10-Q 1 form10q6302001.txt FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended June 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from __________ to __________ Commission File Number 1-8007 FREMONT GENERAL CORPORATION (Exact name of registrant as specified in its charter) NEVADA 95-2815260 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2020 SANTA MONICA BLVD. SANTA MONICA, CALIFORNIA 90404 (Address of principal executive offices) (Zip Code) (310) 315-5500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock: SHARES OUTSTANDING CLASS JULY 31, 2001 Common Stock, $1.00 par value 70,532,165 -------------------------------------------------------------------------------- FREMONT GENERAL CORPORATION INDEX PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Consolidated Balance Sheets June 30, 2001 and December 31, 2000 ................. 3 Consolidated Statements of Operations Three and Six Months Ended June 30, 2001 and 2000 ............................................ 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000 ............. 5 Notes to Consolidated Financial Statements on Form 10-Q ........................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk ......................................... 23 PART II - OTHER INFORMATION Items 1-3. Not applicable Item 4. Submission of Matters to a Vote of Security Holders ............................................. 24 Item 5. Not applicable Item 6. Exhibits and Reports on Form 8-K ...................... 25 Signatures ......................................................... 29 2 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2001 2000 ----------- ----------- (UNAUDITED) (THOUSANDS OF DOLLARS) ASSETS Investment securities available for sale at fair value: Fixed maturity investments (cost: 2001-$813,524; 2000-$925,727) ......................................................... $ 798,827 $ 890,075 Non-redeemable preferred stock (cost: 2001-$276,809; 2000-$276,809) ......................................................... 243,282 234,280 ----------- ----------- Total investment securities available for sale ....................... 1,042,109 1,124,355 Loans receivable, net of unearned income and allowance for loan losses .......................................................... 3,622,730 3,403,256 Short-term investments ..................................................... 667,121 843,434 Loans held for sale ........................................................ 607,934 298,568 Residual interests in securitized loans at fair value ...................... 46,410 52,061 Other investments .......................................................... 31,255 11,110 ----------- ----------- TOTAL INVESTMENTS AND LOANS .......................................... 6,017,559 5,732,784 Cash ....................................................................... 104,512 198,099 Accrued investment income .................................................. 41,499 40,638 Premiums receivable and agents' balances ................................... 219,389 364,618 Reinsurance recoverable on paid losses ..................................... 56,850 43,460 Reinsurance recoverable on unpaid losses ................................... 900,775 975,404 Deferred policy acquisition costs .......................................... 5,988 9,491 Costs in excess of net assets acquired ..................................... 18,163 21,660 Deferred income taxes ...................................................... 370,472 395,414 Other assets ............................................................... 192,501 178,699 Assets held for discontinued operations .................................... 190,891 203,791 ----------- ----------- TOTAL ASSETS ......................................................... $ 8,118,599 $ 8,164,058 =========== =========== LIABILITIES Claims and policy liabilities: Losses and loss adjustment expenses ...................................... $ 2,466,265 $ 2,808,433 Life insurance benefits and liabilities .................................. 81,069 91,024 Unearned premiums ........................................................ 98,950 214,045 Dividends to policyholders ............................................... 37,211 33,497 ----------- ----------- Total Claims and Policy Liabilities .................................. 2,683,495 3,146,999 Reinsurance premiums payable and funds withheld ............................ 5,090 13,149 Other liabilities .......................................................... 229,804 254,165 Deposits ................................................................... 4,059,294 3,849,211 Short-term debt ............................................................ 225,000 - Long-term debt ............................................................. 358,029 376,843 Liabilities of discontinued operations ..................................... 165,892 178,792 ----------- ----------- TOTAL LIABILITIES .................................................... 7,726,604 7,819,159 Company-obligated mandatorily redeemable preferred securities of subsidiary Trust holding solely Company junior subordinated debentures ................................... 100,000 100,000 STOCKHOLDERS' EQUITY Common Stock, par value $1 per share-- Authorized: 150,000,000 shares; issued and outstanding: (2001-70,540,000 and 2000-70,732,000) .................................... 70,540 70,732 Additional paid-in capital ................................................. 274,943 280,764 Retained earnings .......................................................... 37,157 10,677 Deferred compensation ...................................................... (59,299) (66,456) Accumulated other comprehensive loss ....................................... (31,346) (50,818) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY ........................................... 291,995 244,899 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $ 8,118,599 $ 8,164,058 =========== =========== See notes to consolidated financial statements on Form 10-Q.
3 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ----------------------- 2001 2000 2001 2000 --------- ---------- --------- --------- (THOUSANDS OF DOLLARS) REVENUES Interest and fee income on loans receivable ................... $ 103,329 $ 91,971 $ 202,342 $ 179,306 Property and casualty insurance net premiums earned ........... 77,040 289,575 195,728 548,685 Net investment income ......................................... 27,729 42,126 61,953 83,575 Realized investment gains (losses) ............................ 78 (28) 1,412 (239) Other revenue ................................................. 9,622 4,690 20,494 9,644 --------- ---------- --------- --------- TOTAL REVENUES .............................................. 217,798 428,334 481,929 820,971 EXPENSES Losses and loss adjustment expenses ........................... 71,756 647,902 171,968 852,264 Policy acquisition costs ...................................... 11,448 54,711 31,817 112,821 Provision for loan losses ..................................... 6,112 3,372 11,849 5,405 Other operating costs and expenses ............................ 39,888 49,024 87,895 97,096 Dividends to policyholders .................................... 1,215 26,137 3,182 32,485 Interest expense .............................................. 67,003 64,793 136,399 124,957 --------- ---------- ---------- ---------- TOTAL EXPENSES .............................................. 197,422 845,939 443,110 1,225,028 --------- ---------- ---------- ---------- Income (loss) before taxes .................................... 20,376 (417,605) 38,819 (404,057) Income tax expense (benefit) .................................. 6,092 (147,287) 12,453 (143,223) --------- ---------- ---------- ---------- Net income (loss) from continuing operations .................. 14,284 (270,318) 26,366 (260,834) Extraordinary gain on extinguishment of debt, net of tax ...... 529 2,245 2,965 2,245 --------- ---------- ---------- ---------- NET INCOME (LOSS) ............................................. $ 14,813 $ (268,073) $ 29,331 $ (258,589) ======== ========== ========== ========== PER SHARE DATA Basic: Net income (loss) from continuing operations ................ $ 0.22 $ (4.29) $ 0.41 $ (4.17) Extraordinary gain on extinguishment of debt ................ 0.01 0.03 0.04 0.03 -------- ---------- ---------- ---------- Net income (loss) ........................................ $ 0.23 $ (4.26) $ 0.45 $ (4.14) ======== ========== ========== ========== Diluted: Net income (loss) from continuing operations ................ $ 0.20 $ (4.29) $ 0.38 $ (4.17) Extraordinary gain on extinguishment of debt ................ 0.01 0.03 0.04 0.03 -------- ---------- ---------- ---------- Net income (loss) ........................................ $ 0.21 $ (4.26) $ 0.42 $ (4.14) ======== ========== ========== ========== Cash dividends ............................................... $ 0.02 $ 0.08 $ 0.04 $ 0.16 Weighted average shares (in thousands): Basic ....................................................... 65,108 62,939 64,700 62,529 Diluted ..................................................... 70,771 62,939 70,407 62,529 See notes to consolidated financial statements on Form 10-Q
4 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------- 2001 2000 ------------ ------------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income (loss) from continuing operations ................................ $ 26,366 $ (260,834) Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operating activities: Change in premiums receivable and agents' balances and reinsurance recoverable on paid losses ........................... 131,839 (32,281) Change in accrued investment income .................................... (861) (430) Change in claims and policy liabilities ................................ (377,802) 516,473 Amortization of policy acquisition costs ............................... 31,817 112,821 Policy acquisition costs deferred ...................................... (28,314) (116,092) Net change in residual interests in securitized loans .................. 5,651 3,395 Provision for deferred income taxes .................................... 14,457 (164,255) Provision for loan losses .............................................. 11,849 5,405 Depreciation and amortization .......................................... 13,129 22,366 Net amortization on fixed maturity investments ......................... (5,697) (871) Realized investment (gains) losses ..................................... (1,412) 239 Change in other assets and liabilities ................................. (50,918) (48,659) ------------ ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................ (229,896) 37,277 INVESTING ACTIVITIES Investment securities available for sale: Purchases ................................................................. (209,226) (71,730) Sales ..................................................................... 237,907 82,685 Maturities or calls ....................................................... 90,631 34,923 (Increase) decrease in short-term and other investments ..................... 156,168 (28,210) Loan originations and bulk purchases funded ................................. (2,311,007) (1,808,489) Receipts from repayments of loans and bulk sales of loans ................... 1,770,318 1,616,026 Purchase of property and equipment .......................................... (3,487) (11,757) ------------ ------------- NET CASH USED IN INVESTING ACTIVITIES .............................. (268,696) (186,552) FINANCING ACTIVITIES Proceeds from short-term debt ............................................... 225,000 - Repayments of short-term debt ............................................... - (10,000) Repayments of long-term debt ................................................ (14,452) (7,734) Net increase in deposits .................................................... 210,083 210,952 Annuity contract receipts ................................................... 36 273 Annuity contract withdrawals ................................................ (11,109) (32,561) Dividends paid .............................................................. (4,239) (10,979) (Increase) decrease in deferred compensation plans .......................... (314) 4,869 ------------ ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 405,005 154,820 ------------ ------------- INCREASE (DECREASE) IN CASH ................................................. (93,587) 5,545 Cash at beginning of year ................................................... 198,099 65,102 ------------ ------------- CASH AT END OF PERIOD ....................................................... $ 104,512 $ 70,647 ============ ============= 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 accounting principles generally accepted in the United States 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 notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain 2000 amounts have been reclassified to conform to the 2001 presentation. NOTE B-- LOANS RECEIVABLE Loans receivable consist of commercial and residential real estate loans and syndicated loans. Commercial real estate loans, which are primarily variable rate, represent loans secured generally by first mortgages on income-producing properties such as office, retail, industrial, hotels/motels, multi-family and mixed-use properties. Loan terms are generally for up to five years. Residential real estate loans have loan terms for up to thirty years and are generally secured by first deeds of trust on single-family residences. Syndicated loans are commercial variable rate senior loans originated on both a revolving and fixed-term basis, generally not in excess of seven years. These loans are generally secured by substantially all of the assets of the borrower, and, if applicable, of its subsidiaries. Loans held for sale consist solely of residential real estate loans which are aggregated prior to their sale. 6 NOTE C - TOTAL COMPREHENSIVE INCOME The components of total comprehensive income are summarized in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2001 2000 2001 2000 --------- ---------- -------- ---------- (THOUSANDS OF DOLLARS) Net income (loss) .............................................. $ 14,813 $ (268,073) $ 29,331 $ (258,589) Other comprehensive income: Net unrealized gains (losses) on investments, net of tax: Net change in unrealized gains (losses) during the period, net of deferred income tax expense (benefit) ........................... 753 (16,889) 19,344 (9,745) Less: reclassification adjustments, net of tax ............................................ 73 1,985 128 (588) -------- ---------- -------- ---------- Other comprehensive income (loss) ....................... 826 (14,904) 19,472 (10,333) -------- ---------- -------- ---------- Total comprehensive income (loss) .............................. $ 15,639 $ (282,977) $ 48,803 $ (268,922) ======== ========== ======== ==========
The net change in unrealized gains (losses) during the period is net of deferred income tax expense (benefit) of $405,000 and $(9,094,000) for the three months ended June 30, 2001 and 2000, respectively and $10,457,000 and $(5,564,000) for the six months ended June 30, 2001 and 2000, respectively. The reclassification adjustments are net of deferred income tax expense (benefit) of $40,000 and $(1,069,000) for the three months ended June 30, 2001 and 2000, respectively and $28,000 and $316,000 for the six months ended June 30, 2001 and 2000, respectively. The reclassification adjustments avoid double counting net unrealized gains (losses) included in accumulated other comprehensive income in different periods. 7 NOTE D - OPERATIONS BY REPORTABLE SEGMENT The Company's businesses are managed within two reportable segments: financial services and property and casualty insurance. Additionally, there are certain corporate revenues and expenses, comprised primarily of investment income, interest expense and certain general and administrative expenses, that the Company does not allocate to its segments. The following data for the three and six months ended June 30, 2001 and 2000 provide certain information necessary for reportable segment disclosure:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2001 2000 2001 2000 ---------- ----------- ----------- ----------- (THOUSANDS OF DOLLARS) REVENUES Financial services .............................. $115,019 $ 100,745 $230,174 $ 196,419 Property and casualty insurance ................. 102,160 326,426 250,233 622,075 Unallocated corporate ........................... 619 1,163 1,522 2,477 ---------- ----------- ----------- ----------- Total consolidated ............................. $217,798 $ 428,334 $481,929 $ 820,971 ========== =========== =========== =========== INCOME (LOSS) BEFORE INCOME TAXES Financial services .............................. $ 34,070 $ 23,072 $ 65,074 $ 43,902 Property and casualty insurance ................. (122) (425,833) (48) (425,766) Unallocated corporate ........................... (13,572) (14,844) (26,207) (22,193) ---------- ----------- ----------- ----------- Total consolidated ............................. $ 20,376 $ (417,605) $ 38,819 $ (404,057) ========== =========== =========== ===========
8 NOTE E - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share ("EPS") for the three and six months ended June 30, 2001 and 2000:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 -------- ---------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income from continuing operations (numerator for basic earnings per share) .......................... $ 14,284 $ (270,318) $ 26,366 $ (260,834) Effect of dilutive securities: LYONs ............................................................. 31 - 61 - -------- ---------- -------- ---------- Income from continuing operations available to common stockholders after assumed conversions (numerator for diluted earnings per share) ............ $ 14,315 $ (270,318) $ 26,427 $ (260,834) ======== ========== ======== ========== Weighted-average shares (denominator for basic earnings per share) ....................................................... 65,108 62,939 64,700 62,529 Effect of dilutive securities: Restricted stock 5,370 - 5,414 - LYONs ............................................................. 293 - 293 - -------- ---------- -------- ---------- Dilutive potential common shares .................................... 5,663 - 5,707 - Adjusted weighted-average shares and assumed conversions (denominator for diluted earnings per share) .......... 70,771 62,939 70,407 62,529 ======== =========== ======== ========== Basic earnings per share from continuing operations ................. $ 0.22 $ (4.29) $ 0.41 $ (4.17) ======== =========== ======== ========== Diluted earnings per share from continuing operations ............... $ 0.20 $ (4.29) $ 0.38 $ (4.17) ======== =========== ======== ==========
NOTE F - EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT In the first six months of 2001, the Company has extinguished $19,500,000 par value of its 7.875% Series B Senior Notes due 2009. The extinguishment of debt resulted in after-tax gains of $2,436,000, and $529,000 for the three months ended March 31 and the three months ended June 30, respectively. In the second quarter of 2000, the Company extinguished $6,300,000 par value of its 7.70% Series B Senior Notes due 2004. This extinguishment of debt resulted in an after-tax gain of $2,245,000. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those related to the plans and objectives of management for future operations, projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, economic performance and other expectations and beliefs concerning future developments and their potential effects on Fremont General Corporation. Actual developments and/or results could differ materially from those anticipated by the Company as a result of, among other things: the variability of business conditions, the inherent difficulty of accurately forecasting revenues and expenses, Fremont General Corporation's businesses' ability to sell its products, to make loans and to access capital resources and the associated costs of doing so, the accuracy in projecting loss reserves, changes in the frequency, severity of claims and catastrophic events, inability to secure regulatory approvals from, or certain determinations or actions by, the California Department of Insurance ("DOI") on various matters, the impact of competition and pricing environments, changes in interest rates, effect of the performance of financial markets on investment income and fair values of investments, adverse state and federal legislation, regulation and actions, adverse court decisions and judicial climate, changes in the medical, legal and rehabilitation cost control environment, increases in fraud and abuse, changes in asset valuations and general economic conditions and trends, and other risks and uncertainties detailed in this section and elsewhere in this Form 10-Q and from time to time in Fremont's other reports, press releases and filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update such forward-looking statements. GENERAL Fremont General Corporation ("Fremont" or "the Company") is a financial services holding company. Fremont manages its business through two operating segments: (i) financial services and (ii) property and casualty insurance. Fremont's financial services' segment is consolidated within Fremont General Credit Corporation, which is engaged in collateralized commercial and consumer lending, primarily on real estate, nationwide through its California-chartered industrial bank subsidiary, Fremont Investment & Loan ("FIL"). Fremont's property and casualty insurance segment is consolidated within Fremont Compensation Insurance Group ("FCIG") and substantially all of its insurance operation is represented by the underwriting of workers' compensation insurance policies. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented under Item 1, and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. RESULTS OF OPERATIONS The Company reported net income of $14.8 million and $29.3 million for the three and six months ended June 30, 2001. This was comprised of net income from continuing operations of $14.3 million and $26.4 million and after-tax gains on the extinguishment of debt of $529,000 and $2.9 million, respectively. This is compared to net losses from continuing operations of $270.3 million and $260.8 million for the same respective periods of 2000. 10 The following table presents a summary of the Company's income (loss) before taxes by business segment and net after tax income for the three and six months ended June 30, 2001 and 2000, respectively:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 --------- ---------- --------- ---------- (THOUSANDS OF DOLLARS) Income (loss) before taxes: Financial services ............................................... $ 34,070 $ 23,072 $ 65,074 $ 43,902 Property and casualty insurance .................................. (122) (425,833) (48) (425,766) Unallocated corporate interest and other expenses ................ (13,572) (14,844) (26,207) (22,193) --------- ---------- --------- ---------- Total income before taxes from continuing operations ............... 20,376 (417,605) 38,819 (404,057) Income tax expense (benefit) ....................................... 6,092 (147,287) 12,453 (143,223) --------- ---------- --------- ---------- Net income (loss) from continuing operations ....................... 14,284 (270,318) 26,366 (260,834) Extraordinary gain on extinguishment of debt, net of tax ........... 529 2,245 2,965 2,245 --------- ---------- --------- ---------- Net income (loss) .................................................. $ 14,813 $ (268,073) $ 29,331 $ (258,589) ========= ========== ========= ==========
The Company's financial services segment recorded income before taxes for the three and six months ended June 30, 2001 of $34.1 million and $65.1 million, respectively, as compared to $23.1 million and $43.9 million for the same respective periods in 2000. The increase in income before taxes for the quarter ended June 30, 2001 represents a 48% increase over the results for the same respective period of 2000 and, is a result of an increased level of interest-bearing assets, primarily commercial real estate loans, lower operating expense ratios and higher levels of gains on the whole loan sales of residential real estate loans, offset by lower interest margins and a higher provision for loan losses. The Company's loans receivable, before allowance for loan losses, were approximately $3.70 billion at June 30, 2001, as compared to $3.47 billion and $3.20 billion at December 31, 2000 and June 30, 2000, respectively. Operating expenses for the financial services segment, as a percentage of average interest-bearing assets, decreased to 1.6% and 1.7% during the three and six month periods ended June 30, 2001 as compared to 2.2% and 2.4% for the same respective periods of 2000. This decrease is a result of cost reduction programs implemented by the Company and various operating efficiencies associated with increased volumes of loan originations and outstandings. Gains on the whole loan sales of residential real estate loans, net of reductions in the carrying valuations of loans held for sale, increased from $2.9 million and $4.4 million in the three and six months ended 2000 to $6.2 million and $12.5 million for the same respective periods of 2001. This increase is primarily attributable to improved market conditions for the pricing of residential real estate loans and the Company's ability to lower its costs associated with originating these loans. The volume of loans sold in the second quarter of 2000 was $609 million as compared to $702 million in the second quarter of 2001. The Company's property and casualty insurance segment recorded a loss before taxes of $122,000 and $48,000 for the three and six months ended June 30, 2001, respectively, as compared to a $425.8 million loss before 11 taxes for both the three and six month periods ended June 30, 2000. The combined ratio was 132.8% and 127.4% for the three and six months ended June 30, 2001 as compared to 259.0% and 189.4% for the same respective periods of 2000. As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, the Company's workers' compensation insurance subsidiaries incurred substantial operating losses during 2000 and, as a result, operate under an agreement with the California Department of Insurance ("DOI") which provides for additional regulatory supervision of certain of their business activities. The higher combined ratio in the second quarter of 2000 (and resultantly, the first six months of 2000) was predominantly the result of increases in the Company's gross liability for loss and loss adjustment expenses totaling $450 million. Due to the regulatory involvement, A. M. Best reduced their rating on the Company's workers' compensation insurance subsidiaries to "E" (Under Regulatory Supervision) in December 2000. This rating downgrade severely limited the Company's ability to retain policy renewals and to originate new business. In an effort to mitigate the impact of its lowered rating, the Company's workers' compensation insurance subsidiaries finalized, in May 2001, a fronting facility with "A" rated (by A. M. Best) affiliates of Clarendon Insurance Group. The establishment of this fronting facility provides the Company with the ability to issue new and renewal workers' compensation insurance policies under the name of an insurance carrier with an "A" rating. As of July 31, 2001, a total of $25.2 million in estimated gross annual premium was in force under the fronting facility. The unallocated corporate interest and other expense loss before taxes for the three and six months ended June 30, 2001, was $13.6 million and $26.2 million as compared to $14.8 million and $22.2 million for the same respective periods in 2000. The increase in the total loss before taxes for the six months ended June 30, 2001 is due primarily to lower affiliate interest income from the Company's downstream insurance property and casualty holding company subsidiary. The lower affiliate interest income resulted from the Company's conversion on April 1, 2000 of approximately $267 million in notes receivable due from this subsidiary to common equity, thereby establishing a capital contribution to the affiliate.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- (THOUSANDS OF DOLLARS) Revenues: Financial services ...................... $ 115,019 $ 100,745 $ 230,174 $ 196,419 Property and casualty insurance ......... 102,160 326,426 250,233 622,075 Unallocated corporate revenue ........... 619 1,163 1,522 2,477 --------- --------- --------- --------- Total ......................... $ 217,798 $ 428,334 $ 481,929 $ 820,971 ========= ========= ========= =========
The Company generated revenues of approximately $218 million and $482 million for the three and six months ended June 30, 2001, as compared to $428 million and $821 million for the same respective periods in 2000. Lower consolidated revenues in 2001 resulted from significantly lower workers' compensation insurance premiums 12 in the property and casualty insurance segment offset by higher revenues in the financial services segment. The Company's workers' compensation insurance premiums earned dropped significantly primarily as a result of the workers' compensation insurance subsidiaries rating downgrade to "E". The Company also reduced the geographic operating area of its workers' compensation insurance operation from a nationwide base to originating premiums only in the western United States, primarily in California. See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for a more detailed discussion on the restructuring of the Company's workers' compensation insurance operation during 2000. Revenues in the financial services segment increased in 2001 as the Company's average interest-bearing assets increased to $4.51 billion and $4.40 billion in the three and six months ended June 30, 2001 from $3.95 billion and $3.89 billion in the same respective periods in 2000. Net margins (annualized) on the Company's financial services average interest-bearing assets increased by 0.05% and decreased by 0.19% in the second quarter of 2001 as compared to the first quarter of 2001 and the second quarter of 2000, respectively. During the three months ended June 30, 2001 the Company extinguished $2 million in principal amount of its publicly traded 7.875% Series B Senior Notes due 2009 ("Senior Notes"). The Company recognized an after-tax gain of $529,000 from this extinguishment in the three months ended June 30, 2001. The after-tax gain is reported as an extraordinary item in the accompanying Consolidated Statements of Operations. Income tax expense of $6.1 million and $12.5 million for the three and six months ended June 30, 2001, represents effective tax rates of 30% and 32%, respectively, on income before taxes and extraordinary items of $20.4 million and $38.8 million for the same respective periods. The effective tax rates for both periods presented are different than the federal enacted tax rate of 35%, due mainly to tax exempt investment income and non-deductible goodwill amortization. 13 FINANCIAL SERVICES OPERATION The following table summarizes the Company's financial services segment earnings for the respective quarters indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 --------- ---------- --------- --------- (THOUSANDS OF DOLLARS) FINANCIAL SERVICES Interest and fee income on loans receivable ........................ $ 103,329 $ 91,971 $ 202,342 $ 179,306 Interest income on investment securities ........................... 2,164 4,289 7,590 7,880 --------- --------- --------- --------- Total interest income ........................................... 105,493 96,260 209,932 187,186 Interest expense ................................................... 57,328 52,374 117,019 100,902 --------- --------- --------- --------- Net interest income ............................................. 48,165 43,886 92,913 86,284 Provision for loan losses .......................................... 6,112 3,372 11,849 5,405 --------- --------- --------- --------- Net interest income after provision for loan losses ............. 42,053 40,514 81,064 80,879 Other non-interest income .......................................... 9,526 4,485 20,242 9,233 Operating expenses ................................................. (17,509) (21,927) (36,232) (46,210) --------- --------- --------- --------- Income before taxes ................................................ $ 34,070 $ 23,072 $ 65,074 $ 43,902 ========= ========= ========= =========
14 The following table shows loans receivable in the various financing categories and the percentages of the total represented by each category:
JUNE 30, DECEMBER 31, JUNE 30, 2001 2000 2000 ------------------ ------------------ ---------------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ----------- ----- ----------- ----- ----------- ----- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Commercial real estate loans .............. $ 3,281,449 89% $ 2,923,269 84% $ 2,638,466 82% Residential real estate loans ............. 151,647 4% 239,655 7% 141,298 4% Syndicated loans .......................... 271,895 7% 317,471 9% 348,202 11% Insurance premium finance loans ........... - - - - 83,083 3% Other ..................................... 10,408 - 8,942 - 4,023 - ----------- ------ ----------- ----- ----------- ----- Total loans receivable .................... 3,715,399 100% 3,489,337 100% 3,215,072 100% Yield discounts and deferred fees ......... (19,535) ====== (18,482) ===== (15,086) ===== ----------- ----------- ----------- Total net loans receivable ................ 3,695,864 3,470,855 3,199,986 Less allowance for loan losses ............ (73,134) (67,599) (59,574) ----------- ----------- ----------- Total loans receivable, net of allowance .. $ 3,622,730 $ 3,403,256 $ 3,140,412 =========== =========== ============ Residential real estate loans held for sale ................................ $ 607,934 $ 298,568 $ 402,269 =========== =========== ===========
As of June 30, 2001, approximately 49% of the Company's commercial real estate loans outstanding were secured by properties located in California; the next largest state, Virginia, represented approximately 6% of the loan portfolio. The Company's largest single commercial real estate loan outstanding at June 30, 2001 was $37.4 million. 15 The following table breaks out commercial real estate loans by amounts outstanding as of June 30, 2001 (in thousands of dollars, except percents and number of loans):
NUMBER TOTAL LOANS LOAN SIZE RANGE OF LOANS OUTSTANDING % ----------------------------- -------- ------------------ $0 - $5 million .................... 457 $ 834,748 26% > $5 million - $10 million ......... 113 798,861 24% > $10 million - $15 million ........ 48 597,308 18% > $15 million - $20 million ........ 28 495,123 15% > $20 million - $30 million ........ 16 383,344 12% > $30 million - $40 million ........ 5 172,065 5% > $40 million ...................... - - - -------- ------------------- 667 $ 3,281,449 100% ======== ===================
16 The following table identifies the interest income, interest expense, average interest bearing assets and liabilities, and interest margins for the Company's financial services operation:
SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------------------------- 2001 2000 ------------------------------------- -------------------------------------- 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 ........... $ 3,107,176 $ 155,503 10.09% $ 2,437,521 $ 120,917 9.98% Residential real estate loans (3) ...... 713,244 33,821 9.56 788,548 38,000 9.69 Syndicated loans ....................... 303,119 13,018 8.66 342,174 16,481 9.69 Insurance premium finance loans ........ - - - 72,097 3,908 10.90 Investments ............................ 278,046 7,590 5.50 245,717 7,880 6.45 ----------- --------- ----------- --------- Total interest-bearing assets ........ $ 4,401,585 $ 209,932 9.62% $ 3,886,057 $ 187,186 9.69% =========== ========= =========== ========= Interest-bearing liabilities: Time deposits .......................... $ 3,234,030 $ 99,289 6.19% $ 2,840,573 $ 82,495 5.84% Savings deposits ....................... 680,811 16,311 4.83 676,585 18,181 5.40 Debt with banks and other institutions ................... 64,272 1,380 4.33 6,621 207 6.29 Other .................................. 3,915 39 2.01 1,933 19 1.98 ----------- --------- ----------- --------- Total interest-bearing liabilities ... $ 3,983,028 $ 117,019 5.92% $ 3,525,712 $ 100,902 5.76% -========== ========= =========== ========= Net interest income ...................... $ 92,913 $ 86,284 ========= ========= Percent of average interest-bearing assets: Interest income ........................ 9.62% 9.69% Interest expense ....................... 5.36% 5.22% --------- --------- Net interest margin .................. 4.26% 4.47% ========= ========= (1) Annualized. (2) Average loan balances include non-accrual loan balances and exclude residual interests in securitized loans. (3) Includes loans held for sale.
The Company's net interest margin as a percentage of average interest-bearing assets decreased to 4.26% in the six months ended June 30, 2001 as compared to the same respective period in 2000 level of 4.47%. The decrease is due primarily to the differential between the repricing of the Company's variable-rate loans receivable and the Company's deposits which fund the loans when interest rates were declining during the first and second quarters of 2001, as well as the effect of an increase in non-interest accruing loans. 17 The following table describes the asset classifications, loss experience and allowance for loan losses reconciliation of the financial services operation as of or for the periods ended as shown below:
AS OF OR FOR SIX MONTH PERIOD ENDING JUNE 30, ----------------------- 2001 2000 ------- ------- (THOUSANDS OF DOLLARS) Non-accrual loans receivable: Commercial real estate loans ............................................. $ 54,559 $ 21,108 Residential real estate loans ............................................ 17,634 19,777 Syndicated loans ......................................................... 4,970 - Insurance premium finance loans .......................................... - 668 Other .................................................................... 129 16 -------- -------- 77,292 41,569 Real estate owned ("REO"): Commercial real estate loans ............................................. 9,868 - Residential real estate loans ............................................ 5,803 2,965 -------- -------- 15,671 2,965 -------- -------- Total non-performing assets ................................................. $ 92,963 $ 44,534 ======== ======== Accrual loans 90 days past due: Commercial real estate loans ............................................. $ 16,373 $ 2,237 Insurance premium finance loans .......................................... - 561 Other .................................................................... - 384 -------- -------- $ 16,373 $ 3,182 ======== ======== Beginning allowance for loan losses ........................................ $ 67,599 $ 56,494 Provision for loan losses .................................................. 11,849 5,405 Charge-offs: Commercial real estate loans ............................................. 1,971 1,763 Residential real estate loans ............................................ 581 598 Syndicated loans ......................................................... 3,855 - Insurance premium finance loans .......................................... - 77 -------- -------- Total charge-offs ...................................................... 6,407 2,438 -------- -------- Recoveries: Commercial real estate loans ............................................. - 43 Residential real estate loans ............................................ 93 57 Syndicated loans ......................................................... - - Insurance premium finance loans .......................................... - 13 -------- -------- Total recoveries ....................................................... 93 113 -------- -------- Net charge-offs ............................................................ 6,314 2,325 -------- -------- Ending allowance for loan losses ........................................... $ 73,134 $ 59,574 ======== ========
18
AS OF OR FOR SIX MONTH PERIOD ENDING JUNE 30, ----------------------------- 2001 2000 ----------- ----------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Allocation of allowance for loan losses: Commercial real estate loans ............................................. $ 61,851 $ 48,764 Residential real estate loans ............................................ 5,379 4,392 Syndicated loans ......................................................... 5,904 5,573 Insurance premium finance loans .......................................... - 845 ----------- ----------- Total allowance for loan losses ....................................... $ 73,134 $ 59,574 =========== =========== As of end of period indicated: Total loans receivable before allowance for loan losses .................. $ 3,695,864 $ 3,199,986 Non-performing assets to total loans receivable plus REO ................. 2.50% 1.39% Allowance for loan losses to total loans receivable ...................... 1.98% 1.86% Allowance for loan losses to non-performing assets ....................... 78.67% 133.77% Accrual loans 90 days past due to total loans receivable ................. 0.44% 0.10% For period ended: Average total loans receivable (1) ....................................... $ 4,123,539 $ 3,640,340 Net charge-offs to average total loans receivable ........................ 0.31% 0.13% (1) Includes loans held for sale.
Non-performing assets increased to $93.0 million, or 2.50% of total loans receivable plus real estate owned at June 30, 2001, from $44.5 million or 1.39% at June 30, 2000. The $93.0 million of non-performing assets at June 30, 2001, however, is a decrease from $100.3 million, or 2.73% of total loans receivable plus real estate owned, at March 31, 2001. Non-performing assets totaled $86.1 million as of December 31, 2000, or 2.47% of total loans receivable plus real estate owned. In addition, there were $16.4 million in loans on accrual status at June 30, 2001 which were 90 days or greater past due. Accruing loans past due 90 days or more include approximately $7.0 million in loans that are contractually past maturity, but continue to make interest payments. The level of non-performing assets fluctuates and specific loans can have a material impact upon the total. The provision for loan losses for the six months ended June 30, 2001 increased to $11.8 million, as compared to $5.4 million in the same respective period of 2000. The allowance for loan losses, however, as a percentage of total loans receivable, excluding loans held for sale, remained relatively consistent at 1.98% as of June 30, 2001, as compared to 1.93% at March 31, 2001 and 1.95% at December 31, 2000, respectively. The allowance for loan losses, as a percentage of total loans receivable, was 1.86% at June 30, 2000. The increase in the provision for loan losses during the six months ended June 30, 2001, as compared to same respective period of 2000, is primarily due to increased levels of net loan charge-offs in the Company's syndicated loan portfolio and a slightly higher level in the allowance for loan losses as a percentage of total loans receivable. 19 PROPERTY AND CASUALTY INSURANCE OPERATION The following table summarizes the Company's property and casualty insurance segment earnings for the respective quarters indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 2001 2000 2001 2000 --------- ----------- ---------- ----------- (THOUSANDS OF DOLLARS) Property and Casualty Insurance Net earned premium ................................. $ 77,040 $ 289,575 $ 195,728 $ 548,685 Loss and loss adjustment expenses .................. (71,756) (648,866) (171,968) (854,445) Underwriting expenses .............................. (29,336) (74,974) (74,266) (152,385) Policyholder dividends ............................. (1,215) (26,137) (3,182) (32,485) --------- ---------- ---------- ----------- Underwriting loss ............................... (25,267) (460,402) (53,688) (490,630) Investment income .................................. 25,219 34,900 52,469 71,128 Realized gains (losses) on investments ............. 78 (28) 1,412 (239) Interest expense ................................... (248) (508) (493) (6,436) Other .............................................. 96 205 252 411 --------- ---------- ---------- ----------- Loss before taxes .................................. $ (122) $ (425,833) $ (48) $ (425,766) ========= ========== ========== ===========
Set forth below are the respective underwriting ratios of the Company's property and casualty insurance business as determined in accordance with generally accepted accounting principles ("GAAP"):
SIX MONTHS ENDED JUNE 30, ---------------- 2001 2000 ----- ----- Loss and loss adjustment expense ratio .......................... 87.9% 155.7% Underwriting expense ratio ...................................... 37.9% 27.8% Policyholders' dividend ratio ................................... 1.6% 5.9% ----- ----- Total combined ratio .......................................... 127.4% 189.4% ===== =====
During the six months ended June 30, 2001, the Company's property and casualty insurance operation's combined ratio was 127.4% as compared to 189.4% for the same respective period of 2000. The increased levels of loss and loss adjustment expenses in 2000 is due primarily to a $450 million addition to the Company's loss and loss adjustment expense reserves during the second quarter of 2000. The increase in the unallocated loss adjustment expense and the underwriting expense components of these ratios is due primarily to higher earned premiums in the 20 six months ended June 30, 2000 as compared to the six months ended June 30, 2001 and the effect of premiums earned declining faster than expenses were reduced. See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for special discussions of loss and loss adjustment expense reserve increases taken by the Company during 1999 and 2000. Investment income decreased during the three and six months ended June 30, 2001 to $25.2 million and $52.5 million, as compared to $34.9 million and $71.1 million for the same respective periods of 2000. This decrease was due primarily to significantly lower amounts of invested assets during the three and six months ended June 30, 2001 and lower investment yields. The Company's property and casualty insurance operation continued to experience significant negative cash flow during the second quarter of 2001 as claims were paid out with less new premium volume being generated. The Company expects to continue to experience negative cash flow in this segment into the foreseeable future due to its expectation of significantly reduced levels of workers' compensation insurance premiums. The Company's property and casualty insurance segment also had less interest expense in the six months ended June 30, 2001, as compared to the first six months of 2000, due to the conversion on April 1, 2000 of approximately $267 million of the property and casualty insurance's holding company debt into equity. Using estimated annual premiums on policies in effect, the Company's gross premiums in force have decreased to $278.7 million at June 30, 2001 from $695.2 million and $974.6 million at December 31, 2000 and June 30, 2000, respectively. Gross premiums in force have steadily declined since June 30, 2000 as a consequence of ratings downgrades, the Company's efforts to bring premium levels in line with the levels of statutory surplus in its workers' compensation insurance subsidiaries, and the restructuring of the workers' compensation insurance operation in December of 2000. The Company's commitment to strengthening its premium rate levels has also resulted in a reduction in its renewal business, which has contributed to further reductions in the Company's gross premiums in force. LIQUIDITY AND CAPITAL RESOURCES The Company's industrial bank subsidiary finances its lending activities primarily through Federal Deposit Insurance Corporation ("FDIC") insured customer deposits, which have grown to $4.06 billion at June 30, 2001 from $3.85 billion at December 31, 2000. The industrial bank is also eligible for financing through the Federal Home Loan Bank of San Francisco ("FHLB"), which financing is available at various rates and terms. At June 30, 2001, the industrial bank had borrowing availability with the FHLB of $659.9 million, of which $225 million was borrowed and outstanding. In addition, the industrial bank has a line of credit with the Federal Reserve Bank of San Francisco ("FRB") with a borrowing availability of $108.4 million at June 30, 2001. There were no amounts outstanding under the line of credit with the FRB at June 30, 2001. The Company believes it has sufficient liquidity and capital resources to fund its financial services operations for the foreseeable future. 21 The property and casualty insurance operation has several sources of funds to meet its obligations, primarily its investment securities portfolio and recoveries from reinsurance contracts. The Company invests in fixed income and preferred equity securities with an objective of providing a reasonable return while limiting credit and liquidity risk. With the property and casualty insurance operations expectations of significantly reduced levels of workers' compensation insurance premiums, the Company expects to experience negative cash flow in its property and casualty insurance operation for the foreseeable future. The Company, however, believes it has adequate levels of liquidity and invested assets to meet ongoing obligations to policyholders and claimants, and to cover ordinary operating expenses. As a holding company, Fremont General Corporation pays its operating expenses, meets its other obligations and pays stockholders' dividends from its cash on hand, intercompany tax payments from its industrial bank, management fees paid by its subsidiaries and dividends from its subsidiaries. Dividends paid on Fremont General Corporation's common stock aggregated $4.2 million and $11.0 million during the six months ended June 30, 2001 and 2000, respectively, however, the Company can give no assurance that future common stock dividends will be declared. As a result of the substantial operating losses incurred by the Company's property and casualty insurance operations during 2000, and its agreement with the DOI, Fremont does not expect to receive any dividends from its property and casualty insurance operations for the foreseeable future. Under the agreement with the DOI, Fremont General Corporation has agreed to provide additional capital to the workers' compensation insurance subsidiaries in five annual installments of $6 million each, the first installment of which was contributed in the first quarter of 2001. The Company has available to it significant tax net operating loss carryforwards, which may be utilized to reduce or eliminate future tax payments. As a result, intercompany payments of tax obligations from the industrial bank, which would otherwise be payable to taxing authorities, are available for use by Fremont General Corporation for general working capital purposes. Under the fronting facility established with affiliates of Clarendon Insurance Group (together "Clarendon"), Fremont General Corporation has guaranteed the payment to Clarendon of its fronting fee for the underwriting period of May 1, 2001 through May 31, 2002. The guarantee has been collateralized by a cash payment in May 2001 by Fremont General Corporation to Clarendon in the amount of $13 million. The $13 million in collateral will be returned, with interest, to Fremont General Corporation as Clarendon collects its fronting fee from premiums written under the fronting facility. The Company, however, can give no assurance that enough premiums will be written under the fronting facility to fully recover its $13 million in collateral. The $13 million represents the fronting fee percentage due Clarendon of 6.5% times the premium volume guaranty of $200 million during the underwriting period. A subsidiary of Fremont Indemnity Company, a workers' compensation insurance subsidiary, is to receive certain amounts from Clarendon for underwriting and claims administration expenses. 22 Fremont General Corporation has cash and short term investments of $57.2 million at June 30, 2001 and no debt maturities until March of 2004 and believes that, with its other available sources of liquidity, it will have sufficient means to satisfy its liquidity needs for at least the next twelve months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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. Changes in interest rates will affect the Company's net investment income, loan interest, interest expense and total stockholders' equity. The objective of Fremont's asset and liability management activities is to provide the highest level of net interest and investment income and to seek cost effective sources of capital, while maintaining acceptable levels of interest rate and liquidity risk. Fremont 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. Quantitative and qualitative disclosures about the Company's market risk are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. There have been no material changes in such risks or in the Company's asset and liability management activities during the six months ended June 30, 2001. 23 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. None. ITEM 2: Changes in Securities and Use of Proceeds. None. ITEM 3: Defaults Upon Senior Securities. None. ITEM 4: Submission of Matters to a Vote of Security Holders. None. a) The Annual Meeting of Stockholders was held on May 31, 2001. b) The following directors were elected to serve until the next Annual Meeting of Stockholders or until their successors have been elected and qualified: J.A. McIntyre D.W. Morrisroe W.R. Bailey L.J. Rampino T.W. Hayes D.C. Ross c) The directors named in (b) above were elected. The results of the voting of the 64,864,497 shares represented at the meeting are summarized in the following table: VOTES FOR WITHHELD ---------- --------- J.A. McIntyre 60,354,049 4,510,448 W.R. Bailey 60,250,650 4,613,847 T.W. Hayes 62,398,463 2,466,034 D.W. Morrisroe 62,372,131 2,492,366 L.J. Rampino 60,167,288 4,697,209 D.C. Ross 62,332,135 2,532,362 d) The appointment of the accounting firm of Ernst & Young LLP as the Corporation's Independent Auditors was ratified. The results of the voting of the 64,864,497 shares represented at the meeting are summarized in the following table: FOR AGAINST ABSTAINED ---------- ------- --------- 63,655,313 980,294 228,890 ITEM 5: Other Information. None. 24 ITEM 6: Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits. EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 1998, Commission File Number 1-8007.) 3.2 Certificate of Amendment of Articles of Incorporation of Fremont General Corporation. (Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1998, Commission File Number 1-8007.) 3.3 Amended and Restated By-Laws of Fremont General Corporation. (Incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-3 filed on October 1, 1993, Registration Number 33-68098.) 4.3 Indenture among the Registrant, the Trust and Bank of New York (originated with First Interstate Bank of California), a New York Banking Corporation, as trustee. (Incorporated by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.4 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. (Incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.5 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. (Incorporated by reference to Exhibit 4.6 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.6 Common Securities Guarantee Agreement by the Registrant. (Incorporated by reference to Exhibit 4.7 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Incorporated by reference to Exhibit 4.8 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 25 EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 10.1(a)* Fremont General Corporation Supplemental Executive Retirement Plan. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 filed on April 9, 2001, Registration Number 333-58560.) 10.1(b)* First Amendment to the Fremont General Corporation Supplemental Executive Retirement Plan. 10.2* Fremont General Corporation Deferred Compensation Trust. (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 filed on April 9, 2001, Registration Number 333-58560.) 10.3(a)* Fremont General Corporation Excess Benefit Plan Restated effective as of January 1, 1997 and First Amendment dated December 21, 1998. (Incorporated by reference to Exhibit 10.8 (a) to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1998, Commission File Number 1-8007.) 10.3(b)* Second Amendment to the Fremont General Corporation Excess Benefit Plan. 10.3(c)* Trust Agreement for Fremont General Corporation Excess Benefit Plan. (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 10.4* 1997 Stock Plan and related agreements. (Incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007.) 10.5* The 1999 Long Term Incentive Compensation Plan of the Registrant. (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1999, Commission File Number 1-8007.) 10.6* 1995 Restricted Stock Award Plan As Amended and forms of agreement thereunder. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8/S-3 filed on December 9, 1997, Registration Number 333-17525.) 10.7(a)* Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Registrant and Merrill Lynch Trust Company of California. (Incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 10.7(b)* November 11, 1999 Amendment to Exhibit A to the Fremont General Corporation Employee Benefits Trust ("Grantor Trust") dated September 7, 1995 between the Registrant and Merrill Lynch Trust Company of California. (Incorporated by reference to Exhibit 10.13 (a) to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999, Commission File Number 1-8007.) 10.8(a)* Employment Agreement between the Registrant and James A. McIntyre dated January 1, 1994. (Incorporated by reference to Exhibit (10)(i) to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007.) 26 EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 10.8(b)* First Amendment to Employment Agreement between the Registrant and James A. McIntyre dated August 1, 1996. (Incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007.) 10.8(c)* Second Amendment to Employment Agreement between the Registrant and James A. McIntyre dated August 8, 1997. (Incorporated by reference to Exhibit 10.14 (c) to the Registrant's Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007.) 10.8(d)* Third Amendment to Employment Agreement between the Registrant and James A. McIntyre dated August 1, 2000. (Incorporated by reference to Exhibit 10.9 (d) to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 10.9* Employment Agreement between the Registrant and Louis J. Rampino dated February 25, 2000. (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 10.10* Employment Agreement between the Registrant and Wayne R. Bailey dated February 25, 2000. (Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 10.11* Employment Agreement between the Registrant and Raymond G. Meyers dated February 25, 2000. (Incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.12* Management Continuity Agreement between the Registrant and John Donaldson dated April 1, 2000. (Incorporated by reference to Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.13* Management Continuity Agreement between the Registrant and Patrick E. Lamb dated April 1, 2000. (Incorporated by reference to Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.14* Management Continuity Agreement between the Registrant and Alan Faigin dated April 1, 2000. (Incorporated by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.15* Management Continuity Agreement between the Registrant and Eugene E. McNany, Jr. dated April 1, 2000. (Incorporated by reference to Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.16* Management Continuity Agreement among the Registrant, Fremont Investment & Loan and Murray L. Zoota dated May 15, 2000. (Incorporated by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007). 27 EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 10.17* Management Continuity Agreement among the Registrant, Fremont Investment & Loan and Gwyneth E. Colburn dated May 15, 2000. (Incorporated by reference to Exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007). 10.18* Management Continuity Agreement among the Registrant, Fremont Investment & Loan and Kyle R. Walker dated May 15, 2000. (Incorporated by reference to Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007). 10.19* Management Incentive Compensation Plan of Fremont General Corporation and Affiliated Companies. (Incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q, for the period ended March 31, 2000, Commission File Number 1-8007.) 10.20 Continuing Compensation Plan for Retired Directors. (Incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 10.21 Letter Agreement among Fremont Compensation Insurance Group, the Registrant and the State of California Department of Insurance dated November 27, 2000. (Incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) ---------------------------------- *Management or compensatory plans or arrangements. With respect to long-term debt instruments, the Registrant undertakes to provide copies of such agreements upon request by the Commission. (b) Reports on Form 8-K. None. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FREMONT GENERAL CORPORATION Date: August 14, 2001 /s/ LOUIS J. RAMPINO ------------------------------- Louis J. Rampino, President, Chief Operating Officer and Director Date: August 14, 2001 /s/ PATRICK E. LAMB ------------------------------- Patrick E. Lamb, Senior Vice President and Principal Accounting Officer 29 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 1998, Commission File Number 1-8007.) 3.2 Certificate of Amendment of Articles of Incorporation of Fremont General Corporation. (Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1998, Commission File Number 1-8007.) 3.3 Amended and Restated By-Laws of Fremont General Corporation. (Incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-3 filed on October 1, 1993, Registration Number 33-68098.) 4.3 Indenture among the Registrant, the Trust and Bank of New York (originated with First Interstate Bank of California), a New York Banking Corporation, as trustee. (Incorporated by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.4 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. (Incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.5 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. (Incorporated by reference to Exhibit 4.6 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.6 Common Securities Guarantee Agreement by the Registrant. (Incorporated by reference to Exhibit 4.7 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Incorporated by reference to Exhibit 4.8 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 10.1(a)* Fremont General Corporation Supplemental Executive Retirement Plan. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 filed on April 9, 2001, Registration Number 333-58560.) 10.1(b)* First Amendment to the Fremont General Corporation Supplemental Executive Retirement Plan. 10.2* Fremont General Corporation Deferred Compensation Trust. (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 filed on April 9, 2001, Registration Number 333-58560.) 10.3(a)* Fremont General Corporation Excess Benefit Plan Restated effective as of January 1, 1997 and First Amendment dated December 21, 1998. (Incorporated by reference to Exhibit 10.8 (a) to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1998, Commission File Number 1-8007.) 10.3(b)* Second Amendment to the Fremont General Corporation Excess Benefit Plan. 10.3(c)* Trust Agreement for Fremont General Corporation Excess Benefit Plan. (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 10.4* 1997 Stock Plan and related agreements. (Incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007.) 10.5* The 1999 Long Term Incentive Compensation Plan of the Registrant. (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1999, Commission File Number 1-8007.) 10.6* 1995 Restricted Stock Award Plan As Amended and forms of agreement thereunder. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8/S-3 filed on December 9, 1997, Registration Number 333-17525.) 10.7(a)* Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Registrant and Merrill Lynch Trust Company of California. (Incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 10.7(b)* November 11, 1999 Amendment to Exhibit A to the Fremont General Corporation Employee Benefits Trust ("Grantor Trust") dated September 7, 1995 between the Registrant and Merrill Lynch Trust Company of California. (Incorporated by reference to Exhibit 10.13 (a) to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999, Commission File Number 1-8007.) 10.8(a)* Employment Agreement between the Registrant and James A. McIntyre dated January 1, 1994. (Incorporated by reference to Exhibit (10)(i) to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007.) EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 10.8(b)* First Amendment to Employment Agreement between the Registrant and James A. McIntyre dated August 1, 1996. (Incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 1997, Commission File Number 1-8007.) 10.8(c)* Second Amendment to Employment Agreement between the Registrant and James A. McIntyre dated August 8, 1997. (Incorporated by reference to Exhibit 10.14 (c) to the Registrant's Quarterly Report on Form 10-Q, for the period ended September 30, 1997, Commission File Number 1-8007.) 10.8(d)* Third Amendment to Employment Agreement between the Registrant and James A. McIntyre dated August 1, 2000. (Incorporated by reference to Exhibit 10.9 (d) to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 10.9* Employment Agreement between the Registrant and Louis J. Rampino dated February 25, 2000. (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 10.10* Employment Agreement between the Registrant and Wayne R. Bailey dated February 25, 2000. (Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) 10.11* Employment Agreement between the Registrant and Raymond G. Meyers dated February 25, 2000. (Incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.12* Management Continuity Agreement between the Registrant and John Donaldson dated April 1, 2000. (Incorporated by reference to Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.13* Management Continuity Agreement between the Registrant and Patrick E. Lamb dated April 1, 2000. (Incorporated by reference to Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.14* Management Continuity Agreement between the Registrant and Alan Faigin dated April 1, 2000. (Incorporated by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.15* Management Continuity Agreement between the Registrant and Eugene E. McNany, Jr. dated April 1, 2000. (Incorporated by reference to Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007.) 10.16* Management Continuity Agreement among the Registrant, Fremont Investment & Loan and Murray L. Zoota dated May 15, 2000. (Incorporated by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007). EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------- 10.17* Management Continuity Agreement among the Registrant, Fremont Investment & Loan and Gwyneth E. Colburn dated May 15, 2000. (Incorporated by reference to Exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007). 10.18* Management Continuity Agreement among the Registrant, Fremont Investment & Loan and Kyle R. Walker dated May 15, 2000. (Incorporated by reference to Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q, for the period ended June 30, 2000, Commission File Number 1-8007). 10.19* Management Incentive Compensation Plan of Fremont General Corporation and Affiliated Companies. (Incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q, for the period ended March 31, 2000, Commission File Number 1-8007.) 10.20 Continuing Compensation Plan for Retired Directors. (Incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007.) 10.21 Letter Agreement among Fremont Compensation Insurance Group, the Registrant and the State of California Department of Insurance dated November 27, 2000. (Incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, Commission File Number 1-8007.) ---------------------------------- *Management or compensatory plans or arrangements. With respect to long-term debt instruments, the Registrant undertakes to provide copies of such agreements upon request by the Commission.