 $ 29.7
State and local .3 2.7 3.9
-------------------------------
Income tax provision 20.5 70.5 33.6
Tax on cumulative effect of accounting change -
purschased mortgage servicing (23.8) - -
Tax on cumulative effect of accounting change -
postretirement benefits - - (1.0)
Cumulative effect of accounting change -
income taxes - - 23.6
-------------------------------
Total income tax provision (benefit) $ (3.3) $ 70.5 $ 56.4
--------------------------------------------------------===============================
Net income tax payments (recoveries) $ (.7) $ 12.0 $(108.7)
--------------------------------------------------------===============================
Tax provision (benefit) recorded directly to
shareholders' equity related to:
Exercises of employee stock options and warrants $ (2.0) $ (4.7) $ (19.0)
Changes in net unrealized
investment gains and losses $ (29.5) $ 24.1 $ 6.1
=======================================================================================
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
The components of the income tax provision follow:
---------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Millions 1994 1993 1992
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision $ 21.9 $ 33.3 $ 19.2
Deferred provision (benefit) (1.4) 37.2 14.4
------------------------------------
Income tax provision $ 20.5 $ 70.5 $ 33.6
========================================================================================
</TABLE>
Pursuant to the liability method of accounting for income
taxes, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax return purposes. Significant
components of Fund American's net deferred Federal income tax
liability and asset follow:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
December 31,
----------------------
Millions 1994 1993
------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets related to:
Capitalized mortgage servicing $ 18.7 $ -
Employee compensation and benefit accruals 12.2 10.7
Allowance for mortgage loan losses 4.7 5.5
Other items 6.1 3.8
----------------------
Total deferred tax assets 41.7 20.0
------------------------------------------------------------------------------------
Deferred tax liabilities related to:
Purchase accounting adjustments 11.2 12.8
Net unrealized investment gains 2.5 22.8
Capitalized mortgage servicing - 12.7
Other items 6.6 5.2
---------------------
Total deferred tax liabilities 20.3 53.5
------------------------------------------------------------------------------------
Net deferred Federal income tax liability (asset) $(21.4) $ 33.5
====================================================================================
</TABLE>
A reconciliation of taxes calculated using Federal
statutory rates to the income tax provision follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Year Ended December 31,
------------------------------
Millions 1994 1993 1992
-----------------------------------------------------------------------------------
Federal statutory rate 35% 35% 34%
------------------------------
<S> <C> <C> <C>
Tax provision at Federal statutory rate $ 14.6 $ 49.3 $ 29.9
Differences in taxes resulting from:
Minority interest dividends 2.3 - -
Purchase accounting adjustments .7 .8 .7
State and local income taxes .2 1.8 2.6
White River Distribution - 17.7 -
Dividends received deduction (2.2) (2.7) (2.2)
Equity income - (.6) (1.7)
Tax reserve adjustments 4.6 2.4 4.5
Other .3 1.8 (.2)
-------------------------------
Income tax provision $ 20.5 $ 70.5 $ 33.6
====================================================================================
</TABLE>
38
<PAGE>
In December 1993 the Company distributed to its
shareholders (the "Distribution") approximately 74% of
the outstanding shares of Common Stock of White River
Corporation ("White River"). The $17.7 million tax
provision resulting from the Distribution includes $13.0
million of current tax related to taxable capital gains
triggered by the Distribution which were not recognized
for financial reporting purposes pursant to GAAP. The
provision also includes a $4.7 million tax reserve
established on White River's books of record as of
December 22, 1993, the date of the Distribution. The
reserve offsets White River's deferred tax asset
calculated on a stand-alone basis as of that date.
Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended (the "IRC"), impose limitations on
the use of certain tax benefits by a corporation that
undergoes a more than 50% ownership change. The tax
benefits which may be limited include loss carryforwards
and built-in losses and deductions existing on the date
of ownership change. The annual limitation for the
utilization of such benefits during a five-year post-
change period is generally calculated by multiplying the
value of the corporation (as defined by the IRC) at the
time of the ownership change by an interest rate (a
long-term tax-exempt bond rate defined by the IRC).
We regulatory guidance on the subject is not complete,
the Company believes that it had an ownership change
during 1992 so as to make the Section 382 and 383
limitations applicable to Fund American. Fund American
believes that the imposition of such limitations will
not have a material adverse effect on its financial
position or results of operations. However, such
limitations could serve to constrain the timing and
structure of gain or loss recognition transactions,
including assets sales, in the future.
9. Retirement On December 31, 1992 the Company terminated its defined
and Post- benefit plan, supplemental pension plan, incentive
Retirement savings plan and retiree medical plan. In 1993 the Plans
Plans Company established the Fund American Deferred Benefit
Plan (the "Deferred Benefit Plan"), a nonqualified
defined contribution plan for a select group of
management employees for the purpose of providing
retirement and postretirement benefits. The amount of
annual contributions to the new plan are determined
using actuarial assumptions and benefit levels similar
to those of the previous plans; however, participants in
the new plan may choose between two investment options
for their paln balances. During 1993 accrued benifits
under all the Company's terminated retirement plans we
either (i) distributed to or for the benefit of
employees or (ii) transferred to the Deferred Benefit
Plan. At December 31, 1994 the Company's liability to
participants pursuant to the Deferred Benefit Plan was
$1.4 million.
In 1993 the Company also established the Fund
American Voluntary Deferred Compensation Plan (the
"Deferred Compensation Plan"), a nonqualified plan for a
select group of management employees for the purpose of
deferring current compensation. Pursuant to the Deferred
Compensation Plan, participants may defer all or a
portion of qualifying remuneration payable by Fund
American, Participants in the Deferred Compensation Plan
may choose between two investment options for their plan
balances. At December 31, 1994 the Company's liability
to participants pursuant to the Deferred Compensation
Plan was $15.5 million.
39
<PAGE>
Source One established its defined benefit pension plan as of July 1,
1986 for the benefit of its employees. Benefits under the Source One are based
on years of service and each employee's highest average aligble compensation
over five consective years in his last ten years of employment. Funding of
retirement costs complies with the minimum funding requirements specified by the
Employee Retirement Income Security Act. Cash contributions received by the
Source One plan for the years ended December 31, 1994, 1993 and 1992, totalled
$1.1 million, $1.9 million and $1.0 million, respectively.
Source One also has a supplemental pension plan which is a nonqualified,
unfunded benefit plan designed to provide supplementary retirement benefits for
employees whose pensionable compensation exceeds statutory limits.
The following table sets forth the pension cost and actuarial assumptions
used in determing the funded status of Fund American's qualified defined benefit
pension plans:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------
Dollars in millions 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
PENSION COST FOR PERIOD:
Service cost for period $ 1.6 $ 1.4 $ .9
Interest cost on projected benefit
obligation 1.3 1.2 .9
Actual return on plan assets 1.0 (1.3) (.9)
Net amortization and deferral (1.5) .9 .4
----------------------------------
Total pension cost $ 2.4 $ 2.2 $ 1.3
----------------------------------------------==================================
FUNDED STATUS AT END OF PERIOD:
Actuarial present value of benefit
obligation:
Accumulated benefit obligation, including
vested benefits of $11.0, $11.3 and $9.9 $ 12.6 $ 13.0 $ 10.3
Effect of future projected salary increases 5.1 5.3 4.3
----------------------------------
Total projected benefit obligation 17.7 18.3 14.6
Plan assets at fair value 13.1 13.3 11.1
----------------------------------
Projected benefit obligation in
excess of plan assets 4.6 5.0 3.5
Aggregate of items not yet recognized
in earnings (2.7) (4.4) (2.9)
----------------------------------
Pension cost accrued at end of period $ 1.9 $ .6 $ .6
----------------------------------------------==================================
ACTUARIAL ASSUMPTIONS:
Discount Rate 8.0% 7.0% 7.5-8.5%
Rate of increase in future compensation
levels 6.0% 6.0% 8.0%
Expected long-term rate of return on plan
assets 8.0% 8.0% 8.0%
================================================================================
</TABLE>
Total accrued postretirement benefit costs included in accounts payable and
other liabilities was $3.2 million and $3.0 million at December 31, 1994 and
1993, respectively.
40
<PAGE>
10. EMPLOYEE The 1985 Long-Term Incentive Plan (the "Incentive Plan")
STOCK PLAN provides for granting to officers and key employees of the
Company and its participating subsidiaries various types of
stock-based incentive awards including stock options and
performance shares. At December 31, 1994, 404,762 Shares of
the Company's Common Stock, par value $1.00 per share
("Shares"), remained available for grants under the Incentive
Plan.
Stock options are rights to purchase a specified number
of Shares at or above the fair market value of Shares at the
time an option is granted. Stock options generally vest over
a four-year period and expire no later than ten years after
the date on which they are granted.
Performance shares are conditional grants of a
specified maximum number of Shares or an equivalent amount of
cash. The grants are generally payable, subject to the
attainment of a specified return on equity, at the end of
three- to five-year periods or as otherwise determined by the
Human Resources Committee (the Committee") of the Company's
Board of Directors (the "Board"). The Committee consists
solely of non-management directors.
The following table details the transactions applicable
to non-qualified stock options to acquire Shares:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Number Exercise price
----------------------------------------------------------------------
<S> <C> <C>
Balance at December 31,1991 1,236,386 $25.75-$52.83
Exercised during 1992 1,122,111 $25.75-$39.69
Expired or cancelled during 1992 150 $32.56
----------------------------
Balance at December 31, 1992 114,125 $25.75-$56.41
Exercised during 1993 107,000 $25.75-$59.87
----------------------------
BALANCE AT DECEMBER 31, 1993 AND 1994 7,125 $24.82-$32.60
======================================================================
</TABLE>
Stock options exercised during 1992 included 272,111 stock
options exercised by employees of Fireman's Fund. The cost of
stock options exercised by employees of Fireman's Fund
subsequent to consummation of the sale of Fireman's Fund has
been deducted from the Company's gain from sale of
discontinued operations. All the 7,125 Fund American stock
options outstanding at December 31, 1994 and 1993 were held
by employees of Fund American and were fully vested and
exercisable.
Pursuant to the Incentive Plan 56,000 and 191,500
performance shares were granted in 1993 and 1992,
respectively. During 1993 and 1992, respectively, 75,375 and
4,925 performance shares were cancelled. In 1993 and 1992,
respectively, 205,375 and 1,150 performance shares were paid,
of which 27,672 and 650 were paid in the form of Shares and
the remainder in cash. No performance shares were granted,
cancelled or paid in 1994. At December 31, 1994, 124,250
performance shares were outstanding all of which were held by
employees of Fund American. On the performance shares
outstanding at December 31, 1994, 68,250, which were
outstanding prior to the Distribution are subject to anti-
dilution adjustments and are thereby valued as being
equivalent to one Fund American Share plus one-half share of
Common Stock of White River. The remaining 56,000 performance
shares outstanding at December 31, 1994 are valued as being
equivalent to one Fund American Share. The financial goal for
full payment of the performance shares is the achievement of
a 13% to 15% annual return on equity measured over the
applicable periods.
41
<PAGE>
In 1985 the Company's Chairman purchased warrants
from American Express Company ("American Express")
entitling him to buy 1,700,000 Shares for $25.75 per
Share through January 2, 1996. Warrants to purchase
420,000 Shares and 130,000 Shares were exercised by the
Chairman during 1992 and 1994, respectively, leaving
warrants to purchase 1,150,000 Shares outstanding at
December 31, 1994. Pursuant to certain anti-dilution
adjustments related to the Distribution, the Chairman
received in 1993 warrants entitling him to purchase
640,000 White River Shares for $8.18 per share and the
exercise price for the Chairman's warrants to purchase
Fund American Shares was reduced to $21.66 per Share. The
Chairman excercised the White River warrants on November
19,1993.
Source One has various long-term incentive plans
which provide for the granting to key senior management
employees of Source One, stock-based and cash incentive
awards. Awards made pursuant to the plans are payable upon
the achievement of specified financial goals over multi-
year periods.
Source One also established a qualified employee
stock plan as of July 1,1986. Contributions to this plan
are determined at the discretion of Source One's Board of
Directors
11. Minority In March 1994 Source One issued 4,000,000 shares of 8.42%
Interest- perpetual Cumulative Preferred Stock, Series A (the
Preferred "Source One Preferred Stock"), for net cash proceeds of
Stock of $96.9 million. The Source One Preferred Stock has an
Subsidiary aggregate liquidation preference of $25.00 per share and
is not redeemable prior to May 1, 1999.
12. Shareholders' SERIES D AND E PREFERRED STOCK
Equity The Series D Preferred Stock had a cumulative annual
dividend rate of 7.75% and was initially redeemable for
cash or, at the Company's option, for Shares (based on the
then current market value of Shares) on July 31, 1994. On
August 1, 1994, the Company redeemed 22,778 shares of the
Series D Preferred Stock for $82.0 million, an amount
equal to the stock's liquidation preference. In accordance
with the terms of the Series D Preferred Stock, the annual
dividend rate for the remaining 20,833 shares of the
Series D Preferred Stock outstanding was increased to
8.75% and the stock's term was extended to July 31, 1995.
The Company may extend the redemption date of the Series D
Preferred Stock by one additional year to July 31, 1996,
which would require an increase in the dividend rate to
9.75%. Under certain circumstances, the dividend rate
could be increased if the corporate dividends received
deduction, currently provided for in Section 2439(a)(1) of
the IRC, is reduced below 70%. The Series D Preferred
Stock carries 100 votes per share and votes as a single
class with Shares.
The Company has given certain registration rights to
American Express which beneficially owns all of the
outstanding Series D Preferred Stock. American Express
must exchange the Series D Preferred Stock into Voting
Preferred Stock Series E, par value $1.00 per share (the
"Series E Preferred Stock"), prior to selling such stock
publicly. The terms of the Series E Preferred Stock would
be generally similar to those of the Series D Preferred
Stock, but the Series E Preferred Stock would carry one-
half the aggregate voting rights of the Series D Preferred
Stock.
42
<PAGE>
COMMON SHARE REPURCHASES
During 1994, 1993 and 1992 the Company repurchased
1,128,057 Shares, 536,247 Shares and 5,314,518 Shares,
respectively, for $78.8 million, $41.8 million and
$371.7 million, respectively. The bulk of the Shares
repurchased during 1992 were acquired pursuant to a Plan
of Complete Liquidation which was terminated in June
1992. All Shares repurchased during 1991, 1992 and 1993
have been retired. At December 31, 1994 the Company had
outstanding authorization to purchase an additional
756,092 Shares.
LOAN FOR COMMON STOCK ISSUED
On December 30, 1992 pursuant to a request from the
Board, the Company's Chairman agreed to an early
exercise of stock options and warrants to purchase
1,000,000 Shares. The Board's request reflected concerns
regarding proposed tax legislation which could have
limited or eliminated the Company's tax benefits from
certain employee stock options and warrants exercised in
1993 and thereafter. To encourage exercise of the stock
options and warrants, the Company provided a $30.0
million secured loan to the Chairman. The non-recourse
loan bears interest at 4% and matures on October 23,
1995. In accordance with GAAP, the loan has been
reported on the December 31, 1994 and 1993, balance
sheets in other assets ($4.3 million and $4.2 million,
respectively) and shareholders' equity ($25.0 million
and $24.4 million,respectively). The $2.1 million
difference between the face value and the initial
estimated fair value of the loan has been reported as
compensation and benefits expense in the income
statement for the year ended December 31, 1992.
13. SHAREHOLDERS' The Board adopted in 1987, and in 1988 and 1993 amended,
RIGHTS PLAN a Shareholders' Rights Plan under which rights to
purchase preferred stock were distributed to
shareholders at the rate of one right for each Share
(the "Rights"). Each Right entitles the holder to
purchase one one-thousandth of a share of the Company's
Series A Cumulative Participating Preferred Stock
("Series A Preferred").
The Rights enable the holders to acquire
additional equity in either the Company or an "Acquiring
Person," and are exercisable if an unrelated person or
group (other than American Express or a wholly-owned
subsidiary thereof, any subsidiary of the Company, any
employee benefit plan of the Company or its subsidiaries
or certain affiliates of the Company and certain persons
who inadvertently and temporarily cross the 25%
threshold) acquires beneficial ownership of 25% or more
of the outstanding Shares (such a 25% or more beneficial
owner is deemed an "Acquiring Person"). Thereafter, the
Rights would trade separately from the Shares and
separate certificates representing the Rights would be
issued. The terms of the Series A Preferred are such
that each one-thousandth of a share would be entitled to
participate in dividends and to vote on an equivalent
basis with one whole Share, along with other
preferential dividend rights and preferential
distribution rights in liquidation.
Upon the existence of an Acquiring Person, the
Rights will entitle each holder of a Right to purchase,
at the exercise price, that number of one-thousandth of
a share of Series A Preferred equivalent to the number
of Shares which, at the time of the transaction, would
have a market value of twice the exercise price. If
certain acquisitions of the Company occur, a similar
right to purchase securities of the Company or the
entity acquiring the Company at a discount would arise.
43
<PAGE>
Any Rights that are beneficially owned by an
Acquiring Person (or any affiliate or associate of an
Acquiring Person) are null and void and any holder of
any such Right (including any subsequent holder) will be
unable to exercise or transfer any such Right.
At any time after a person becomes an Acquiring
Person, the Board may mandatorily exchange all or some
of the Rights for consideration per Right equal to one-
half of the securities issuable upon the exercise of one
Right pursuant to the terms of the Rights Agreement (or
the common share equivalent) and without payment of the
exercise price.
The Rights, which do not have the right to vote
or receive dividends, expire November 25, 1997 and may
be redeemed by the Company at a price of $.01 per Right
at any time prior to the earlier of (i) such time as a
person becomes an Acquiring Person or (ii) the
expiration date. Under certain circumstances, the Board
may redeem the Rights only if a majority of the
disinterested directors (as defined in the Shareholders'
Rights Plan) agrees that the redemption is in the best
interests of the Company and its shareholders.
In 1987 the Company reserved 600,000 of its
authorized preferred shares as Series A Preferred for
issuance pursuant to the Shareholders' Rights Plan.
14. INDUSTRY Revenues, pretax earnings and ending identifiable assets
SEGMENTS for Fund American's industry segments are shown below:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Year Ended December 31,
-----------------------------------
Millions 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Source One $ 207.2 $ 234.5 $ 190.1
Other 21.3 16.5 24.0
-----------------------------------
Total $ 228.5 $ 251.0 $ 214.1
-------------------------====================================
PRETAX EARNINGS:
Source One $ 5.3 $ 62.2 $ 17.3
Other 36.3 78.7 70.5
-----------------------------------
Total $ 41.6 $ 140.9 $ 87.8
-------------------------====================================
ENDING ASSETS:
Source One $1,210.0 $2,647.2 $2,456.9
Other 597.3 657.8 671.9
-----------------------------------
Total $1,807.3 $3,305.0 $3,128.8
=============================================================
</TABLE>
15. FINANCIAL Fund American has only limited involvement with
INSTRUMENTS WITH derivative financial instruments and does not use
OFF-BALANCE SHEET derivative financial instruments for trading purposes.
RISK Fund American's use of derivative financial instruments
is primarily limited to (i) commitments to extend
credit, (ii) mandatory forward commitments and (iii) to
achieve a fixed interest rate on existing variable rate
obligations.
44
<PAGE>
Source One is a party to financial instruments with
off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers and reduce
its exposure to fluctuations in interest rates. These
financial instruments primarily include commitments to
extend credit and mandatory forward commitments. Those
instruments involve, to varying degrees, elements of
credit and market interest rate risk excess of the
amounts recognized in the consolidated balance sheets.
The contract or notional amounts of those instruments
reflect the extent of risk Source one has related to the
instuments.
Source One's exposure to credit loss in the event
of nonperformance by the other party to the financial
instrument for commitments to extend credit (mortgage
loan pipeline) is represented by the contractual
notional amount of those instruments. Source One's
mortgage loan pipeline for locked commitments which
are expected to close totalled $147.5 million and $967.7
million at December 31, 1994 and 1993, respectively.
Fixed rate commitments result in Source One having
market interest rate risk as well as credit risk.
Variable rate commitments result in only credit risk.
The amount of collateral required upon extension of
credit is based on management's credit evaluation of the
mortgagor and consists of the mortgagor's residential
property.
Source One obtains mandatory forward commitments
of up to 120 days to sell mortgage-backed securities to
hedge the market interest rate risk associated with the
portion of the mortgage loan pipeline that is expected
to close and all morgage loans receivable. At December
31, 1994 and 1993, Source One had approximately $351.2
million and $2,055.3 million, respectively, of mandatory
forward commitments outstanding. If secondary market
interest rates decline after Source One commits to an
interest rate for a loan, the loan may not close and
Source One may incur a loss from the cost of covering
its obligations under a related mandatory forward
commitment. If secondary market interest rates increase
after Source One commits to an interest rate for a loan
and Source One has not obtained a foward commitment,
Source One may incur a loss when the loan is subsequntly
sold.
Source One's risk management function closely
monitors the mortgage loan pipeline and mortgage loans
receivable balance to determine appropriate forward
commitment coverage on a daily basis in order to
manage the risk inherent in these off-balance-sheet
financial instruments. In addition, the risk management
area seeks to reduce counterparty risk by committing to
sell mortgage loans only to approved dealers with no
dealer having in excess of 20% of current commitments.
Source One currently transacts business with seven
approved dealers.
Source One sells loans through mortgage-backed
securities issued pursuant to programs of GNMA, FNMA,
the Federal Home Loan Mortgage Corporation ("FHLMC") or
through institutional investors. Most loans are
aggregated in pools of $1.0 million or more and are
purchased by institutional investors after having been
guaranteed by GNMA, FNMA or FHLMC. Substantially all
GNMA securities are sold by Source One without recourse
for loss of principal in the event of a subsequent
default by the mortgagor due to the FHA and VA
insurance underlying such securities.
45
<PAGE>
Servicing agreements relating to mortgage-
backed securities issued pursuant to programs of
GNMA, FNMA or FHLMC require Source One to advance
funds to make the required payments in the event
of a delinquency by the borrower. Source One
expects that it would recover most funds advanced
upon cure of default by the borrower or
foreclosure. However, funds advanced in connection
with VA partially guaranteed loans and certain
conventional loans (which are at most partially
insured by private mortgage insurers) may not be
fully recovered due to potential declines in
collateral value. In addition, most of Source
One's servicing agreements for mortgage-backed
securities typically require the payment to
investors of a full month's interest on each loan
although the loan may be paid off (by optional
prepayment or foreclosure) other than on a month-
end basis. In this instance, Source One is
obligated to pay the investor interest at the note
rate from the date of loan payoff through the end
of the calendar month without reimbursement.
As of December 31, 1994, 1993, and 1992,
Source One serviced approximately $11.9 billion,
$11.4 billion and $14.0 billion of GNMA loans
(without substantial recourse), respectively, and
$3.7 billion, $4.8 billion and $9.1 billion of
conventional loans (with recourse), respectively.
Source One occasionally enters into a
variety of interest rate contracts including
interest rate swaps, interest rate collars and put
options. These agreements give rise to credit risk
due to the potential that counterparties may fail
to meet the terms of the agreements. Market
interest rate risk may also arise due to unmatched
asset, and liability positions.
To cover loan losses that may result from
these servicing arrangements and other losses,
Source One has provided an allowance for loan
losses of $13.4 million and $16.0 million on the
consolidated balance sheets at December 31, 1994
and 1993, respectively Source One's management
believes the allowance for loan losses is adequate
to cover reimbursed foreclosure advances and
principal losses.
16. Fair Value Carrying value approximates fair value for common
of Financial equity securities, short-term investments, cash,
Instruments other financial assets, short-term debt and other
financial liabilities. For each other class of
financial instrument for which it is practicable
to estimate fair value, the following methods and
assumptions were used to estimate such value:
Other Investments. The fair values of I/O
strips are estimated based on quoted market prices
for those or similar investments. For REMICs, fair
values are estimated using discounted cash flow
analyses reflecting I/O strip and LIBOR interest
rates, and Prepayment Speed Assumption ("PSA")
rates, taking into consideration the
characteristics of the related collateral. Fair
values of mortgage loans held for investment are
estimated using quoted market prices for
securities backed by similar loans, adjusting for
differences in loan characteristics. For other
long-term investments held by Source One, fair
value is estimated based on quoted market prices
for those or similar investments and by
discounting future cash flows using market
interest rates for similar types of investments.
For other investments held by the Company and its
affiliates other than Source One, fair values have
been determined using quoted market values or
internal appraisal techniques.
46
<PAGE>
Capitalized Excess Mortgage Servicing. Fair value is estimated by
discounting the annual anticipated net revenue to be received over the life of
the related loans, discounted using quoted I/O strip interest rates and PSA
rates.
Mortgage Loans Held for Sale. Fair values are estimated using quoted
market prices for securities backed by similar loans and adjusting for
differences in loan characteristics.
Pool Loan Purchases. Fair values are estimated using (i) discounted cash
flow analyses using Source One's short-term incremental borrowing rate or (ii)
quoted market prices for securities backed by similar loans.
Mortgage Claims Receivable. Fair values are estimated by discounting
anticipated future cash flows using Source One's short-term incremental
borrowing rate.
Employee Loan Receivable. Fair value is estimated by discounting future
cash flows using market interest rates for similar types of borrowing
arrangements.
Long-Term Debt. Fair value is estimated by discounting future cash flows
using incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments. Fair value for commitments to
sell mortgage loans is based on current settlement values for those commitments.
Fair value for commitments to extend credit is based on current quoted market
prices for securities backed by similar loans, adjusting for loan
characteristics.
The estimated fair values of Fund American's financial instruments were as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
December 31, 1994 December 31, 1993
Carrying Fair Carrying Fair
Millions amount value amount value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Common equity securities $332.4 $332.4 $ 585.5 $ 585.5
Other investments 157.3 155.2 113.4 115.1
Short-term investments 119.2 119.2 252.5 252.5
Cash 1.5 1.5 10.7 10.7
Capitalized excess mortgage servicing 72.1 98.3 96.5 107.2
Mortgage loans held for sale (a) 210.5 211.4 1,298.5 1,290.1
Pool loan purchases 163.9 164.9 155.5 159.2
Mortgage claims receivable 33.3 32.4 37.9 37.6
Employee loan receivable 29.3 28.9 28.6 29.0
Other 27.5 27.5 30.0 30.0
--------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Short-term debt 254.1 254.1 1,536.8 1,536.8
Long-term debt 547.0 528.8 601.3 639.4
Other 38.4 38.4 15.0 15.0
--------------------------------------------------------------------------------
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS:
Mandatory forward commitments - 349.0 - 2,067.0
Commitments to extend credit expected
to close - 148.2 - 978.6
================================================================================
</TABLE>
(a) For purposes of this disclosure, fair value has been computed separately
for mortgage loans held for sale, mortgage loan pipeline and mandatory
forward commitments. When mortgage loans held for sale and pipeline are
matched to commitments, fair value is greater than the carrying amount as
of December 31, 1994 and 1993.
47
<PAGE>
Other financial assets includes investment income
receivable and accounts receivable from securities
sales. Other financial liabilities includes accrued
interest payable, accounts payable on securities
purchases and dividends payable to shareholders.
The estimated fair value amounts for Fund
American's financial instruments have been determined
using available market information and valuation
methodologies. Such estimates provided herein are not
necessarily indicative of the amounts that could be
potentially realized in a current market exchange.
It is not practicable to estimate the fair value
of conventional loans sold with recourse, which is an
off-balance-sheet financial instrument representing
Source One's obligation to repurchase loans sold which
subsequently default, without incurring excessive costs.
17. RELATED PARTY American Express and its affiliates have, from time to
TRANSACTIONS time, provided various services to Fund American
including investment banking services, brokerage
services, underwriting of debt and equity securities and
financial consulting services. In addition, Source One
has from time to time sold certain mortgage loans to
subsidiaries of American Express. American Express
beneficially owns all outstanding shares of the Series
D Preferred Stock.
In December 1993 BYRNE & sons, l.p. ("BYRNE &
sons"), a partnership in which the Company's Chairman,
John J. Byrne, is the sole general partner, made its
initial investment in the Merastar Partners Limited
Partnership and the Southern Heritage Limited
Partnership (the "Partnerships"). The Partnerships are
involved in various property-casualty insurance
ventures. Shortly after making its initial investment,
BYRNE & sons offered one-third of its interest in the
Partnerships to Fund American on equal terms and
conditions. In May 1994 Fund American accepted the offer
and paid BYRNE & sons an amount equal to one-third of
BYRNE & sons' cost for the Partnerships plus interest at
a 6.0% annual rate.
48
<PAGE>
Fund American from time to time uses
aircraft for corporate travel purposes owned by
Haverford Transportation Inc. ("HTI"). Fund
American reimburses HTI for its operating costs
associated with Fund American's use of HTI
aircraft. Mr. Byrne and K. Thomas Kemp, Executive
Vice President of the Company, are the sole
shareholders of HTI. Fund American believes that
its arrangement with HTI is on terms that are more
favorable to Fund American than would generally be
available if secured through an arrangement with a
third party.
White River and its affiliates have in the
past provided various services to Fund American
including investment advisory and accounting
services. In addition, Fund American has provided
to White River a $50.0 million term loan and a
revolving credit facility of up to $40.0 million.
Pursuant to the terms of the credit agreement
between White River and the Company, White River
has the right to use certain of its investment
portfolio securities to repay borrowings under the
term loan and revolving credit facility. Gordon S.
Macklin, a director of the Company, is the non-
executive Chairman of White River.
George J. Gillespie, III, a director of the
Company, is a General Partner of Cravath, Swaine &
Moore, which has been retained by Fund American
from time to time to perform legal services.
Arthur Zankel, a director of the Company, is
a General Partner of First Manhattan Co., which
has been retained by Fund American from time to
time to perform non-discretionary investment
advisory services and brokerage services.
Fund American believes that all the above
transactions were on terms that were reasonable
and competitive. Additional transactions of this
nature may be expected to take place in the
ordinary course of business in the future.
49
<PAGE>
Fund American
REPORT ON MANAGEMENT RESPONSIBILITIES
The financial information included in this annual report, including the
audited consolidated financial statements, has been prepared by the management
of Fund American. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include amounts based on informed estimates and judgments. In those instances
where there is no single specified accounting principle or standard, management
makes a choice from reasonable, accepted alternatives which are believed to be
most appropriate under the circumstances. Financial information presented
elsewhere in this annual report is consistent with that shown in the financial
statements.
Fund American maintains internal financial and accounting controls
"internal controls" designed to provide reasonable and cost effective assurance
that assets are safeguarded from loss or unauthorized use, that transactions
are recorded in accordance with management's policies and that financial records
are reliable for preparing financial statements. The internal controls
structure is documented by written policies and procedures which are
communicated to all appropriate personnel and is updated as necessary. Fund
American's business ethics policies require adherence to the highest ethical
standards in the conduct of its business. Compliance with these controls,
policies and procedures is continuously maintained and monitored by management.
Fund American's internal audit staff evaluates and reports on the adequacy
of and adherence to these internal controls, policies and procedures. In
addition, Ernst & Young LLP provides an and objective, independent review and
evaluation of the structure of internal controls to the extent they consider
necessary in their audit of Fund American's consolidated financial statements.
Management reviews all recommendations of the internal auditors and independent
auditors concerning the structure of internal controls and responds to such
recommendations with corrective actions, as appropriate.
The Audit Committee of the Board is comprised of all non-management
directors and has general responsibility for the oversight and surveillance of
the accounting, reporting and financial control practices of Fund American. The
Audit Committee, which reports to the full Board, annually reviews the
effectiveness of the independent auditors, Fund American's internal auditors and
management, with respect to the financial reporting process and the adequacy of
internal controls. Both the internal auditors and the independent auditors have,
at all times, free access to the Audit Committee, without members of management
present, to discuss the results of their audits, the adequacy of internal
controls and any other matter that they believe should be brought to the
attention of the Audit Committee.
/s/ John J. Byrne /s/ A. L. Waters /s/ M. S. Paquette
John J. Byrne Allan L. Waters Michael S. Paquette
Chairman of the Board, Senior Vice President Vice President and
President and Chief and Chief Financial Controller
Executive Officer Officer
50
<PAGE>
Fund American
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Fund
American Enterprises Holdings, Inc., as of December 31, 1994 and 1993, and the
related consolidated income statements and statements of shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fund American
Enterprises Holdings, Inc. at December 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
In 1994 the Company changed its method of accounting for purchased mortgage
servicing rights, in 1993 the Company changed its method of accounting for
certain investment securities, and in 1992 the Company changed certain
accounting methods as discussed in Note 1.
Ernst & Young LLP
New York, New York
January 27, 1995
51
<PAGE>
Fund American
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
Selected quarterly financial data for 1994 and 1993 is shown in the following
table. The quarterly financial data includes in the opinion of management, all
recurring adjustments necessary for a fair presentation of the results of
operations for the interim periods.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
1994 Three Months Ended 1993 Three Months Ended
----------------------------------- -----------------------------------
Millions, except per share amounts Dec.31 Sept.30 June 30 Mar.31 Dec. 31 Sept.30 June 30 Mar.31
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 41.4 $ 44.4 $71.7 $ 71.0 $ 64.2 $64.4 $63.7 $58.7
Expenses 52.0 56.4 59.7 57.6 74.9 59.7 54.2 45.3
-------------------------------------------------------------------------
Pretax operating earnings (loss) (10.6) (12.0) 12.0 13.4 (10.7) 4.7 9.5 13.4
Net investment gains (losses) (4.2) 20.6 20.9 1.5 (68.0) 52.5 53.9 85.6
------------------------------------------------------------------------
Pretax earnings (loss) (14.8) 8.6 32.9 14.9 (78.7) 57.2 63.4 99.0
Income tax provision (benefit) (2.7) 4.3 13.0 5.9 (7.8) 21.7 21.6 34.8
------------------------------------------------------------------------
After tax earnings (loss) (12.1) 4.3 19.9 9.0 (70.9) 35.5 41.6 64.2
Cumulative effect of accounting change-
purchased mortgage servicing, after tax - - - (44.3) - - - -
------------------------------------------------------------------------
Net Income (loss) $(12.1) $ 4.3 $19.9 $(35.3) $(70.9) $35.5 $41.6 $64.2
----------------------------------------========================================================================
Primary earnings per share:
After tax earnings (loss) $(1.64) $ .24 $1.72 $ .60 $(7.78) $3.18 $3.76 $5.89
Net income (loss) (1.64) .24 1.72 (3.86) (7.78) 3.18 3.78 5.89
Fully diluted earnings per share:
After tax earnings (loss) (1.64) .24 1.62 .60 (7.78) 2.95 3.42 5.13
Net income (loss) (1.64) .24 1.62 (3.86) (7.78) 2.95 3.42 5.13
================================================================================================================
The quarterly trading range for shares of common stock during 1994 and 1993 is presented below:
----------------------------------------------------------------------------------------------------------------
1994 1993
------------------ --------------------
High Low High Low
----------------------------------------------------------------------------------------------------------------
Quarter ended:
December 31 $79 1/4 $70 1/2 $92 3/8 $73 1/2
September 30 78 3/8 69 3/4 90 1/4 82
June 30 70 3/8 60 1/2 86 1/2 79 3/4
March 31 77 64 3/4 80 1/2 71 5/8
================================================================================================================
</TABLE>
52
<PAGE>
Fund American
COMMON EQUITY SECURITIES AND OTHER INVESTMENTS
(Unaudited)
<TABLE>
<CAPTION>
Common Equity Securities
--------------------------------------------------------------------------------------------------------------------------
December 31, 1994
------------------------------------------------
Percent
of total
Shares Market market
Shares and units in thousands, dollars in millions or units Cost value value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Energy, natural resources and related industries:
The Louisiana Land and Exploration Company 2,928 $ 97.9 $106.5 32.0%
San Juan Basin Royalty Trust 10,995 59.9 70.1 21.1
Sabine Royalty Trust 962 3.6 9.6 2.9
Lone Star Technologies, Inc. 988 9.0 6.9 2.1
Cross Timbers Royalty Trust 683 5.4 6.9 2.1
Digicon, Inc. 2,775 6.0 3.8 1.1
Aggregate of holdings less than $5.0 million 1.3 1.6 .5
-----------------------------------------------
Total energy, natural resources and related industries 183.1 205.4 61.8
All other:
American Express Company 2,401 52.8 70.9 21.3
Lehman Brothers Holdings, Inc. 1,019 14.6 15.0 4.5
Home Holdings, Inc. 755 7.7 7.1 2.1
Frequency Electronics, Inc. 593 5.0 2.6 .8
Aggregate of holdings less than $5.0 million 31.0 31.2 9.5
-----------------------------------------------
Total common equity securities $294.2 $332.4 100.0%
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Other Investments
--------------------------------------------------------------------------------------------------------------------------
December 31, 1994
--------------------------------
Cost or
amortized Carrying
Millions cost value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Source One:
Mortgage loans held for investment $ 19.8 $ 19.8
REMICs 4.9 4.9
Aggregate of holdings less than $5.0 million 1.2 1.2
Parent Company and other subsidiaries:
White River Corporation note 50.0 50.0
US West, Inc. preferred shares 48.6 48.6
White River Corporation restricted common shares 19.8 17.1
Zurich Reinsurance Centre Holdings, Inc. restriced common shares 10.0 7.5
Southern Heritage/Merastar partnerships 5.0 5.0
Aggregate of holdings less than $5.0 million 4.3 3.2
--------------------------------
Total other investments $163.6 $157.3
==========================================================================================================================
</TABLE>
53
<PAGE>
FUND AMERICAN
DIRECTORS AND COMMITTEES
BOARD OF DIRECTORS
Class I (terms ending in 1995):
HOWARD L. CLARK Former Chairman - American Express Company
K. THOMAS KEMP Executive Vice President
GORDON S. MACKLIN Chairman - White River Corporation
Class II (terms ending in 1996):
GEORGE J. GILLESPIE, III Partner - Cravath, Swaine & Moore
JOHN J. BYRNE Chairman, President and CEO
Class III (terms ending in 1997):
HOWARD L. CLARK, JR. Vice Chairman - Lehman Brothers
ROBERT P. COCHRAN President and CEO - Financial Security
Assurance Holdings Ltd.
ARTHUR ZANKEL Co-Managing Partner - First Manhattan Co.
___________________________________________
COMMITTEES
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee, consisting of all non-management directors, has
general responsibility for the oversight and surveillance of the accounting,
reporting and financial control practices of Fund American. The Audit Committee
annually reviews the qualifications of the independent auditors, makes
recommendations to the Board as to their selection, and reviews the plan, fees
and results of their audit.
Howard L. Clark, Jr., Chairman
HUMAN RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS
The Human Resources Committee, consisting of all non-management
directors, oversees Fund American's compensation and benefit policies and
programs, including administration of the Incentive Plan, the Deferred
Compensation Plan and the Deferred Benefit Plan. The Human Resources Committee
also sets the annual salaries and bonuses for elected officers and certain other
key employees.
Gordon S. Macklin, Chairman
54
<PAGE>
Fund American
OFFICERS
FUND AMERICA ENTERPRISES HOLDINGS,
INC.:
John J. Byrne/*/ Chairman, President and Chief Executive
Officer/1,2/
Dennis P. Beaulieu Corporate Secretary
K. Thomas Kemp/*/ Executive Vice President/1,2,3,/
Michael S. Paquette Vice President and Controller
Allan L. Waters Senior Vice President and Chief
Financial Officer/1,2/
FUND AMERICAN ENTERPRISES, INC.:
John J. Byrne/*/ Chairman
Terry L. Baxter/*/ President and Secretary/1,3/
SOURCE ONE MORTGAGE SERVICES
CORPORATION:
Robert W. Richards/*/ Chairman
Michael C. Allemang/*/ Executive Vice President and Chief
Financial Officer
James A. Conrad/*/ President and Chief Executive Officer
Robert R. Densmore/*/ Executive Vice President and Secretary
WHITE MOUNTAINS INSURANCE HOLDINGS, INC.:
John J. Byrne/*/ Chairman
Dennis P. Beaulieu/*/ Vice President and Secretary
Morgan W. Davis/*/ Senior Vice President and Chief Operating
Officer
K. Thomas Kemp/*/ President and Chief Executive Officer
Michael S. Paquette/*/ Vice President and Controller
Allan L. Waters/*/ Senior Vice President and Chief Financial
Officer
WHITE MOUNTAINS INSURANCE COMPANY:
K. Thomas Kemp/*/ Chairman
Dennis P. Beaulieu/*/ Secretary and Chief Financial Officer
Morgan W. Davis/*/ President and Chief Executive Officer
Michael S. Paquette/*/ Vice President and Controller
___________________________________________
* Individual is also a director of the company listed
/1/ Also a director of Source One Mortgage Services Corporation
/2/ Also a director of Financial Security Assurance Holdings Ltd.
/3/ Also a director of Main Street America Holdings, Inc.
55
<PAGE>
FUND AMERICAN
CORPORATE INFORMATION
<TABLE>
<CAPTION>
PRINCIPAL OFFICE STOCK EXCHANGE INFORMATION
<S> <C>
Fund American Enterprises Holdings, Inc The Company's Common Stock (symbol
The 1820 House FCC) is listed on the New York
Norwich, Vermont 05055-0850 Stock Exchange.
(802)649-3633
ANNUAL MEETING
FORM 10-K
The 1995 Annual Meeting of
The financial statements shareholders will be held on
contained in this Wednesday, May 24, 1995, at the
report, in the opinion of management, Norwich Inn, Norwich, Vermont,
substantially conform with or exceed the at 9:00 a.m.
financial statement information required
in the "Form 10-K, Annual Report" to be filed
with the Securities and Exchange Commission INDEPENDENT AUDITORS
near the end of March 1995. Certain
supplemental information appears in the Ernst & Young LLP
Form 10-K which is not disclosed within 787 Seventh Avenue
this document. COPIES OF THE FORM 10-K ARE New York, New York 10019-6018
AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST
TO THE CORPORATE SECRETARY'S OFFICE AT THE SHAREHOLDER INQUIRIES
NORWICH, VERMONT ADDRESS.
Written shareholder inquiries should
be sent to the Corporate Secretary at
the Norwich, Vermont address. Written
TRANSFER AGENT AND REGISTRAR FOR COMMON STOCK inquiries from the investment community
should be directed to the Investor
First Chicago Trust Company of New York Relations Department at the same address.
P.O. Box 2532
Jersey City, New Jersey 07303-2532
Shareholders may obtain information about
transfer requirements, replacement dividend
checks, duplicate 1099 forms and changes
of address by calling the Transfer Agent's
Telephone Response Center at (201) 324-0498.
Please be prepared to provide your tax
identification or social security number,
description of securities and address of
record. Other inquiries concerning your
shareholder account should be addressed in
writing to the Transfer Agent and Registrar.
</TABLE>
56
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1994
FULL NAME OF SUBSIDIARY PLACE OF INCORPORATION
----------------------- ----------------------
FFOG, INC. DELAWARE, USA
FUND AMERICAN CASUALTY REINSURANCE, LTD. ISLANDS OF BERMUDA
FUND AMERICAN ENTERPRISES, INC. DELAWARE, USA
FUND AMERICAN INVESTMENT
SUBSIDIARY I, INC. DELAWARE, USA
SOURCE ONE MORTGAGE SERVICES
CORPORATION and subsidiaries DELAWARE, USA
WHITE MOUNTAINS INSURANCE
HOLDINGS, INC. DELAWARE, USA
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Fund American Enterprises Holdings, Inc., of our report dated January
27, 1995, included in the 1994 Annual Report to Shareholders of Fund American
Enterprises Holdings, Inc.
Our audits also included the financial statement schedules of Fund American
Enterprises Holdings, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We further consent to the incorporation by reference in the Registration
Statements (Form S-8, No. 33-5297, Form S-3, No. 33-54006, and Form S-3, No. 33-
54749) pertaining to the 1985 Long-Term Incentive Plan, Medium-Term Notes Series
A and Common Stock Warrants of Fund American Enterprises Holdings, Inc. of our
report dated January 27, 1995, with respect to the consolidated financial
statements and financial statement schedules of Fund American Enterprises
Holdings, Inc. included or incorporated by reference in the Annual Report (Form
10-K) for the year ended December 31, 1994.
ERNST & YOUNG LLP
New York, New York
March 30, 1995
<PAGE>
EXHIBIT 24
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that John J. Byrne does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ John J. Byrne
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Howard L. Clark does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Howard L. Clark
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Howard L. Clark Jr. does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Howard L. Clark Jr.
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Robert P. Cochran does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Robert P. Cochran
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that George J. Gillespie III does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ George J. Gillespie III
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that K. Thomas Kemp does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ K. Thomas Kemp
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Gordon S. Macklin does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Gordon S. Macklin
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Michael S. Paquette does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Michael S. Paquette
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Allan L. Waters does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Allan L. Waters
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Arthur Zankel does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 15th
day of February, 1995.
/s/ Arthur Zankel
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993
<PERIOD-START> JAN-01-1994 JAN-01-1993
<PERIOD-END> DEC-31-1994 DEC-31-1993
<CASH> 2 11
<SECURITIES> 609 951
<RECEIVABLES> 50 46
<ALLOWANCES> 13 16
<INVENTORY> 0 0
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<TOTAL-ASSETS> 1,807 3,305
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<BONDS> 547 601
<COMMON> 0 0
75 157
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 1,807 3,305
<SALES> 0 0
<TOTAL-REVENUES> 229 251
<CGS> 0 0
<TOTAL-COSTS> (147) (131)
<OTHER-EXPENSES> 39 124
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<INTEREST-EXPENSE> (79) (103)
<INCOME-PRETAX> 42 141
<INCOME-TAX> (21) (71)
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