UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
-----------
Date of Report (Date of earliest event reported): June 3, 1998
CONSECO, INC.
(Exact name of registrant as specified in its charter)
Indiana 1-9250 35-1468632
---------------- ----------- -------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
organization)
11825 North Pennsylvania Street
Carmel, Indiana 46032
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(317) 817-6100
--------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------
(Former name or former address,
if changed since last report.)
<PAGE>
ITEM 5. OTHER EVENTS.
On April 6, 1998, Green Tree Financial Corporation, a Delaware
corporation ("Green Tree"), agreed to merge (the "Merger") with a subsidiary of
Conseco, Inc., an Indiana corporation ("Conseco"). The terms of the Merger are
set forth in an Agreement and Plan of Merger (the "Merger Agreement") dated as
of April 6, 1998, as amended, among Conseco, Marble Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Conseco, and Green Tree.
In the Merger, each share of Green Tree's common stock, par value $.01 per share
("Green Tree Common Stock"), will be converted into 0.9165 of a share of
Conseco's common stock, no par value ("Conseco Common Stock"). As a result of
the Merger, Green Tree will become a wholly owned subsidiary of Conseco. The
Boards of Directors of Conseco and Green Tree approved the Merger at their
respective meetings held on April 6, 1998.
The Merger is intended to constitute a tax-free reorganization under
the Internal Revenue Code of 1986, as amended, and to be accounted for as a
pooling of interest.
Green Tree is a diversified financial services company that provides
financing for manufactured homes, home equity, home improvements, consumer
products and equipment and provides consumer and commercial revolving credit.
Green Tree's insurance agencies market physical damage and term mortgage life
insurance and other credit protection relating to the customers' contracts Green
Tree services. Green Tree is the largest servicer of manufactured housing
contracts in the United States. Through its principal offices in Saint Paul,
Minnesota and service centers throughout the United States, Green Tree serves
all 50 states.
Green Tree pools and securitizes substantially all of the contracts it
originates, retaining the servicing on the contracts. Such pools are structured
into asset-backed securities which are sold in the public securities markets. In
servicing the contracts, Green Tree collects payments from the borrower and
remits principal and interest payments to the holder of the contract or investor
certificate backed by the contracts.
Green Tree was originally incorporated under the laws of the State of
Minnesota in 1975. In 1995, Green Tree reincorporated under the laws of the
State of Delaware. Green Tree's principal executive offices are located at 1100
Landmark Towers, 345 Saint Peter Street, Saint Paul, Minnesota 55102-1639, and
its telephone number is (612) 293-3400.
Pro forma combined financial statements of Conseco as if the Merger
had already occurred as of March 31, 1998, for the three months ended March 31,
1998 and 1997, and for each of the three years ended December 31, 1997, are
attached as Exhibit 99.1.
The audited consolidated financial statements of Green Tree as of
December 31, 1997 and 1996 and for each of the three years ended December 31,
1997, are attached as Exhibit 99.2.
The unaudited consolidated financial statements of Green Tree as of
March 31, 1998 and for each of the three month periods ended March 31, 1998 and
1997, are attached as Exhibit 99.3.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(a) -- (b) Not applicable.
(c) Exhibits.
23 Consent of KPMG Peat Marwick LLP
99.1 Pro Forma Combined Financial Statements of Conseco, Inc. and
Subsidiaries
99.2 Audited Consolidated Financial Statements of Green Tree Financial
Corporation as of December 31, 1997 and 1996, and for each of
the three years ended December 31, 1997
99.3 Unaudited Consolidated Financial Statements of Green Tree
Financial Corporation as of March 31, 1998, and for each of the
three month periods ended March 31, 1998 and 1997
<PAGE>
SIGNATURE
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 hereunto duly authorized.
CONSECO, INC.
DATE: June 3, 1998 By: /s/ ROLLIN M. DICK
----------------------------------
Name: Rollin M. Dick
Title: Executive Vice President
and Chief Financial Officer
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Green Tree Financial Corporation:
We consent to the incorporation by reference in the Registration Statement (No.
333-27803) on Form S-3 of Conseco, Inc. of our report dated January 27, 1998,
except as to Note O which is as of February 13, 1998, with respect to the
consolidated balance sheets of Green Tree Financial Corporation and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the Form 8-K
of Conseco, Inc. dated June 3, 1998 and to the reference to our firm under the
heading "EXPERTS" in the Registration Statement. Our report refers to the
Company's adoption of the Financial Accounting Standards Board's Statement No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," in 1997.
/S/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 3, 1998
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF CONSECO, INC.
On April 6, 1998, Conseco, Inc. ("Conseco") and Green Tree Financial
Corporation ("Green Tree") entered into an Agreement and Plan of Merger pursuant
to which Green Tree would become a wholly owned subsidiary of Conseco (the
"Merger"). The following unaudited pro forma combined balance sheet as of March
31, 1998, combines the historical combined balance sheets of Conseco and Green
Tree as if the Merger had been effective on March 31, 1998, after giving effect
to certain adjustments described in the accompanying notes to the unaudited pro
forma combined financial information.
The unaudited pro forma combined statements of operations for the three
months ended March 31, 1998 and 1997, and for each of the three years ended
December 31, 1997, present the combined results of operations of Conseco and
Green Tree as if the Merger had been effective at the earliest period presented.
The unaudited pro forma combined financial information and accompanying
notes reflect the application of the pooling of interests method of accounting
for the Merger. Under this method of accounting, the recorded assets,
liabilities, shareholders' equity, income and expense of Conseco and Green Tree
are combined and reflected at their historical amounts.
The unaudited pro forma combined financial statements are based on the
historical financial statements of Conseco and Green Tree and are qualified in
their entirety by, and should be read in conjunction with, these financial
statements and the notes thereto. The unaudited pro forma combined financial
statements are not necessarily indicative of the results of operations or the
combined financial position that would have resulted had the Merger been
consummated at the beginning of the period indicated, nor are they necessarily
indicative of future results of operations or financial position.
1
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1998
(Dollars in millions)
ASSETS
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Investments:
Actively managed fixed maturities at fair value.................. $22,968.9 $ - $ - $22,968.9
Equity securities at fair value.................................. 263.4 - - 263.4
Interest only securities......................................... - 1,412.3 - 1,412.3
Finance receivables.............................................. - 2,154.6 - 2,154.6
Mortgage loans................................................... 474.2 - - 474.2
Credit-tenant loans.............................................. 596.6 - - 596.6
Policy loans..................................................... 691.7 - - 691.7
Other invested assets ........................................... 534.8 19.1 - 553.9
Short-term investments........................................... 837.7 888.7 - 1,726.4
Assets held in separate accounts................................. 675.2 - - 675.2
--------- -------- ------ ---------
Total investments.......................................... 27,042.5 4,474.7 - 31,517.2
Accrued investment income............................................ 399.9 - - 399.9
Other receivables.................................................... - 228.5 - 228.5
Servicing rights..................................................... - 111.8 - 111.8
Cost of policies purchased........................................... 2,442.6 - - 2,442.6
Cost of policies produced............................................ 1,022.5 - - 1,022.5
Reinsurance receivables.............................................. 761.8 - - 761.8
Income tax assets.................................................... 42.4 - (42.4) (2) -
Goodwill............................................................. 3,604.9 55.4 - 3,660.3
Property and equipment............................................... 176.0 121.2 - 297.2
Cash deposits, restricted............................................ - 234.2 - 234.2
Other assets......................................................... 431.3 29.4 - 460.7
--------- -------- ------ ---------
Total assets............................................... $35,923.9 $5,255.2 $(42.4) $41,136.7
========= ======== ====== =========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)
March 31, 1998
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products................................... $17,320.6 $ - $ - $17,320.6
Traditional products.......................................... 5,758.0 - - 5,758.0
Claims payable and other policyholder funds................... 1,617.3 - - 1,617.3
Unearned premiums............................................. 409.1 - - 409.1
Liabilities related to separate accounts...................... 675.2 - - 675.2
Investment borrowings............................................ 1,196.1 - - 1,196.1
Investor payables................................................ - 653.3 - 653.3
Other liabilities................................................ 1,223.4 556.2 240.0 (3) 2,019.6
Income tax liabilities........................................... - 637.4 (42.4) (2) 595.0
Notes payable and commercial paper:
Corporate...................................................... 2,435.1 - - 2,435.1
Related to finance receivables................................. - 2,059.1 - 2,059.1
--------- -------- ------- ---------
Total liabilities.......................................... 30,634.8 3,906.0 197.6 34,738.4
--------- -------- ------- ---------
Minority interest:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust...................... 1,388.1 - - 1,388.1
Common stock of subsidiary....................................... .7 - - .7
Shareholders' equity:
Preferred stock.................................................. 115.8 - - 115.8
Common stock and additional paid-in capital...................... 2,397.0 446.6 (222.6) (4) 2,621.0
Accumulated other comprehensive income:
Unrealized appreciation of fixed maturity investments......... 159.0 - - 159.0
Unrealized appreciation of other investments.................. 10.9 .9 - 11.8
Minimum pension liability adjustment.......................... - (3.1) - (3.1)
Less treasury shares at cost..................................... - (222.6) 222.6 (4) -
Retained earnings................................................ 1,217.6 1,127.4 (240.0) (3) 2,105.0
--------- -------- ------- ---------
Total shareholders' equity................................. 3,900.3 1,349.2 (240.0) 5,009.5
--------- -------- ------- ---------
Total liabilities and shareholders' equity................. $35,923.9 $5,255.2 $ (42.4) $41,136.7
========= ======== ======= =========
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 1998
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $ 859.4 $ - $ 859.4
Interest sensitive products...................................... 130.7 - 130.7
Net investment income............................................... 583.3 101.0 684.3
Gain on sale of receivables......................................... - 129.1 129.1
Net investment gains................................................ 104.8 - 104.8
Fee revenue and other income........................................ 20.8 55.7 76.5
-------- ------ --------
Total revenues.............................................. 1,699.0 285.8 1,984.8
-------- ------ --------
Benefits and expenses:
Insurance policy benefits........................................... 680.4 - 680.4
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 188.4 - 188.4
Other amounts added to variable and equity-indexed
annuity products........................................... 85.6 - 85.6
Interest expense on notes payable................................... 39.0 48.5 87.5
Interest expense on short-term investment borrowings................ 18.9 - 18.9
Amortization related to operations.................................. 117.1 - 117.1
Amortization related to investment gains............................ 86.4 - 86.4
Other operating costs and expenses.................................. 165.0 134.9 299.9
-------- ------ --------
Total benefits and expenses................................... 1,380.8 183.4 1,564.2
-------- ------ --------
Income before income taxes, minority interest
and extraordinary charge ................................. 318.2 102.4 420.6
Income tax expense...................................................... 131.3 38.9 170.2
-------- ------ --------
Income before minority interest and
extraordinary charge ..................................... 186.9 63.5 250.4
Minority interest - distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts, net of
income taxes........................................................ 19.4 - 19.4
-------- ------ --------
Income before extraordinary charge ......................... 167.5 63.5 231.0
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 16.4 - 16.4
-------- ------ --------
Net income.................................................. 151.1 63.5 214.6
Less preferred stock dividends.......................................... 2.0 - 2.0
-------- ------ --------
Net income applicable to common stock....................... $ 149.1 $ 63.5 $ 212.6
======== ====== ========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the three months ended March 31, 1998
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 185,941,000 134,237,000 (11,209,000) (4) 308,969,000
Net income before extraordinary charge ........................ $.89 $.47 $.74
Extraordinary charge .......................................... .09 - .05
---- ---- ----
Net income................................................ $.80 $.47 $.69
==== ==== ====
Diluted:
Weighted average shares outstanding........................... 207,930,000 135,820,000 (11,341,000) (4) 332,409,000
Net income before extraordinary charge ........................ $.81 $.47 $.70
Extraordinary charge........................................... .08 - .05
---- ---- ----
Net income................................................ $.73 $.47 $.65
==== ==== ====
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $ 566.2 $ - $ 566.2
Interest sensitive products...................................... 103.9 - 103.9
Net investment income............................................... 409.2 75.4 484.6
Gain on sale of receivables......................................... - 153.4 153.4
Net investment gains................................................ 5.1 - 5.1
Fee revenue and other income........................................ 14.6 38.4 53.0
-------- ------ --------
Total revenues.............................................. 1,099.0 267.2 1,366.2
-------- ------ --------
Benefits and expenses:
Insurance policy benefits........................................... 455.3 - 455.3
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 173.7 - 173.7
Other amounts added to variable and equity-indexed
annuity products........................................... 16.2 - 16.2
Interest expense on notes payable................................... 25.8 29.8 55.6
Interest expense on short-term investment borrowings................ 2.8 - 2.8
Amortization related to operations.................................. 103.6 - 103.6
Amortization related to investment gains............................ 11.8 - 11.8
Other operating costs and expenses.................................. 114.4 89.3 203.7
-------- ------ --------
Total benefits and expenses................................... 903.6 119.1 1,022.7
-------- ------ --------
Income before income taxes, minority interest
and extraordinary charge ................................. 195.4 148.1 343.5
Income tax expense...................................................... 70.6 56.3 126.9
-------- ------ --------
Income before minority interest and
extraordinary charge ..................................... 124.8 91.8 216.6
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes.... 8.7 - 8.7
Dividends on preferred stock of subsidiaries........................ 1.3 - 1.3
-------- ------ --------
Income before extraordinary charge ........................... 114.8 91.8 206.6
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 3.3 - 3.3
-------- ------ --------
Net income.................................................... 111.5 91.8 203.3
Less amounts applicable to preferred stock:
Charge related to induced conversions............................... 12.3 - 12.3
Preferred stock dividends........................................... 2.3 - 2.3
-------- ------ --------
Net income applicable to common stock....................... $ 96.9 $ 91.8 $ 188.7
======== ====== ========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the three months ended March 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 177,670,000 138,511,000 (11,566,000) (4) 304,615,000
Net income before extraordinary charge ........................ $.57 $.66 $.63
Extraordinary charge .......................................... .02 - .01
---- ---- ----
Net income................................................ $.55 $.66 $.62
==== ==== ====
Diluted:
Weighted average shares outstanding........................... 203,620,000 142,220,000 (11,875,000) (4) 333,965,000
Net income before extraordinary charge ........................ $.51 $.65 $.58
Extraordinary charge........................................... .02 - .01
---- ---- ----
Net income................................................ $.49 $.65 $.57
==== ==== ====
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $2,954.1 $ - $2,954.1
Interest sensitive products...................................... 456.7 - 456.7
Net investment income............................................... 1,825.3 370.6 2,195.9
Gain on sale of receivables......................................... - 546.8 546.8
Net investment gains................................................ 266.5 - 266.5
Fee revenue and other income........................................ 65.8 174.1 239.9
-------- -------- --------
Total revenues.............................................. 5,568.4 1,091.5 6,659.9
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 2,368.3 - 2,368.3
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 697.1 - 697.1
Other amounts added to variable and equity-indexed
annuity products........................................... 109.6 109.6
Interest expense on notes payable................................... 109.4 160.9 270.3
Interest expense on short-term investment borrowings................ 42.0 - 42.0
Amortization related to operations.................................. 408.8 - 408.8
Amortization related to investment gains............................ 181.2 - 181.2
Nonrecurring charges................................................ 71.7 - 71.7
Other operating costs and expenses.................................. 577.2 444.5 1,021.7
-------- -------- --------
Total benefits and expenses................................... 4,565.3 605.4 5,170.7
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 1,003.1 486.1 1,489.2
Income tax expense...................................................... 376.6 184.7 561.3
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 626.5 301.4 927.9
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes... 49.0 - 49.0
Dividends on preferred stock of subsidiaries........................ 3.3 - 3.3
-------- -------- --------
Income before extraordinary charge ......................... 574.2 301.4 875.6
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 6.9 - 6.9
-------- -------- --------
Net income.................................................. 567.3 301.4 868.7
Less amounts applicable to preferred stock:
Charge related to induced conversions............................... 13.2 - 13.2
Preferred stock dividends........................................... 8.7 - 8.7
-------- -------- --------
Net income applicable to common stock....................... $ 545.4 $ 301.4 $ 846.8
======== ======== ========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the year ended December 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 185,751,000 136,715,000 (11,416,000)(4) 311,050,000
Net income before extraordinary charge ........................ $2.98 $2.20 $2.74
Extraordinary charge .......................................... .04 - .02
----- ----- -----
Net income................................................ $2.94 $2.20 $2.72
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 210,179,000 140,254,000 (11,711,000)(4) 338,722,000
Net income before extraordinary charge ........................ $2.67 $2.15 $2.55
Extraordinary charge........................................... .03 - .02
----- ----- -----
Net income................................................ $2.64 $2.15 $2.53
===== ===== =====
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $1,384.3 $ - $1,384.3
Interest sensitive products...................................... 269.9 - 269.9
Net investment income............................................... 1,302.5 215.3 1,517.8
Gain on sale of receivables......................................... - 389.7 389.7
Net investment gains................................................ 60.8 - 60.8
Fee revenue and other income........................................ 49.8 119.1 168.9
-------- -------- --------
Total revenues.............................................. 3,067.3 724.1 3,791.4
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 1,195.0 - 1,195.0
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 620.2 - 620.2
Other amounts added to variable and equity-indexed
annuity products........................................... 48.4 - 48.4
Interest expense on notes payable................................... 108.1 70.1 178.2
Interest expense on short-term investment borrowings................ 22.0 - 22.0
Amortization related to operations.................................. 240.0 - 240.0
Amortization related to investment gains............................ 36.0 - 36.0
Other operating costs and expenses.................................. 304.0 330.2 634.2
-------- -------- --------
Total benefits and expenses................................... 2,573.7 400.3 2,974.0
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 493.6 323.8 817.4
Income tax expense...................................................... 179.8 123.0 302.8
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 313.8 200.8 514.6
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes... 3.6 - 3.6
Dividends on preferred stock of subsidiaries........................ 8.9 - 8.9
Equity in earnings of subsidiaries.................................. 22.4 - 22.4
-------- -------- --------
Income before extraordinary charge ......................... 278.9 200.8 479.7
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 26.5 - 26.5
-------- -------- --------
Net income.................................................. 252.4 200.8 453.2
Less preferred stock dividends.......................................... 27.4 - 27.4
-------- -------- --------
Net income applicable to common stock....................... $ 225.0 $ 200.8 $ 425.8
======== ======== ========
(continued on next page)
The accompanying notes are an integral
part of the pro forma combined financial
statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the year ended December 31, 1996
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 104,584,000 136,996,000 (11,439,000)(4) 230,141,000
Net income before extraordinary charge ........................ $2.40 $1.47 $1.96
Extraordinary charge .......................................... .25 - .11
----- ----- -----
Net income................................................ $2.15 $1.47 $1.85
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 138,860,000 140,562,000 (11,737,000)(4) 267,685,000
Net income before extraordinary charge ........................ $2.01 $1.43 $1.79
Extraordinary charge........................................... .19 - .10
----- ----- -----
Net income................................................ $1.82 $1.43 $1.69
===== ===== =====
The accompanying notes are an integral
part of the pro forma combined financial
statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1995
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $1,355.6 $ - $1,355.6
Interest sensitive products...................................... 109.4 - 109.4
Net investment income............................................... 1,142.6 176.0 1,318.6
Gain on sale of receivables......................................... - 448.7 448.7
Net investment gains................................................ 204.1 - 204.1
Fee revenue and other income........................................ 43.6 86.6 130.2
-------- -------- --------
Total revenues.............................................. 2,855.3 711.3 3,566.6
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 1,107.5 - 1,107.5
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 556.6 - 556.6
Other amounts added to variable and equity-indexed
annuity products........................................... 28.8 - 28.8
Interest expense on notes payable................................... 119.4 57.3 176.7
Interest expense on short-term investment borrowings................ 22.2 - 22.2
Amortization related to operations.................................. 203.6 - 203.6
Amortization related to investment gains............................ 126.6 - 126.6
Other operating costs and expenses.................................. 272.1 244.4 516.5
-------- -------- --------
Total benefits and expenses................................... 2,436.8 301.7 2,738.5
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 418.5 409.6 828.1
Income tax expense...................................................... 87.0 155.6 242.6
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 331.5 254.0 585.5
Minority interest:
Dividends on preferred stock of subsidiaries........................ 11.9 - 11.9
Equity in earnings of subsidiaries.................................. 97.1 - 97.1
-------- -------- --------
Income before extraordinary charge ......................... 222.5 254.0 476.5
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 2.1 - 2.1
-------- -------- --------
Net income.................................................. 220.4 254.0 474.4
Less preferred stock dividends.......................................... 18.4 - 18.4
-------- -------- --------
Net income applicable to common stock....................... $ 202.0 $ 254.0 $ 456.0
======== ======== ========
(continued on next page)
The accompanying notes are an integral
part of the pro forma combined financial
statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the year ended December 31, 1995
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 81,405,000 136,644,000 (11,410,000)(4) 206,639,000
Net income before extraordinary charge ........................ $2.51 $1.86 $2.22
Extraordinary charge .......................................... .03 - .01
----- ----- -----
Net income................................................ $2.48 $1.86 $2.21
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 103,881,000 140,090,000 (11,698,000)(4) 232,273,000
Net income before extraordinary charge ........................ $2.14 $1.81 $2.05
Extraordinary charge........................................... .02 - .01
----- ----- -----
Net income................................................ $2.12 $1.81 $2.04
===== ===== =====
The accompanying notes are an integral
part of the pro forma combined financial
statements.
</TABLE>
13
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma combined financial statements have been prepared
assuming that the Merger will be accounted for under the pooling of
interests method and are based on the historical consolidated financial
statements of Conseco and Green Tree. Certain amounts in the historical
financial statements of Green Tree have been reclassified to conform with
Conseco's historical financial statement presentation.
Conseco and Green Tree are still in the process of reviewing their
respective accounting policies relative to those followed by the other
entity. As a result of this review, it might be necessary to restate
certain amounts in Conseco's or Green Tree's financial statements to
conform to those accounting policies that are most appropriate. In
management's opinion, any such restatements will not be material.
Green Tree pools and securitizes substantially all of the loan contracts
it originates, retaining: (i) investments in interest-only securities
that are subordinated to the rights of other investors; and (ii) the
servicing on the contracts. The valuation of interest-only securities and
servicing rights is determined by discounting the projected cash flows
over the expected life of the finance receivables sold using prepayment,
default, loss, servicing cost and discount rate assumptions. Impairment
in the value of interest-only securities considered other than temporary
is recognized as a reduction to earnings, while impairment that is
temporary is recognized as a reduction to shareholders' equity.
Impairment in the value of servicing rights is recognized as a reduction
in earnings. The assumptions used in calculating the value of
interest-only securities and servicing rights are subject to volatility.
Prepayments resulting from competition, obligor mobility, general and
regional economic conditions, and prevailing interest rates, as well as
actual losses incurred, may vary from the performance projected in future
periods. Assumptions with respect to future prepayments, defaults,
losses, servicing costs and discount rates are reviewed periodically. As
disclosed in its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Green Tree realized a material writedown of its interest-
only securities due to higher than expected prepayments. Prepayments have
continued to exceed expectations in April 1998. If prepayments continue
above expectations, or upon review certain other assumptions are revised,
it is likely that there will be a further material writedown in the value
of the interest-only securities and servicing rights and this reduction
in value could materially affect operating results. Any adjustments to be
made in future periods will depend on circumstances existing at that
time.
The unaudited pro forma consolidated financial information should be read
in conjunction with the historical consolidated financial statements of
Conseco and Green Tree and the notes thereto.
2. INCOME TAX LIABILITIES
The income tax assets of Conseco are netted against the income tax
liabilities of Green Tree.
3. MERGER AND INTEGRATION COSTS
In connection with the Merger, Conseco expects to incur Merger-related
costs of approximately $240 million, net of income taxes. Such costs
include investment banking, accounting, legal and regulatory fees,
severance and retention costs and other costs associated with the Merger.
These expenses (including the related tax effect) have been reflected in
the unaudited pro forma combined balance sheet financial information, but
are not reflected in the unaudited pro forma statement of operations
financial information since such expenses are not expected to have a
continuing impact on the combined company.
4. SHAREHOLDERS' EQUITY AND WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average shares outstanding have been adjusted to reflect the
issuance of .9165 shares of Conseco common stock for each share of Green
Tree common stock or equivalent. The following shares of Green Tree
common stock or equivalents were outstanding at April 6, 1998: (i)
134,012,054 shares of Green Tree common stock; (ii) 10,297,132 options
outstanding to purchase Green Tree common stock at an average price of
$23.12 per share (such options are equivalent to 6,174,713 shares of
Conseco common stock, based on the last reported sale price of a share of
Conseco common stock on April 6, 1998); and (iii) warrants to purchase
2,735,688 shares of Green Tree common stock at $22.75 per share (such
warrants are equivalent to 710,568 shares of Conseco common stock, based
on the last reported sale price of a share of Conseco common stock on
April 6, 1998 based on Green Tree's right to call the warrant by issuing
stock equivalents at $15 per warrant). The treasury stock held by Green
Tree prior to the Merger has been reclassified to common stock and
additional paid-in capital to conform to Conseco's presentation.
5. OPERATING COST SAVINGS
No adjustment has been included in the unaudited pro forma consolidated
financial information for the anticipated operating cost savings. The
combined company expects to achieve operating cost savings through the
reduction of certain borrowing costs as well as potentially through the
elimination of redundant staff functions, data processing, marketing
synergies and certain back office operations and the reduction of
corporate overhead. There can be no assurance that anticipated operating
cost savings will be achieved.
14
<PAGE>
EXHIBIT 99.2 - Audited consolidated financial statements of Green Tree
Financial Corporation as of December 31, 1997 and 1996, and
for each of the three years ended December 31, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Green Tree Financial Corporation
Saint Paul, Minnesota:
We have audited the accompanying consolidated balance sheets of Green Tree
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Green Tree Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in 1997.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
January 27, 1998, except as to Note O which is as of February 13, 1998
1
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 741,398,000 $ 442,071,000
Cash deposits, restricted 247,237,000 171,484,000
Other investments 25,294,000 11,925,000
Interest only securities 1,363,200,000 1,014,340,000
Finance receivables 1,971,024,000 1,219,983,000
Other receivables 235,705,000 85,503,000
Servicing rights 96,311,000 --
Property, furniture and fixtures 112,404,000 77,859,000
Goodwill 56,095,000 58,950,000
Other assets 18,124,000 15,929,000
------------------- -------------------
Total assets $4,866,792,000 $3,098,044,000
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable $1,355,995,000 $ 472,181,000
Senior/Senior subordinated notes 510,316,000 290,348,000
Accounts payable and accrued liabilities 492,789,000 378,559,000
Investors payable 552,781,000 346,272,000
Deferred income taxes 622,771,000 473,192,000
------------------- -------------------
Total liabilities 3,534,652,000 1,960,552,000
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par; authorized 400,000,000
shares; issued 141,595,984
and 139,782,706 shares, respectively 1,416,000 1,398,000
Additional paid-in capital 435,570,000 373,573,000
Retained earnings 1,075,670,000 818,733,000
Minimum pension liability adjustments (3,142,000) (2,299,000)
Unrealized gain on securities
available for sale, net 21,824,000 --
------------------- -------------------
1,531,338,000 1,191,405,000
Less treasury stock, 7,012,156 and 2,051,000
shares at cost (199,198,000) (53,913,000)
------------------- -------------------
Total stockholders' equity 1,332,140,000 1,137,492,000
------------------- -------------------
Total liabilities and stockholders' equity $4,866,792,000 $3,098,044,000
=================== ===================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUES:
Gain on sale of receivables $ 546,828,000 $389,743,000 $448,702,000
Interest 370,569,000 215,315,000 175,990,000
Service 109,253,000 73,263,000 53,572,000
Commissions and other 64,810,000 45,790,000 33,056,000
-------------------- ------------------ ------------------
1,091,460,000 724,111,000 711,320,000
EXPENSES:
Interest 160,882,000 70,050,000 57,313,000
Cost of servicing 88,740,000 53,022,000 39,168,000
General and administrative 355,715,000 277,210,000 205,211,000
-------------------- ------------------ ------------------
605,337,000 400,282,000 301,692,000
-------------------- ------------------ ------------------
EARNINGS BEFORE INCOME
TAXES 486,123,000 323,829,000 409,628,000
INCOME TAXES 184,727,000 123,055,000 155,659,000
-------------------- ------------------ ------------------
NET EARNINGS $ 301,396,000 $200,774,000 $253,969,000
==================== ================== ==================
EARNINGS PER COMMON SHARE:
BASIC $2.20 $1.47 $1.86
DILUTED $2.15 $1.43 $1.81
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Additional Unrealized
Common paid-in Treasury gain on
stock capital stock securities, net
-------------- --------------- -------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
BALANCES, December 31, 1994 $1,352 $296,732 $ -- $ --
Common stock issuance of 2,300,000 23 26,832 -- --
shares
Cost of 2,051,000 shares of treasury -- -- (53,913) --
stock acquired
Dividends on common stock -- -- -- --
Net earnings -- -- -- --
-------------- --------------- -------------- ----------------
BALANCES, December 31, 1995 1,375 323,564 (53,913) --
Common stock issuance of 2,300,000 23 50,009 -- --
shares
Minimum pension liability adjustments -- -- -- --
Dividends on common stock -- -- -- --
Net earnings -- -- -- --
-------------- --------------- -------------- ----------------
BALANCES, December 31, 1996 1,398 373,573 (53,913) --
Common stock issuance of 1,800,000 18 61,997 -- --
shares
Cost of 4,961,156 shares of treasury -- -- (145,285) --
stock acquired
Minimum pension liability adjustments -- -- -- --
Unrealized gain on securities, net -- -- -- 21,824
Dividends on common stock -- -- -- --
Net earnings -- -- -- --
-------------- --------------- -------------- ----------------
BALANCES, December 31, 1997 $1,416 $435,570 $(199,198) $21,824
============== =============== ============== ================
<CAPTION>
Minimum Total
pension Retained stockholders'
liability earnings equity
-------------- --------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
BALANCES, December 31, 1994 $ -- $ 427,807 $ 725,891
Common stock issuance of 2,300,000
shares -- -- 26,855
Cost of 2,051,000 shares of treasury
stock acquired -- -- (53,913)
Dividends on common stock -- (27,780) (27,780)
Net earnings -- 253,969 253,969
-------------- --------------- --------------
BALANCES, December 31, 1995 -- 653,996 925,022
Common stock issuance of 2,300,000
shares -- -- 50,032
Minimum pension liability
adjustments (2,299) -- (2,299)
Dividends on common stock -- (36,037) (36,037)
Net earnings -- 200,774 200,774
-------------- --------------- --------------
BALANCES, December 31, 1996 (2,299) 818,733 1,137,492
Common stock issuance of 1,800,000
shares -- -- 62,015
Cost of 4,961,156 shares of treasury
stock acquired -- -- (145,285)
Minimum pension liability
adjustments (843) -- (843)
Unrealized gain on securities, net -- -- 21,824
Dividends on common stock -- (44,459) (44,459)
Net earnings -- 301,396 301,396
-------------- --------------- --------------
BALANCES, December 31, 1997 $(3,142) $1,075,670 $1,332,140
============== =============== ==============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Servicing fees and net interest
payments
collected on sold loans $ 419,537,000 $ 217,922,000 $ 159,535,000
Net proceeds from sale of net interest
margin certificates -- -- 302,312,000
Net principal payments collected on 152,302,000 77,810,000 40,571,000
sold loans
Interest on unsold loans 196,103,000 99,046,000 102,785,000
Interest on cash and investments 37,314,000 27,496,000 22,712,000
Commissions 32,461,000 26,340,000 18,616,000
Other (916,000) 3,784,000 484,000
--------------------- -------------------- --------------------
836,801,000 452,398,000 647,015,000
--------------------- -------------------- --------------------
Cash paid to employees and suppliers (398,022,000) (252,625,000) (171,935,000)
Interest paid on debt (156,487,000) (66,381,000) (55,214,000)
Income taxes paid (31,822,000) (44,182,000) (37,496,000)
--------------------- -------------------- --------------------
(586,331,000) (363,188,000) (264,645,000)
--------------------- -------------------- --------------------
NET CASH PROVIDED BY
OPERATIONS 250,470,000 89,210,000 382,370,000
Purchase of loans and leases (10,916,782,000) (7,564,745,000) (5,210,560,000)
Proceeds from sale of loans
and leases 10,378,121,000 7,864,008,000 4,562,468,000
Principal collections on unsold loans
and leases 390,397,000 144,716,000 120,989,000
Commercial and revolving credit loans (4,778,837,000) (2,868,508,000) (1,579,568,000)
disbursed
Principal collections on commercial
and revolving credit loans 3,982,865,000 2,289,916,000 1,187,431,000
Proceeds from sale of commercial
and revolving credit loans 224,400,000 499,115,000 426,304,000
Net cash deposits provided as credit
enhancements (75,753,000) (19,673,000) (13,254,000)
--------------------- -------------------- --------------------
NET CASH (USED FOR) PROVIDED
BY OPERATING ACTIVITIES (545,119,000) 434,039,000 (123,820,000)
--------------------- -------------------- --------------------
</TABLE>
(continued)
5
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- --------------------
<S> <C> <C> <C>
NET CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of subsidiary -- (620,566,000) --
Purchase of property, furniture and
fixtures (61,381,000) (31,231,000) (31,478,000)
Net (purchases) sales of investment
securities (13,369,000) 7,955,000 1,040,000
------------------- ------------------- --------------------
NET CASH USED FOR INVESTING
ACTIVITIES (74,750,000) (643,842,000) (30,438,000)
------------------- ------------------- --------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on credit facilities 10,357,770,000 7,514,398,000 4,633,237,000
Repayments on credit facilities (9,473,955,000) (7,128,379,000) (4,539,575,000)
Issuance of long-term debt 220,000,000 -- --
Common stock issued 5,125,000 6,125,000 2,346,000
Common stock repurchased (145,285,000) -- (53,913,000)
Dividends paid (44,459,000) (36,037,000) (27,780,000)
Payments of debt -- -- (20,246,000)
------------------- ------------------- --------------------
NET CASH PROVIDED BY (USED
FOR) FINANCING ACTIVITIES 919,196,000 356,107,000 (5,931,000)
------------------- ------------------- --------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 299,327,000 146,304,000 (160,189,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 442,071,000 295,767,000 455,956,000
------------------- ------------------- --------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 741,398,000 $ 442,071,000 $ 295,767,000
=================== =================== ====================
</TABLE>
(continued)
6
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------
1997 1996 1995
------------------- ------------------ -------------------
<S> <C> <C> <C>
RECONCILIATION OF NET EARNINGS TO
NET CASH (USED FOR) PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 301,396,000 $ 200,774,000 $ 253,969,000
Deferred income taxes 149,579,000 67,460,000 109,686,000
Valuation adjustment of interest only 190,000,000 200,000,000 --
securities
Depreciation and amortization 32,125,000 22,427,000 13,518,000
Net proceeds from sale of net interest
margin certificates -- -- 302,312,000
Net loan payments collected, less
interest only securities and servicing
rights recorded (309,026,000) (394,021,000) (331,882,000)
Amortization of servicing rights 15,372,000 -- --
Amortization of deferred service income -- (30,594,000) (14,689,000)
Accretion of yield on interest only
securities (125,831,000) (77,223,000) (51,267,000)
Net increase in cash deposits (75,753,000) (19,673,000) (13,254,000)
Purchase of loans and leases, net of sales (134,597,000) 443,978,000 (527,103,000)
and principal collections
Commercial and revolving loans
disbursed, net of sales and
principal collections (571,572,000) (79,477,000) 34,167,000
Net selling expenses on sale of loans 61,513,000 50,900,000 38,852,000
Increase in current income tax accruals 3,326,000 11,413,000 8,477,000
Increase in amounts payable to employees 16,183,000 9,041,000 54,951,000
and suppliers
Increase in other receivables (77,508,000) (178,000) --
Other (20,326,000) 29,212,000 (1,557,000)
------------------- ------------------ -------------------
NET CASH (USED FOR) PROVIDED
BY OPERATING ACTIVITIES $(545,119,000) $ 434,039,000 $(123,820,000)
=================== ================== ===================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- - ---------------------
(a) Consolidation
-------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany profits,
transactions and balances have been eliminated. In certain cases, prior
year amounts have been reclassified to conform to the current year's
presentation.
(b) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change relate to the valuation of the interest only securities.
(c) Restatement of 1996 Financial Statements
----------------------------------------
During the fourth quarter of 1997, the Company determined that its
processes for assessing the valuation of its excess servicing rights had
not fully considered the effects of partial prepayments on projected future
interest collections and the impact of changes in projected future interest
due to investors on a weighted average basis on bonds outstanding. In
consideration of these items, the Company has restated its previously
reported financial statements for 1996 as follows:
<TABLE>
<S> <C>
Decrease net gains on contract sales and excess servicing rights $200,000,000
Decrease in general and administrative expense and accrued liabilities $ 25,868,000
Decrease in earnings before income taxes $174,132,000
Decrease in provision for income taxes and deferred tax liability $ 66,170,000
Decrease in net earnings for 1996 and decrease in retained earnings
as of December 31, 1996 $107,962,000
Decrease in net earnings per common share $ 0.77
</TABLE>
8
<PAGE>
ADOPTION OF NEW ACCOUNTING STANDARDS
- - ------------------------------------
(a) Accounting for Stock Based Compensation
---------------------------------------
On January 1, 1996, the Company adopted the pro forma disclosure provisions
of Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation". The Company continues to apply
the accounting provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
(b) Accounting for Transfers and Servicing of Financial Assets and
--------------------------------------------------------------
Extinguishments of Liabilities
------------------------------
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
requires prospective implementation only; however, certain
reclassifications have been made to prior year's financial statements to
conform to the current year's presentation.
Among other provisions, SFAS No. 125 uses a "financial components" approach
relative to the recognition of financial assets and liabilities resulting
from the transfer of financial assets. SFAS No. 125 also provides guidance
relative to the classification and ongoing measurement of the financial
components retained in connection with financial asset sales. Such
components are recorded at allocated cost. The Company retains interest
only securities and servicing rights upon the sale of its financial assets
or receivables.
(c) Earnings Per Share
------------------
On December 31, 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings Per Share", which establishes
new standards for calculating and disclosing earnings per share. All prior
period earnings per share data has been restated to conform with the
provisions of SFAS No. 128, as shown in Note G, "Earnings Per Share".
(d) Disclosure of Information about Capital Structure
-------------------------------------------------
On December 31, 1997 the Company adopted Statement of Financial Accounting
Standards No. 129 (SFAS No. 129), "Disclosure of Information about Capital
Structure", which establishes standards for disclosing information about an
entity's capital structure. The statement has no effect on the Company's
current capital structure disclosures.
9
<PAGE>
REVENUE RECOGNITION
- - -------------------
(a) Gain on Sale of Receivables
---------------------------
Effective January 1, 1997 the Company accounts for the sale of receivables
in accordance with SFAS No. 125. Gain on sale of receivables represents the
difference between the proceeds from the sale, net of related transaction
costs, and the allocated carrying amount of the receivables sold. The
allocated carrying amount is determined by allocating the original amount
of the receivables between the portion sold and any retained interests
(interest only securities and servicing rights), based on their relative
fair values at the date of sale. The initial unrealized gain on the
valuation of interest only securities which represents the difference
between the allocated carrying amount of the receivables and their fair
market value at time of sale is recorded in stockholders' equity. In
addition, gain on sale of receivables includes pointsreceived and premiums
paid.
The fair value of interest only securities and servicing rights as of the
sale date are determined by discounting the cash flows over the expected
life of the financial contracts using prepayment, default, loss and
interest rate assumptions that the Company believes market participants
would use for similar financial instruments.
(b) Interest
--------
Interest revenue generally represents interest earned on unsold finance
receivables, custodial trust cash and other investments. In addition, the
Company recognizes interest yield on its interest only securities.
(c) Service
-------
Service income represents the contractual servicing fees received less the
amortization of servicing rights. Servicing rights are amortized in
proportion to and over the period of estimated net future servicing fee
income.
(d) Commission and Other
--------------------
Commission and other income generally represents insurance commissions and
late fees.
CASH AND CASH EQUIVALENTS
- - -------------------------
For purposes of the statements of cash flows, the Company considers all highly
liquid temporary investments purchased with a maturity of three months or less
to be cash equivalents. At December 31, 1997 and 1996, cash of approximately
$528,644,000 and $341,936,000, respectively, was held in trust for subsequent
payment to investors. In addition, cash of $247,237,000 and $171,484,000 is
restricted by the pooling and servicing agreements and approximately $3,261,000
and $3,101,000 is restricted and held by the Company's subsidiaries pursuant to
various government requirements at December 31, 1997 and 1996, respectively.
OTHER INVESTMENTS
- - -----------------
Other investments consist of liquid investments with original maturities of no
more than three months. Investments are held in trust for FDIC requirements and
policy and claim reserves and a master repurchase agreement for the Company's
bank and insurance subsidiaries.
10
<PAGE>
INTEREST ONLY SECURITIES
- - ------------------------
Effective January 1, 1997, the Company accounts for interest only securities in
accordance with SFAS No. 125 and SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Interest only securities represent
the right to receive certain cash flows which exceed the amount of cash flows
sold in the Company's securitized receivable sales. Interest only securities
generally represent the value of interest to be collected on the underlying
financial contracts of each securitization over the sum of the interest to be
paid to security classes sold, contractual servicing fees and credit losses.
The Company classifies its interest only securities as available for sale and
carries these securities at fair market value. Accordingly, unrealized gains
and losses are reported net of deferred income taxes, as a separate component of
stockholders' equity.
The Company monitors its interest only securities for other than temporary
impairment. Generally, other than temporary impairment is deemed to occur when
the present value of estimated future cash flows discounted at a risk free rate
using appropriate prepayment and default assumptions is less than the carrying
value of the interest only securities. If other than temporary impairment
occurs, the carrying value is reduced to fair value and a loss is recognized in
the statements of operations.
FINANCE RECEIVABLES
- - -------------------
Finance receivables consist of lease, commercial finance and revolving credit
receivables and loans held for sale. Generally all lease receivables are direct
financing leases as defined in SFAS No. 13 "Accounting for Leases". The
carrying value of lease receivables represents the present value of both the
future minimum lease payments and related residual values. The Company's
commercial finance receivables generally represent dealer floorplan, asset-based
financing arrangements with dealers, manufacturers and other commercial entities
and commercial real estate loans. Revolving credit receivables consist of retail
credit card arrangements with merchants and dealers and their customers. Loans
held for sale generally consist of recent originations of manufactured housing,
home equity, home improvement and consumer and equipment contracts which will be
sold during the following quarter. Finance receivables are net of allowance for
expected losses.
OTHER RECEIVABLES
- - -----------------
Other receivables consist of the Company's miscellaneous accounts receivable,
insurance related, interest and other production and servicing related
receivables.
SERVICING RIGHTS
- - ----------------
Servicing rights are carried at allocated cost and amortized in proportion to
and over the estimated period of net servicing income.
GOODWILL
- - --------
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, generally 20 years.
11
<PAGE>
DEPRECIATION
- - ------------
Property, furniture and fixtures are carried at cost and are depreciated over
their estimated useful lives on a straight-line basis.
B. INTEREST ONLY SECURITIES
Effective January 1, 1997 the Company began accounting for its sales of
receivables, interest only securities and servicing rights in accordance with
SFAS No. 125 and SFAS No. 115.
The activity in interest only securities for 1997 is summarized as follows:
<TABLE>
<S> <C>
Balance at beginning of year $1,014,340,000
Transfer to servicing rights (30,755,000)
Additions 674,660,000
Yield on interest only securities 125,831,000
Net cash collected (266,077,000)
Realized loss on valuation of interest
only securities (190,000,000)
Unrealized gain on valuation of interest
only securities 35,201,000
--------------
Balance at end of year $1,363,200,000
==============
</TABLE>
In 1995 and previous years, the Company sold a substantial portion of its
interest only securities related to manufactured housing securitization
transactions between 1978 and 1995 in the form of securitized Net Interest
Margin Certificates. The Company retained a subordinated interest in the cash
flow of the interest only securities sold. These interests are included in
interest only securities and total $77,030,000 at December 31, 1997.
Generally interest only securities relate to the sale of closed end manufactured
housing, home equity, home improvement, consumer and equipment finance
receivables. The Company's interest only securities are subject to a
substantial amount of credit loss and prepayment risk related to the receivables
sold. In connection with the valuation of interest only securities the Company
has provided for approximately $899,981,000 of credit losses as of December 31,
1997. On a nondiscounted basis the amount of credit losses provided for in
connection with the valuation of the interest only securities is approximately
$1,321,260,000. These estimated losses if realized, would reduce the amount of
cash flows available to the interest only securities and are considered in the
company's valuation processes.
12
<PAGE>
The table below details information pertinent to the valuation of the interest
only securities as of December 31, 1997.
<TABLE>
<CAPTION>
Manufactured Home Equity / Consumer /
Housing Home Improvement Equipment Total
---------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Interest only securities carrying amount $ 857,352,000 335,089,000 170,759,000 $ 1,363,200,000
Unpaid principal balance of sold receivables $17,558,224,000 4,251,590,000 2,467,478,000 $24,277,292,000
Weighted average customer interest rate on
sold receivables 10.49% 11.82% 11.33%
Approximate expected weighted average
constant prepayment rate as a percentage
of unpaid principal balance of sold
receivables (1) 9.5% 24.0% 22.0%
Approximate remaining expected non
discounted credit losses as a percentage
of unpaid principal balance of sold
receivables (1) 6.2% 4.3% 2.1%
</TABLE>
(1) Valuation of the Company's interest only securities is impacted not only by
the projected level of prepayments of principal and net credit losses, as
shown above, but also by the projected timing of such prepayments and net
credit losses. Should the timing of projected pre-payments of principal or
net credit losses differ materially from the timing projected by the
Company, such timing could have a material effect on the valuation of the
interest only securities.
13
<PAGE>
The weighted average interest rate used to discount expected future cash flows
of the interest only securities is 11.47% as of December 31, 1997.
Prior to the implementation of SFAS 125, the Company recorded "excess servicing
rights receivable" and "allowance for losses on loans sold" on its balance
sheet. Excess servicing rights receivable consisted of net excess cash
expected to be collected over the life of the loans sold. In initially valuing
its excess servicing rights receivable at the time of securitization, the
Company established an allowance for expected losses on loans sold. This
allowance represents the Company's best estimate of future credit losses likely
to be incurred over the entire life of the loans. As of December 31, 1996,
excess servicing rights receivable consisted of:
<TABLE>
<S> <C>
Gross cash flows receivable on loans sold $ 4,379,336,000
Less:
Prepayment reserve (2,221,016,000)
Deferred service income (281,301,000)
Discount to present value (505,297,000)
FHA insurance and other fees (8,813,000)
Subordinated interest in NIM certificates 145,307,000
---------------
1,508,216,000
Allowance for losses (493,876,000)
---------------
Net excess servicing rights receivable $ 1,014,340,000
===============
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, the Company sold
$10,524,758,000, $7,913,357,000 and $4,599,087,000, respectively, of closed end
receivables in various securitized transactions.
The Company recorded a writedown of interest only securities carrying value of
$190 million in 1997 due to adverse prepayment experience. Additionally, the
Company recorded a $35 million unrealized gain at December 31, 1997. As further
discussed in Note A the Company recorded a $200 million writedown in 1996.
Writedowns are recorded as a reduction of "gain on sale of receivables" in the
consolidated statements of operations. Unrealized gains are recorded as a
component of stockholders' equity.
C. FINANCE RECEIVABLES
Finance receivables consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C>
Lease $ 191,572,000 $ 570,407,000
Commercial Finance 683,691,000 212,920,000
Revolving Credit Card 165,151,000 40,803,000
Loans Held For Sale 930,610,000 395,853,000
---------------------- ----------------------
Total $1,971,024,000 $1,219,983,000
====================== ======================
</TABLE>
14
<PAGE>
The allowance for doubtful accounts included in finance receivables at December
31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C>
Lease $17,776,000 $13,334,000
Commercial Finance 875,000 687,000
Revolving Credit Card 1,149,000 239,000
---------------------- ----------------------
Total $19,800,000 $14,260,000
====================== ======================
</TABLE>
D. SERVICING RIGHTS
The activity in servicing rights for 1997 is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $ --
Transfer from interest only securities 30,755,000
Additions 80,928,000
Amortization (15,372,000)
-------------------------
Balance at end of year $ 96,311,000
=========================
</TABLE>
Servicing rights are evaluated for impairment on an ongoing basis, stratified by
product type and origination period. To the extent the recorded amount exceeds
the fair value of those servicing rights, a valuation allowance is established
through a charge to earnings. Upon subsequent measurement of the fair value of
these servicing rights in future periods, if the fair value equals or exceeds
the carrying amount, any previously recorded valuation allowance would be deemed
unnecessary and, therefore, represent current period earnings only to the extent
of such previously recorded allowance. Fair value of servicing rights
approximated the carrying amount and no valuation allowance with respect to the
servicing rights was necessary at December 31, 1997.
E. PROPERTY, FURNITURE AND FIXTURES
Property, furniture and fixtures consist of:
<TABLE>
<CAPTION>
December 31
Estimated -----------------------------------------
useful life 1997 1996
---------------- ------------------ -----------------
<S> <C> <C> <C>
Cost:
Building 35 years $ 20,024,000 $ 20,648,000
Furniture and equipment 3-7 years 137,451,000 87,686,000
Leasehold improvements 3-10 years 17,829,000 11,779,000
Land and improvements 7,159,000 1,724,000
------------------ -----------------
182,463,000 121,837,000
Less accumulated depreciation (70,059,000) (43,978,000)
------------------ -----------------
$112,404,000 $ 77,859,000
================== =================
</TABLE>
Depreciation expense for 1997, 1996 and 1995 was $26,851,000, $17,932,000 and
$10,956,000, respectively.
15
<PAGE>
F. DEBT
In 1997 the Company had a $2,000,000,000 commercial paper program which was used
primarily for purposes of financing its loan production inventory prior to sale
of those receivables in the form of securitization. This program was backed by
both committed bank facilities and master repurchase agreements with various
investment banking firms. During the first quarter of 1998, the Company
substantially curtailed its issuance of commercial paper, as discussed in Note
O, "Subsequent Events".
As of December 31, 1997, the Company had both a one-year and three-year
unsecured revolving line of credit totaling $1,500,000,000 which were scheduled
to expire April 28, 1998 and April 28, 2000, respectively. The credit agreement
contained certain restrictive covenants which included maintenance of a minimum
net worth of $750 million and a debt to net worth ratio not to exceed 5 to 1. In
addition, the Company utilized master repurchase agreements that were in place
with a variety of investment banking firms totaling $2,800,000,000 at December
31, 1997 which were subject to the availability of eligible collateral. There
were no outstanding balances under these facilities as of December 31, 1997 and
1996. See Note O, "Subsequent Events", for new revolving line of credit
agreement information.
The Company has a $2,000,000 promissory note which contains a balloon payment
due on April 9, 2001, bearing interest at an annual rate of 2%.
The Company also has a $250,000,000 medium term note program under which it may
issue senior notes bearing either fixed or floating rates of interest with
maturities in excess of nine months. As of December 31, 1997, $246,650,000 of
notes were outstanding under this program. Interest on these notes is payable
semi-annually.
The Senior Subordinated Notes due June 1, 2002 were issued in connection with a
debt exchange completed in April 1992. The effective interest rate on these
notes is 10.8%. There is unamortized original issue discount of $3,588,000 and
$3,556,000 at December 31, 1997 and 1996, respectively. The Company must
maintain net worth of $80,000,000 or will be required, through the use of a
sinking fund, to redeem $25,000,000 on such contingent sinking fund payment
date. Interest on these notes is payable semi-annually.
Debt outstanding and its weighted average interest rates are as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1997 1996
------------------------------ ----------------------------
Amount Rate Amount Rate
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Commercial paper $1,319,140,000 6.08% $431,242,000 5.68%
Revolving line of credit 35,000,000 5.80 39,000,000 5.63
Promissory note 1,855,000 2.00 1,939,000 2.00
------------------- -------------------
Notes payable 1,355,995,000 472,181,000
------------------- -------------------
Medium term notes 246,650,000 6.62 26,650,000 7.27
Senior subordinated notes 263,666,000 10.80 263,698,000 10.80
------------------- -------------------
Senior/Senior subordinated notes 510,316,000 290,348,000
------------------- -------------------
Total $1,866,311,000 $762,529,000
=================== ===================
</TABLE>
16
<PAGE>
At December 31, 1997, aggregate maturities of debt, excluding commercial paper
and the revolving line of credit, for the following five years are $512,109,000,
payable as follows: $3,085,000 in 1998, $5,087,000 in 1999, $12,088,000 in
2000, $4,595,000 in 2001, and $487,254,000 in 2002.
G. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted
average number of shares of Common Stock outstanding during each year. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of shares of Common Stock and potential Common Stock outstanding during
each year. All share and per-share amounts have been restated to reflect the
two-for-one stock split the Company effected in October 1995. The following
table presents the earnings per share data as required by SFAS No. 128. Options
to purchase 628,548, 33,063 and 1,124,776 shares are excluded from the
computation of diluted earnings per common share because of their anti-dilutive
effect, as the exercise price of the option exceeds the average market price of
the Common Stock for the years ended December 31, 1997, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------
1997 1996 1995
----------------- ------------------- -------------------
<S> <C> <C> <C>
Net Earnings $301,396,000 $200,774,000 $253,969,000
================= =================== ===================
Weighted average Common Stock
outstanding 136,714,884 136,995,701 136,644,397
Effect of dilutive securities:
Options 3,539,558 3,566,129 3,445,259
----------------- ------------------- -------------------
Diluted Common Stock 140,254,442 140,561,830 140,089,656
================= =================== ===================
Earnings per common share:
Basic $ 2.20 $ 1.47 $ 1.86
Diluted $ 2.15 $ 1.43 $ 1.81
</TABLE>
H. STOCKHOLDERS' EQUITY
COMMON STOCK
- - ------------
In May 1996, the Board of Directors and shareholders approved the authorization
of 250,000,000 additional shares of Common Stock for general corporate purposes,
including stock dividends, raising additional capital and issuances pursuant to
employee stock option plans and possible future acquisitions.
In September 1995, the Board of Directors declared a two-for-one stock split, in
the form of stock dividends, payable on October 15, 1995 to stockholders of
record as of September 30, 1995. All references in the consolidated financial
statements and notes with regard to number of shares, stock options and related
prices and per-share amounts have been restated to give retroactive effect to
the stock split.
In February 1995, the Company's Board of Directors approved and authorized the
repurchase of up to 7,000,000 shares of the Company's Common Stock. As of
December 31, 1997, the Company had repurchased the entire 7,000,000 shares.
17
<PAGE>
STOCK BONUS PLAN
- - ----------------
The Company had a key executive compensation stock bonus plan. Shares issued
under this plan are pursuant to an employment agreement and the stock is valued
at $2.96875 per share which represents the closing market price of the stock on
the date of the employment agreement. Total shares issued under this plan
during 1997, 1996 and 1995 were 2,400,000, 1,998,745 and 1,349,216,
respectively. On January 27, 1998, 761,210 shares issued in 1997 were returned
to the Company in connection with the Company's recomputation of the bonus
amount for fiscal year 1996.
STOCK OPTION PLANS
- - ------------------
The Company has two stock option plans: an employee stock option plan and an
outside director plan. In 1992, the Board of Directors approved a supplemental
stock option plan for its outside directors and in 1995, the Company's
stockholders approved an Employee Stock Incentive Plan.
In 1996, the Company's stockholders approved a chief executive plan. Two
million options were granted under this plan at an exercise price equal to the
fair market value of the Company's stock on February 9, 1996, of $30.875. The
term of the option, which commences in 1997, is for ten years, with a five-year
vesting schedule providing vesting of 20% per year for each full year of
service.
Options for 742,120 shares were available for future grant under these plans.
The Company's Board of Directors has reserved 13,833,752 shares for future
issuance under all plans as of December 31, 1997.
A summary of the stock option plan activity is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------------- ------------------------
<S> <C> <C>
Outstanding at December 31, 1994 5,146,468 $ 4.45
Granted 3,015,000 24.00
Exercised (1,794,936) 4.39
Expired (110,000) 24.00
---------------
Outstanding at December 31, 1995 6,256,532 13.60
Granted 5,632,500 32.02
Exercised (1,196,500) 4.69
Expired (620,500) 26.49
---------------
Outstanding at December 31, 1996 10,072,032 23.91
Granted 1,289,500 37.32
Exercised (528,500) 9.69
Expired (922,567) 28.13
---------------
Outstanding at December 31, 1997 9,910,465 25.98
===============
</TABLE>
18
<PAGE>
Of the 9,910,465 options outstanding at December 31, 1997, 9,778,465 options
relate to the employee and chief executive stock option plans and 132,000
options relate to the outside director plan. The exercise price per share
represents the market value of the Company's stock on the date of grant except
for certain options granted in 1996 and 1995. The option price per share on
850,000 options granted in 1996 represents approximately 77% of the market value
of the Company's stock on the date of grant and 370,000 options granted in 1995
represents approximately 79% of the market value of the Company's stock on the
date of grant.
A summary of stock options outstanding and exercisable at December 31, 1997 is
as follows:
Options Outstanding:
<TABLE>
<CAPTION>
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- - ---------------- ------------------ --------------------- -----------------------
<S> <C> <C> <C>
$ 2.97-24.00 3,621,665 5.97 $14.77
25.00-30.62 1,602,300 8.58 29.23
30.87-30.87 2,020,000 8.11 30.87
31.25-38.37 2,558,500 8.89 35.40
38.62-47.00 108,000 9.12 39.49
- - ---------------- ------------------ --------------------- -----------------------
$ 2.97-47.00 9,910,465 7.62 $25.98
Options Exercisable:
<CAPTION>
Range of Number Weighted Average
Exercise Prices Exercisable Exercise Price
- - ---------------- ------------------ -----------------------
<S> <C> <C>
$ 2.97-24.00 2,496,398 $11.03
25.00-30.62 351,100 28.82
30.87-30.87 404,000 30.87
31.25-38.37 348,000 34.07
38.62-47.00 16,000 38.94
- - ---------------- ------------------ -----------------------
$ 2.97-47.00 3,615,498 $17.32
</TABLE>
19
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25, and related
interpretations in accounting for its stock incentive plans. Proceeds from
stock options exercised are credited to common stock and paid-in capital. There
are no charges or credits to expense with respect to the granting or exercise of
options that were issued at fair market value on their respective dates of
grant. Had compensation costs for the Company's stock-based compensation plans
been determined consistent with Statement of Financial Accounting Standards No.
123, the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Earnings As Reported $301,396,000 $200,774,000 $253,969,000
Pro Forma 281,645,000 190,185,000 250,805,000
Diluted Earnings
Per Share As Reported $2.15 $1.43 $1.81
Pro Forma 2.01 1.35 1.79
</TABLE>
The fair value for each option granted in 1997, 1996 and 1995 utilized in the
foregoing pro forma amounts is estimated on the date of grant using an option
pricing model. The model incorporates the following assumptions in 1997, 1996
and 1995: .8% dividend yield; 41.9%, 38.5% and 39.7% expected volatility,
respectively; risk-free interest rates ranging from 5.2% to 7.7%; and expected
option term beyond vesting of 2 years.
DIVIDENDS
- - ---------
During 1997, 1996 and 1995 the Company declared and paid dividends of $.33, $.26
and $.20 per share, respectively, on its Common Stock. Under a letter of credit
agreement, the Company is subject to restrictions limiting the payment of
dividends and common stock repurchases. At December 31, 1997, such payments
were limited to $106,239,000 which represents 50% of consolidated net earnings
for the most recently concluded four fiscal quarter periods less dividends paid.
I. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Fair value estimates as of December 31, 1997 and 1996 are based on pertinent
information available to management as of the respective dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been revalued for purposes
of these financial statements subsequent to December 31, 1997 and 1996.
Therefore, current estimates of fair value may differ significantly from the
amounts presented herein. Fair value estimates, methods and assumptions are set
forth below for the Company's financial instruments.
CASH AND CASH EQUIVALENTS, CASH DEPOSITS AND OTHER INVESTMENTS
- - --------------------------------------------------------------
The carrying amount of cash and cash equivalents, cash deposits and other
investments approximates fair value because they generally mature in 90 days or
less and do not present unanticipated credit concerns.
20
<PAGE>
INTEREST ONLY SECURITIES
- - ------------------------
Fair value on interest only securities is calculated using prepayment, default
and interest rate assumptions on expected future cash flows that the Company
believes market participants would use for similar instruments, as shown in Note
B, "Interest Only Securities".
FINANCE RECEIVABLES
- - -------------------
(a) Lease
-----
Lease receivables generally consist of a large number of individually small
finance leases with average remaining terms of less than 36 months. Fair
value approximates carrying value.
(b) Commercial Finance
-------------------
Commercial finance receivables consist primarily of loans which reprice
monthly, typically in accordance with the prime lending rate offered by
banks. Given this repricing structure, the Company estimates the fair value
of these receivables to approximate their carrying value.
(c) Revolving Credit Card
---------------------
Revolving credit card receivables consist of retail credit and the
applicable interest from credit card agreements applied to revolving credit.
The Company estimates the fair value of these receivables to approximate
their carrying value.
(d) Loans Held for Sale
--------------------
Loans held for sale are generally recent originations which will be sold
during the following quarter. Generally, the loans have origination rates in
excess of rates on the securities into which they will be pooled. Since
these loans have not been converted into securitized pools, the Company
estimates the fair value to be the carrying amount plus the cost of
origination.
NOTES PAYABLE
- - -------------
Notes payable consist of short-term amounts payable under the Company's
commercial paper program, line of credit or repurchase agreements and are at a
rate which approximates market. As such, fair value approximates the carrying
amount.
SENIOR NOTES AND SENIOR SUBORDINATED NOTES
- - ------------------------------------------
The fair value of the Company's senior notes is estimated based on their quoted
market price or on the current rates offered to the Company for debt of a
similar maturity. The Company's senior subordinated notes are valued at quoted
market prices.
21
<PAGE>
The carrying amounts and estimated fair values of the Company's financial assets
and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Financial assets:
Cash and cash equivalents, cash
deposits and other investments $1,013,929 $1,013,929 $ 625,480 $ 625,480
Interest only securities 1,363,200 1,363,200 1,014,340 1,006,480
Finance receivables:
Lease 191,572 191,572 570,407 570,407
Commercial finance 683,691 683,691 212,920 212,920
Revolving credit 165,151 165,151 40,803 40,803
Loans held for sale 930,610 945,965 395,853 404,738
Financial liabilities:
Notes payable 1,355,995 1,355,995 472,181 472,181
Senior notes/senior subordinated
notes 510,316 520,018 290,348 331,580
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. The
estimates do not reflect any premium or discount that could result from offering
for sale at one time, the Company's entire holdings of a particular financial
instrument. Fair value estimates are based on judgments regarding future loss
and prepayment experience, current economic conditions, specific risk
characteristics and other factors. Changes in market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
J. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
- - -----------------
At December 31, 1997, aggregate minimum rental commitments under noncancelable
leases having terms of more than one year were $32,984,000, payable $10,425,000
(1998), $9,485,000 (1999), $7,116,000 (2000), $4,400,000 (2001) and $1,558,000
(2002). Total rental expense for the years ended December 31, 1997, 1996 and
1995 was $13,055,000, $8,664,000 and $6,101,000, respectively. These leases are
for office facilities and equipment and many contain either clauses for cost of
living increases and/or options to renew or terminate the lease.
CONTINGENT LIABILITY
- - --------------------
The Company services all receivables securitized. In connection with certain
securitization transactions, the Company has provided guarantees in the amount
of $1.7 billion and $1.5 billion as of December 31, 1997 and 1996, respectively.
The Company believes it has adequately considered this guarantee in connection
with its presentation of its financial condition and no liability is necessary
to provide for exposure related to this guarantee.
22
<PAGE>
LITIGATION
- - ----------
The Company has been served with various lawsuits in United States District
Court. These lawsuits were filed by certain stockholders of the Company as
purported class actions on behalf of persons or entities who purchased common
stock of the Company during the alleged class periods. In addition to the
Company, certain current and former officers and directors of the Company are
named as defendants in one or more of the lawsuits. The Company and the other
defendants intend to seek consolidation of each of the lawsuits in the United
States District Court for the District of Minnesota. Plaintiffs in the lawsuits
assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. In each case, plaintiffs allege that the Company and the other defendants
violated federal securities laws by, among other things, making false and
misleading statements about the current state and future prospects of the
Company (particularly with respect to prepayment assumptions and performance of
certain of the Company's loan portfolios) which allegedly rendered the Company's
financial statements false and misleading. The Company believes that the
lawsuits are without merit and intends to defend such lawsuits vigorously.
In addition, the nature of the Company's business is such that it is routinely a
party or subject to items of pending or threatened litigation. Although the
ultimate outcome of certain of these matters cannot be predicted, management
believes, based upon information currently available that the resolution of
these legal matters will not result in any material adverse effect on its
consolidated financial condition.
K. BENEFIT PLANS
The Company has a qualified noncontributory defined benefit pension plan
covering substantially all of its employees over 21 years of age. The plan's
benefits are based on years of service and the employee's compensation. The
plan is funded annually based on the maximum amount that can be deducted for
federal income tax purposes. The assets of the plan are primarily invested in
common stock, corporate bonds and cash equivalents. In addition, the Company
maintains a nonqualified pension plan for certain key employees as designated by
the Board of Directors. The following table sets forth the plans' funded status
and amounts recognized in the Company's statement of financial position at
December 31.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ---------------------------------------
Actuarial Present Value of Qualified Supplemental Qualified Supplemental
Benefit Obligations Plan Plan Plan Plan
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vested benefit obligation $ (7,800,861) $(17,066,920) $ (6,851,740) $(13,029,105)
----------------- ----------------- ----------------- -----------------
Accumulated benefit obligation (11,112,689) (17,066,920) (8,340,969) (13,167,331)
----------------- ----------------- ----------------- -----------------
Projected benefit obligation (21,780,333) (51,101,268) (17,033,929) (22,840,557)
Plan assets at fair value 9,071,280 -- 7,074,888 --
----------------- ----------------- ----------------- -----------------
Excess of projected benefit
obligation over plan assets (12,709,053) (51,101,268) (9,959,041) (22,840,557)
Unrecognized net loss 7,753,539 35,395,087 7,089,685 13,381,065
Prior service cost (339,491) -- (375,599) --
Unrecognized net (asset)
obligation (44,600) 212,600 (59,140) 359,000
----------------- ----------------- ----------------- -----------------
Net pension liability recognized
in the consolidated balance sheet $ (5,339,605) $(15,493,581) $ (3,304,095) $ (9,100,492)
================= ================= ================= =================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
- - --------------------------------- -------------------- ------------------- -------------------
Net Periodic Pension Cost -
Qualified and Supplemental 1997 1996 1995
- - --------------------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Service cost $ 4,854,946 $3,074,664 $1,105,952
Interest cost on projected
benefit obligation 3,949,924 1,944,237 622,688
Actual return on plan assets (1,304,116) (776,764) (816,479)
Net amortization and deferral 2,493,995 1,104,904 391,726
-------------------- ------------------- -------------------
Net periodic pension cost $ 9,994,749 $5,347,041 $1,303,887
==================== =================== ===================
</TABLE>
The preretirement discount rate, postretirement discount rate and rate of
increase in future compensation levels used for determining obligations as of
December 31, 1997 were 6.75%, 6.5% and 5.5% respectively, and for determining
expense at December 31, 1996 were 7.25%, 6.5% and 5.5% respectively.
Preretirement mortality table and postretirement mortality tables were used for
determining expense and obligations at December 31, 1997. The wage base under
Social Security was assumed to increase at 4.5% per year starting in 1997. The
maximum benefit and compensation contained in Sections 415(b) and 401(a)(17) of
the IRS Code are assumed to increase by 4.0% per year in the future. Total
pension expense for the plans in 1997, 1996 and 1995 was $14,064,000, $5,347,000
and $3,091,000, respectively.
The Company also has a 401(k) Retirement Savings Plan available to all eligible
employees. To be eligible for the plan, the employee must be at least 21 years
of age and have completed six months of employment at Green Tree during which
the employee worked at least 1,000 hours. Eligible employees may contribute to
the plan up to 15% of their earnings with a maximum of $9,500 for 1997 based on
the Internal Revenue Service annual contribution limit. The Company will match
50% of the employee contributions for an amount up to 6% of each employee's
earnings. Contributions are invested at the direction of the employee to one or
more funds. Company contributions vest after three years. Company
contributions to the plan were $2,498,000, $1,316,000 and $859,000 in 1997, 1996
and 1995, respectively.
24
<PAGE>
L. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ 32,574,000 $ 51,908,000 $ 43,883,000
State 2,574,000 3,687,000 2,090,000
------------------- ------------------- -------------------
35,148,000 55,595,000 45,973,000
Deferred:
Federal 129,717,000 56,201,000 92,870,000
State 19,862,000 11,259,000 16,816,000
------------------- ------------------- -------------------
149,579,000 67,460,000 109,686,000
------------------- ------------------- -------------------
$184,727,000 $123,055,000 $155,659,000
=================== =================== ===================
Deferred income taxes are provided for temporary differences between financial
statement carrying amounts and their respective tax basis. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 1997 and 1996 are
presented below.
<CAPTION>
December 31
--------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Deferred tax liabilities:
Interest only securities $737,238,000 $451,051,000
Other 45,282,000 50,602,000
------------------- -------------------
Gross deferred tax liabilities 782,520,000 501,653,000
------------------- -------------------
Deferred tax assets:
Net operating loss carryforward 135,180,000 20,347,000
Other 24,569,000 8,114,000
------------------- -------------------
Gross deferred tax assets 159,749,000 28,461,000
------------------- -------------------
Net deferred tax liability $622,771,000 $473,192,000
=================== ===================
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $386,000,000 which are available to
offset future federal taxable income and expire no earlier than 2003. No
valuation allowance was required as of December 31, 1997 or 1996 since it is
likely that the deferred tax asset will be realized against future income and
the reversal of deferred tax liabilities.
The effective tax rate for December 31, 1997, 1996 and 1995 is 38.0%. It is
comprised of the statutory federal income tax rate of 35.0% and a state tax
rate, net of federal benefit of 3.0%.
25
<PAGE>
M. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income", which the Company is required to adopt
effective January 1, 1998. This adoption requires information to be reported in
interim periods in the initial year and will have no financial impact to the
Company, but will require new disclosure information.
In June, 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which the Company is required to adopt for the 1998 fiscal period. This
adoption does not require that segment information be reported in interim
periods in the initial year, but that segment information is disclosed in the
following year for comparability purposes. The segmentation disclosure
requirements are under review by the Company's management.
N. BUSINESS ACQUISITION
On December 1, 1996, the Company purchased the net assets of FINOVA Acquisition
I, Inc. for approximately $620,000,000. The business acquired under a stock
purchase agreement provides equipment leases, loans and related services to
manufacturers and dealers and their customers. Goodwill totaling $59,201,000,
was recorded as part of this acquisition. The December 1996 financial
operations of this leasing/loan business is included in the Company's December
31, 1996 financial statements.
O. SUBSEQUENT EVENTS
During the fourth quarter of 1997 and in early 1998 the Company's senior
unsecured debt ratings and short-term debt ratings were lowered by each of the
credit rating agencies which provide ratings on the Company's debt. As a result
of these ratings actions the Company has, in 1998, substantially curtailed its
issuance of commercial paper in favor of its master repurchase agreements.
In addition, effective February 10, 1998, the Company has substantially
restructured its unsecured bank credit agreements reducing the aggregate
commitment to $750,000,000 and renegotiating significant terms and covenants in
lieu of a waiver of certain representations required of the Company for purposes
of utilizing the credit line. This waiver/amendment expires on April 28, 1998.
Certain of the Company's master repurchase agreements have been amended in 1998
primarily to include financing for a broader range of receivables originated by
the Company. Additionally, aggregate master repurchase lines have been increased
to $3.8 billion.
In addition, on February 13, 1998 the Company closed on a $500 million line of
credit secured by its interest only securities. This line of credit matures on
February 12, 2000, with an option to extend for an additional one year term.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (unaudited)
-------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(dollars in thousands except per-share amounts)
1997:
Income $267,155 $317,145 $348,260 $158,900
Net earnings (loss) 91,803 108,093 118,822 (17,322)
Diluted earnings (loss)
per share .65 .78 .85 (.12)
1996:
Income $168,118 $196,102 $219,665 $140,226
Net earnings (loss) 66,362 75,422 85,518 (26,528)
Diluted earnings (loss)
per share .48 .54 .61 (.19)
1995:
Income $128,199 $153,274 $174,374 $255,473
Net earnings 50,729 61,712 72,037 69,491
Diluted earnings per
share .36 .44 .51 .50
</TABLE>
27
Exhibit 99.3 Unaudited Consolidated Financial Statements of Green Tree
Financial Corporation for the quarter ended March 31, 1998
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 888,743,000 $ 741,398,000
Cash deposits, restricted 234,194,000 247,237,000
Other investments 19,096,000 25,294,000
Interest only securities 1,412,280,000 1,363,200,000
Finance receivables 2,154,646,000 1,971,024,000
Other receivables 228,525,000 235,705,000
Servicing rights 111,823,000 96,311,000
Property, furniture and fixtures 121,164,000 112,404,000
Goodwill 55,399,000 56,095,000
Other assets 29,372,000 18,124,000
--------------- ---------------
Total assets $ 5,255,242,000 $ 4,866,792,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable $ 1,548,618,000 $ 1,355,995,000
Senior/Senior subordinated notes 510,484,000 510,316,000
Accounts payable and accrued liabilities 556,194,000 492,789,000
Investors payable 653,297,000 552,781,000
Deferred income taxes 637,430,000 622,771,000
--------------- ---------------
Total liabilities 3,906,023,000 3,534,652,000
Common stock, $.01 par; authorized 400,000,000
shares; issued 141,899,317 and
and 141,595,984 shares, respectively 1,419,000 1,416,000
Additional paid-in capital 445,190,000 435,570,000
Retained earnings 1,127,417,000 1,075,670,000
Accumulated other comprehensive income (loss):
Minimum pension liability adjustments (3,142,000) (3,142,000)
Unrealized gain on securities
available for sale, net 902,000 21,824,000
--------------- ---------------
1,571,786,000 1,531,338,000
Less treasury stock, 7,773,366 and 7,012,156
shares at cost (222,567,000) (199,198,000)
--------------- ---------------
Total stockholders' equity 1,349,219,000 1,332,140,000
--------------- ---------------
Total liabilities and stockholders' equity $ 5,255,242,000 $ 4,866,792,000
=============== ===============
</TABLE>
See notes to unaudited financial statements.
1
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31,
---------------------------
1998 1997
------------ ------------
REVENUES:
Gain on sale of receivables $129,116,000 $153,367,000
Interest 100,991,000 75,429,000
Service 30,216,000 24,681,000
Commissions and other 25,431,000 13,678,000
------------ ------------
285,754,000 267,155,000
------------ ------------
EXPENSES:
Interest 48,492,000 29,818,000
Cost of servicing 26,974,000 19,379,000
General and administrative 107,912,000 69,889,000
------------ ------------
183,378,000 119,086,000
------------ ------------
EARNINGS BEFORE INCOME TAXES 102,376,000 148,069,000
INCOME TAXES 38,903,000 56,266,000
------------ ------------
NET EARNINGS $ 63,473,000 $ 91,803,000
============ ============
EARNINGS PER COMMON SHARE:
BASIC $ .47 $ .66
DILUTED $ .47 $ .65
See notes to unaudited financial statements.
2
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Treasury comprehensive Retained stockholders'
stock capital stock income (loss) earnings equity
----------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 $ 1,398 $ 373,573 $ (53,913) $ (2,299) $ 818,733 $ 1,137,492
Comprehensive income, net of tax:
Net earnings -- -- -- -- 91,803 91,803
Unrealized loss on securities,
net of applicable
income taxes ($17,080) -- -- -- (27,867) -- (27,867)
-----------
Total comprehensive income 63,936
Common stock issuance of
1,300,000 shares 13 51,761 -- -- -- 51,774
Cost of 1,017,000 shares of
treasury stock acquired -- -- (36,688) -- -- (36,688)
Dividends on common stock -- -- -- -- (10,430) (10,430)
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, March 31, 1997 $ 1,411 $ 425,334 $ (90,601) $ (30,166) $ 900,106 $ 1,206,084
=========== =========== =========== =========== =========== ===========
BALANCES, December 31, 1997 $ 1,416 $ 435,570 $ (199,198) $ 18,682 $ 1,075,670 $ 1,332,140
Comprehensive income, net of tax:
Net earnings -- -- -- -- 63,473 63,473
Unrealized loss on securities,
net of applicable
income taxes ($12,823) -- -- -- (20,922) -- (20,922)
-----------
Total comprehensive income 42,551
Stock warrants issuance -- 7,687 -- -- -- 7,687
Common stock issuance of
303,000 shares 3 1,933 -- -- -- 1,936
Cost of 761,210 shares of
treasury stock acquired -- -- (23,369) -- -- (23,369)
Dividends on common stock -- -- -- -- (11,726) (11,726)
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, March 31, 1998 $ 1,419 $ 445,190 $ (222,567) $ (2,240) $ 1,127,417 $ 1,349,219
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
3
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
1998 1997
------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Servicing fees and net interest
payments collected on sold loans $ 84,070,000 $ 78,009,000
Net principal payments collected on sold loans 128,678,000 64,067,000
Interest on unsold loans 50,972,000 46,166,000
Interest on cash and investments 14,540,000 8,539,000
Commissions 19,160,000 11,501,000
Other 13,322,000 (2,523,000)
--------------- ---------------
310,742,000 205,759,000
--------------- ---------------
Cash paid to employees and suppliers (132,988,000) (126,443,000)
Interest paid on debt (40,571,000) (20,251,000)
Income taxes paid (10,114,000) (7,430,000)
--------------- ---------------
(183,673,000) (154,124,000)
--------------- ---------------
NET CASH PROVIDED BY OPERATIONS 127,069,000 51,635,000
Purchase of loans and leases (2,766,690,000) (2,087,204,000)
Proceeds from sale of loans and leases 2,607,081,000 1,809,087,000
Principal collections on unsold loans and leases 102,141,000 178,880,000
Commercial and revolving credit loans disbursed (1,692,443,000) (839,249,000)
Principal collections on commercial and revolving credit loans 1,262,226,000 757,492,000
Proceeds from sale of commercial and revolving credit loans 317,840,000 --
Net cash deposits provided as credit enhancements 13,043,000 (4,249,000)
--------------- ---------------
NET CASH USED FOR
OPERATING ACTIVITIES (29,733,000) (133,608,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, furniture and fixtures (17,846,000) (10,084,000)
Net sales (purchases) of investment securities 6,198,000 (3,839,000)
--------------- ---------------
NET CASH USED FOR INVESTING
ACTIVITIES (11,648,000) (13,923,000)
--------------- ---------------
</TABLE>
4
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued, unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------
1998 1997
--------------- -----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit facilities 2,553,788,000 1,921,498,000
Repayments on credit facilities (2,353,963,000) (1,659,804,000)
Common stock issued 627,000 475,000
Common stock repurchased -- (36,688,000)
Dividends paid (11,726,000) (10,430,000)
--------------- ---------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 188,726,000 215,051,000
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 147,345,000 67,520,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 741,398,000 442,071,000
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 888,743,000 $ 509,591,000
=============== ===============
RECONCILIATION OF NET EARNINGS TO NET CASH
USED FOR OPERATING ACTIVITIES:
Net earnings $ 63,473,000 $ 91,803,000
Deferred income taxes 38,903,000 56,266,000
Valuation adjustments of interest only securities 47,000,000 --
Depreciation and amortization 10,669,000 7,556,000
Net loan payments collected, less interest only securities
and servicing rights recorded (11,746,000) (50,189,000)
Amortization of servicing rights 4,947,000 2,569,000
Accretion of yield on interest only securities (33,384,000) (25,257,000)
Net decrease (increase) in cash deposits 13,043,000 (4,249,000)
Purchase of loans and leases,
net of sales and principal collections (72,367,000) (99,237,000)
Commercial and revolving loans disbursed, net of
sales and principal collections (109,816,000) (81,757,000)
Net selling expenses on sale of loans 30,786,000 10,897,000
Interest payable increase 7,128,000 8,434,000
Income taxes paid (10,114,000) (7,430,000)
Decrease in amounts payable to employees and suppliers (7,977,000) (43,598,000)
Decrease (increase) in other receivables 2,570,000 (5,033,000)
Other (2,848,000) 5,617,000
--------------- ---------------
NET CASH USED FOR
OPERATING ACTIVITIES ($ 29,733,000) ($ 133,608,000)
=============== ===============
</TABLE>
See notes to unaudited financial statements.
5
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The interim financial statements have been prepared by Green Tree Financial
Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission applicable to quarterly
reports on Form 10-Q. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments which are of a normal
recurring nature and are necessary for a fair presentation have been included.
However, results for interim periods are not necessarily indicative of the
results that may be expected for a full year. It is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and related notes and schedules included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
includes all changes in stockholders' equity except those arising from
transactions with shareholders. The new standard requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations.
6
<PAGE>
B. INTEREST ONLY SECURITIES
The activity in interest only securities for the three months ended March 31,
1998 is summarized as follows:
Balance at beginning of period $1,363,200,000
Additions 164,349,000
Yield on interest only securities 33,384,000
Net cash collected (67,908,000)
Realized writedown of interest only
securities (47,000,000)
Unrealized writedown of interest
only securities (33,745,000)
----------------
Balance at end of period $1,412,280,000
================
In 1995 and previous years, the Company sold a substantial portion of its
interest only securities related to manufactured housing securitization
transactions between 1978 and 1995 in the form of securitized Net Interest
Margin Certificates. The Company retained a subordinated interest in the cash
flow of the interest only securities sold. These interests are included in
interest only securities and total $79,357,000 at March 31, 1998.
Generally, interest only securities relate to the sale of closed end
manufactured housing, home equity, home improvement, consumer and equipment
finance receivables. The Company's interest only securities are subject to a
substantial amount of credit loss and prepayment risk related to the receivables
sold. In connection with the valuation of interest only securities, the Company
has provided for approximately $946,060,000 of credit losses as of March 31,
1998. On a nondiscounted basis the amount of credit losses provided for in
connection with the valuation of the interest only securities is approximately
$1,399,149,000. These estimated losses if realized, would reduce the amount of
cash flows available to the interest only securities and are considered in the
Company's valuation processes.
The weighted average interest rate used to discount expected future cash flows
of the interest only securities is 11.60% as of March 31, 1998.
7
<PAGE>
The table below details information pertinent to the valuation of the interest
only securities as of March 31, 1998.
<TABLE>
<CAPTION>
Manufactured Home Equity/ Consumer/
Housing Home Improvement Equipment Total
--------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Interest only securities carrying amount $ 872,578,000 396,498,000 143,204,000 $ 1,412,280,000
Unpaid principal balance of sold receivables $18,186,731,000 5,004,964,000 2,655,252,000 $25,846,947,000
Weighted average customer interest rate on
sold receivables 10.46% 11.85% 11.12%
Approximate expected weighted average constant
prepayment rate as a percentage
of unpaid principal balance of sold
receivables (1) 9.75% 25.0% 22.0%
Approximate remaining expected non
discounted credit losses as a percentage
of unpaid principal balance of sold
receivables (1) 6.2% 4.4% 2.0%
</TABLE>
(1) Valuation of the Company's interest only securities is impacted not only
by the projected level of prepayments of principal and net credit losses,
as shown above, but also by the projected timing of such prepayments and
net credit losses. Should the timing of projected prepayments of principal
or net credit losses differ materially from the timing projected by the
Company, such timing could have a material effect on the valuation of the
interest only securities.
8
<PAGE>
C. FINANCE RECEIVABLES
Finance receivables consisted of the following:
March 31, 1998 December 31,1997
-------------- ----------------
Lease $ 267,987,000 $ 191,572,000
Commercial Finance 632,172,000 683,691,000
Revolving Credit Card 324,795,000 165,151,000
Loans Held For Sale 929,692,000 930,610,000
-------------- --------------
Total $2,154,646,000 $1,971,024,000
============== ==============
D. SERVICING RIGHTS
The activity in servicing rights for the period ended March 31, 1998 is
summarized as follows:
Balance at beginning of period $ 96,311,000
Additions 20,459,000
Amortization ( 4,947,000)
--------------
Balance at end of period $ 111,823,000
==============
E. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted
average number of shares of Common Stock outstanding during each period. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of shares of Common Stock and potential Common Stock outstanding during
each period. The following table presents the earnings per share data. Options
to purchase 5,529,469 and 298,544 shares are excluded from the computation of
diluted earnings per common share because of their anti-dilutive effect, as the
exercise price of the option exceeds the average market price of the Common
Stock for the three months ended March 31, 1998 and 1997, respectively.
Three months ended March 31,
---------------------------
1998 1997
------------ ------------
Net Earnings $ 63,473,000 $ 91,803,000
============ ============
Weighted average Common Stock
outstanding 134,236,605 138,511,310
Effect of dilutive securities:
Options 1,463,317 3,708,253
Warrants 119,981 --
------------ ------------
Diluted Common Stock 135,819,903 142,219,563
============ ============
Earnings per common share:
Basic $ .47 $ .66
Diluted $ .47 $ .65
9
<PAGE>
F. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has three stock option plans: two employee stock option plans and an
outside director plan. In 1992, the Board of Directors approved a supplemental
stock option plan for its outside directors. In 1995, the Company's stockholders
approved an Employee Stock Incentive Plan. In 1998 the Board of Directors
approved a Company Stock Option Plan for issuances of stock options to non-
officer employees.
Options for 864,520 shares were available for future grant under these plans.
The Company's Board of Directors has reserved 11,149,252 shares for future
issuance under all plans as of March 31, 1998.
A summary of the stock option plan activity is as follows:
Number of Weighted Average
Shares Exercise Price
---------- -----------------
Outstanding at December 31, 1997 9,910,465 $25.98
Granted 835,500 23.00
Exercised (303,333) 12.87
Expired (156,900) 30.92
----------
Outstanding at March 31, 1998 10,285,732 $23.04
==========
Of the 10,285,732 options outstanding at March 31, 1998, 10,145,732 options
relate to the employee and chief executive stock option plans and 140,000
options relate to the outside director plan.
On March 1, 1998, the Company offered to reprice certain employee stock options
to the current market price on March 1, 1998. The offer was not extended to the
six most senior executive officers. Employees accepting this offer agreed to a
revised vesting schedule and an exercise price of $23.00, representing the
market price at March 1, 1998. Approximately 2.8 million options were repriced.
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<PAGE>
A summary of stock options outstanding and exercisable at March 31, 1998 is as
follows:
Options Outstanding:
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- - ----------------- ------------- ---------------- -------------------
$ 2.97-22.50 1,714,332 4.17 $ 6.46
23.00-23.00 3,639,500 9.92 23.00
23.38-30.50 2,350,300 7.68 25.52
30.88-33.38 2,323,000 7.90 31.21
33.50-47.00 258,600 9.17 37.61
----------- --------- ---- -------
$ 2.97-47.00 10,285,732 7.97 $ 23.04
Options Exercisable:
Range of Number Weighted Average
Exercise Prices Exercisable Exercise Price
- - ------------------- ----------- -----------------
$ 2.97-22.50 1,563,665 $ 5.45
23.00-23.00 0 0.00
23.38-30.50 824,300 25.01
30.88-33.38 493,000 31.31
33.50-47.00 57,600 38.10
-------------- ---------- -------
$ 2.97-47.00 2,938,565 $ 15.92
WARRANTS
On February 13, 1998, the Company issued warrants to purchase 2.7 million common
shares at $22.75 per share to the provider of a credit facility secured by the
Company's interest only securities. The warrant expires on the later of February
13, 2000 or 90 days after the credit facility has been paid in full. The Company
has the option to call and repurchase the warrant for $15.00 per warrant share
regardless of the closing price of the common shares at the call date.
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