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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, 2002
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 AUGUST 2, 2002
Common Stock, $1.00 par value 75,055,000
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FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 .................. 3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001 .... 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001............... 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................... 11
Item 3. Quantitative and Qualitative Disclosure About
Market Risk .......................................... 21
PART II - OTHER INFORMATION
Items 1-3. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders .... 22
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K ....................... 23
Signatures .......................................................... 27
2
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
ASSETS
Cash and cash equivalents ................................................... $ 171,756 $ 151,204
Investment securities available for sale at fair value
(cost: 2002 - $347,988; 2001- $341,721) ................................... 348,148 341,903
Loans receivable ............................................................ 3,929,185 3,757,222
Loans held for sale ......................................................... 1,059,669 755,367
Residual interests in securitized loans at fair value ....................... 29,948 41,840
Accrued interest receivable ................................................. 26,234 25,042
Deferred income taxes ....................................................... 291,913 316,169
Other assets ................................................................ 51,685 63,739
Assets held for discontinued insurance operations ........................... 2,146,487 2,556,519
----------- -----------
TOTAL ASSETS ........................................................... $ 8,055,025 $ 8,009,005
=========== ===========
LIABILITIES
Deposits .................................................................... $ 4,404,845 $ 4,256,422
Other liabilities ........................................................... 103,048 114,859
Short-term debt ............................................................. 640,000 309,000
Long-term debt .............................................................. 291,021 342,568
Liabilities of discontinued insurance operations ............................ 2,111,354 2,528,383
----------- -----------
TOTAL LIABILITIES ...................................................... 7,550,268 7,551,232
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: (2002-72,805,000 and 2001-70,795,000) ............ 72,805 70,795
Additional paid-in capital .................................................. 281,183 276,024
Retained earnings ........................................................... 102,846 64,129
Deferred compensation ....................................................... (52,181) (53,293)
Accumulated other comprehensive income ...................................... 104 118
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................. 404,757 357,773
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 8,055,025 $ 8,009,005
=========== ===========
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,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(RESTATED) (RESTATED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fee income on loans ............................ $ 106,935 $ 103,329 $ 206,312 $ 202,342
Interest income on investment securities .................... 1,224 2,783 2,246 9,112
--------- --------- --------- ---------
108,159 106,112 208,558 211,454
INTEREST EXPENSE:
Deposits .................................................... 36,417 55,958 74,088 115,600
Short-term debt ............................................. 2,817 1,370 4,407 1,419
Long-term debt .............................................. 8,732 9,427 17,780 18,887
--------- --------- --------- ---------
47,966 66,755 96,275 135,906
Net interest income ........................................... 60,193 39,357 112,283 75,548
Provision for loan losses ..................................... 20,913 6,112 36,424 11,849
--------- --------- --------- ---------
Net interest income after provision for loan losses ........... 39,280 33,245 75,859 63,699
NON-INTEREST INCOME:
Net gain on sale of residential real estate loans ........... 26,394 6,213 41,235 12,488
Net gains on whole loan sales - other ....................... 48 155 74 1,245
Other ....................................................... 4,889 3,385 8,298 7,496
--------- --------- --------- ---------
31,331 9,753 49,607 21,229
NON-INTEREST EXPENSE:
Compensation ................................................ 18,765 14,415 34,407 28,619
Occupancy ................................................... 2,143 2,022 4,206 4,055
Expenses and losses on real estate owned .................... 3,918 966 5,333 2,042
Other ....................................................... 6,520 5,097 13,435 11,345
--------- --------- --------- ---------
31,346 22,500 57,381 46,061
--------- --------- --------- ---------
Income before income taxes .................................... 39,265 20,498 68,085 38,867
Income tax expense ............................................ 16,347 8,571 27,632 15,159
--------- --------- --------- ---------
Net income from continuing operations ......................... 22,918 11,927 40,453 23,708
Discontinued insurance operations, net of tax ................. - 2,357 - 2,658
Extraordinary gains on extinguishment of debt, net of tax ..... 620 529 1,142 2,965
--------- --------- --------- ---------
Net income .................................................... $ 23,538 $ 14,813 $ 41,595 $ 29,331
========= ========= ========= =========
PER SHARE DATA:
BASIC:
Net income from continuing operations ....................... $ 0.34 $ 0.20 $ 0.61 $ 0.38
Discontinued insurance operations ........................... - 0.02 - 0.03
Extraordinary gains on extinguishment of debt ............... 0.01 0.01 0.02 0.04
--------- --------- --------- ---------
Net income .................................................. $ 0.35 $ 0.23 $ 0.63 $ 0.45
========= ========= ========= =========
DILUTED:
Net income from continuing operations ....................... $ 0.32 $ 0.18 $ 0.57 $ 0.35
Discontinued insurance operations ........................... - 0.02 - 0.03
Extraordinary gains on extinguishment of debt ............... 0.01 0.01 0.01 0.04
--------- --------- --------- ---------
Net income .................................................. $ 0.33 $ 0.21 $ 0.58 $ 0.42
========= ========= ========= =========
CASH DIVIDENDS ................................................ $ 0.02 $ 0.02 $ 0.04 $ 0.04
WEIGHTED AVERAGE SHARES (IN THOUSANDS):
Basic ....................................................... 66,854 65,108 66,395 64,700
Diluted ..................................................... 72,318 70,771 71,628 70,407
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,
-------------------------------
2002 2001
------------ ------------
(RESTATED)
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income from continuing operations .................................... $ 40,453 $ 23,708
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Provision for loan losses .............................................. 36,424 11,849
Net change in residual interests in securitized loans .................. 11,892 5,651
Deferred income tax expense ............................................ 24,264 16,755
Depreciation and amortization .......................................... 7,111 5,934
Change in other assets and liabilities ................................. (5,374) 5,045
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 114,770 68,942
INVESTING ACTIVITIES
Loan originations and bulk purchases funded .............................. (4,004,079) (2,311,007)
Receipts from repayments and bulk sales of loans ......................... 3,500,867 1,769,788
Investment securities available for sale:
Purchases .............................................................. (336,062) (306,674)
Maturities or repayments ............................................... 329,795 270,384
Capital contributions to discontinued insurance operations ............... (6,997) (6,000)
Purchases of property and equipment ...................................... (1,437) (501)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................................ (517,913) (584,010)
FINANCING ACTIVITIES
Deposits accepted, net of repayments ..................................... 148,423 210,083
Proceeds from short-term debt ............................................ 331,000 225,000
Repayments of long-term debt ............................................. (50,009) (14,452)
Dividends paid ........................................................... (4,253) (4,239)
Increase in deferred compensation plans .................................. (1,466) (314)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ 423,695 416,078
Increase (decrease) in cash and cash equivalents ........................... 20,552 (98,990)
Cash and cash equivalents at beginning of year ........................... 151,204 236,352
------------ ------------
Cash and cash equivalents at end of period ................................. $ 171,756 $ 137,362
============ ============
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, 2001. The consolidated statements
of operations and cash flows for 2001 have been restated to reflect the
discontinuance of the Company's property and casualty insurance operations.
NOTE B - LOANS RECEIVABLE
Loans receivable consist of commercial and residential real estate loans
and syndicated commercial loans. Commercial real estate loans, which are
primarily variable rate, represent loans secured generally by first mortgages on
properties such as office, retail, industrial, hotels/motels, multi-family and
commercial mixed-use properties. Commercial real estate loans are reported net
of participations to other financial institutions or investors in the amount of
$116.7 million, $118.0 million and $126.5 million as of June 30, 2002, December
31, 2001 and June 30, 2001, respectively. 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 commercial loans are commercial
variable rate senior loans and are generally secured by substantially all of the
assets of the borrower.
Loans held for sale consist solely of residential real estate loans which
are aggregated prior to their sale and are carried at the lower of aggregate
amortized cost or market.
NOTE C - DISCONTINUED OPERATIONS
In the fourth quarter of 2001, the Company discontinued its property and
casualty insurance operation, primarily represented by the underwriting of
workers' compensation insurance policies. Consequently, the property and
casualty insurance operation is accounted for as a discontinued operation using
the liquidation basis of accounting as prescribed under Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations." As of June 30,
2002, the Company believes that Fremont Comp's workers' compensation insurance
loss and loss adjustment expenses reserves are adequate. The Company intends to
allow the liabilities related to this business to run-off and estimates that the
dedicated assets supporting these operations, and all related future cash
inflows, will be adequate to fund future policy obligations. Discontinued
insurance operations also include the Company's discontinued assumed treaty and
facultative reinsurance, and life insurance businesses.
6
The dedicated assets supporting the discontinued insurance operations and
related liabilities are summarized in the following table:
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(THOUSANDS OF DOLLARS)
Assets
Cash and invested assets, at amortized cost ............................... $ 957,978 $ 1,248,303
Premiums receivable ....................................................... 89,491 121,871
Reinsurance recoverables:
Property and casualty insurance - paid losses ........................... 49,495 60,407
Property and casualty insurance - unpaid losses ......................... 778,045 856,652
Assumed reinsurance and life insurance .................................. 70,929 75,317
Other assets .............................................................. 200,549 193,969
----------- -----------
Total ................................................................. $ 2,146,487 $ 2,556,519
=========== ===========
Liabilities
Reserves for loss and loss adjustment expenses:
Property and casualty insurance ......................................... $ 1,862,912 $ 2,203,349
Assumed reinsurance ..................................................... 93,662 103,563
Life insurance benefits and liabilities ................................... 48,647 59,906
Other liabilities ......................................................... 106,133 161,565
----------- -----------
Total ................................................................. $ 2,111,354 $ 2,528,383
=========== ===========
NOTE D - 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,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(RESTATED) (RESTATED)
(THOUSANDS OF DOLLARS)
Net income .................................................... $ 23,538 $ 14,813 $ 41,595 $ 29,331
Other comprehensive income (loss):
Net change in unrealized gains (losses) during the period ... 35 (60) (22) 158
Less deferred income tax expense (benefit) .................. 12 (21) (8) 55
-------- -------- -------- --------
Other comprehensive income (loss) ......................... 23 (39) (14) 103
-------- -------- -------- --------
Total comprehensive income .................................... $ 23,561 $ 14,774 $ 41,581 $ 29,434
======== ======== ======== ========
7
NOTE E - OPERATIONS BY REPORTABLE SEGMENT
The Company's business is engaged in one reportable segment, financial
services. Additionally, there are certain corporate revenues and expenses,
comprised primarily of investment income, interest expense and certain general
and administrative expenses, that are not allocated to its reportable segment or
to the discontinued insurance operations.
The following data for the three and six months ended June 30, 2002 and
2001 provide certain information necessary for reportable segment disclosure:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(RESTATED) (RESTATED)
(THOUSANDS OF DOLLARS)
NET INTEREST INCOME
Financial services ............................................ $ 68,681 $ 48,165 $ 129,520 $ 92,913
Unallocated corporate ......................................... (8,488) (8,808) (17,237) (17,365)
--------- --------- --------- ---------
Total consolidated ........................................... $ 60,193 $ 39,357 $ 112,283 $ 75,548
========= ========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES
Financial services ............................................ $ 54,097 $ 34,070 $ 96,283 $ 65,074
Unallocated corporate ......................................... (14,832) (13,572) (28,198) (26,207)
--------- --------- --------- ---------
Total consolidated ........................................... $ 39,265 $ 20,498 $ 68,085 $ 38,867
========= ========= ========= =========
8
NOTE F - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 2002 and
2001:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income from continuing operations
(numerator for basic earnings per share) ................... $ 22,918 $ 11,927 $ 40,453 $ 23,708
Effect of dilutive securities:
LYONs ...................................................... 31 31 63 61
-------- -------- -------- --------
Net income from continuing operations
available to common stockholders after assumed conversions
(numerator for basic earnings per share) ................... $ 22,949 $ 11,958 $ 40,516 $ 23,769
======== ======== ======== ========
Weighted-average shares
(denominator for basic earnings per share) ................. 66,854 65,108 66,395 64,700
Effect of dilutive securities:
Restricted stock ........................................... 5,259 5,370 5,028 5,414
LYONs ...................................................... 205 293 205 293
-------- -------- -------- --------
Dilutive potential common shares ............................. 5,464 5,663 5,233 5,707
-------- -------- -------- --------
Adjusted weighted-average shares and assumed
conversions (denominator for diluted earnings per share) ... 72,318 70,771 71,628 70,407
======== ======== ======== ========
Basic earnings per share from continuing operations .......... $ 0.34 $ 0.20 $ 0.61 $ 0.38
======== ======== ======== ========
Diluted earnings per share from continuing operations ........ $ 0.32 $ 0.18 $ 0.57 $ 0.35
======== ======== ======== ========
9
NOTE G - EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
The Company extinguished debt that resulted in gains reported as an
extraordinary item in the accompanying Consolidated Statements of Operations.
These gains are summarized in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- ------- -------- --------
(THOUSANDS OF DOLLARS)
7.70% SENIOR NOTES DUE 2004:
Par Value of debt extinguished ............................... $ 44,815 $ - $ 50,815 $ -
Gain on extinguishment, net of tax ........................... 573 - 1,095 -
7.875% SENIOR NOTES DUE 2009:
Par Value of debt extinguished ............................... $ - $ 2,000 $ - $ 19,500
Gain on extinguishment, net of tax ........................... - 529 - 2,965
LIQUID YIELD OPTION NOTES DUE 2013 ("LYONS"):
Principal amount at maturity extinguished .................... $ 2,269 $ - $ 2,269 $ -
Gain on extinguishment, net of tax ........................... 47 - 47 -
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
("APB No. 30") will now be used to classify those gains and losses. Any gain or
loss on extinguishment of debt that was classified, as an extraordinary item in
prior periods presented that does not meet the criteria in APB No. 30 for
classification as an extraordinary item shall be reclassified. The Company will
adopt SFAS No. 145 as of January 1, 2003. The Company has not yet determined the
impact this statement will have on its financial position or results of
operations.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets,". The adoption of SFAS No.
144 did not have a material impact on the Company's financial position or
results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report may contain "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 plan and objectives of management for future
operations, projections of revenues, income, loan origination volume, 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 ("Fremont") and its
subsidiaries (combined "the Company"). Actual developments and/or results could
differ materially and adversely from those anticipated by the Company as a
result of significant risks, uncertainties and factors beyond our control (as
well as the various assumptions utilized in determining the Company's
expectations) which include, among other things: the variability of business and
economic conditions, the inherent difficulty of accurately forecasting revenues,
expenses and asset valuations, the Company's ability to make loans and to access
necessary capital resources and the associated costs of doing so, the ability of
the Company to sell the residential real estate loans it originates, the
accuracy in projecting loan loss and claims and policy reserves, the ability to
collect and realize the amounts outstanding of loans, premiums and reinsurance
recoverables, changes in the frequency and severity of claims, the occurrence of
catastrophic events, the inability to secure regulatory approvals from, or
certain determinations or actions taken by, the Federal Deposit Insurance
Corporation, the Department of Financial Institutions of the State of California
and the California Department of Insurance (or other regulatory bodies) 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 the fair values of loans and investments, the implementation and
consequences of 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 loan and other asset valuations and general economic conditions and trends,
and other events, risks and uncertainties discussed 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 when combined with its
subsidiaries "the Company") is a financial services holding company. Fremont's
financial services segment is consolidated within Fremont General Credit
Corporation ("FGCC"), which is engaged in commercial and consumer real estate
lending nationwide through its California-chartered industrial bank subsidiary,
Fremont Investment & Loan ("FIL"). Additionally, there are certain corporate
revenues and expenses, comprised primarily of investment income, interest
expense and certain general and administrative expenses, that are not allocated
by Fremont to FGCC or to the discontinued insurance operations.
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,
2001.
RESULTS OF OPERATIONS
The Company reported net income of $23,538,000 for the second quarter of
2002. This was comprised of net income from continuing operations of $22,918,000
and an after-tax gain on the extinguishment of debt of $620,000. This is
compared to net income from continuing operations of $11,927,000 for the second
quarter of 2001, and $17,535,000 for the first quarter of 2002.
11
The following table presents a summary of the Company's income (loss)
before taxes and net after tax income for the periods ended June 30, 2002 and
2001, respectively:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(RESTATED) (RESTATED)
(THOUSANDS OF DOLLARS)
Income (loss) before taxes:
Financial services ......................................... $ 54,097 $ 34,070 $ 96,283 $ 65,074
Unallocated corporate interest and other expenses .......... (14,832) (13,572) (28,198) (26,207)
--------- --------- --------- ---------
Income before taxes from continuing operations ............... 39,265 20,498 68,085 38,867
Income tax expense ........................................... 16,347 8,571 27,632 15,159
--------- --------- --------- ---------
Net income from continuing operations ........................ 22,918 11,927 40,453 23,708
Discontinued insurance operations, net of tax ................ - 2,357 - 2,658
Extraordinary gains on extinguishment of debt, net of tax .... 620 529 1,142 2,965
--------- --------- --------- ---------
Net income ................................................... $ 23,538 $ 14,813 $ 41,595 $ 29,331
========= ========= ========= =========
The Company's financial services operation recorded income before taxes of
$54.1 million for the second quarter of 2002, as compared to $34.1 million for
the second quarter of 2001. The increase in income before taxes for the second
quarter of 2002 represents a 59% increase over the results for the second
quarter of 2001 and is a result of significantly increased levels of net
interest income and net gain on the sale of residential real estate loans,
offset by a higher provision for loan losses. The net interest income for the
second quarter of 2002 was $68.7 million as compared to $48.2 million for the
second quarter of 2001 and $60.8 million for the first quarter of 2002. The
increase in net interest income is primarily a result of an increase in the net
interest income margin (as a percentage of average interest-earning assets). The
net interest income margin improved to an annualized 5.20% for the second
quarter of 2002 from 4.28% for the second quarter of 2001 and 4.98% for the
first quarter of 2002. The net gain on the sale of residential real estate
loans, net of reductions in the carrying valuations of loans held for sale,
increased from $6.2 million in the second quarter of 2001 to $26.4 million for
the second quarter of 2002. This increase is primarily attributable to an
increase in the volume of loans sold in the two comparable quarters and an
increase in the net premiums realized for the loans sold. A total of $1.27
billion in loans were sold during the second quarter of 2002, as compared to
loan sales of $702.4 million during the second quarter of 2001. The provision
for loan losses increased to $20.9 million for the second quarter of 2002 as
compared to $6.1 million for the second quarter of 2001 and $15.5 million for
the first quarter of 2002. The Company's loans receivable (excluding loans held
for sale), before the allowance for loan losses, were approximately $4.05
billion at June 30, 2002, as compared to $3.88 billion and $3.70 billion at
March 31, 2002 and June 30, 2001, respectively.
The unallocated corporate interest and other expense loss before taxes for
the quarter ended June 30, 2002, was $14.8 million as compared to $13.6 million
for the same period in 2001. The increase for the second quarter of 2002, as
compared to the second quarter of 2001, is a result of lower investment income
(due to the lower interest rate environment existing during the second quarter
of 2002 and lower invested balances), lower amounts of recognized management
fees from the workers' compensation insurance subsidiaries and higher incentive
compensation expense, offset by lower interest and other general expenses.
12
The Company's property and casualty insurance operation (which was
primarily the underwriting of workers' compensation insurance policies) was
classified as discontinued during the fourth quarter of 2001, and is now
accounted for as a discontinued operation using the liquidation basis of
accounting and, accordingly, the Company's operating results have been restated
to reflect reporting in this manner for all periods presented. The Company
recognized net income of $2.66 million from the property and casualty insurance
operations for the first six months of 2001 prior to their classification as
discontinued. Discontinued insurance operations also include the Company's
discontinued assumed treaty and facultative reinsurance, and life insurance
businesses. The Company believes that the loss and loss adjustment expense
reserves of the discontinued insurance operations are adequate, on a discounted
basis, as of June 30, 2002, and that the assets of these operations, and all
related future cash inflows, will be adequate to fund all future policy
obligations and related expenses.
During the quarter ended June 30, 2002, the Company extinguished $44.8
million in principal amount of its publicly traded 7.70% Senior Notes due 2004,
and recognized an after-tax gain of $573,000. Also, during the second quarter of
2002, the Company extinguished $2.3 million of principal amount at maturity of
its Liquid Yield Option Notes due 2013 and recognized an after-tax gain of
$47,000. The after-tax gain from these extinguishments is reported as an
extraordinary item in the accompanying Consolidated Statements of Operations.
Income tax expense of $16.3 million and $8.6 million for the quarters ended
June 30, 2002 and 2001, respectively, represents effective tax rates of 41.6%
and 41.8%, respectively, on income before taxes from continuing operations of
$39.3 million and $20.5 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 various state income tax provisions within the
Company's financial services operation.
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,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
FINANCIAL SERVICES
Interest and fee income on loans ............................. $ 106,935 $ 103,329 $ 206,312 $ 202,342
Interest income on investment securities ..................... 980 2,164 1,703 7,590
--------- --------- --------- ---------
Total interest income ...................................... 107,915 105,493 208,015 209,932
Interest expense ............................................. 39,234 57,328 78,495 117,019
--------- --------- --------- ---------
Net interest income ........................................ 68,681 48,165 129,520 92,913
Provision for loan losses .................................... 20,913 6,112 36,424 11,849
--------- --------- --------- ---------
Net interest income after provision for loan losses ........ 47,768 42,053 93,096 81,064
Net gain on sale of residential real estate loans ............ 26,394 6,213 41,235 12,488
Other non-interest income .................................... 4,937 3,313 8,042 7,754
Operating expenses ........................................... (25,002) (17,509) (46,090) (36,232)
---------- --------- --------- ---------
Income before taxes .......................................... $ 54,097 $ 34,070 $ 96,283 $ 65,074
========= ========= ========= =========
13
The following table shows loans receivable outstanding (excluding loans
held for sale) in the various financing categories as of the dates indicated:
JUNE 30, DECEMBER 31, JUNE 30,
2002 2001 2001
------------ ------------ -----------
(THOUSANDS OF DOLLARS)
Commercial real estate loans:
Bridge ......................................................... $ 1,416,973 $ 1,653,970 $ 1,180,585
Permanent ...................................................... 1,345,840 1,320,993 1,201,467
Construction ................................................... 387,772 263,587 580,711
Single tenant credit ........................................... 303,314 307,320 318,686
----------- ---------- -----------
3,453,899 3,545,870 3,281,449
Residential real estate loans .................................... 548,660 195,643 151,647
Syndicated commercial loans ...................................... 49,177 113,504 271,895
Other - consumer loans ........................................... 4,476 22,555 10,408
----------- ---------- -----------
4,056,212 3,877,572 3,715,399
Deferred fees and costs .......................................... (9,113) (16,171) (19,535)
----------- ---------- -----------
Loans receivable before allowance for loan losses .............. 4,047,099 3,861,401 3,695,864
Allowance for loan losses ........................................ (117,914) (104,179) (73,134)
----------- ---------- -----------
Loans receivable, net of allowance for loan losses ............. $ 3,929,185 $ 3,757,222 $ 3,622,730
=========== =========== ===========
Residential real estate loans held for sale ...................... $ 1,059,669 $ 755,367 $ 607,934
=========== =========== ===========
As of June 30, 2002, approximately 48% of the Company's commercial real
estate loans outstanding were secured by properties located within California;
no other state represented greater than 7% of the loan portfolio. The Company's
largest single commercial real estate loan outstanding at June 30, 2002 was
$42.6 million. The largest net commitment for a single loan at June 30, 2002 was
$55.5 million. In addition, the portfolio has one concentration by common
investor or sponsor base that is in excess of $75 million. This concentration,
which totals $78.1 million at June 30, 2002, is from two affiliated investment
funds (affiliated by common advisor) and is comprised of four separate loans,
each of which was performing as of June 30, 2002.
The following table stratifies the commercial real estate portfolio by loan
amounts outstanding as of June 30, 2002 (in thousands of dollars, except
percents and number of loans):
NUMBER TOTAL LOANS
LOAN SIZE RANGE OF LOANS OUTSTANDING %
---------------------------- -------- ----------- -----
$0 - $5 million ........................................ 395 $ 755,796 22%
> $5 million - $10 million ............................. 116 830,031 24%
> $10 million - $15 million ............................ 43 530,834 15%
> $15 million - $20 million ............................ 29 505,526 15%
> $20 million - $30 million ............................ 23 588,884 17%
> $30 million - $40 million ............................ 6 200,201 6%
> $40 million .......................................... 1 42,627 1%
-------- ----------- -----
613 $ 3,453,899 100%
======== =========== =====
14
The following tables identify the interest income, interest expense,
average interest-earning assets and interest-bearing liabilities, and net
interest margins for the Company's financial services operation for the periods
indicated:
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
2002 2001
-------------------------------------- ----------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
----------- --------- -------- ----------- ---------- --------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest-earning assets (2) :
Commercial real estate loans ........ $ 3,454,536 $ 70,971 8.24% $ 3,215,090 $ 78,800 9.83%
Residential real estate loans (3) ... 1,621,003 35,364 8.75 812,725 18,670 9.21
Syndicated commercial loans ......... 63,383 600 3.80 295,037 5,859 7.97
Investment securities ............... 160,443 980 2.45 189,142 2,164 4.59
----------- --------- ----------- ---------
Total interest-earning assets ...... $ 5,299,365 $ 107,915 8.17% $ 4,511,994 $ 105,493 9.38%
=========== ========= =========== =========
Interest-bearing liabilities:
Time deposits ....................... $ 3,264,376 $ 28,693 3.53% $ 3,249,962 $ 47,954 5.92%
Savings deposits .................... 1,089,869 7,724 2.84 709,796 8,004 4.52
Debt with FHLB ...................... 457,044 2,789 2.45 125,843 1,352 4.31
Other ............................... 5,661 28 1.98 3,532 18 2.04
----------- --------- ----------- ---------
Total interest-bearing liabilities . $ 4,816,950 $ 39,234 3.27% $ 4,089,133 $ 57,328 5.62%
=========== ========= =========== =========
Net interest income ................... $ 68,681 $ 48,165
========= =========
Percent of average interest-earning
assets(1):
Interest income ..................... 8.17% 9.38%
Interest expense .................... 2.97% 5.10%
--------- ---------
Net interest margin ................ 5.20% 4.28%
========= =========
15
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
2002 2001
-------------------------------------- ----------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
----------- --------- -------- ----------- ---------- --------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest-earning assets (2) :
Commercial real estate loans ......... $ 3,478,318 $ 142,123 8.24% $ 3,107,176 $ 155,503 10.09%
Residential real estate loans (3) .... 1,436,958 62,245 8.74 713,244 33,821 9.56
Syndicated commercial loans .......... 80,103 1,944 4.89 303,119 13,018 8.66
Investment securities ................ 131,342 1,703 2.61 278,046 7,590 5.50
----------- --------- ----------- ---------
Total interest-earning assets ...... $ 5,126,721 $ 208,015 8.18% $ 4,401,585 $ 209,932 9.62%
=========== ========= =========== =========
Interest-bearing liabilities:
Time deposits ........................ $ 3,230,040 $ 59,437 3.71% $ 3,234,030 $ 99,289 6.19%
Savings deposits ..................... 1,044,413 14,650 2.83 680,811 16,311 4.83
Debt with FHLB ....................... 365,171 4,363 2.41 64,272 1,380 4.33
Other ................................ 4,487 45 2.02 3,915 39 2.01
----------- --------- ----------- ---------
Total interest-bearing liabilities . $ 4,644,111 $ 78,495 3.41% $ 3,983,028 $ 117,019 5.92%
=========== ========= =========== =========
Net interest income .................... $ 129,520 $ 92,913
========= =========
Percent of average interest-earning
assets(1):
Interest income ..................... 8.18% 9.62%
Interest expense .................... 3.09% 5.36%
--------- ---------
Net interest margin ............... 5.09% 4.26%
========= =========
(1) Annualized.
(2) Average loan balances include non-accrual loan balances and exclude residual interests in securitized loans.
(3) Includes loans held for sale and other consumer loans.
The Company's net interest margin as a percentage of average
interest-earning assets increased to 5.20% in the second quarter of 2002 as
compared to 4.28% for the second quarter of 2001. The increase in the Company's
net interest margin is due primarily to higher net spreads between the
commercial and residential real estate loans yields and the effective cost of
funds employed to fund these assets, as well as the effect of a higher yielding
mix of interest-earning assets (i.e. an increased average balance of higher
yielding residential loans and lower average balances of lower yielding
syndicated commercial loans and investment securities). Interest yields on
deposits and Federal Home Loan Bank ("FHLB") borrowings declined on a
quarter-to-quarter comparison more than the yields on commercial and residential
real estate loans did. This is due in part to the presence of interest rate
floors (i.e. the total of the variable base rate, such as six-month LIBOR, plus
the related spread on a commercial real estate loan will not contractually drop
below a certain absolute level, such as 7%) on a significant number of the
Company's commercial real estate loans, as well as various economic and
market factors.
The following tables report the non-performing asset classifications,
accruing loans past due 90 days or more, loan loss experience and allowance for
loan losses reconciliation of the financial services operation as of or for the
periods ended as shown below:
16
JUNE 30, DECEMBER 31, JUNE 30,
2002 2001 2001
--------- ---------- ---------
(THOUSANDS OF DOLLARS)
Non-accrual loans receivable:
Commercial real estate loans ............................... $ 74,831 $ 68,921 $ 54,559
Residential real estate loans - portfolio .................. 3,039 2,531 2,800
Residential real estate loans - held for sale .............. 10,272 16,639 14,834
Syndicated commercial loans ................................ 7,690 3,397 4,970
Other ...................................................... - 104 129
-------- --------- --------
95,832 91,592 77,292
Real estate owned ("REO"):
Commercial real estate loans ............................... 4,999 19,329 9,868
Residential real estate loans - portfolio .................. 794 4,260 5,803
Residential real estate loans - held for sale .............. 5,107 - -
--------- --------- --------
10,900 23,589 15,671
--------- --------- --------
Total non-performing assets ("NPA") .......................... $ 106,732 $ 115,181 $ 92,963
========= ========= ========
Accruing loans past due 90 days or more:
Commercial real estate loans ............................... $ 1,093 $ 15,586 $ 16,373
Residential real estate loans .............................. - - -
Other ...................................................... - 4 -
--------- --------- --------
$ 1,093 $ 15,590 $ 16,373
========= ========= ========
NPA to total loans receivable, loans held for
sale ("HFS") and REO ....................................... 2.09% 2.48% 2.15%
Accruing loans past due 90 days or more to total
loans receivable and HFS ................................... 0.02% 0.34% 0.38%
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- --------- --------
(THOUSANDS OF DOLLARS)
Beginning allowance for loan losses .......................... $ 114,076 $ 70,578 $ 104,179 $ 67,599
Provision for loan losses .................................... 20,913 6,112 36,424 11,849
Charge-offs:
Commercial real estate loans ............................ (9,419) (971) (13,027) (1,971)
Residential real estate loans ........................... (22) (323) (56) (581)
Syndicated commercial loans ............................. (7,640) (2,355) (9,619) (3,855)
Other-consumer .......................................... - 24 - -
--------- -------- --------- --------
Total charge-offs ....................................... (17,081) (3,625) (22,702) (6,407)
--------- -------- --------- --------
Recoveries:
Commercial real estate loans ............................ - - 1 -
Residential real estate loans ........................... 4 67 3 93
Syndicated commercial loans ............................. - - - -
Other-consumer .......................................... 2 2 9 -
--------- -------- --------- --------
Total recoveries ........................................ 6 69 13 93
--------- -------- --------- --------
Net charge-offs .............................................. (17,075) (3,556) (22,689) (6,314)
--------- -------- --------- --------
Ending allowance for loan losses ............................. $ 117,914 $ 73,134 $ 117,914 $ 73,134
========= ======== ========= ========
Allowance for loan losses to total loans receivable .......... 2.91% 1.98% 2.91% 1.98%
Net loan charge-offs to average total loans
receivable (excluding HFS)* ............................. 1.70% 0.38% 1.15% 0.35%
* Annualized
17
JUNE 30, DECEMBER 31, JUNE 30,
2002 2001 2001
--------- ---------- --------
(THOUSANDS OF DOLLARS)
Allocation of allowance for loan losses:
Commercial real estate loans ............................... $ 99,817 $ 92,676 $ 61,851
Residential real estate loans .............................. 15,142 7,534 5,379
Syndicated commercial loans ................................ 2,963 3,986 5,904
Other-consumer ............................................. (8) (17) -
--------- --------- --------
Total allowance for loan losses ............................ $ 117,914 $ 104,179 $ 73,134
========= ========= ========
Non-performing assets decreased to $106.7 million, or 2.1% of total loans
receivable, loans held for sale and real estate owned at June 30, 2002, from
$115.2 million or 2.5% at December 31, 2001. In addition, there was one loan,
for $1.1 million, on accrual status at June 30, 2002 that was 90 days or greater
past due. At June 30, 2002, there were six commercial real estate loans with a
total balance of $56.8 million included in accrual status that were modified
during the second quarter of 2002 in connection with loan restructurings. There
were no such loan restructurings during the second quarter of 2001. During the
first quarter of 2002, there were five commercial real estate loans, with a
total outstanding balance of $103.2 million at March 31, 2002, that were
restructured and included in accrual status. Of these five loans, three were
paid off in full during the second quarter of 2002. The remaining two loans,
with a total balance of $47.1 million as of June 30, 2002, were performing
within their contractual terms and were in accrual status at June 30, 2002. 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 quarter ended June 30, 2002 increased
to $20.9 million, as compared to $6.1 million in the same period of 2001. The
allowance for loan losses, as a percentage of total loans receivable, excluding
loans held for sale, increased to 2.91% as of June 30, 2002, as compared to
1.98% at June 30, 2001. The increase in the provision for loan losses during the
second quarter of 2002, as compared to the second quarter of 2001, is primarily
due to an increased level of non-performing assets and net loan charge-offs in
the second quarter of 2002, and an observed decline in general economic
conditions. Net charge-offs in the second quarter of 2002 totaled $17.1 million,
as compared to $3.6 million for the second quarter of 2001. The increase is a
result of increased net charge-offs for commercial real estate and syndicated
commercial loans. The net charge-offs for commercial real estate and syndicated
commercial loans increased during 2002 primarily as a reflection of the effect
of the economic downturn, as well as a concerted effort by the Company to reduce
non-performing asset levels through asset sales.
DISCONTINUED INSURANCE OPERATIONS
The Company and Employers Insurance Company of Nevada ("EICN") executed a
definitive agreement, effective July 1, 2002, for the acquisition by EICN of the
on-going business, policy production organization and facilities of the
Company's workers' compensation insurance operation. EICN will operate the new
business under the name Fremont Employers Insurance Company, which is a
wholly-owned subsidiary of EICN. Substantially all of the existing loss reserves
and related assets of the discontinued workers' compensation insurance operation
will remain with the Company.
18
In July 2002, Fremont executed a definitive agreement with the California
Department of Insurance that would allow the Company to self-administer the
run-off of policies currently in force by paying claims and operating expenses
in the ordinary course of business and also preserve the Company's net operating
loss carryforwards attributable to its discontinued workers' compensation
insurance subsidiary. The agreement also obligates Fremont to make certain
additional capital contributions to its discontinued workers' compensation
insurance subsidiary. Fremont is obligated to contribute $13.25 million each
year for three years beginning with 2002. Beginning in 2005 and through 2008,
Fremont would have a contingent obligation to make capital contributions of up
to $13.25 million each year. These contingent capital contributions would be
subject to payment only if in any subject year that the statutory surplus and
loss and loss adjustment expense reserves of the discontinued property and
casualty insurance subsidiaries were deemed to be inadequate by the California
Department of Insurance. Any amount not paid in any one of these years shall be
a deferred contingent liability and subject to payment in any future year if any
deficiency arises, however, the amount of contribution for any one year,
including any deferred contingent liability, shall not exceed $13.25 million.
The total amount of potential contributions is $92.75 million, of which $53.0
million is contingent. During 2002, Fremont has contributed, as per the
agreement's schedule, a total of $9.95 million through August 13, 2002. The
remaining $3.3 million for 2002 is scheduled for contribution on November 1,
2002. This new agreement supersedes and terminates the November 27, 2000
agreement with the California Department of Insurance in all respects.
The capital contributions made to the discontinued workers' compensation
insurance subsidiary increase the net investment in the Company's discontinued
insurance operations. As of June 30, 2002, the net investment in the
discontinued insurance operations was $35.1 million. The Company's investment in
its discontinued insurance operations is tested for impairment periodically and
should the financial position of the discontinued insurance operations
experience a significant deterioration, the investment may be deemed to be
impaired, in part or in whole, and subsequently, a write down of some or all of
the investment would be necessary. Also, dependent upon the level of
deterioration in the financial condition of the discontinued insurance
operations, the Company may need to record an additional loss for some or all of
any capital contributions not yet made, including those considered contingent.
Any gains from the liquidation of the discontinued insurance operations would be
recorded only at such time as their realization is certain. The Company's net
investment in its discontinued insurance operations may be negatively impacted
by such developments as adverse loss and loss adjustment expense reserve
development, failure by one or more of the Company's reinsurers to meet their
obligations in a timely and complete manner, less than expected realization of
premiums receivable and other receivables and assets, adverse legislative and
regulatory actions, including conservation of the discontinued insurance
operations by regulatory authorities, and significant realized losses in the
discontinued insurance operations' investment portfolio.
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 $4.4 billion at June 30, 2002 from $4.1
billion at June 30, 2001. The industrial bank is also eligible for financing
through the FHLB, which financing is available at various rates and terms. At
June 30, 2002, the industrial bank had borrowing availability with the FHLB
19
of $1.36 billion, of which $640 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 $205.4 million at June
30, 2002. There were no amounts outstanding under the line of credit with the
FRB at June 30, 2002. The Company believes it has sufficient liquidity and
capital resources to fund its financial services operation for the foreseeable
future.
The discontinued insurance operations have 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. The Company 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 pays its operating expenses, meets its other
obligations and pays interest and stockholders' dividends primarily from its
cash on hand and intercompany tax payments from its industrial bank subsidiary,
and to a lesser degree from dividends from FGCC. Dividends of $1.4 million were
paid on Fremont's common stock in each of the quarters ending June 30, 2002 and
2001, 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 by agreement with the California Department of Insurance, Fremont does
not expect to receive any dividends from its property and casualty insurance
operations for the foreseeable future. Fremont is obligated for certain capital
contributions to its discontinued workers' compensation insurance subsidiary -
see Discontinued Insurance Operations for further information. Should the
Company's discontinued workers' compensation insurance subsidiary come under
regulatory conservation, or similar arrangement, this may cause an event of
default under the Company's Senior Notes outstanding. If an event of default is
declared under the Senior Notes, the outstanding principal may become
immediately due and payable. The Company's current financial position would not
enable it to meet such an obligation and, as a result, the Company and the
holders of its Senior Notes may pursue various alternatives. Such actions could
have a significant adverse impact upon the Company's liquidity and the holders
of its various securities. Fremont has available to it significant federal tax
net operating loss carryforwards, which may be utilized to reduce or eliminate
future tax payments. As a result, intercompany payments of federal tax
obligations from the industrial bank, which would otherwise be payable to taxing
authorities, are available for use by Fremont for general working capital
purposes, including the extinguishment of debt. The Company currently pays
various state taxes, primarily California Franchise Taxes, as there are no
significant state net operating loss carryforwards available to it for offset.
The Company's discontinued insurance operations are subject to state premium
taxes, and not income taxes, and thus no net operating loss carryforwards were
generated. The Company has certain California Franchise Tax issues pending
resolution. The Company does not believe that the ultimate outcome of these
matters, which are expected to take several years to resolve, will have a
material effect on the Company's financial position or liquidity.
Fremont General Corporation has cash and short term investments of $43.2
million at June 30, 2002 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.
20
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, net gain on the sale of residential real
estate loans, interest expense and total stockholders' equity. The level of net
gain on the sale of residential real estate loans is highly dependent upon the
level of loan origination volume and the net premium paid by the purchasers of
such loans. Both the volume and net premium, in turn, are highly dependent upon
the level of interest rates and other economic factors. The Company may
experience a decrease in the amount of net gain it realizes should significant
interest rate increases occur or if other economic factors have a negative
impact on the value and volume of the loans the Company originates. 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,
2001. 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,
2002.
21
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.
a) The Annual Meeting of Stockholders was held on May 30, 2002.
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 67,993,602 shares represented at the meeting are
summarized in the following table:
VOTES
FOR WITHHELD
--- --------
J.A. McIntyre 64,071,779 3,921,823
W.R. Bailey 63,986,740 4,006,862
T.W. Hayes 63,388,618 1,604,984
D.W. Morrisroe 66,337,639 1,655,963
L.J. Rampino 63,975,918 4,017,684
D.C. Ross 66,339,822 1,653,780
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 67,993,602 shares represented at the meeting are summarized in the
following table:
FOR AGAINST ABSTAINED
--- ------- ---------
67,110,476 651,198 231,928
ITEM 5: Other Information.
None.
22
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 Deutsche Bank Trust Company of America (formerly
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.)
23
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Incorporated
by reference to Exhibit 4.8 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.1(a)* Fremont General Corporation 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. (Incorporated by reference to Exhibit
10.1(b) to the Registrant's Quarterly Report on Form 10-Q, for the
period ended June 30, 2001, Commission File Number 1-8007.)
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* 1997 Stock Plan and related agreements. (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.)
10.4* 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.)
10.5* 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.)
10.6(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.)
10.6(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.)
10.7(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.)
10.7(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.)
10.7(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.)
24
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.7(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.)
10.8* 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.)
10.9* 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.)
10.10* 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.)
10.11* Management Continuity Agreement between the Registrant and John A.
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.)
10.12* 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.)
10.13* Management Continuity Agreement between the Registrant and Alan W.
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.)
10.14* 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.)
10.15* 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.)
10.16* 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.)
10.17* 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.)
10.18* Management Continuity Agreement among the Registrant, Fremont
Compensation Insurance Group and Mary-Lou A. Misrahy dated July 1,
2001. (Incorporated by reference to Exhibit 10.18 to the Registrant's
Quarterly Report on Form 10-Q, for the period ended September 30,
2001, Commission File Number 1-8007.)
25
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.19* Management Incentive Compensation Plan of Fremont General Corporation
and Affiliated Companies. (Incorporated by reference to Exhibit 10.19
to the Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 2001, 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 California Department of Insurance Letter Agreement of Run-Off and
Regulatory Oversight of the Fremont Compensation Insurance Group, Inc.
Workers' Compensation Insurance Companies. (Incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed
July 16, 2002, Commission File Number 1-8007.)
10.22 Transition Agreement by and among Fremont Compensation Insurance
Group, Inc., Fremont Compensation Insurance Company, Fremont Indemnity
Company, Fremont Pacific Insurance Company and Amyniles Insurance
Company dated as of May 31, 2002. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed
July 16, 2002, Commission File Number 1-8007.)
99.1 Written Statement pursuant to 18 U.S.C. Section 1350.
- ----------
* 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 filed during the quarterly period ended June 30,
2002:
No reports on Form 8-K were filed during the quarterly period ended
June 30, 2002.
A Current Report on Form 8-K filed July 16, 2002 reported definitive
agreements related to the Registrant's discontinued workers'
compensation insurance business.
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: August 13, 2002 /s/ LOUIS J. RAMPINO
----------------------------------------
Louis J. Rampino, President,
Chief Operating Officer and Director
Date: August 13, 2002 /s/ PATRICK E. LAMB
---------------------------------------
Patrick E. Lamb, Senior Vice President,
Controller and Chief Accounting Officer
Principal Accounting Officer)
27