-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVwnOJZR5dgLjvpbuyDNr9blSL1wUSR6CHHH6Eq01T7NdVhYhmquUWRBWKAGjXkp lYk+QZfBtJ7u8zV1RcefFA== 0000038984-98-000016.txt : 19981118 0000038984-98-000016.hdr.sgml : 19981118 ACCESSION NUMBER: 0000038984-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREMONT GENERAL CORP CENTRAL INDEX KEY: 0000038984 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952815260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08007 FILM NUMBER: 98749877 BUSINESS ADDRESS: STREET 1: 2020 SANTA MONICA BLVD STREET 2: STE 600 CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 3103155500 MAIL ADDRESS: STREET 1: 2020 SANTA MONICA BLVD CITY: SANTA MONICA STATE: CA ZIP: 90404 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended September 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from __________ to __________ Commission File Number 1-8007 FREMONT GENERAL CORPORATION (Exact name of registrant as specified in this charter) NEVADA 95-2815260 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2020 Santa Monica Blvd. Santa Monica, California 90404 (Address of principal executive offices) (Zip Code) (310) 315-5500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15 (d) of Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of common stock: SHARES OUTSTANDING CLASS NOVEMBER 2, 1998 - ------------------------------ ------------------ Common Stock, $1.00 par value 34,950,648 - -------------------------------------------------------------------------------- FREMONT GENERAL CORPORATION INDEX PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Consolidated Balance Sheets September 30, 1998 and December 31, 1997 ............. 3 Consolidated Statements of Income Three and Nine Months Ended September 30, 1998 ....... 4 and 1997 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997 ........ 5 Notes to Consolidated Financial Statements on Form 10-Q ............................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk ............................................. 21 PART II - OTHER INFORMATION Items 1-5. Not applicable Item 6. Exhibits and Reports on Form 8-K .......................... 22 Signatures ........................................................... 27 2 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------ ----------- (UNAUDITED) (THOUSANDS OF DOLLARS) ASSETS Securities available for sale at fair value: Fixed maturity investments (cost: 1998 - $1,588,861; 1997 - $1,835,086) ..... $ 1,618,654 $ 1,893,876 Non-redeemable preferred stock (cost: 1998 - $487,097; 1997 - $356,223) ..... 504,647 378,832 ------------ ----------- TOTAL SECURITIES AVAILABLE FOR SALE ........................................ 2,123,301 2,272,708 Loans receivable ............................................................... 2,461,329 1,983,687 Short-term investments ......................................................... 349,459 164,626 Other investments .............................................................. 5,720 5,479 ------------ ----------- TOTAL INVESTMENTS AND LOANS ................................................ 4,939,809 4,426,500 Cash ........................................................................... 152,991 64,987 Accrued investment income ...................................................... 34,680 42,038 Premiums receivable and agents' balances ....................................... 169,621 146,144 Reinsurance recoverable on paid losses ......................................... 24,788 20,287 Reinsurance recoverable on unpaid losses ....................................... 779,162 522,928 Deferred policy acquisition costs .............................................. 40,267 38,014 Costs in excess of net assets acquired ......................................... 168,678 149,321 Deferred income taxes .......................................................... 167,063 148,757 Other assets ................................................................... 256,965 275,144 Assets held for discontinued operations ........................................ 242,629 256,507 ------------ ----------- TOTAL ASSETS ............................................................... $ 6,976,653 $ 6,090,627 ============ =========== LIABILITIES Claims and policy liabilities: Losses and loss adjustment expenses .......................................... $ 2,344,891 $ 2,163,323 Life insurance benefits and liabilities ...................................... 159,041 180,976 Unearned premiums ............................................................ 101,396 78,625 Dividends to policyholders ................................................... 22,685 37,626 ------------ ----------- TOTAL CLAIMS AND POLICY LIABILITIES ........................................ 2,628,013 2,460,550 Reinsurance premiums payable and funds withheld ................................ 41,557 13,049 Other liabilities .............................................................. 292,450 250,877 Thrift deposits ................................................................ 1,851,345 1,492,985 Short-term debt ................................................................ 36,715 26,290 Long-term debt ................................................................. 913,870 691,068 Liabilities of discontinued operations ......................................... 209,115 222,993 ------------ ----------- TOTAL LIABILITIES .......................................................... 5,973,065 5,157,812 Commitments and contingencies Company-obligated mandatorily redeemable preferred securities of subsidiary Trust holding solely Company junior subordinated debentures ....... 100,000 100,000 STOCKHOLDERS' EQUITY Common Stock, par value $1 per share -- Authorized: 75,000,000 shares; issued and outstanding: (1998 - 34,816,000 and 1997 - 34,571,000) ............ 34,816 34,571 Additional paid-in capital ..................................................... 331,718 323,065 Retained earnings .............................................................. 591,608 508,533 Deferred compensation .......................................................... (85,327) (86,263) Accumulated other comprehensive income ......................................... 30,773 52,909 ------------ ----------- TOTAL STOCKHOLDERS' EQUITY ................................................. 903,588 832,815 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 6,976,653 $ 6,090,627 ============ =========== See notes to consolidated financial statements on Form 10-Q.
3 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 --------- --------- --------- --------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES Property and casualty premiums earned .................. $ 125,515 $ 168,436 $ 399,045 $ 404,466 Loan interest .......................................... 61,974 42,694 168,348 103,739 Net investment income .................................. 49,235 49,018 144,166 140,514 Realized investment losses ............................. (139) (456) (1,063) (1,485) Other revenue .......................................... 16,490 7,580 44,269 20,928 --------- --------- --------- --------- TOTAL REVENUES ..................................... 253,075 267,272 754,765 668,162 EXPENSES Losses and loss adjustment expenses .................... 71,354 105,092 244,843 254,369 Policy acquisition costs ............................... 29,740 34,107 88,093 82,889 Provision for loan losses .............................. 4,423 2,747 9,405 6,643 Other operating costs and expenses ..................... 53,311 43,136 146,256 105,701 Dividends to policyholders ............................. 1,328 1,317 4,273 1,317 Interest expense ....................................... 42,321 38,647 115,980 103,053 --------- --------- --------- --------- TOTAL EXPENSES ..................................... 202,477 225,046 608,850 553,972 --------- --------- --------- --------- Income before taxes .................................... 50,598 42,226 145,915 114,190 Income tax expense ..................................... 16,411 13,407 47,493 36,074 --------- --------- --------- --------- NET INCOME ......................................... $ 34,187 $ 28,819 $ 98,422 $ 78,116 ========= ========= ========= ========= PER SHARE DATA Net income: Basic .............................................. $ 1.07 $ 0.97 $ 3.08 $ 2.79 Diluted ............................................ 0.98 0.85 2.82 2.35 Cash dividends ....................................... 0.15 0.15 0.45 0.45 Weighted average shares: Basic .............................................. 32,048 29,737 31,956 27,971 Diluted ............................................ 35,053 34,402 35,012 34,179 See notes to consolidated financial statements on Form 10-Q.
4 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ----------- ----------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income ................................................................. $ 98,422 $ 78,116 Adjustments to reconcile net income to net cash provided by operating activities: Change in premiums receivable and agents' balances and reinsurance recoverable on paid losses ......................... (15,494) (8,208) Change in accrued investment income .................................... 7,487 8,160 Change in claims and policy liabilities ................................ (302,252) (140,373) Amortization of policy acquisition costs ............................... 88,093 82,889 Policy acquisition costs deferred ...................................... (90,185) (84,606) Provision for deferred income taxes .................................... 17,411 12,838 Provision for loan losses .............................................. 9,405 6,643 Provision for depreciation and amortization ............................ 28,761 21,604 Net amortization on fixed maturity investments ......................... (18,975) (12,694) Realized investment losses ............................................. 1,063 1,485 Change in other assets and liabilities ................................. 56,597 77,568 ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................. (119,667) 43,422 INVESTING ACTIVITIES Securities available for sale: Purchases of securities .................................................. (659,138) (3,509,089) Sales of securities ...................................................... 500,136 2,867,205 Securities matured or called ............................................. 295,744 23,923 Decrease in short-term and other investments ............................... 159,627 465,134 Loan originations and bulk purchases funded ................................ (1,690,172) (733,800) Receipts from repayments of loans and bulk sales of loans .................. 1,203,125 463,797 Purchase of subsidiaries, less cash acquired ............................... (114,626) (317,205) Purchase of property and equipment ......................................... (22,942) (15,700) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES ................................ (328,246) (755,735) FINANCING ACTIVITIES Proceeds from short-term debt .............................................. - 353,539 Repayments of short-term debt .............................................. (2,792) (1,967) Proceeds from long-term debt ............................................... 277,750 274,260 Repayments of long-term debt ............................................... (36,228) (117,750) Net increase in thrift deposits ............................................ 358,360 258,276 Annuity contract receipts .................................................. 748 1,202 Annuity contract withdrawals ............................................... (37,354) (25,269) Dividends paid ............................................................. (15,311) (13,046) Stock options exercised .................................................... 1,435 13,111 Net increase in deferred compensation plans ................................ (10,691) (20,393) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ 535,917 721,963 ----------- ----------- INCREASE IN CASH ........................................................... 88,004 9,650 Cash at beginning of year .................................................. 64,987 55,378 ----------- ----------- CASH AT SEPTEMBER 30, ...................................................... $ 152,991 $ 65,028 =========== =========== See notes to consolidated financial statements on Form 10-Q.
5 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON FORM 10-Q (UNAUDITED) NOTE A --- BASIS OF PRESENTATION OF FINANCIAL STATEMENTS These statements have been prepared in accordance with generally accepted accounting principles and, accordingly, adjustments (consisting of normal accruals) have been made as management considers necessary for fair presentations. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Certain 1997 amounts have been reclassified to conform to the 1998 presentation. NOTE B --- ACQUISITION On September 2, 1998, the Company completed the acquisition of UNICARE Specialty Services, Inc., ("UNICARE") the workers' compensation insurance subsidiary of WellPoint Health Networks Inc., one of the nation's largest publicly traded managed care companies, for $110 million in cash. At acquisition date, UNICARE's assets approximated $408 million, including $348 million in investment securities. Liabilities assumed approximated $311 million, including $293 million of loss reserves. UNICARE's operating results are included in the Company's consolidated statement of income from the date of acquisition. The impact of the UNICARE acquisition on the Company's results of operations for the three and nine months ended September 30, 1998 was not material. NOTE C --- COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130 ("FASB 130"), "Reporting Comprehensive Income." This new standard establishes new rules for the reporting of comprehensive income and its components; however, the adoption of this standard had no impact on the Company's net income or stockholders' equity. FASB 130 requires unrealized gains or losses on the Company's securities available-for-sale to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to these requirements. Total comprehensive income amounted to $9.8 million and $60.2 million for the nine months ended September 30, 1998 and 1997, respectively, and $76.3 million and $120.3 million for the nine months ended September 30, 1998 and 1997, respectively. Included in comprehensive income for these periods was the net change in unrealized gains (losses) of $(24.4) million and $31.3 million for the three months ended September 30, 1998 and 1997, respectively, and $(22.1) million and $42.2 million for the nine months ended September 30, 1998 and 1997, respectively. 6 NOTE D - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 1998 and 1997:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (numerator for basic earnings per share) ......................... $ 34,187 $ 28,819 $ 98,422 $ 78,116 Effect of dilutive securities: Liquid Yield Option Notes ("LYONs") ....................................... 77 447 269 2,148 -------- -------- -------- -------- Income available to common stockholders after assumed conversions (numerator for diluted earnings per share ....... $ 34,264 $ 29,266 $ 98,691 $ 80,264 ======== ======== ======== ======== Weighted-average shares (denominator for basic earnings per share) .......... 32,048 29,737 31,956 27,971 Effect of dilutive securities: Restricted stock .......................................................... 2,085 1,861 2,085 1,861 Stock options ............................................................. 461 241 474 150 LYONs ..................................................................... 459 2,563 497 4,197 -------- -------- -------- -------- Dilutive potential common shares ............................................ 3,005 4,665 3,056 6,208 -------- -------- --------- -------- Adjusted weighted-average shares and assumed conversions (denominator for diluted earnings per share) .................. 35,053 34,402 35,012 34,179 ======== ======== ======== ======== Basic earnings per share .................................................... $ 1.07 $ 0.97 $ 3.08 $ 2.79 ======== ======== ======== ======== Diluted earnings per share .................................................. $ 0.98 $ 0.85 $ 2.82 $ 2.35 ======== ======== ======== ========
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A") CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE FACTORS SET FORTH IN THIS MD&A SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q. RESULTS OF OPERATIONS Fremont General is a nationwide insurance and financial services holding company operating select businesses in niche markets. Fremont General's insurance business includes one of the largest underwriters of workers' compensation insurance in the nation. The Company's financial services business includes commercial real estate lending, residential real estate lending, commercial finance and insurance premium financing. The Company's reported assets as of September 30, 1998 were $7.0 billion. Income before taxes for the nine months ended September 30, 1998 was $146 million. The primary operating strategy of the Company is to build upon its core business units through acquisition opportunities and new business development. The Company's secondary strategy is to achieve income balance and geographic diversity among its business units in order to limit the exposure of the Company to industry, market and regional concentrations. The Company's stock is traded on the New York Stock Exchange under the symbol "FMT." Consistent with its primary operating strategy, the Company's workers' compensation insurance operations have recently expanded through acquisition. On September 2, 1998, the Company acquired UNICARE Specialty Services, Inc. ("UNICARE"), the workers' compensation insurance subsidiary of Wellpoint Health Networks Inc., one of the nation's largest publicly traded managed care companies, for $110 million in cash. At acquisition date, UNICARE's assets approximated $408 million, including $348 million in investment securities. Liabilities assumed approximated $311 million, including $293 million of loss reserves. Additionally, on August 1, 1997 the Company acquired Industrial Indemnity Holdings, Inc. ("Industrial") from Talegen Holdings, Inc ("Talegen"), a subsidiary of Xerox Corporation, whereby a subsidiary of the Company purchased all of the issued and outstanding capital stock of Industrial. The purchase price paid by the Company consisted of $365 million in cash and the pay-off of approximately $79 million of an outstanding debt obligation that Industrial owed to Talegen. Financing for the transaction was provided by internal funds and bank borrowings. Industrial, which specializes in underwriting workers' compensation insurance, has a strong presence in the western United States dating back over 70 years. The following table presents information for the three and nine months ended September 30, 1998 and 1997 with respect to the Company's primary business segments.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- --------- --------- (THOUSANDS OF DOLLARS) Revenues: Property and casualty .......... $ 170,488 $ 207,664 $ 531,257 $ 498,628 Financial services ............. 81,934 59,517 221,846 168,913 Corporate ...................... 653 91 1,662 621 --------- --------- --------- --------- Total ................. $ 253,075 $ 267,272 $ 754,765 $ 668,162 ========= ========= ========= ========= Income (Loss) Before Taxes: Property and casualty .......... $ 42,860 $ 38,720 $ 124,884 $ 103,818 Financial services ............. 14,754 10,483 42,048 31,444 Corporate ...................... (7,016) (6,977) (21,017) (21,072) --------- --------- --------- --------- Total ................. $ 50,598 $ 42,226 $ 145,915 $ 114,190 ========= ========= ========= =========
The Company generated revenues of approximate $253 million and $755 million in the three and nine months ended September 30, 1998, as compared to $267 million and $668 million in the same respective periods in 8 1997. Revenues were lower in the three month period ended September 30, 1998 as compared to the same prior year period due primarily to the impact of additional ceded reinsurance costs incurred. These additional reinsurance costs were due primarily to additional excess of loss reinsurance purchased for the Company's workers' compensation insurance business which became effective January 1, 1998. See "Property and Casualty Insurance Operations - Premiums." This was offset partially by higher revenue in the financial services segment due mainly to higher loan interest resulting from growth in the average loan portfolio, as well as higher other revenues resulting primarily from residential real estate loan sales. Revenues were higher in the nine months ended September 30,1998 as compared to the same prior year period, due primarily to higher loan interest and other revenues within the financial services segment. Additionally, workers' compensation insurance premiums in the Company's property and casualty segment were slightly lower in the nine month period ended September 30, 1998, as compared to the same prior year period. Higher workers' compensation insurance premiums, due mainly to the acquisition of Industrial on August 1, 1997, were more than offset by the impact of additional ceded reinsurance costs incurred. These additional reinsurance costs were due primarily to additional excess of loss reinsurance purchased for the Company's workers' compensation insurance business which became effective January 1, 1998. Higher revenues in the financial services segment were due mainly to higher loan interest resulting from growth in the average loan portfolio, as well as higher other revenues resulting primarily from residential real estate loan sales. See "Financial Services." Realized investment losses in the three and nine month periods ended September 30, 1998 were $139,000 and $1,063,000, respectively, as compared to $456,000 and $1,485,000 for the same respective periods in 1997. The Company posted net income of $34.2 million or $0.98 diluted earnings per share and $98.4 million or $2.82 diluted earnings per share for the three and nine months ended September 30, 1998, respectively, as compared to $28.8 million or $0.85 diluted earnings per share and $78.1 million or $2.35 diluted earnings per share for the same respective periods in 1997. Income before taxes for the three and nine month periods ended September 30, 1998 was $50.6 million and $145.9 million, respectively, as compared to $42.2 million and $114.2 million for the same respective periods of 1997, representing increases of 19.8% and 27.8%, respectively, for the three and nine month periods. The property and casualty insurance operations, consisting primarily of workers' compensation insurance, posted income before taxes of $42.9 million and $124.9 million for the three and nine month periods ended September 30, 1998, respectively, as compared to $38.7 million and $103.8 million for the three and nine month periods ended September 30, 1997, respectively. The increases in income before taxes of 10.7% and 20.3% for the three and nine month periods, respectively, were due primarily to the acquisition of Industrial and lower losses incurred resulting from the additional reinsurance purchased by the Company which became effective January 1, 1998. The combined ratio for the three and nine month periods ended September 30, 1998 was 95.7% and 96.3%, respectively, as compared to 93.2% and 92.0% for the same respective periods in 1997. The higher combined ratio was due primarily to the combined effects of higher underwriting expenses associated with Industrial's operations, as well as the previously mentioned additional reinsurance, which resulted in a lower premium base as compared to the prior year periods. See "Property and Casualty Insurance Operations - Premiums." The financial services operations posted income before taxes for the three and nine months ended September 30, 1998 of $14.8 million and $42.0 million, respectively, as compared to $10.5 million and $31.4 million for the same respective periods of 1997. The increases in income before taxes were due mainly to the growth in the average loan portfolio of the real estate lending operation, as well as to gains on residential real estate loan sales. The average loan portfolio of the financial services operations grew to $2.24 billion for the nine month period ended September 30, 1998, from $1.86 billion for the same period of 1997. Corporate revenues during the three and nine month periods ended September 30, 1998 consisted primarily of investment income, while corporate expenses consisted primarily of interest expense and general and administrative expenses. The corporate loss before income taxes for the three and nine months ended September 30, 1998 was $7.0 million and $21.0 million, respectively, as compared to $7.0 million and $21.1 million for the same respective periods of 1997. Income tax expense of $16.4 million and $47.5 million for the three and nine months ended September 30, 1998, respectively, represents effective tax rates of 32.4% and 32.5% on respective income before taxes of $50.6 million and $145.9 million. These effective tax rates are lower than the enacted federal income tax rate of 35%, due primarily to tax exempt investment income which reduces the Company's taxable income. 9 PROPERTY AND CASUALTY INSURANCE OPERATIONS The following table represents information for the three and nine month periods ended September 30, 1998 and 1997 with respect to the Company's property and casualty insurance operations:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 --------- --------- --------- --------- (THOUSANDS OF DOLLARS) Revenues ............................ $ 170,488 $ 207,664 $ 531,257 $ 498,628 Expenses ............................ 127,628 168,944 406,373 394,810 --------- --------- --------- --------- Income Before Taxes ................. $ 42,860 $ 38,720 $ 124,884 $ 103,818 ========= ========= ========= =========
PREMIUMS. Insurance premiums from the Company's property and casualty insurance operations were $125.5 million and $399.0 million in the three and nine month periods ended September 30, 1998, as compared to $168.4 million and $404.5 million for the same periods of 1997. The lower premiums in the three and nine month periods ended September 30, 1998, were due primarily to the impact of additional ceded reinsurance costs incurred, offset partially by the Industrial-related increases in workers' compensation insurance premiums. These additional reinsurance costs were due to additional excess of loss reinsurance purchased for the Company's workers' compensation insurance business, which became effective January 1, 1998. The Company purchased the additional reinsurance in an effort to further reduce the volatility of operating results which occurs through fluctuations in loss costs. The additional reinsurance purchased reduced the point at which reinsurers assume liability ("the attachment point") from $1 million per loss occurrence to $50,000 per loss occurrence. See "Variability of Operating Results" and "Workers' Compensation Regulation." NET INVESTMENT INCOME. Net investment income within the property and casualty insurance operations increased to $45.1 and $133.3 million in the three and nine months ended September 30, 1998, from $39.7 million and $95.7 million for the same periods of 1997. These increases were due primarily to the acquisition of Industrial. LOSS AND LOSS ADJUSTMENT EXPENSE. The property and casualty loss and loss adjustment expenses ("LAE") were $71.4 million and $244.8 million in the three and nine month periods ended September 30, 1998, as compared to $105.1 million and $254.4 million for the same respective periods of 1997. In addition, the ratio of these losses and LAE to property and casualty insurance premiums earned ("loss ratio") was 56.8% and 61.3% for the three and nine month periods ended September 30, 1998, as compared to 62.4% and 62.9% for the same respective periods of 1997. The loss ratio decreased in the three and nine months ended September 30, 1998, as compared to the same prior year periods, due primarily to lower ratios in 1998 resulting from the additional reinsurance purchased by the Company and which became effective January 1, 1998, offset partially by higher loss ratios in 1998 associated with Industrial. See "Premiums". The Company regularly reviews its reserving techniques, overall reserve position and reinsurance. In light of present facts and current legal interpretations, management believes that adequate provisions have been made for loss reserves. In making this determination, management has considered its claims experience to date, loss development history for prior accident years and estimates of future trends of claims frequency and severity. However, establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. Subsequent actual experience has resulted and could result in loss reserves being too high or too low. Future loss development could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. POLICY ACQUISITION COSTS AND OTHER OPERATING COSTS AND EXPENSES. The ratio of policy acquisition costs and other operating costs and expenses to insurance premiums is referred to as the expense ratio, which was 37.8% and 33.9% for the three and nine month periods ended September 30, 1998, as compared to 30.0% and 28.8% for the same periods of 1997. The increases in this ratio were due primarily to a lower premium base in the three and nine month periods of September 30, 1998, resulting from additional reinsurance costs incurred. See "Premiums". 10 VARIABILITY OF OPERATING RESULTS. The Company's profitability can be affected significantly by many factors including competition, the severity and frequency of claims, interest rates, regulations, court decisions, the judicial climate, and general economic conditions and trends, all of which are outside of the Company's control. These factors have contributed, and in the future could contribute, to significant variation of results of operations in different aspects of the Company's business from quarter to quarter and year to year. With respect to the workers' compensation insurance business, changes in economic conditions can lead to reduced premium levels due to lower payrolls as well as increased claims due to the tendency of workers who are laid off to submit workers' compensation claims. Legislative and regulatory changes can also contribute to variable operating results for workers' compensation insurance businesses. For example, in 1995 the Company experienced the negative impact of lower premiums and lower profitability on the Company's California workers' compensation business due to increased price competition resulting from legislation enacted in California in July 1993 which, among other things, repealed the minimum rate law effective January 1, 1995. Additionally, price competition in Illinois, where the Company has a significant presence, continues to impact the Company's profitability, where overall average decreases of 7.9% and 10.0% in advisory premium rates, which workers' compensation insurance companies in Illinois tend to follow, became effective January 1, 1998 and 1997, respectively. See "Workers' Compensation Regulation." The acquisition of Industrial has mitigated the adverse effects of this price competition in Illinois by providing the Company with a broader geographic diversity of its premium writings. Industrial has a significant presence in the western United States, in addition to California. The Company anticipates that its results of operations and financial condition will continue to be adversely affected by the continued price competition in Illinois and California. Also, the establishment of appropriate reserves necessarily involves estimates, and reserve adjustments have caused significant fluctuations in operating results from year to year. WORKERS' COMPENSATION REGULATION. At September 30, 1998, approximately 63% of the Company's inforce premiums were in California and Illinois. Illinois began operating under an open rating system in 1982 and California began operating under such a system effective January 1, 1995. In an open rating system, workers' compensation insurance companies are provided with advisory premium rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory premium rates, companies in Illinois generally follow such rates. This characteristic has resulted in increased price competition in Illinois, where overall average decreases in advisory premium rates of 7.9% and 10.0% became effective January 1, 1998 and 1997, respectively. In contrast, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory premium rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. Most of the states in which the Company writes premiums operate under some form of open rating system. FINANCIAL SERVICES The Company's financial services operations, which are comprised primarily of the results of Fremont General Credit Corporation ("FGCC"), are principally engaged in commercial and residential real estate lending, commercial finance and insurance premium financing. Revenues consist primarily of interest income and to a lesser extent fees and other income. 11 The following table presents information for the three and nine month periods ended September 30, 1998 and 1997 with respect to the Company's financial services operations:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 --------- -------- --------- --------- (THOUSANDS OF DOLLARS) Revenues ............................ $ 81,934 $ 59,517 $ 221,846 $ 168,913 Expenses ............................ 67,180 49,034 179,798 137,469 -------- -------- --------- --------- Income Before Taxes ................. $ 14,754 $ 10,483 $ 42,048 $ 31,444 ======== ======== ========= =========
Revenues increased 38% and 31% in the three and nine month periods ended September 30, 1998, respectively, as compared to the same respective periods of 1997, due primarily to greater loan interest revenue attributable to the growth in the average loan portfolio of the commercial and residential real estate lending operations. Additionally, higher revenues resulted from increased residential real estate loan sales. These loan sales are pursuant to a program, begun by the Company's real estate lending operation in 1995 and expanded in 1997, of selling certain residential real estate loans to other financial institutions. This has allowed the Company an opportunity to become more selective in its residential real estate loan portfolio, as well as to offer a broader range of residential real estate loans to its customers, primarily through independent brokers. These loan sales are made without recourse to the Company or its subsidiaries. Income before taxes in the financial services operations was $14.8 million and $42.0 million for the three and nine month periods ended September 30, 1998, respectively, as compared to $10.5 million and $31.4 million for the same respective periods of 1997. The 41% and 34% increases in income before taxes in the three and nine month periods ended September 30, 1998, respectively, were due to higher income before taxes in the real estate lending operation. Contributing to this higher income before taxes were higher loan interest revenue due to a greater average real estate loan portfolio, as well as the previously described gains on residential real estate loan sales. These conditions were partially offset by increases in operating expenses. 12 The following table identifies the interest income, interest expense, average interest-bearing assets and liabilities, and interest margins for the Company's financial services operations:
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------- 1998 1997 ----------------------------------- ----------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST (1) BALANCE INTEREST COST (1) ----------- --------- -------- ----------- --------- -------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Interest bearing assets (2) : Commercial real estate loans ..................... $ 1,158,924 $ 86,436 9.94% $ 925,977 $ 66,597 9.59% Residential real estate loans .................... 404,881 28,493 9.38 305,792 22,063 9.62 Commercial finance loans ......................... 617,215 48,167 10.41 580,243 47,182 10.84 Other loans ...................................... 61,402 5,252 11.40 54,712 4,677 11.40 Investments ...................................... 225,110 9,229 5.47 180,782 7,460 5.50 ----------- --------- ----------- --------- Total interest bearing assets .................. $ 2,467,532 $ 177,577 9.60% $ 2,047,506 $ 147,979 9.64% =========== ========= =========== ========= Interest bearing liabilities: Time deposits .................................... $ 1,281,927 $ 55,105 5.73% $ 992,296 $ 43,306 5.82% Savings deposits ................................. 360,189 14,052 5.20 257,449 9,710 5.03 Securitization obligation ........................ 283,602 13,142 6.18 301,355 13,819 6.11 Debt with banks .................................. 232,361 11,420 6.55 219,762 10,904 6.62 Debt from affiliates ............................. 53,932 2,453 6.06 50,968 2,042 5.34 Other ............................................ 1,458 37 3.38 7,093 303 5.70 ----------- ---------- ----------- --------- Total interest bearing liabilities ............. $ 2,213,469 $ 96,209 5.80% $ 1,828,923 $ 80,084 5.84% =========== ========== =========== ========= Net interest income ................................ $ 81,368 $ 67,895 ========== ========= Net yield .......................................... 4.40% 4.42% - --------------------------- (1) Annualized (2) Average loan balances include non-accrual loan balances.
The margin between the Company's interest income and cost of funds was relatively even in the nine month period ended September 30, 1998 as compared to the nine month period ended September 30, 1997, due primarily to the offsetting effects of a decrease in the net yields in the commercial finance segment as increases in the credit quality of the commercial finance portfolio and continued competition resulted in lower yields; and an increase in the net yields in the real estate lending operation, due mainly to an increase in the yield on commercial real estate loans offset partially by a decrease in the yield on residential real estate loans. 13 LOANS RECEIVABLE AND RESERVE ACTIVITY. The following table shows loans receivable in the various financing categories and the percentages of the total represented by each category:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------- ------------------ % OF % OF AMOUNT TOTAL AMOUNT TOTAL ----------- ----- ----------- ----- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Term loans: Real estate loans ...................... $ 1,757,660 70% $ 1,480,824 73% Commercial finance loans ............... 237,153 9 158,013 8 ----------- ----- ----------- ----- Total term loans ..................... 1,994,813 79 1,638,837 81 Revolving loans: Commercial finance loans ............... 519,228 21 389,252 19 ----------- ----- ----------- ----- Total loans .......................... 2,514,041 100 2,028,089 100 Less allowance for possible loan losses .. 52,712 2 44,402 2 ----------- ----- ----------- ----- Loans receivable ..................... $ 2,461,329 98% $ 1,983,687 98% =========== ===== =========== =====
The following table illustrates the maturities of the Company's loans receivable:
MATURIES AT SEPTEMBER 30, 1998 ------------------------------------------------ 1 TO 24 25 - 60 OVER 60 MONTHS MONTHS MONTHS TOTAL ----------- --------- --------- ----------- (THOUSANDS OF DOLLARS) Terms loans -- variable rate................... $ 376,895 $ 868,780 $ 461,879 $ 1,707,554 Term loans -- fixed rate ...................... 109,570 74,490 103,199 287,259 Revolving loans -- variable ................... 519,228 - - 519,228 ----------- --------- --------- ----------- Total ................................. $ 1,005,693 $ 943,270 $ 565,078 $ 2,514,041 =========== ========= ========= ===========
The Company monitors the relationship of fixed and variable rate loans and interest bearing liabilities in order to minimize interest rate risk. During 1997, the Company began originating both commercial and residential real estate loans outside of California. The Company intends to seek portfolio growth outside of California in order to achieve greater geographic diversity in its loan portfolio and thereby lessen the Company's exposure to regional economic conditions. The total amount of commercial and residential real estate loans outstanding on properties located outside of California at September 30, 1998 was $164.5 million and $109.6 million, respectively. Adverse economic developments can negatively affect the Company's business and results of operations in a number of ways. Such developments can, among other things, reduce the demand for loans, impair the ability of borrowers to pay loans and impair the value of the underlying collateral. 14 The following table describes the asset classifications, loss experience and reserve reconciliation of the real estate lending and commercial finance operations as of or for the periods ended as shown below:
SEPTEMBER 30, --------------------------- 1998 1997 ----------- ----------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Non-accrual loans .......................................................... $ 23,947 $ 28,610 Accrual loans 90 days past due ............................................. 1,617 882 Real estate owned ("REO") .................................................. 8,568 10,631 ----------- ----------- Total non-performing assets ................................................ $ 34,132 $ 40,123 =========== =========== Beginning allowance for possible loan losses ............................... $ 44,402 $ 37,747 Provision for loan losses .................................................. 9,405 6,643 Reserves established with portfolio acquisitions ........................... 777 - Charge-offs: Commercial real estate loans ............................................. 202 790 Residential real estate loans ............................................ 868 977 Commercial finance loans ................................................. 1,282 2,303 Other loans .............................................................. 117 152 ----------- ----------- Total charge-offs ...................................................... 2,469 4,222 ----------- ----------- Recoveries: Commercial real estate loans ............................................. 319 338 Residential real estate loans ............................................ 92 596 Commercial finance loans ................................................. 116 11 Other loans .............................................................. 70 123 ----------- ------------ Total recoveries ....................................................... 597 1,068 ----------- ------------ Net charge-offs ............................................................ 1,872 3,154 ----------- ------------ Ending allowance for possible loan losses .................................. $ 52,712 $ 41,236 =========== ============ Allocation of allowance for possible loan losses: Real estate loans ........................................................ $ 38,811 $ 29,945 Commercial finance loans ................................................. 13,901 11,291 ----------- ------------ Total allowance for possible loan losses ............................... $ 52,712 $ 41,236 =========== ============ Total loans receivable ..................................................... $ 2,514,041 $ 1,992,636 Average total loans receivable ............................................. $ 2,242,422 $ 1,864,222 Net charge-offs to average total loans receivable (annualized) ............. 0.11% 0.23% Non-performing assets to total loans receivable ............................ 1.36% 2.01% Allowance for possible loan losses to total loans receivable ............... 2.10% 2.07% Allowance for possible loan losses to non-performing assets ................ 154.44% 102.77% Allowance for possible loan losses to non-accrual loans and accrual loans 90 days past due ................................. 206.20% 139.82%
Non-performing assets decreased 14.9% to $34.1 million at September 30, 1998 from $40.1 million at September 30, 1997, despite a 26.2% increase in total loans receivable to $2.5 billion at September 30, 1998 from $2.0 billion at September 30, 1997. The higher provision for loan losses in the nine month period ended September 30, 1998, as compared to the same prior year period, is also consistent with the overall increase in total loans receivable. The Company 15 continues to experience low loan loss experience as evidenced by the continued low ratio of net charge-offs to average total loans receivable. The Company's low loan loss experience is further evidenced by the decrease in the ratio of non-performing assets to total loans receivable in the preceding table. The Company's ratio of the allowance for possible loan losses to non-accrual loans and accrual loans 90 days past due increased to 206.20% from 139.82% for the nine month periods ended September 30, 1998 and 1997, respectively, thereby increasing the coverage of these non-performing assets by the allowance for possible loan losses. MARKET RISK The Company is subject to market risk resulting primarily from fluctuations in interest rates arising from balance sheet financial instruments such as investments, loans and debt. In the property and casualty insurance operations, the greatest interest rate risk exposure occurs where the interest rate of the financial instrument is fixed in nature and there is a difference between the fixed rate of the financial instrument and the market rate. The greatest interest rate risk exposure in the financial services operations occurs when interest rate gaps arise wherein assets are funded with liabilities having different repricing intervals or different market indices to which the instruments' interest rates are tied. Changes in interest rates will affect the Company's net investment income, loan interest, interest expense and total stockholders' equity. The objective of the Company's asset and liability management activities is to provide the highest level of net interest income and to seek cost effective sources of capital, while maintaining acceptable levels of interest rate and liquidity risk. The Company has designated its entire investment portfolio as investments that would be available for sale in response to changing market conditions, liquidity requirements, interest rate movements and other investment factors. The Company currently owns no derivative financial instruments and, consequently, is not subject to market risk for such off-balance sheet financial instruments. Furthermore, the Company does not have exposure to foreign currency or commodity price risk. For additional information regarding market risk, see the discussion set forth under the subheadings "Property and Casualty Insurance Operations-Interest Rate Risk," "Financial Services Operations-Interest Rate Risk" and "Fremont General Corporation (Parent-only)-Interest Rate Risk" in the corresponding Management's Discussion and Analysis in the Company's 1997 Annual Report on Form 10-K. No material changes in market risk have occurred since year-end. LIQUIDITY AND CAPITAL RESOURCES The property and casualty insurance operations must have cash and liquid assets available to meet their obligations to policyholders in accordance with contractual obligations, in addition to having the funds available to meet ordinary operating costs. These operations have several sources of funds to meet their obligations, including cash flow from operations, recoveries from reinsurance contracts and investment securities. By statute, the majority of the cash from these operations is required to be invested in investment grade securities to provide protection for policyholders. The Company invests in fixed income and preferred equity securities with an objective of providing a reasonable return while limiting credit and liquidity risk. The Company's investment portfolio had an unrealized gain of $47.3 million and $81.4 million at September 30, 1998 and December 31, 1997, respectively. The Company's thrift and loan subsidiary, which is principally engaged in real estate lending, finances its lending activities primarily through customer deposits, which have grown to $1.9 billion at September 30, 1998 from $1.5 billion at December 31, 1997. In addition, this subsidiary is eligible for financing through the Federal Home Loan Bank of San Francisco ("FHLB"). This financing is available at varying rates and terms. As of September 30, 1998, $475 million was available under the facility with no advances outstanding. The Company's commercial finance operation funds its lending activities primarily through its asset securitization program, an unsecured revolving line of credit with a syndicated bank group and its capital. The asset securitization program was established to provide a stable and cost effective source of funds to facilitate the expansion of this business. As of September 30, 1998, an aggregate $235 million senior series and an aggregate $39 million subordinated series of asset-backed certificates were outstanding. The interest rate on the certificates, set monthly, ranged from LIBOR plus 0.23% to LIBOR plus 0.95% at September 30, 1998. The securities issued in this program have a scheduled maturity of three to five years, but could mature earlier depending on fluctuations in outstanding balances of loans in the portfolio and other factors. As of September 30, 1998, up to $265 million in additional publicly offered asset-backed certificates may be issued pursuant to a shelf registration statement to fund 16 future growth in the commercial finance portfolio. In April 1997, $109.26 million in certificates ("Series D") were issued, comprised of $100 million in senior certificates and $9.26 million in subordinated certificates. The Series D certificates were issued to retire $100 million in maturing Series B certificates. In December 1995, a commercial paper facility was established as part of the asset securitization program. This facility, which expires in December 2000, provides for the issuance of up to $150 million in commercial paper, dependent upon the level of assets within the asset securitization program. As of September 30, 1998, $11 million was outstanding under this facility. The commercial finance operation's unsecured revolving line of credit is with a syndicated bank group that presently permits borrowings of up to $450 million, which includes a revolving credit facility of $350 million and a term loan of $100 million. The revolving credit facility converts to a term loan in August 2000, with ultimate maturity of the term loan in June 2002. The $100 million term loan matures July 2001. The balance outstanding at September 30, 1998 of the revolving credit facility and the term loan was $374 million, with a weighted average interest rate of 5.97%. This credit line is primarily used to finance assets which are not included in the Company's asset securitization program. As a holding company, Fremont General pays its operating expenses, meets its other obligations and pays stockholders' dividends from its cash on hand, management fees paid by its subsidiaries and dividends paid by its subsidiaries. Stockholders' dividends declared aggregated $15.4 million and $13.9 million for the quarters ended September 30, 1998 and 1997, respectively. Several of the Company's subsidiaries are subject to certain statutory and regulatory restrictions and various agreements, principally loan agreements, that restrict their ability to distribute dividends to the Company. The Company expects that during the next few years dividends from its subsidiaries will consist of dividends from its property and casualty insurance subsidiaries and dividends on preferred stock of its thrift and loan holding company and commercial finance subsidiaries. The maximum amount available for payment of dividends by the property and casualty insurance subsidiaries during 1998, without prior regulatory approval, is approximately $67.8 million. To facilitate general corporate operations, the Company maintains a revolving line of credit with a syndicated bank group that permits borrowings of up to $400 million, of which $275 million was outstanding as of September 30, 1998. This credit facility expires in July 2002. During 1997, an aggregate $266,744,000 principal amount at maturity of Liquid Yield OptionTM Notes due October 12, 2013 (Zero Coupon-Subordinated) ("LYONs") were converted into 5,145,000 shares of the Company's Common Stock. The effect of these conversions was an increase in stockholders' equity and a decrease in long-term debt of $117 million. During the first nine months of 1998, an aggregate $13,067,000 principal amount at maturity of LYONs were converted into 252,000 shares of the Company's Common Stock. The effect of these conversions was an increase in stockholders' equity and a decrease in long-term debt of $6.0 million. On March 1, 1996, Fremont General Financing I, a statutory business trust (the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100 million of 9% Trust Originated Preferred SecuritiesSM ("the Preferred Securities") in a public offering. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust. The proceeds from the sale of the Preferred Securities were invested in 9% Junior Subordinated Debentures of the Company ("the Junior Subordinated Debentures"). The proceeds from the sale of the Junior Subordinated Debentures were used to repay approximately $50 million in revolving bank line of credit indebtedness, with the remainder used for general corporate purposes. The $100 million Junior Subordinated Debentures are the sole asset of the Trust. The Preferred Securities will be redeemed upon maturity of the Junior Subordinated Debentures in 2026, subject to the election available to the Company to extend the maturity up to 2045, and they may be redeemed, in whole or in part, at any time on or after March 31, 2001 and under certain specified circumstances. The Junior Subordinated Debentures are subordinate and junior to all senior indebtedness of the Company. Payment of distributions out of cash held by the Trust, and payments on liquidation of the Trust or the redemption of the Preferred Securities are guaranteed by the Company. Net cash provided by (used in) operating activities of continuing operations was $(120.0) million and $43.4 million for the nine months ended September 30, 1998 and 1997, respectively. Net cash provided by (used in) continuing operations decreased in the nine months September 30, 1998, due primarily to a higher reduction in claims and policy liabilities and a decrease in the change in other assets and liabilities, offset partially by an increase in net income. The higher reduction in claims and policy liabilities is due primarily to an increase in 1998 in reinsurance recoverables on unpaid losses and LAE resulting from the additional excess of loss reinsurance purchased by the Company and which became effective January 1, 1998. See "Premiums". Contributing to the 17 change in other assets and liabilities in the nine months ended September 30, 1998 is $22.4 million in reinsurance premium payable increases due primarily to the previously mentioned additional reinsurance purchased by the Company. Additionally, included in the change in other assets and liabilities in the nine months ended September 30, 1997 is a $45 million collection on a policyholder receivable classified in other assets. Net cash used in investing activities decreased to $328.2 million from $755.7 million for the nine months ended September 30, 1998 and 1997, respectively. The decrease in net cash used in investing activities was due mainly to an increase in investment sales, maturities and calls, net of purchases and short-term investment activity, and a decrease in the purchase of subsidiaries as the UNICARE acquisition, completed September 2, 1998 at $110 million, was smaller than the Industrial acquisition, completed August 1, 1997 at $365 million. Partially offsetting these decreases was an increase in loan originations, net of loan sales and repayments. Net cash provided by financing activities was $535.9 million and $722.0 million in the nine months ended September 30, 1998 and 1997, respectively. The decrease in net cash provided by financing activities was due primarily to a decrease in short-term and long-term debt proceeds, net of repayments, and an increase in annuity contract withdrawals. Contributing to the decrease in short-term debt proceeds was $327.8 million in borrowings at September 30, 1997 pursuant to certain reverse repurchase agreements within the property and casualty segment. Partially offsetting these decreases was an increase in thrift deposits. The amortized cost of the Company's invested assets was $2.43 billion and $2.36 billion at September 30, 1998 and December 31, 1997, respectively. The invested assets are up slightly at September 30, 1998, as compared to December 31, 1997, due mainly to an increase in the invested assets of the property and casualty operations resulting from the acquisition of UNICARE. The Company's property and casualty premium to surplus ratio for the year ended December 31, 1997 was 1.5 to 1, which is within industry guidelines. The FDIC has established certain capital and liquidity standards for its member institutions, and the Company's thrift and loan subsidiary was in compliance with these standards as of September 30, 1998. The Company believes that its existing cash, its bank lines of credit, revenues from operations and other available sources of liquidity will be sufficient to satisfy its liquidity needs for at least the next twelve months. YEAR 2000 READINESS DISCLOSURE Problems may arise from computer software programs and operating systems that use only two digits to designate the calendar year in a date code field. For example, where the date September 21, 1998, is encoded as "09/21/98" instead of "09/21/1998." Based on this two-digit format for date coding, computers with date-sensitive programs could recognize the year 2000 as "00" and incorrectly assume that the year is 1900. Similar problems can arise for systems dependent upon embedded chips that are encoded to only use or recognize two digits when referring to a calendar year. Additionally, problems may arise from the computer's inability to process (including calculating, comparing, sequencing, displaying, or storing), transmit, or receive date data from, into, and between the 20th and 21st centuries, and during the years 1999 and 2000, and leap year calculations. The Company refers to these problems as the "Year 2000 Problem." The Company considers the Year 2000 Problem a critical business continuity issue and has categorized the Year 2000 Problem into the following four areas: OFFICE FACILITIES AND EQUIPMENT - Will the telephones, facsimile machines, copy machines, elevators, air conditioning and heating systems, and other utility systems used by the Company in its leased and owned facilities function properly in the year 2000 and beyond? KEY BUSINESS PARTNERS, VENDORS, OTHER SUPPLIERS - Will the Company's key business partners, major vendors, and other suppliers face significant disruption to the goods and services provided to the Company due to Year 2000 Problems? CUSTOMERS - Will the Company's revenues be significantly adversely affected by customers' inability to remediate successfully their own Year 2000 Problems? 18 INTERNAL COMPUTER SYSTEMS - Considered the most important area to resolve, will the Company's computer systems operate properly in the year 2000 and beyond? The following discussion establishes the extent of work performed, or to be performed, and results obtained as of September 30, 1998 in addressing the impact of the Year 2000 Problem on the above-described areas. OFFICE FACILITIES AND EQUIPMENT: Regarding telephone systems, the Company is in the process of evaluating all of its telephone systems to determine the extent of any Year 2000 Problems. This evaluation is to be completed in the fourth quarter of 1998. For any of those systems that are determined not to be Year 2000 compliant, the Company will work with its telephone service providers to remediate Year 2000 issues and currently anticipates full Year 2000 compliance on all telephone systems by June 30, 1999. Regarding the Company's leased and owned facilities, we are currently in the process of determining the extent of Year 2000 Problems (if any) as they relate to the elevator, air conditioning/heating, and other utility systems in these facilities. The Company anticipates this review to be completed by December 31, 1998. The Company currently anticipates no significant disruption from these various facility-related systems due to the Year 2000 Problem. Finally, with regard to office equipment such as facsimile and copy machines, the Company considers the risk minimal as to any significant cost or disruption to its operations resulting from a Year 2000 Problem impacting any of its office equipment (excluding telephone and computer systems). Accordingly, no significant work is currently being planned in this area. KEY BUSINESS PARTNERS, VENDORS, OTHER SUPPLIERS: The Company has identified its key business partners, such as its critical banking, employee benefits, reinsurance, auditors, outside legal counsel, and other professional service relationships. The Company is in the process of surveying all of these relationships as to their Year 2000 compliance, and will develop appropriate contingency plans to avoid significant disruption to the Company's operations. The Company anticipates this process to be completed by March 31, 1999. Many surveys have already been received and evaluated in the areas of employee benefits and reinsurance. Based on the evaluations received to date, most of these business partners anticipate their Year 2000 compliance and testing to be completed in early 1999. In addition to key business partners, the Company's suppliers and vendors are concentrated into the areas of office supplies, office furniture and equipment, and computer hardware and software. With the exception of computer software, the Company believes that there are many alternative suppliers for their office supply and furniture needs, as well as several alternative sources for computer hardware. Accordingly, the risk of a significant disruption to the Company's operations due to a supplier's inability to resolve its Year 2000 Problems is considered minimal since the Company could select an alternate supplier. (With regards to computer software, refer to the separate discussion on the Company's internal computer systems.) In an effort to identify which suppliers may have Year 2000 compliance difficulties, the Company is currently in the process of identifying its more significant suppliers/vendors and will be surveying them as to their Year 2000 compliance status. The results of these surveys will be evaluated and appropriate contingency plans will be developed if considered necessary. The Company expects this process to be completed by March 31, 1999. CUSTOMERS: In the financial services operations, the Company's revenues could be impacted should a customer/borrower be unable to pay interest and/or principal when due because of the customers' inability to resolve its Year 2000 Problems. Regarding the real estate lending operation, the risk of a significant impact to operating results is considered minimal since the Company would utilize the collateral securing existing loans to mitigate any loan losses. Additionally for commercial real estate loans, the borrower's Year 2000 risk is further limited by the multiple tenant nature of most of the properties under collateral. The Company has focused its attention on those commercial properties that are single tenant, which are currently comprised of approximately fifty loans. The Company is in the process of surveying these customers to determine their Year 2000 compliance. In its commercial finance operation, the Company is surveying its entire customer base to ascertain whether or not any significant Year 2000 issues exist with existing borrowers. With regard to new loan customers, the Company has adopted additional review procedures in both the real estate lending and commercial finance operations to determine 19 the extent of an applicant's Year 2000 compliance. Based on the results obtained to date, the Company does not anticipate any significant impact to its financial services revenues due to the Year 2000 Problem. In its workers' compensation operation, the Company is in the process of determining the extent of procedures to employ in ascertaining the potential impact to its insurance premium revenues resulting from an insured's or agent's inability to resolve their Year 2000 Problems. The Company anticipates completing its action plan by December 31, 1998. INTERNAL COMPUTER SYSTEMS: As of September 30, 1998, significant Year 2000 compliance issues remain only within the Company's workers' compensation operation. The Company's computer-based systems ("Systems") supporting the financial services operations, administrative systems (personnel, payroll and accounting) and treasury systems (cash management and investment portfolio management) have all been rendered substantially Year 2000 compliant. Within the financial services segment, both the real estate lending and commercial finance subsidiaries utilize application Systems that are vendor supported. In the real estate lending operation, current application Systems are substantially Year 2000 compliant, and the vendors are aware of the few remaining issues that need to be resolved to render their systems fully compliant. These solutions are expected to be included in the normal application upgrade cycle that will occur by December 31, 1998. Accordingly, the real estate lending unit is expected to be 100% compliant by December 31, 1998. Additionally, these application Systems have been tested internally to validate their Year 2000 compliance, with no significant errors identified or left unresolved. Similarly, the commercial finance operation's application Systems, while substantially compliant in their present form, will be fully compliant after upgrading to the current version of the software, which is already available and installed at several of the vendor's clients. The Company intends to test these Systems in early 1999 to verify the vendors' representations. With regard to the workers' compensation operation, the Company developed an action plan in 1996 to render its workers' compensation Systems Year 2000 compliant. Based on an evaluation of the progress made as of September 30, 1998, the Company estimates that its workers' compensation Systems, excluding those Systems supporting the recently acquired Industrial Indemnity and Unicare companies, will be Year 2000 compliant and substantially tested by December 31, 1998. The Industrial Indemnity and Unicare Systems are expected to be converted to Year 2000 compliant Systems by June 30, 1999. Industrial will be moving onto a new System that will, after full implementation, be the workers' compensation operation's new nationwide claims and policy handling platform. The costs to be incurred by the Company in completing these Year 2000 initiatives are not expected to have a material impact on the Company's results of operations (projected 1998 costs of $4.5 million). Regarding administrative and back-office operations, the personnel, payroll, accounting, and treasury Systems are 100% Year 2000 compliant. The Company intends to test these Systems in early 1999 to verify the vendors' representations. In addition to its various application Systems, the Company maintains several PC-based client/server network infrastructures. The majority of these installations were established within the past five years. Substantially all of these networks use the most current versions of network operating and data transmission software, all of which are Year 2000 compliant. The Company is in the process of identifying any PC hardware which is not Year 2000 compliant, as well as testing vendors' representations as to Year 2000 compliance of installed network software. These processes are anticipated to be completed by March 31, 1999 with no significant Year 2000 Problems expected. Management of the Company continues to monitor the progress of its Year 2000 compliance initiatives and will continue to allocate resources necessary to resolve significant Year 2000 Problems as they are identified. Based on the progress of the work performed through September 30, 1998, the Company anticipates that its office facilities and equipment; key business partners, vendors and other suppliers; major customers; and internal computer systems will be substantially Year 2000 compliant well in advance of December 31, 1999. 20 Readers are cautioned that forward-looking statements contained in this Year 2000 Readiness Disclosure section should be read in conjunction with the Company's disclosures in the first paragraph after the heading "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the subheading "Market Risk" in the Company's Management Discussion and Analysis contained in this Quarterly Report on Form 10-Q is incorporated herein by reference. 21 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. None. ITEM 2: Changes in Securities. None. ITEM 3: DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4: Submission of Matters to a Vote of Security Holders. None. ITEM 5: Other Information. None. ITEM 6: Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits. EXHIBIT NO. DESCRIPTION ------------ -------------------------------------------------------------- 2.1 Stock Purchase Agreement by and among Talegen Holdings, Inc., Fremont Indemnity Company and Fremont General Corporation dated as of May 16, 1997 including exhibits thereto. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of August 1, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 2.2 Tax Allocation and Indemnification Agreement, dated as of May 16, 1997 by and among Xerox Financial Services, Inc., Talegen Holdings, Inc., Industrial Indemnity Holdings, Inc., Fremont General Corporation, and Fremont Indemnity Corporation, a California corporation. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K, as of August 1, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 3.1 Restated Articles of Incorporation of Fremont General Corporation and amendments. (Filed as Exhibit No. 3.1 to Quarterly Report on Form 10-Q, for the period ended June 30, 1998, Commission File Number 1-8007, and incorporated herein by reference.) 3.2 Amended and Restated By-Laws of Fremont General Corporation. (Filed as Exhibit No. 3.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Filed as Exhibit No. 4.4 to Registration Statement on Form S-3 filed on October 1, 1993, and incorporated herein by reference.) 4.3 Indenture among the Registrant, the Trust and First Interstate Bank of California, a California banking corporation, as trustee. (Filed as Exhibit No. 4.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 22 EXHIBIT NO. DESCRIPTION ------------ -------------------------------------------------------------- 4.4 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. (Filed as Exhibit No. 4.5 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.5 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. (Filed as Exhibit No. 4.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.6 Common Securities Guarantee Agreement by the Registrant. (Filed as Exhibit No. 4.7 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as Exhibit No 4.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.8 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3). (Filed as Exhibit No. 4.9 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.1(a) Fremont General Corporation Employee Stock Ownership Plan as amended. (Filed as Exhibit No. 10.1 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.1(b) Amendment Number Two to the Fremont General Corporation Employee Stock Ownership Plan. (Filed as Exhibit No. 10.1 (b) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.1(c) Amendment Number Three to the Fremont General Corporation Employee Stock Ownership Plan. 10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.3(a) Fremont General Corporation and Affiliated Companies Investment Incentive Plan. (Filed as Exhibit No. 10.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.3(b) Amendments Number One, Two and Three to the Fremont General Corporation and Affiliated Companies Investment Incentive Plan. (Filed as Exhibit No. 10.3 (b) to Quarterly Report on Form 10-Q, for the period ended September 30, 1997,Commission File Number 1-8007, and incorporated herein by reference.) 10.3(c) Amendment Number Four to the Fremont General Corporation and Affiliated Companies Investment Incentive Plan. (Filed as Exhibit No. 10.3 (c) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.3(d) Amendment Number Five to the Fremont General Corporation and Affiliated Companies Investment Incentive Plan. 23 EXHIBIT NO. DESCRIPTION ------------ -------------------------------------------------------------- 10.4(a) Trust Agreement for Investment Incentive Plan. (Filed as Exhibit No. (10)(xi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 10.4(b) Amendment to Trust Agreement for Investment Incentive Plan. (Filed as Exhibit No. 10.4 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(a) Supplemental Retirement Plan of the Company, as restated January 1, 1997. (Filed as Exhibit No. 10.5 to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(b) Amendment Number One to the Fremont General Corporation Supplemental Retirement Plan of the Company. (Filed as Exhibit No. 10.5(b) to Quarterly Report on Form 10-Q for the period ended March 31, 1998, Commission File Number 1-8007, and incorporated herein by reference.) 10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior Supplemental Retirement Plan of The Company, as amended. (Filed as Exhibit No. 10.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.7 Senior Supplemental Retirement Plan, as restated January 1, 1997. (Filed as Exhibit No. 10.7 to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference). 10.8(a) Excess Benefit Plan of the Company. (Filed as Exhibit No. (10)(vi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 10.8(b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.8(c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.9 Amended Non-Qualified Stock Option Plan of 1989 and related agreements of the Company. (Filed as Exhibit No. 10.9 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.10 1997 Stock Plan and related agreements. (Filed as Exhibit No. 10.10 to Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.11(a) Long-Term Incentive Compensation Plan of the Company - Senior Executive Plan. (Filed as Exhibit No. 10.10 (a) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 24 EXHIBIT NO. DESCRIPTION ------------ -------------------------------------------------------------- 10.11(b) Long-Term Incentive Compensation Plan of the Company (Filed as Exhibit No. 10.10 (b) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.12 1995 Restricted Stock Award Plan as amended and forms of agreement thereunder. (Filed as Exhibit No. 4.1 to Registration Statement on Form S-8/S-3 File No. 333-17525 which was filed on December 9, 1997, and incorporated herein by reference.) 10.13 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust Company of California. (Filed as Exhibit No. 10.12 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(a) Employment Agreement between the Company and James A. McIntyre dated January 1, 1994. (Filed as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(b) First Amendment to Employment Agreement between the Company and James A. McIntyre dated August 1, 1996. (Filed as Exhibit No. 10.10 to Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(c) Second Amendment to Employment Agreement between the Company and James A. McIntyre dated August 8, 1997. (Filed as Exhibit No. 10.14 (c) to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.15(a) Employment Agreement between the Company and Louis J. Rampino dated February 8, 1996. (Filed as Exhibit No. 10.14 (a) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.15(b) Employment Agreement between the Company and Wayne R. Bailey dated February 8, 1996. (Filed as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.16 Management Continuity Agreement between the Company and Raymond G. Meyers dated February 8, 1996. (Filed as Exhibit No. 10.15 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.17 1998 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.18 Continuing Compensation Plan for Retired Directors. (Filed as Exhibit No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.19 Non-Employee Directors' Deferred Compensation Plan. (Filed as Exhibit No.10.18 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 25 EXHIBIT NO. DESCRIPTION ------------ -------------------------------------------------------------- 10.20 Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent dated August 1, 1997. (Filed as Exhibit No. 10.20 to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference). 10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of California as trustee for the Fremont General Corporation Employee Stock Ownership Trust. The Plan Committee (hereinafter described) on behalf of the Fremont General Corporation Employee Stock Ownership Plan, Fremont General Corporation, and First Interstate Bank of California August 10, 1995. (Filed as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.) 27 Financial Data Schedule (b) REPORT ON FORM 8-K. None filed during the quarter ended September 30, 1998. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FREMONT GENERAL CORPORATION Date: November 13, 1998 /s/ LOUIS J. RAMPINO ---------------------------- Louis J. Rampino, President, Chief Operating Officer and Director Date: November 13, 1998 /s/ JOHN A. DONALDSON ----------------------------- John A. Donaldson, Senior Vice President, Controller and Chief Accounting Officer 27 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE ------------ -------------------------------------------------------------- ------------- 2.1 Stock Purchase Agreement by and among Talegen Holdings, Inc., Fremont Indemnity Company and Fremont General Corporation dated as of May 16, 1997 including exhibits thereto. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of August 1, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 2.2 Tax Allocation and Indemnification Agreement, dated as of May 16, 1997 by and among Xerox Financial Services, Inc., Talegen Holdings, Inc., Industrial Indemnity Holdings, Inc., Fremont General Corporation, and Fremont Indemnity Corporation, a California corporation. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K, as of August 1, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit No. 3.1 to Quarterly Report on Form 10-Q, for the period ended June 30, 1998, Commission File Number 1-8007, and incorporated herein by reference.) 3.2 Amended and Restated By-Laws of Fremont General Corporation. (Filed as Exhibit No. 3.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Filed as Exhibit No. 4.4 to Registration Statement on Form S-3 filed on October 1, 1993, and incorporated herein by reference.) 4.3 Indenture among the Registrant, the Trust and First Interstate Bank of California, a California banking corporation, as trustee. (Filed as Exhibit No. 4.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.4 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. (Filed as Exhibit No. 4.5 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.5 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. (Filed as Exhibit No. 4.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.6 Common Securities Guarantee Agreement by the Registrant. (Filed as Exhibit No. 4.7 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as Exhibit No 4.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.8 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3). (Filed as Exhibit No. 4.9 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.1(a) Fremont General Corporation Employee Stock Ownership Plan as amended. (Filed as Exhibit No. 10.1 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.1(b) Amendment Number Two to the Fremont General Corporation Employee Stock Ownership Plan. (Filed as Exhibit No. 10.1 (b) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.1(c) Amendment Number Three to the Fremont General Corporation Employee Stock Ownership Plan. 10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.3(a) Fremont General Corporation and Affiliated Companies Investment Incentive Plan. (Filed as Exhibit No. 10.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.3(b) Amendments Number One, Two and Three to the Fremont General Corporation and Affiliated Companies Investment Incentive Plan. (Filed as Exhibit No. 10.3 (b) to Quarterly Report on Form 10-Q, for the period ended September 30, 1997,Commission File Number 1-8007, and incorporated herein by reference.) 10.3(c) Amendment Number Four to the Fremont General Corporation and Affiliated Companies Investment Incentive Plan. (Filed as Exhibit No. 10.3 (c) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.3(d) Amendment Number Five to the Fremont General Corporation and Affiliated Companies Investment Incentive Plan. 10.4(a) Trust Agreement for Investment Incentive Plan. (Filed as Exhibit No. (10)(xi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 10.4(b) Amendment to Trust Agreement for Investment Incentive Plan. (Filed as Exhibit No. 10.4 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(a) Supplemental Retirement Plan of the Company, as restated January 1, 1997. (Filed as Exhibit No. 10.5 to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(b) Amendment Number One to the Fremont General Corporation Supplemental Retirement Plan of the Company. (Filed as Exhibit No. 10.5(b) to Quarterly Report on Form 10-Q for the period ended March 31, 1998, Commission File Number 1-8007, and incorporated herein by reference.) 10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior Supplemental Retirement Plan of The Company, as amended. (Filed as Exhibit No. 10.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.7 Senior Supplemental Retirement Plan, as restated January 1, 1997. (Filed as Exhibit No. 10.7 to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference). 10.8(a) Excess Benefit Plan of the Company. (Filed as Exhibit No. (10)(vi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 10.8(b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.8(c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.9 Amended Non-Qualified Stock Option Plan of 1989 and related agreements of the Company. (Filed as Exhibit No. 10.9 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.10 1997 Stock Plan and related agreements. (Filed as Exhibit No. 10.10 to Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.11(a) Long-Term Incentive Compensation Plan of the Company - Senior Executive Plan. (Filed as Exhibit No. 10.10 (a) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.11(b) Long-Term Incentive Compensation Plan of the Company (Filed as Exhibit No. 10.10 (b) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.12 1995 Restricted Stock Award Plan as amended and forms of agreement thereunder. (Filed as Exhibit No. 4.1 to Registration Statement on Form S-8/S-3 File No. 333-17525 which was filed on December 9, 1997, and incorporated herein by reference.) 10.13 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust Company of California. (Filed as Exhibit No. 10.12 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(a) Employment Agreement between the Company and James A. McIntyre dated January 1, 1994. (Filed as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(b) First Amendment to Employment Agreement between the Company and James A. McIntyre dated August 1, 1996. (Filed as Exhibit No. 10.10 to Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(c) Second Amendment to Employment Agreement between the Company and James A. McIntyre dated August 8, 1997. (Filed as Exhibit No. 10.14 (c) to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.15(a) Employment Agreement between the Company and Louis J. Rampino dated February 8, 1996. (Filed as Exhibit No. 10.14 (a) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.15(b) Employment Agreement between the Company and Wayne R. Bailey dated February 8, 1996. (Filed as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.16 Management Continuity Agreement between the Company and Raymond G. Meyers dated February 8, 1996. (Filed as Exhibit No. 10.15 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.17 1998 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1997, Commission File Number 1-8007, and incorporated herein by reference.) 10.18 Continuing Compensation Plan for Retired Directors. (Filed as Exhibit No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.19 Non-Employee Directors' Deferred Compensation Plan. (Filed as Exhibit No.10.18 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.20 Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent dated August 1, 1997. (Filed as Exhibit No. 10.20 to Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007, and incorporated herein by reference). 10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of California as trustee for the Fremont General Corporation Employee Stock Ownership Trust. The Plan Committee (hereinafter described) on behalf of the Fremont General Corporation Employee Stock Ownership Plan, Fremont General Corporation, and First Interstate Bank of California August 10, 1995. (Filed as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.) 27 Financial Data Schedule
EX-10 2 10.1(C) AMENDMENT NO. 3 TO ESOP AMENDMENT NUMBER THREE TO THE FREMONT GENERAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN Effective as of January 1, 1998, the Fremont General Corporation Employee Stock Ownership Plan (the "Plan") is amended to provide that: FIRST: On December 30, 1997, the Company executed an amendment to the Fremont General Employee Stock Ownership Plan entitled "Amendment Number Four to the Fremont General Corporation Employee Stock Ownership Plan." Said Amendment is hereby retitled "Amendment Number Two to the Fremont General Corporation Employee Stock Ownership Plan." SECOND: Paragraph (a) of Section 1.7 is amended to read as follows: (a) Compensation means all of an Employee's W-2 wages as defined in Section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). Notwithstanding the foregoing, Compensation shall not include FICA paid by the Employer with respect to nonqualified deferred compensation or retirement plans, Rideshare payments, relocation payments, Excess/SRP distributions, amounts realized from the exercise of nonqualified stock options or when restricted stock held by an employee is no longer subject to substantial risk of forfeiture, meals, moving expense payments, fringe car payments, referral awards, parking, recognition awards and nonperformance based bonuses including holiday bonuses, hiring bonuses and travel incentive bonuses. THIRD: The first sentence of Section 1.9 is amended to read as follows: 1.9 EMPLOYEE: Any person employed by the Employer or by a Participating Employer, other than as an independent contractor. FOURTH: Exhibit A is hereby deleted and Section 1.18 is amended to read as follows: 1.18 PARTICIPATING EMPLOYEES: The Affiliated Companies which have, from time to time, adopted the Plan. FIFTH: Paragraph (d) of Section 1.30 shall be amended as follows: (d) Each Year of Service completed by a Participant while he or she was an employee of Beaver Insurance Company, Pacific Compensation Insurance Company, Investors Bancor, Casualty Insurance Company, Workers Compensation and Indemnity Company, Industrial Indemnity Holdings, Inc. or its subsidiaries (including but not limited to American All-Risk Group, Inc. and its subsidiaries) ("acquired companies") shall be deemed a Year of Service under this Plan; provided, however, and except with respect to past service credit granted by the Company or the Plan Administrator on other terms prior to the adoption of this amendment, in order to be entitled to past service credit, an Employee must have been employed by such acquired company at the time of its acquisition by or merger into the Employer or any Affiliate Company. SIXTH: The first sentence of Section 3.1(a) shall be amended to read as follows: 3.1 EMPLOYER CONTRIBUTIONS: (a) For each Plan Year, the Employer shall contribute to the Trust such amount(s) on its behalf and on behalf of each Participating Employer as the Board of Directors may deem appropriate and reasonable considering the condition of the business and the interests of the Plan Participants. SEVENTH: Section 4.2(c) is hereby amended in its entirety to read as follows: (c) Contributions on behalf of the Employer shall be allocated among the Accounts of Participants who are Employees of the Employer who complete 1000 Hours of Service during the Plan Year, and who are employed by the Employer on the last day of the Plan Year, in the proportion that each such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants who are Employees of the Employer for the Plan Year. Contributions on behalf of a Participating Employer shall be allocated among the accounts of Participants who are Employees of such Participating Employer who complete 1000 Hours of Service during the Plan Year, and who are employed by such Participating Employer on the last day of the Plan Year, in the proportion that each such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants who are Employees of the Participating Employer for the Plan Year. Notwithstanding the foregoing, however, effective as of January 1, 1993, if an allocation is made of Employer Stock released from a Suspense Account, such stock and other cash or stock contributions shall be allocated (1) first, to the Accounts of Special Participants, in an amount equal to the Special Allocation, and (2) next, to the Accounts of all Participants in the same manner described in this Section as if there was no allocation made pursuant to a release of Employer Stock from a Suspense Account. For purposes of this Section, an Employee whose employment with the Employer terminates during this Plan Year because this Employee (i) retires on or after reaching his Normal Retirement Date, (ii) incurs a Permanent and Total Disability, or (iii) dies, shall be deemed to have completed 1000 Hours of Service during the Plan Year and to have been employed by the Employer on the last day of the Plan Year. EIGHTH: Wherever in this document there appears the amount of $3,500, including but not limited to Sections 5.2, 6.5 and 6.9. That amount shall be read as $5,000. NINTH: New Section 6.12 shall be added to Section VI, and reads as follows: 6.12 MINIMUM DISTRIBUTION REQUIREMENTS: (a) General Rules. (i) Subject to Section 6.6 and any applicable Appendices to the Plan, the requirements of this Section shall apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of this Plan. (ii) All distributions required under this Section shall be determined and made in accordance with the proposed regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed regulations. (b) Required Beginning Date. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. (c) Limits on Distribution Periods. As of the first distribution calendar year, distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (i) the life of the Participant, (ii) the life of the Participant and a designated Beneficiary, (iii) a period certain not extending beyond the life expectancy of the Participant, or (iv) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. (d) Determination of Amount to be Distributed Each Year. If the Participant's interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the Required Beginning Date: (i) Individual Account. (A) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary or (2) a period not extending beyond the life expectancy of the designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (B) For calendar years beginning before January 1, 1989, if the Participant's Spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (C) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the applicable life expectancy or (2) if the Participant's Spouse is not the designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the Proposed Regulations. Distributions after the death of the Participant shall be distributed using the applicable life expectancy in paragraph (A) above as the relevant divisor without regard to proposed regulations Section 1.401(a)(9)-2. (D) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the Employee's required beginning date occurs, must be made on or before December 31 of that distribution calendar year. (ii) Other Forms. If the Participant's benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Section 401(a)(9) of the Code and the proposed regulations thereunder. Any annuity contract distributed from this Plan must be nontransferable. (e) Definitions: For purposes of this Section, the following definitions shall apply: (i) Applicable Life Expectancy. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated such succeeding calendar year. (ii) Designated Beneficiary. The individual who is designated as the Beneficiary under the Plan in accordance with Section 401(a)(9) of the Code and the proposed regulations thereunder. (iii) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to Section 401(a)(9) of the Code. (iv) Five Percent Owner. A Participant is treated as a Five Percent Owner for purposes of this Section if such Participant is a Five Percent Owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 of the Code but without regard to whether the Plan is Top-Heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66 1/2 or any subsequent Plan Year. (v) Life Expectancy. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the income tax regulations. Unless otherwise elected by the Participant (or Spouse in the case of distributions which begin following the Participant's death and in which the Spouse is named as the designated Beneficiary) by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant (or Spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. (vi) Participant's Benefit. (A) The Account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. (B) Exception for second distribution calendar year. For purposes of paragraph (A) above, if any portion of the minimum distribution for the first distribution calendar year is made in the second distribution calendar year on or before the required beginning date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. (vii) Required Beginning Date. (A) Five Percent Owners: the first day of April following the later of: (1) the calendar year in which the Participant attains age 70 1/2, or (2) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a Five Percent Owner, or the calendar year in which the Participant's Severance Date occurs. Once begun, distributions to a Five Percent Owner under this Section must continue to be distributed, even if the Participant ceases to be a Five Percent Owner in a subsequent year. (B) Non-Five Percent Owners: (1) Participants who are not Five Percent Owners, but who attain age 70 1/2 prior to January 1, 1996: the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2. (2) Participants who are not Five Percent Owners and who attain age 70 1/2 between January 1, 1996 and December 31, 1998: the first day of April of the calendar year following the calendar year in which the later of attainment of age 70 1/2 or the Participant's Severance Date occurs; provided, however, that an Employee whose Severance Date has not occurred may irrevocably elect, in writing, to defer distribution until that Employee's Severance Date. (3) Participants who are not Five Percent Owners and who attain age 70 1/2 after December 31, 1998: the date on which occurs the Participant's Severance Date. Dated: October 13, 1998 FREMONT GENERAL CORPORATION By:/s/ RAYMOND G. MEYERS --------------------------- Raymond G. Meyers Senior Vice President EX-10 3 10.3(D) AMENDMENT NO. 5 INVESTMENT INCENTIVE PLAN AMENDMENT NUMBER FIVE TO THE FREMONT GENERAL CORPORATION AND AFFILIATED COMPANIES INVESTMENT INCENTIVE PLAN Effective as of January 1, 1998, the Fremont General Corporation and Affiliated Companies Investment Incentive Plan (the "Plan") is amended to provide that: FIRST: Paragraph (a) of Section 2.10 is amended to read as follows: Compensation means all of an Employee's W-2 wages as defined in Section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). Notwithstanding the foregoing, Compensation shall not include FICA paid by the Employer with respect to nonqualified deferred compensation or retirement plans, Rideshare payments, relocation payments, Excess/SRP distributions, amounts realized from the exercise of nonqualified stock options or when restricted stock held by an employee is no longer subject to substantial risk of forfeiture, meals, moving expense payments, fringe car payments, referral awards, parking, recognition awards and nonperformance based bonuses including holiday bonuses, hiring bonuses and travel incentive bonuses. SECOND: Exhibit A is hereby deleted and Section 2.30 is amended to read as follows: 2.30 PARTICIPATING EMPLOYERS: The Affiliated Companies which have, from time to time, adopted the Plan. THIRD: Paragraph (c) of Section 2.44 shall be amended as follows: (c) Each Year of Service completed by a Participant while he or she was an employee of Beaver Insurance Company, Pacific Compensation Insurance Company, Investors Bancor, Casualty Insurance Company, Workers Compensation and Indemnity Company, Industrial Indemnity Holdings, Inc. or its subsidiaries (including but not limited to American All-Risk Group, Inc. and its subsidiaries) ("acquired companies") shall be deemed a Year of Service under this Plan; provided, however, and except with respect to past service credit granted by the Company or the Plan Administrator on other terms prior to the adoption of this amendment, in order to be entitled to past service credit, an Employee must have been employed by such acquired company at the time of its acquisition by or merger into the Employer or any Affiliate Company. FOURTH: Wherever in this document there appears the amount of $3,500, including but not limited to Sections 6.2 and 6.6, that amount shall be read as $5,000. FIFTH: Sections 6.10(a) through (e) shall be amended in their entirety to read as follows: 6.10 MINIMUM DISTRIBUTION REQUIREMENTS: (a) General Rules. (i) Subject to Section 6.8 and any applicable Appendices to the Plan, the requirements of this Section shall apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of this Plan. (ii) All distributions required under this Section shall be determined and made in accordance with the proposed regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed regulations. (b) Required Beginning Date. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. (c) Limits on Distribution Periods. As of the first distribution calendar year, distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (i) the life of the Participant, (ii) the life of the Participant and a designated Beneficiary, (iii) a period certain not extending beyond the life expectancy of the Participant, or (iv) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. (d) Determination of Amount to be Distributed Each Year. If the Participant's interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the Required Beginning Date: (i) Individual Account. (A) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary or (2) a period not extending beyond the life expectancy of the designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (B) For calendar years beginning before January 1, 1989, if the Participant's Spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (C) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the applicable life expectancy or (2) if the Participant's Spouse is not the designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the Proposed Regulations. Distributions after the death of the Participant shall be distributed using the applicable life expectancy in paragraph (A) above as the relevant divisor without regard to proposed regulations Section 1.401(a)(9)-2. (D) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the Employee's required beginning date occurs, must be made on or before December 31 of that distribution calendar year. (ii) Other Forms. If the Participant's benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Section 401(a)(9) of the Code and the proposed regulations thereunder. Any annuity contract distributed from this Plan must be nontransferable. (e) Definitions: For purposes of this Section, the following definitions shall apply: (i) Applicable Life Expectancy. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated such succeeding calendar year. (ii) Designated Beneficiary. The individual who is designated as the Beneficiary under the Plan in accordance with Section 401(a)(9) of the Code and the proposed regulations thereunder. (iii) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to Section 401(a)(9) of the Code. (iv) Five Percent Owner. A Participant is treated as a Five Percent Owner for purposes of this Section if such Participant is a Five Percent Owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 of the Code but without regard to whether the Plan is Top-Heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66 1/2 or any subsequent Plan Year. (v) Life Expectancy. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the income tax regulations. Unless otherwise elected by the Participant (or Spouse in the case of distributions which begin following the Participant's death and in which the Spouse is named as the designated Beneficiary) by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant (or Spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. (vi) Participant's Benefit. (A) The Account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. (B) Exception for second distribution calendar year. For purposes of paragraph (A) above, if any portion of the minimum distribution for the first distribution calendar year is made in the second distribution calendar year on or before the required beginning date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. (vii) Required Beginning Date. (A) Five Percent Owners: the first day of April following the later of: (1) the calendar year in which the Participant attains age 70 1/2, or (2) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a Five Percent Owner, or the calendar year in which the Participant's Severance Date occurs. Once begun, distributions to a Five Percent Owner under this Section must continue to be distributed, even if the Participant ceases to be a Five Percent Owner in a subsequent year. (B) Non-Five Percent Owners: (1) Participants who are not Five Percent Owners, but who attain age 70 1/2 prior to January 1, 1996: the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2. (2) Participants who are not Five Percent Owners and who attain age 70 1/2 between January 1, 1996 and December 31, 1998: the first day of April of the calendar year following the calendar year in which the later of attainment of age 70 1/2 or the Participant's Severance Date occurs; provided, however, that an Employee whose Severance Date has not occurred may irrevocably elect, in writing, to defer distribution until that Employee's Severance Date. (3) Participants who are not Five Percent Owners and who attain age 70 1/2 after December 31, 1998: the date on which occurs the Participant's Severance Date. Dated: October 13, 1998 FREMONT GENERAL CORPORATION By:/s/ RAYMOND G. MEYERS ------------------------ Raymond G. Meyers Senior Vice President EX-27 4 FDS 9-MOS 1998
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000038984 FREMONT GENERAL CORPORATION 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,618,654 0 0 504,647 0 0 4,939,809 152,991 24,788 40,267 6,976,653 2,503,932 101,396 0 22,685 950,585 100,000 0 34,816 868,772 6,976,653 399,045 144,166 (1,063) 212,617 244,843 88,093 47,232 145,915 47,493 98,422 0 0 0 98,422 3.08 2.82 0 0 0 0 0 0 0 Includes Loans receivable, Short-term and Other investments. Sum of Additional paid-in-capital, Retained earnings, Deferred Compensation and Accumulated other comprehensive income. Includes Loan interest and Other revenue. Basic earnings per share Diluted earnings per share
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