UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-8993
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The 1820 House, Main Street, Norwich, Vermont 05055-0850
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 649-3633
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
per share
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting shares (based on the closing price of
those shares listed on the New York Stock Exchange and the consideration
received for those shares not listed on a national or regional exchange) held by
non-affiliates of the registrant as of March 27, 1995, was $629,386,740.
As of March 27, 1995, 7,659,937 shares of Common Stock with a par value of
$1.00 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1994 Annual Report to Shareholders (Parts II and
IV). Portions of the registrant's Notice of Annual Meeting of Shareholders and
Proxy Statement dated March 30, 1995 (Part III)
TABLE OF CONTENTS
PART I
Item 1. Business........................................................ 1
a. General................................................... 1
b. Mortgage Origination and Servicing Operations............. 1
c. Investment Portfolio Management........................... 6
d. Certain Business Conditions............................... 7
d. Competition............................................... 7
e. Regulation................................................ 7
f. Employees................................................. 8
Item 2. Properties...................................................... 8
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............. 8
a. Executive Officers of the Registrant and its Subsidiaries... 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................... 10
Item 6. Selected Financial Data......................................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10
Item 8. Financial Statements and Supplementary Data..................... 10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 10
PART III
Item 10. Directors and Executive Officers................................ 10
Item 11. Executive Compensation.......................................... 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 10
Item 13. Certain Relationships and Related Transactions.................. 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 11
PART I
Item 1. Business
GENERAL
Fund American Enterprises Holdings, Inc., (the "Company"), is a Delaware
corporation which was organized in 1980. Within this report, the consolidated
organization is referred to as "Fund American." The Company's principal
operating activities are conducted through its wholly owned subsidiary, Source
One Mortgage Services Corporation, and its subsidiaries ("Source One"). The
Company added two operating affiliates during 1994: (i) a 23% voting interest
in Financial Security Assurance Holdings Ltd. ("FSA"), a leading Aaa/AAA writer
of financial guarantee insurance, and (ii) a 33% stake in Main Street America
Holdings ("MSA"), a unit of National Grange Mutual Insurance Company, a New
Hampshire-based property and casualty insurer. Fund American also owns a
portfolio of common equity securities and other investments totalling $489.7
million as of December 31, 1994. The Company's principal office is located at
The 1820 House, Main Street, Norwich, Vermont, 05055-0850, and its telephone
number is (802) 649-3633.
MORTGAGE ORIGINATION AND SERVICING OPERATIONS
General
Source One is one of the largest mortgage banking companies in the United
States based on the size of its mortgage loan servicing portfolio. As of
December 31, 1994 Source One had a mortgage loan servicing portfolio totalling
$39.6 billion, including $4.3 billion of loans subserviced for others, which is
serviced on behalf of approximately 350 institutional investors and numerous
other security holders. As of December 31,1994 Source One had 161 retail branch
offices in 28 states and originated $4.6 billion in mortgage loans for the year
then ended.
Source One engages primarily in the business of producing, selling and
servicing residential mortgage loans. Its sources of revenue are net mortgage
servicing revenue, net interest revenue, net gain on sales of mortgages and
other revenue (including underwriting and appraisal fees). Through
subsidiaries, Source One also sells credit-related insurance products (such as
life, disability, health, accidental death and property-casualty insurance) and
provides bi-weekly mortgage payment services.
Source One was incorporated in 1972 and is the successor to Citizens Mortgage
Corporation which was organized in 1946. Source One is a wholly-owned
subsidiary of Fund American Enterprises, Inc. ("FAE") which is a wholly-owned
subsidiary of the Company. Source One's principal executive offices are located
in Farmington Hills, Michigan.
Industry Overview
Mortgage banking is the business of serving as a financial intermediary in
the: (i) origination and purchase of mortgage loans; (ii) holding of such loans
while aggregating sufficient loans to form appropriate mortgage-backed security
pools; (iii) subsequent sale of such loans through pools or directly to
investors; and (iv) ongoing management or servicing of such loans during the
repayment period. Mortgage bankers generate revenue in each of the four stages
of the mortgage banking process.
The origination process involves providing competitive mortgage loan rates,
soliciting loan applications, reviewing title and credit matters, and funding
loans at closing. Mortgage loans are often purchased from the originators
thereof, who may receive a premium for releasing the right to service such
purchased mortgage loans. The purchase price and any premium paid for servicing
rights are greatly influenced by existing market conditions.
When interest rates on long-term mortgage loans exceed average interest rates
incurred on total borrowings by Source One, as is generally the case, the
holding of mortgage loans generates net interest income. In periods when
borrowing rates exceed long-term mortgage lending rates, the holding of mortgage
loans can generate net interest expense.
1
Marketing or selling mortgage loans requires matching the needs of the
production market (consisting of homebuyers and homeowners seeking new
mortgages) with the needs of the secondary market for mortgage loans (consisting
of securities broker-dealers, depository institutions, insurance companies,
pension funds and other investors). Conventional mortgage loans (i.e., those
not guaranteed or insured by agencies of the Federal government) which are
secured by one- to four-family residential properties, and which comply with
applicable requirements, are packaged for direct sale or conversion to a
mortgage-backed security, generally in pools of $1.0 million or more. Such
mortgage-backed securities are guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA").
Mortgage-backed securities are sold by mortgage banking companies primarily to
securities broker-dealers. Federal Housing Administration ("FHA") insured
mortgage loans and Veterans Administration ("VA") partially guaranteed mortgage
loans are packaged in the form of modified pass-through mortgage-backed
securities guaranteed by the Government National Mortgage Association ("GNMA")
for sale primarily to securities broker-dealers. In addition, private entities
may pool mortgage loans in the form of collateralized mortgage obligations or
pass-through certificates, which may or may not qualify as real estate mortgage
investment conduits ("REMICs") under the Internal Revenue Code of 1986, as
amended, and offer the resulting mortgage-backed securities to the public
through securities broker-dealers. There is also a limited private market for
mortgage loans which have not been pooled or securitized.
Servicing involves: (i) collecting principal, interest and funds to be
escrowed for tax and insurance payments from mortgage loan borrowers; (ii)
remitting principal and interest to mortgage loan investors; (iii) paying
property taxes and insurance premiums on mortgaged property; (iv) in some cases,
advancing uncollected payments to mortgage loan investors; (v) administering
delinquent loans; (vi) supervising foreclosures in the event of unremedied
defaults; and (vii) performing all related accounting and reporting activities.
Servicing generates cash income in the form of fees, which represent a
percentage of the declining outstanding principal amount of the loans serviced
and are collected from each mortgage loan payment received plus any late
charges.
Mortgage Loan Production
Source One produces residential mortgage loans through a system of retail
branch offices, a correspondent network of banks, thrift institutions and other
mortgage lenders, mortgage brokers and a specialized marketing program. The
existence of these mortgage production sources gives Source One the flexibility
to shift its production between those sources as market conditions warrant and
allows Source One to emphasize the production mode which is most economically
advantageous.
Loans produced, whether through origination or purchase, include conventional
residential mortgage loans as well as mortgage loans which are either insured by
the FHA or partially guaranteed by the VA. In evaluating loans purchased
through its correspondent network and loans originated through its broker
network, Source One applies the same quality standards as those required for
loans originated by Source One itself. Source One's quality control department
reviews a random sample of the loans purchased to determine compliance with
Source One's standards.
It is a policy of Source One to primarily produce fixed rate mortgage loans.
As of December 31, 1994 approximately 3% of Source One's total mortgage loan
servicing portfolio consisted of adjustable rate mortgage loans.
2
The following table sets forth selected information regarding Source One's
mortgage loan production:
-------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------
Millions 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------
Loan production by type of loan:
FHA/VA insured $ 2,065 $ 3,453 $ 1,927 $ 1,641 $ 1,818
Conventional 2,521 7,999 5,664 2,386 1,376
-------------------------------------------------
Total $ 4,586 $ 11,452 $ 7,591 $ 4,027 $ 3,194
------------------------------------------=================================================
Loan production by
origination source:
Retail branch office originations $ 2,005 $ 4,922 $ 3,326 $ 1,695 $ 1,021
Correspondent network acquisitions 1,081 2,643 2,578 1,908 1,874
Mortgage broker originations 696 1,708 1,026 290 143
Refinance division originations 804 2,179 661 134 156
-------------------------------------------------
Total $ 4,586 $ 11,452 $ 7,591 $ 4,027 $ 3,194
===========================================================================================
Retail Branch Offices. As of December 31, 1994 Source One had 161 retail
branch offices in 28 states. Each office has sales representatives who originate
mortgage loans through contacts with real estate brokers, builders and
developers, and others, as well as through direct contact with homebuyers.
As a result of a contracting mortgage loan origination market, Source One
implemented a restructuring plan in 1994 to bring its mortgage loan production
network in line with anticipated levels of mortgage loan production. As a
result of this downsizing, Source One closed several retail branch offices
during 1994.
As of December 31, 1994 Source One's retail branch offices were located in the
following states:
--------------------------------------------------------------------------------
Number of Number of Number of
State offices State offices State offices
--------------------------------------------------------------------------------
Washington 31 New York 5 Rhode Island 2
California 28 Maryland 4 Tennessee 2
Texas 18 Virginia 4 Alaska 1
Arizona 7 Kentucky 3 Connecticut 1
Colorado 7 Missouri 3 Iowa 1
Florida 7 Kansas 2 Montana 1
Illinois 7 Massachusetts 2 Oklahoma 1
Michigan 6 New Jersey 2 Wisconsin 1
Ohio 6 Oregon 2
Nevada 5 Pennsylvania 2
--------------------------------------------------------------------------------
Mortgage loans originated by Source One are subject to a defined underwriting
process in order to assess each prospective borrower's ability to repay the loan
requested and the adequacy of each property as collateral. In addition, Source
One is subject to the underwriting guidelines of FHA, VA, FHLMC and FNMA, as
well as specific contractual requirements of institutional investors who have
agreed to acquire mortgage loans originated by Source One. Most branch office
originations are referred to regional operating centers for preparation of loan
documentation, evaluation of compliance with Source One's underwriting
conditions and closing of the loans.
Correspondent Network. Source One conducts a program through which it agrees
to purchase mortgage loans from a network of banks, thrift institutions and
other mortgage lenders. The funding price for such loans is set by Source One
on a daily basis. In addition, Source One pays a premium for the release of
servicing rights which is negotiated on a case-by-case basis. As of December
31, 1994 there were approximately 200 participants in Source One's correspondent
network.
3
Mortgage Brokers. In 1989 Source One commenced a program through which it
closes loans originated by a network of mortgage brokers. The funding price for
such loans is set by Source One on a daily basis. The mortgage broker receives
compensation equivalent to the difference between Source One's pricing schedule
and the closing price. Source One maintains offices to service this network in
Arizona, California, Colorado, Illinois, Oregon, Virginia and Washington. As of
December 31, 1994 there were approximately 1,000 active participants in Source
One's mortgage broker network.
Specialized Marketing Program. Source One also generates mortgage loan
originations through an operation which responds to refinancings requests from
the population of loans currently serviced by Source One.
Sales of Loans
Source One sells loans either through mortgage-backed securities issued
pursuant to programs of GNMA, FNMA and FHLMC, or to institutional investors.
Most loans are aggregated in pools of $1.0 million or more, which are purchased
by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
During 1994 approximately 41%, 41% and 16% of the principal amount of Source
One's loans were sold in pools through GNMA, FNMA and FHLMC, respectively.
During 1993 approximately 29%, 45% and 25% of the principal amount of Source
One's loans were sold in pools through GNMA, FNMA and FHLMC, respectively.
Substantially all GNMA securities are sold without recourse to Source One for
loss of principal in the event of a subsequent default by the mortgage borrower
due to the underlying FHA and VA insurance. Servicing agreements relating to
mortgage-backed securities issued pursuant to the programs of GNMA, FNMA or
FHLMC require Source One to advance funds to make the required payments to
investors in the event of a delinquency by the borrower. Source One expects
that it would recover most funds advanced upon cure of default by the borrower
or at foreclosure. However, in connection with VA partially guaranteed loans
and certain conventional loans (which may be partially insured by private
mortgage insurers), funds advanced may not cover losses due to potential
declines in collateral value. In addition, most of Source One's servicing
agreements for mortgage-backed securities typically require the payments to
investors of a full month's interest on each loan although the loan may be paid
off (by optional prepayment or foreclosure) other than on a month-end basis. In
this instance, Source One is obligated to pay the investor interest at the note
rate from the date of the loan payoff through the end of that calendar month
without reimbursement.
Source One, through private placements and public offerings, has also sold
mortgage loans through issuance of its mortgage pass-through certificates.
Source One has issued $521.7 million of REMIC certificates from 1986 through
1994. Source One is the primary servicer for these REMIC certificates, which
were sold pursuant to five separate trusts which have no recourse provisions.
Source One may offer additional mortgage-backed securities in the future if
economic and market conditions warrant.
Historically, Source One's sales of loans have generated net gains. However,
if secondary market interest rates decline after Source One obtains a mandatory
forward commitment for a loan, the loan may not close and Source One may incur a
loss from the cost of covering its obligations under such commitment. If
secondary market interest rates increase after Source One commits to an interest
rate for a loan, and Source One has not obtained a forward commitment, Source
One may incur a loss when the loan is subsequently sold. To minimize this risk,
Source One obtains mandatory forward commitments of up to 120 days to sell
mortgage-backed securities with respect to all loans which have been funded and
a substantial portion of loans in process (pipeline) which it believes will
close.
Source One's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily basis.
In addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers, with no dealer
having in excess of 20% of current commitments. Source One currently transacts
business with seven approved dealers.
4
Loan Servicing
Source One currently retains the rights to service the majority of the
mortgage loans it produces. In addition, Source One may acquire the rights to
service or subservice a mortgage loan portfolio without originating or acquiring
the underlying mortgage loans. Source One customarily makes such purchases of
servicing rights from banks, thrift institutions and other mortgage lenders.
The fees paid to acquire such servicing rights are negotiated on a case-by-case
basis.
During the second quarter of 1994 Source One sold the rights to service $3.9
billion of mortgage loans to a third party. Source One has continued to service
these loans pursuant to a five-year subservicing agreement. In February 1995
Source One reached a definitive agreement to sell $9.8 billion of its mortgage
servicing portfolio to a third party. The sale is expected to close in the
first quarter of 1995, subject to required approvals. The sale of mortgage
servicing was undertaken by Source One to take advantage of the substantial
increase in the value of servicing rights that has been created by the rise in
interest rates during 1994.
Mortgage loan servicing consists primarily of collecting monthly loan payments
and remitting amounts due to investors, collecting property tax and insurance
escrow deposits, and making tax and insurance premium payments when due. Source
One retains a servicing fee from each monthly loan payment equal to a fixed
percentage of the outstanding principal balance of each loan, plus any late
charges.
The following table summarizes the changes in Source One's mortgage loan
servicing portfolio:
--------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
Billions 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------
Balance at beginning of year $38.4 $37.3 $41.0 $35.6 $29.7
---------------------------------
Mortgage loan production 4.6 11.4 7.6 4.0 3.2
Servicing acquisitions 3.7 6.4 2.3 6.8 5.9
---------------------------------
Total servicing in 8.3 17.8 9.9 10.8 9.1
---------------------------------
Payoffs 4.7 13.5 11.5 3.9 2.0
Principal amortization, servicing released and foreclosures 2.4 3.2 2.1 1.5 1.2
---------------------------------
Total servicing out 7.1 16.7 13.6 5.4 3.2
---------------------------------
Balance at end of year $39.6 $38.4 $37.3 $41.0 $35.6
==================================================================================================
Source One closely monitors the rate of delinquencies and foreclosures
incident to its servicing portfolio. The following table summarizes delinquency
and foreclosure experience with respect to the residential mortgage loans
serviced by Source One:
-------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------
Percent of total residential loans serviced:
Past due:
31-59 days 3.15% 3.41% 3.26% 3.56% 3.38%
60-89 days .54 .58 .65 .61 .59
90 days or more .38 .45 .48 .41 .35
--------------------------------
Total delinquencies 4.07% 4.44% 4.39% 4.58% 4.32%
-----------------------------------------------================================
Foreclosures .77% .92% .77% .74% .70%
===============================================================================
5
Related Activities
In conjunction with its origination activities and portfolio servicing, Source
One sells certain credit-related insurance products (such as life, disability,
health, accidental death, and property-casualty insurance) and provides bi-
weekly mortgage payment services.
Insurance Revenue. Source One acts as an agent and receives fees based on
premium value but does not assume any insurance risk. Insurance products are
sold through (i) solicitation at the time of mortgage application, (ii) direct
mail solicitation by Source One shortly after mortgage loan closing, (iii)
solicitation by direct solicitors and (iv) resolicitation of Source One's
mortgage loan servicing portfolio on an annual basis. At certain locations,
personal solicitation by Source One staff is permitted by state regulations
which determine allowable insurance sales practices. Total fees recognized under
these programs for 1994 were $4.6 million.
Bi-Weekly Mortgage Payment Services Revenue. Source One provides bi-weekly
mortgage payment services to new and existing mortgagors. For a one-time
enrollment fee, Source One collects payments from a mortgagor on a bi-weekly
basis. This arrangement does not involve refinancing or any change to the
mortgage documents. Total bi-weekly fee revenue was $1.1 million for the year
ended December 31, 1994.
INVESTMENT PORTFOLIO MANAGEMENT
Fund American's investment portfolio is primarily managed by a small group of
employees located in Norwich, Vermont. Beginning August 29, 1994, pursuant to a
Discretionary Investment Advisory Agreement between the Company and Warburg,
Pincus Counsellors, Inc. ("Warburg Pincus"), Warburg Pincus is providing
discretionary investment advisory services to Fund American with respect to a
portfolio of investment securities totalling $50.2 million as of December 31,
1994. Warburg Pincus is a registered investment advisor.
Between September 24, 1993 and July 31, 1994, pursuant to an Investment
Management Agreement between the Company and Hanover Advisors, Inc. ("Hanover"),
a wholly-owned subsidiary of White River Corporation, Hanover provided
discretionary and non-discretionary investment advisory and investment
accounting services to Fund American. Hanover and White River Corporation were
formerly wholly-owned subsidiaries of the Company. Prior to September 24, 1993
Fund American's investment portfolio was managed by a small group of employees
located in White Plains, New York.
6
Fund American's philosophy is to invest all assets to maximize their total
return over a three- to five-year time frame. Under this approach, each dollar
of after tax investment income, realized capital gains and unrealized
appreciation is valued equally. Management believes in focusing its efforts and
the entity's funds on a small number of quality companies selling at reasonable
prices in the marketplace. While such an approach leads to a high concentration
in a few securities, management believes it will provide superior returns over a
three- to five-year horizon. However, management does not believe that owning a
large portfolio of passive investment securities in a taxable corporation format
will maximize shareholder returns over the long-term. Therefore, Fund
American's long-term goal is to reinvest at least a portion of its investment
securities (or proceeds from sales thereof) into operating businesses in which
management has knowledge and experience.
CERTAIN BUSINESS CONDITIONS
Changes in the economy or prevailing interest rates can have significant
effects, including material adverse effects, on the mortgage banking business
and Source One.
During periods of economic growth, when the demand for housing is strong,
mortgage originations and loan production income can be expected to increase,
and foreclosures and loan losses may decline. Conversely, in periods of rising
interest rates and/or economic slowdown or recession, mortgage originations and
loan production income can be expected to decline, and foreclosures and loan
losses may increase.
Inflation and changes in interest rates can have differing effects on various
aspects of Source One's business, particularly with respect to marketing gains
and losses on the sale of mortgage loans, mortgage loan production, the value of
Source One's servicing portfolio and net interest revenue. Historically, Source
One's loan originations and loan production income have increased in response to
falling interest rates and have decreased during periods of rising interest
rates. Periods of low inflation and falling interest rates tend to reduce loan
servicing income and the value of Source One's mortgage loan servicing portfolio
because prepayments of mortgages are greater and the average life of loan
servicing rights is shortened. Conversely, periods of increasing inflation and
rising interest rates tend to increase loan servicing income and the value of
Source One's mortgage loan servicing portfolio because prepayments of mortgages
are lower and the average life of loan servicing rights is lengthened.
COMPETITION
Source One competes nationally and locally for loan production with other
mortgage bankers, state and national banks, thrift institutions and insurance
companies. National banks and thrift institutions have substantially more
flexibility in their loan origination programs than Source One, which must
originate loans meeting the standards of the secondary market. Mortgage lenders
compete primarily with respect to price and service. Competition may also occur
on mortgage terms and closing costs. Source One competes, in part, by using its
commissioned sales force to maintain close relationships with real estate
brokers, builders and developers and members of its correspondent network. In
the opinion of management of Source One, no single mortgage lender dominates the
industry.
REGULATION
Source One is subject to the rules and regulations of, and examinations by,
FNMA, FHLMC, GNMA, FHA and VA with respect to originating, processing, selling
and servicing mortgage loans. These rules and regulations, among other things,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers and, in some cases, establish
maximum interest rates, fees and loan amounts. Lenders are required to submit
audited financial statements annually. FNMA and GNMA require the maintenance of
specified net worth levels which vary depending on the amount of FNMA loans
serviced and GNMA mortgage-backed securities issued by Source One. Mortgage
loan origination activities are also subject to fair housing laws, the Equal
Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage
Disclosure Act, and regulations promulgated thereunder which, among other
things, prohibit discrimination in residential lending and require disclosure of
certain information to borrowers.
7
Certain conventional mortgage loans are also subject to state usury statutes;
FHA and VA loans are exempt from the effects of such statutes. In addition,
there are various state laws and regulations affecting Source One's mortgage
banking and insurance operations. Source One's audit and quality control
departments monitor compliance with all these laws and regulations. Statutory
limitations have occasionally constrained the activities of the FHA, VA and
GNMA. To date, Congress has in each case extended the agencies' authority
either before or shortly after the agencies have been forced to suspend their
activities. Thus, there has been little or no adverse effect on the processing,
closing and marketing of FHA and VA loans. There can be no assurance, however,
that Congress will continue to make such extensions. In the event such
extensions are not forthcoming in the future, the processing, closing and
marketing of FHA and VA loans could be adversely affected.
EMPLOYEES
As of December 31, 1994 the Company employed 12 persons and Source One
employed 2,055 persons (of whom 420 were engaged in loan servicing activities
and 1,635 were engaged in residential loan production activities, appraisal
functions, and administrative and managerial responsibilities). None of Fund
American's employees is covered by a collective bargaining agreement.
Management believes that Fund American's employee relations are good.
Item 2. Properties
The Company rents 1,800 square feet of space for use as its principal office
at The 1820 House, Norwich, Vermont, under a lease expiring in 1995. Source One
owns its principal office in Farmington Hills, Michigan, which houses the
majority of its employees. Source One also owns an office building in West
Bloomfield, Michigan. Source One leases several other office facilities and
operating equipment under cancelable and noncancelable agreements. Most of such
leases contain renewal clauses.
Item 3. Legal Proceedings
Various claims have been made against Fund American in the normal course of
its business. In management's opinion, the outcome of such claims will not, in
the aggregate, have a material effect on Fund American's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of Fund American's shareholders
during the fourth quarter of 1994.
8
EXECUTIVE OFFICERS OF THE REGISTRANT AND ITS SUBSIDIARIES (as of March 27, 1995)
---------------------------------------------------------------------------------------------------------
Executive
officer
Name Position Age since
---------------------------------------------------------------------------------------------------------
Terry L. Baxter President and Secretary of FAE 49 1994
Dennis P. Beaulieu Corporate Secretary 47 1995
John J. Byrne Chairman, President and Chief Executive Officer 62 1985
James A. Conrad President and Chief Executive Officer of Source One 53 1985
K. Thomas Kemp Executive Vice President 54 1991
Michael S. Paquette Vice President and Controller 31 1993
Robert W. Richards Chairman of Source One 52 1979
Allan L. Waters Senior Vice President and Chief Financial Officer 37 1990
=========================================================================================================
All executive officers are elected by the Company's Board of Directors for
a term of one year or until their successors have been elected and have duly
qualified.
Mr. Baxter was elected President and Secretary of FAE in January 1994.
Prior to joining the Company in 1994, Mr. Baxter was Managing Director of the
National Transportation Safety Board from 1990. Prior to that, he was the
Assistant Director of OMB in the Reagan Administration. Mr. Baxter is a
director of FAE, MSA, Source One and White Mountains Insurance Holdings, Inc., a
wholly owned subsidiary of the Company ("White Mountains").
Mr. Beaulieu was elected Corporate Secretary in February 1995 and also
serves as Vice President and Secretary of White Mountains. Prior to joining
Fund American in 1995, Mr. Beaulieu was Senior Vice President and Chief
Financial Officer of New Dartmouth Bank. Mr. Beaulieu is a director of White
Mountains.
Mr. Byrne has served as Chairman, President and Chief Executive Officer
since 1990, as Chairman and Chief Executive Officer from 1985 to 1990 and was
Chairman and Chief Executive Officer of Fireman's Fund Insurance Company
("Fireman's Fund") from 1989 through January 2, 1991. Mr. Byrne is also
Chairman of FSA, Chairman of FAE, Chairman of White Mountains and a director of
Source One.
Mr. Conrad has served as President and Chief Executive Officer of Source
One since 1990, as Executive Vice President of its Production Division from 1987
to 1989, and as Corporate Vice President of its Wholesale Division from 1985 to
1987. Mr. Conrad is a director of Source One.
Mr. Kemp has served as Vice President, Treasurer and Secretary since 1991,
was elected Executive Vice President in 1993 and became a director of the
Company in 1994. He is also President and Chief Executive Officer of White
Mountains. Mr. Kemp was a Vice President of Fireman's Fund from 1990 to January
2, 1991. Prior to joining Fireman's Fund, Mr. Kemp was President of Resolute
Reinsurance Company. Mr. Kemp is also a director of FSA, FAE, MSA, Source One
and White Mountains.
Mr. Paquette was elected Vice President and Chief Accounting Officer in
1993 and was appointed Vice President and Controller in February 1995. Mr.
Paquette is also Vice President and Controller of White Mountains. He was
formerly Secretary of FAE from 1990 to 1993 and has been a member of the Fund
American organization since 1989. Mr. Paquette is a director of FAE and White
Mountains.
Mr. Richards has served as Chairman of Source One since 1989, as its
President from 1987 to 1989, and as its Executive Vice President from 1985 to
1987.
Mr. Waters was elected Senior Vice President and Chief Financial Officer in
1993. Mr. Waters is also Senior Vice President and Chief Financial Officer of
White Mountains. He was formerly Vice President and Controller of FAE from 1991
to 1993; was Vice President, Controller and Assistant Secretary of the Company
from 1990 to 1991, and was Vice President, Finance of the Company from 1988 to
1990. Mr. Waters is a director of FSA, FAE, Source One and White Mountains.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 27, 1995 there were 666 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").
The Company does not currently pay regular cash dividends to holders of
Shares. The Company's Board of Directors may reconsider from time to time its
policy with respect to payment of regular periodic dividends on Shares.
The remaining information called for by this item is reported as "Quarterly
trading range for shares of common stock" and "Stock Exchange Information"
appearing on pages 52 and 56, respectively, of the Company's 1994 Annual Report
to Shareholders, herein incorporated by reference.
Item 6. Selected Financial Data
Reported on page 10 of the Company's 1994 Annual Report to Shareholders,
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reported on pages 11 through 21 of the Company's 1994 Annual Report to
Shareholders, herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Reported in the consolidated financial statements of Fund American and the
notes thereto and the report thereon of Ernst & Young LLP, independent auditors,
appearing on pages 22 through 49 and 51 of the Company's 1994 Annual Report to
Shareholders, herein incorporated by reference.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
a. Directors (as of March 27, 1995)
Reported under the caption "Election of Directors" on pages 3 through 5 of
the Company's 1995 Proxy Statement, herein incorporated by reference.
b. Executive Officers (as of March 27, 1995)
Reported in Part I pursuant to General Instruction G to Form 10-K.
Item 11. Executive Compensation
Reported under the captions "Compensation of Executive Officers" on pages 9
through 11, "Reports of the Compensation Committee on Executive Compensation" on
pages 11 though 14, "Shareholder Return Graph" on page 15, and "Compensation
Plans" on page 16 through 17 of the Company's 1995 Proxy Statement, herein
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reported under the caption "Voting Securities and Principal Holders
Thereof" on pages 6 through 8 of the Company's 1995 Proxy Statement, herein
incorporated by reference.
10
Item 13. Certain Relationships and Related Transactions
Reported under the captions "Certain Transactions" on page 11, and
"Compensation Committee Interlocks and Insider Participation in Compensation
Decisions" on page 17 of the Company's 1995 Proxy Statement, herein incorporated
by reference.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. (1) Financial Statements
The financial statements applicable to the Company and its consolidated
affiliates have been incorporated by reference herein from the Company's 1994
Annual Report to Shareholders as they appear in the Index to Financial
Statements and Financial Statement Schedules shown on page 12 of this report.
(2) Financial Statement Schedules
The financial statement schedules and report of independent auditors have
been filed as part of this Annual Report on Form 10-K as indicated in the Index
to Financial Statements and Financial Statement Schedules appearing on page 12
of this report.
b. Reports on Form 8-K
No reports on Form 8-K were issued by the Company during the fourth quarter
of 1994.
11
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Index to Financial Statements and Financial Statement Schedules
------------------------------------------------------------------------------------------------------
Annual Form
Report 10-K
page(s)* page(s)
------------------------------------------------------------------------------------------------------
Financial statements:
Consolidated balance sheets as of December 31, 1994 and 1993..................... 22
Consolidated income statements for each of the years ended
December 31, 1994, 1993 and 1992............................................... 23
Consolidated statements of shareholders' equity for each of the years ended
December 31, 1994, 1993 and 1992............................................... 24
Consolidated statements of cash flows for each of the years ended
December 31, 1994, 1993 and 1992............................................... 25
Notes to consolidated financial statements....................................... 26-49
Other financial information:
Report of independent auditors................................................... 51
Selected quarterly financial data (unaudited).................................... 52
Financial statement schedules:
III. Condensed financial information of registrant............................. 13-14
======================================================================================================
* The Company's 1994 Annual Report to Shareholders.
All other schedules are omitted as they are not applicable or the information
required is included in the financial statements or notes thereto.
12
SCHEDULE III
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company only)
CONDENSED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------
December 31,
---------------------
(Millions) 1994 1993
------------------------------------------------------------------------------------------------------------------
Assets:
Common equity securities and other investments $ 148.7 $ 165.5
Short-term investments, at amortized cost 58.2 127.8
Cash .1 2.1
Other assets 23.9 27.7
Investments in unconsolidated affiliates, at equity 69.7 --
Investments in wholly-owned subsidiaries, at equity 679.2 873.5
---------------------
Total assets $ 979.8 $ 1,196.6
---------------------------------------------------------------------------------------------=====================
Liabilities:
Debt $ 153.8 $ 178.4
Accounts payable and other liabilities 164.9 113.2
---------------------
Total liabilities 318.7 291.6
Shareholders' equity 661.1 905.0
---------------------
Total liabilities and shareholders' equity $ 979.8 $ 1,196.6
==================================================================================================================
CONDENSED INCOME STATEMENTS
------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------
(Millions) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
Revenues $ 14.2 $ 11.1 $ 22.6
Expenses 21.2 29.6 15.2
----------------------------------
Pretax operating earnings (loss) (7.0) (18.5) 7.4
----------------------------------
Net realized investment gains 22.7 68.9 48.6
Change in net unrealized investment gains and losses -- (61.3) 4.1
----------------------------------
Net investment gains 22.7 7.6 52.7
----------------------------------
Pretax earnings (loss) 15.7 (10.9) 60.1
Income tax provision 7.6 14.3 21.8
----------------------------------
Parent company only operating income (loss) 8.1 (25.2) 38.3
Equity in operating income of subsidiaries 13.0 95.6 15.9
Gain from sale of discontinued operations, after tax -- -- .7
Cumulative effect of accounting change -- purchased mortgage
servicing, after tax (44.3)
Cumulative effect of accounting change -- postretirement benefits, after tax -- -- (1.9)
Cumulative effect of accounting change -- income taxes -- -- (23.8)
----------------------------------
Consolidated net income $ (23.2) $ 70.4 $ 29.2
==================================================================================================================
13
SCHEDULE III
(continued)
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company only)
CONDENSED CASH FLOWS
--------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
(Millions) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (23.2) $ 70.4 $ 29.2
Charges (credits) to reconcile net income to net cash from operations:
Net realized investment gains (22.7) (68.9) (48.6)
Change in net unrealized investment gains and losses -- 61.3 (4.1)
Equity in operating income of subsidiaries and affiliates (15.6) (95.6) (15.9)
Dividends received and returns of capital from subsidiaries and affiliates 121.3 114.6 --
Gain from sale of discontinued operations, after tax -- -- (.7)
Cumulative effect of accounting change -- purchased
mortgage servicing, after tax 44.3
Cumulative effect of accounting change -- postretirement benefits, after tax -- -- 1.9
Cumulative effect of accounting change -- income taxes -- -- 23.8
Decrease (increase) in current income taxes receivable 35.1 (10.3) 98.8
Deferred income tax provision 2.8 21.0 4.1
Other, net 10.1 1.9 15.1
---------------------------------
Net cash provided from operations 152.1 94.4 103.6
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments 69.6 (28.3) 133.7
Sales and maturities of common equity securities and other investments 73.3 216.7 229.9
Purchases of common equity securities and other investments (60.3) (314.6) (.3)
Investments in unconsolidated affiliates (44.0) -- --
Sale of discontinued operations -- -- (7.9)
Other -- (1.7) --
---------------------------------
Net cash provided from (used for) investing activities 38.6 (127.9) 355.4
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Decrease) increase in short-term debt -- (100.0) 100.0
Proceeds from issuances of long-term debt -- 178.0 --
Repayments of long-term debt (23.9) -- --
Redemption of preferred stock (82.0) -- (185.0)
Proceeds from issuances of common stock from treasury 2.8 2.1 29.4
Purchases of common stock retired (78.8) (41.8) (371.7)
Dividends paid to preferred shareholders (10.8) (12.2) (22.2)
---------------------------------
Net cash (used for) provided from financing activities (192.7) 26.1 (449.5)
--------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash during year (2.0) (7.4) 9.5
Cash balance at beginning of year 2.1 9.5 --
--------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ .1 $ 2.1 $ 9.5
====================================================================================================================
14
c. Exhibits
--------------------------------------------------------------------------------
Exhibit
number Name
--------------------------------------------------------------------------------
2 - Distribution Agreement, effective September 24, 1993 among the
Company and White River Corporation (incorporated by reference to
Exhibit (2.1) of the Company's Report on Form 8-K dated December 6,
1993)
3(i) - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3(a) of the Company's 1993
Annual Report on Form 10-K)
(ii) - Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3(b) of the Company's 1993 Annual Report on Form
10-K)
4 - Indenture dated January 1, 1993, with The First National Bank of
Chicago, as trustee, pursuant to the Company's offering of $150
million of medium-term notes (incorporated by reference to Exhibit
(4) of the Company's Report on Form 8-K dated January 15, 1993)
9 - Voting Trust Agreement dated September 2, 1994 between the Company,
U S West Capital Corporation and First Chicago Trust Company of New
York (filed pursuant to Exhibit 10(a) herein)
10 - Material Contracts:
(a) - Credit Agreement dated June 2, 1994 among the Company, Fund American
Enterprises, Inc., FFOG, Inc., the banks named therein and The Chase
Manhattan Bank (*)
(b) - Securities Purchase Agreement dated April 10, 1994 between the
Company, U S West, Inc., U S West Capital Corporation and Financial
Security Assurance Holdings Ltd. (incorporated by reference to
Exhibit 10(a) of the Company's Report on Form 8-K dated April 10,
1994)
(c) - Common Stock Warrant Agreement with respect to shares of the
Company's Common stock between the Company and John J. Byrne
(incorporated by reference to Exhibit 10(v) of the Company's
Registration Statement on Form S-1 (No. 33-0199)) (**)
(d) - Loan Agreement between the Company and its Chairman, John J. Byrne,
dated December 30, 1992 (incorporated by reference to Exhibit 10(s)
of the Company's 1992 Annual Report on Form 10-K) (**)
(e) - The Company's Retirement Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10(aa) of the Company's 1992
Annual Report on Form 10-K) (**)
(f) - The Company's Voluntary Deferred Compensation Plan (incorporated by
reference to Exhibit 10(bb) of the Company's 1992 Annual Report on
Form 10-K) (**)
(g) - The Company's Deferred Benefit Plan (incorporated by reference to
Exhibit 10(cc) of the Company's 1992 Annual Report on Form 10-K)
(**)
(h) - The Company's Amended 1985 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10(i) of the Company's 1990 Annual Report on
Form 10-K) (**)
(i) - Source One Mortgage Services Corporation's Long-Term Incentive Plan
(*) (**)
(j) - Source One Mortgage Services Corporation's Voluntary Deferred
Compensation Plan (incorporated by reference to Exhibit 10(s) of the
Company's 1993 Annual Report on Form 10-K) (**)
(k) - Source One Mortgage Services Corporation's Amended and Restated
Executive Phantom Stock Plan (incorporated by reference to Exhibit
10(t) of the Company's 1993 Annual Report on Form 10-K) (**)
(l) - Source One Mortgage Services Corporation's Stock Appreciation Rights
Plan (incorporated by reference to Exhibit 10(u) of the Company's
1993 Annual Report on Form 10-K) (**)
(m) - Investment Contract by and between Source One Mortgage Services
Corporation and James A. Conrad (incorporated by reference to Exhibit
10(v) of the Company's 1993 Annual Report on Form 10-K) (**)
(n) - Investment Contract by and between Source One Mortgage Services
Corporation and Robert W. Richards (incorporated by reference to
Exhibit 10(w) of the Company's 1993 Annual Report on Form 10-K) (**)
(o) - Credit Agreement, dated December 13, 1993, among the Company and
White River Corporation (incorporated by reference to Exhibit 10(x)
of the Company's 1993 Annual Report on Form 10-K) (**)
15
11 - Statement Re Computation of Per Share Earnings (*)
13 - Fund American Enterprises Holdings, Inc. 1994 Annual Report to
Shareholders. Such report, except portions which are expressly
incorporated by reference in this report on Form 10-K, is furnished
only for the information of the Securities and Exchange Commission
and is not being "filed" as part hereof (*)
21 - Subsidiaries of the Registrant (*)
23 - Consent of Independent Auditors (*)
24 - Powers of Attorney (*)
================================================================================
(*) filed herewith.
(**) management contracts or compensation plans/arrangements required to be
filed as an exhibit pursuant to Item 14(a)3 of Form 10-K.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By: /s/ MICHAEL S. PAQUETTE
--------------------------------------
Michael S. Paquette
Vice President and Controller
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
JOHN J. BYRNE* Chairman, President and March 30, 1995
-------------------------------- Chief Executive Officer
John J. Byrne
HOWARD L. CLARK* Director March 30, 1995
--------------------------------
Howard L. Clark
HOWARD L. CLARK, JR.* Director March 30, 1995
--------------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 30, 1995
--------------------------------
Robert P. Cochran
GEORGE J. GILLESPIE, III* Director March 30, 1995
--------------------------------
George J. Gillespie, III
K. THOMAS KEMP* Executive Vice President and March 30, 1995
-------------------------------- Director
K. Thomas Kemp
GORDON S. MACKLIN* Director March 30, 1995
--------------------------------
Gordon S. Macklin
MICHAEL S. PAQUETTE* Vice President and Controller March 30, 1995
--------------------------------
Michael S. Paquette
ALLAN L. WATERS* Senior Vice President and March 30, 1995
-------------------------------- Chief Financial Officer
Allan L. Waters
ARTHUR ZANKEL* Director March 30, 1995
--------------------------------
Arthur Zankel
*By: /s/ K. THOMAS KEMP
--------------------------------
K. Thomas Kemp, Attorney-in-Fact
17