<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-11652
GREEN TREE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1263905
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Landmark Towers
345 St. Peter Street, Saint Paul, Minnesota 55102-1639
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 293-3400
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE
- --------------------- ----------------------
ON WHICH REGISTERED)
--------------------
Common Stock, $.01 par value New York Stock Exchange,
Pacific Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange,
Pacific Stock Exchange
8 1/4% Senior Subordinated Debentures due
June 1, 1995 New York Stock Exchange
10 1/4% Senior Subordinated Notes due June 1, 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ____X____ No ________
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X)
As of February 28, 1994, the aggregate market value of voting stock held by
nonaffiliates of registrant was approximately $1,487,568,000.
As of February 28, 1994, the shares outstanding of the issuer's class of
common stock were as follows:
Common Stock 33,671,661
-------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Part of 10-K
Document Where Incorporated
-------- ------------------
Proxy Statement for the 1994 Annual Meeting of Shareholders III
<PAGE>
PART I
------
ITEM 1. BUSINESS.
------------------
General
-------
Green Tree Financial Corporation ("Green Tree" or "the Company") originates
conditional sales contracts for manufactured homes, home improvements and
special products. The Company's insurance agencies also market physical
damage and term life insurance relating to the customers' contracts it
services, and acts as servicer on manufactured housing contracts originated
by other lenders. Through its principal offices in Saint Paul, Minnesota
and 43 regional service centers throughout the United States, Green Tree
serves all 50 states.
The Company finances both new and previously owned manufactured homes, and
originates conventional contracts as well as contracts insured by the
Department of Housing and Urban Development's Federal Housing
Administration ("FHA") and contracts partially guaranteed by the
Department of Veterans' Affairs ("VA"). The Company's home improvement
loans are financed either on a conventional basis or insured through the
FHA Title I program. In April 1993, the Company was approved as a seller
and servicer of mortgages for the Federal National Mortgage Association
("FNMA"). The Company believes this new program may improve its
flexibility in serving the home improvement lending market.
The Company's special products contracts have historically consisted
primarily of conventional contracts originated through established
motorcycle dealers. In early 1993, the Company began to expand the types
of special products it finances to include snowmobiles, personal
watercraft, all-terrain vehicles, and trailers for recreational activities,
such as horse, boat and snowmobile trailers. While the Company believes its
special products will augment its overall growth, it currently does not
expect special products to represent a substantial component of the
Company's overall business in the foreseeable future.
Green Tree pools and securitizes the contracts it originates, retaining the
servicing on the contracts, and issues and sells asset-backed securities
through public offerings and private placements. Substantially all FHA and
VA manufactured housing contracts are converted into pass-through
certificates ("GNMA certificates") guaranteed by the Government National
Mortgage Association ("GNMA"), a wholly owned corporate instrumentality of
the United States within the Department of Housing and Urban Development.
The GNMA certificates, which are secured by the FHA and VA contracts, are
then sold in the secondary market. Conventional contracts are pooled and
such pools are structured into asset-backed securities which are sold in
the public securities markets. The Company also pools FHA-insured and
conventional home improvement contracts for
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sale in the secondary market. In servicing contracts, the Company collects
payments from the borrower and remits principal and interest payments to
the holder of the contract or investor certificate secured by the
contracts.
The Company was incorporated as Green Tree Acceptance, Inc. under the laws
of the State of Minnesota in 1975. In 1992, the Company changed its name
to Green Tree Financial Corporation. The Company's principal executive
offices are located at 1100 Landmark Towers, 345 St. Peter Street, Saint
Paul, Minnesota 55102-1639, and its telephone number is (612) 293-3400.
Unless the context otherwise requires, "Green Tree" or "the Company" means
Green Tree Financial Corporation and its subsidiaries.
Purchase and Origination of Contracts
-------------------------------------
Conditional sales contracts are the typical means of financing the purchase
of manufactured homes ("MH") and special products ("SP"), and can also be
used to finance home improvements ("HI") to existing single-family homes. A
"contract" or "conditional sales contract" refers to an agreement
evidencing a monetary obligation and providing security for the obligation.
MH contracts grant the owner of the contract a security interest in the
related manufactured home (and any other personal property described
therein), and SP contracts grant a security interest in the related special
product. For HI contracts, a mortgage or deed of trust on the single-
family home to which the improvements relate serves as security for the
payment obligation under the contract (except for unsecured contracts which
may be offered on loans of $10,000 or less).
All contracts that the Company originates directly or indirectly are
written on forms provided by the Company and are originated on an
individually approved basis in accordance with Company underwriting
guidelines.
Manufactured Housing
--------------------
"Manufactured housing" or "manufactured home" is a structure, transportable
in one or more sections, which is designed to be a dwelling with or without
a permanent foundation. Since most manufactured homes are never moved once
the home has reached the homesite, the wheels and axles are removable and
have not been designed for continuous use. Manufactured housing does not
include either modular housing (which typically involves more sections,
greater assembly and a separate means of transporting the sections) or
recreational vehicles ("RV's") (which are either self-propelled vehicles or
units towed by passenger vehicles).
Conditional sales contracts for manufactured home purchases may be financed
on a conventional basis, insured by the FHA or partially guaranteed by the
VA. With respect to manufactured housing, the
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relative volume of conventional, FHA and VA contracts originated by the
Company depends on customer and dealer preferences as well as prevailing
market conditions. Over the last five years, the percentage of FHA and VA
contracts in the Company's manufactured home contract portfolio has ranged
from 29% to 39%, and at December 31, 1993, such contracts constituted 29%
of the Company's portfolio, of which approximately 94% were FHA contracts.
Conventional and VA contracts are generally subject to minimum down
payments of approximately 5% of the amount financed, while FHA contracts
may require a minimum of 10% for down payment. Manufactured housing
contract terms may be for 7 to 25 years.
Through its regional service centers, the Company originates MH contracts
through dealers located throughout the United States. The Company's
regional personnel contact dealers located in their region and explain the
Company's available financing plans, terms, prevailing rates, and credit
and financing policies. If the dealer wishes to utilize the Company's
available customer financing, the dealer must make an application for
dealer approval. Upon satisfactory results of the Company's investigation
of the dealer's creditworthiness and general business reputation, the
Company and the dealer execute a dealer agreement. The Company also
originates manufactured housing loan agreements directly with customers
following the same general procedures for approval as it does with
originations through dealers. For the year ended December 31, 1993, the
Company's manufactured housing contract originations consisted of 87%
originated through dealers, and 13% directly originated by the Company.
The dealer or customer submits the customer's credit application and
purchase order to one of the Company's service centers where the Company's
personnel conduct an analysis of the creditworthiness of the proposed
buyer. The analysis includes a review of the applicant's paying habits,
length and likelihood of continued employment, and certain other factors.
If the application meets the Company's guidelines and credit is approved,
the Company agrees to fund the contract.
For manufactured housing contracts, the Company uses a proprietary
automated credit scoring system which was initially implemented in 1987 and
subsequently refined and statistically re-validated. It is a
statistically based scoring system which quantifies responses using
variables obtained from customers' credit applications. As of December
31, 1993, this credit scoring system has been used in making credit
determinations on approximately 1,140,000 applications. The Company
believes the use of this proprietary credit scoring system has contributed
to the reduction in the number of repossessions incurred as a percentage
of the Company's servicing portfolio.
In 1993, the manufactured housing market's shipments rose to approximately
254,000 units, a 21% increase over 1992. The Company
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has benefitted from the increase in the market's shipments and has
increased its market share of contracts for new manufactured homes without
compromising its credit standards. Competition to finance manufactured
home purchases continues to be strong, and there can be no assurance that
such competition will not intensify in the future. Significant decreases
in consumer demand for manufactured housing, or significant increases in
competition, could have an adverse effect on the Company's financial
position and results of operations.
Home Improvement and Special Products
Through its centralized operations in Saint Paul, Minnesota, the Company
arranges to originate contracts through home improvement contractors and
special products dealers. The Company's available financing plans, terms,
prevailing rates, and credit and financing policies are explained to the
contractors and dealers. If they wish to utilize the Company's available
customer financing, the contractor/dealer ("dealer") must make an
application for approval. Upon satisfactory results of the Company's
investigation of the dealer's creditworthiness and general business
reputation, the Company and the dealer execute a dealer agreement. The
Company occasionally originates home improvement loans directly.
The growth in the Company's home improvement originations during the year
ended December 31, 1993 is attributable primarily to the centralization of
its home improvement business, the addition of business development
managers throughout the United States and the implementation of a
conventional home improvement lending program in September 1992. Prior to
September 1992, the Company only financed home improvement contracts
insured through the FHA Title I program. This focused organizational
structure has enabled the Company to provide quality financial services to
its expanding base of customers.
The Company's home improvement contracts are generally secured by first,
second or, to a lesser extent, third mortgages on single-family homes. For
the year ended December 31, 1993, over 99% of the Company's home
improvement contracts were originated through contractors.
In April 1993, the Company was approved as a seller and servicer of
secondary mortgages for FNMA. The Company believes this program may
improve the Company's flexibility in serving the home improvement lending
market, and expects to begin utilizing this program in 1994.
The contractor, dealer or customer submits the customer's credit
application and purchase order to the Company's home improvement office
where personnel conduct an analysis of the creditworthiness of the proposed
buyer. The analysis includes factors similar to that of a MH application.
In the case of home improvement
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financing, the Company agrees to fund the contract if the application meets
the Company's underwriting guidelines for credit approval (and applicable
FHA regulations if FHA insured) and if stipulated funding guidelines are
met. As to special products, the Company agrees to fund the contract once
credit is approved and the customer accepts delivery of the unit.
For home improvement contracts, the Company has developed a credit scoring
system which was initially implemented in June 1993. This scoring system
is similar to the system the Company uses in MH financing.
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The volume of contracts originated by the Company during the past five
years and certain other information for each of those years, are indicated
below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------
1993 1992(a) 1991(b) 1990 1989
------------- ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
COST OF CONTRACTS
(IN THOUSANDS):
MH-Conventional $2,196,655 $ 942,874 $ 432,060 $459,466 $446,728
MH-FHA/VA 252,466 265,992 507,879 426,689 324,137
HI 169,443 75,287 112,135 78,272 12,413
SP(c) 47,442 34,911 22,340 19,575 19,827
---------- ---------- ---------- -------- ---------
Total $2,666,006 $1,319,064 $1,074,414 $984,002 $803,105
========== ========== ========== ======== =========
NUMBER OF CONTRACTS:
MH-Conventional 87,327 43,162 23,126 24,694 23,895
MH-FHA/VA 9,607 10,322 20,716 17,702 13,756
HI 16,926 8,384 12,975 9,286 1,499
SP(c) 6,161 4,235 2,924 2,675 2,465
---------- ---------- ---------- -------- ---------
Total 120,021 66,103 59,741 54,357 41,615
========== ========== ========== ======== =========
AVERAGE SIZE OF CONTRACTS:
MH-Conventional $ 25,154 $ 21,845 $ 18,683 $ 18,606 $ 18,695
MH-FHA/VA 26,279 25,769 24,516 24,104 23,563
HI 10,011 8,980 8,642 8,429 8,281
SP(c) 7,700 8,243 7,640 7,318 8,043
---------- ---------- ---------- -------- ---------
Average size $ 22,213 $ 19,955 $ 17,985 $ 18,103 $ 19,298
========== ========== ========== ======== =========
WEIGHTED AVERAGE INTEREST RATES:
MH-Conventional 10.2% 11.7% 13.5% 14.2% 14.1%
MH-FHA/VA 9.7 10.7 12.1 12.9 12.8
HI 12.6 13.9 15.3 15.5 15.5
SP(c) 13.2 14.7 16.3 16.3 15.6
---------- ----------- ---------- ------- ---------
Weighted average 10.3% 11.7% 13.1% 13.8% 13.6%
interest rate ========== =========== ========== ======= =========
WEIGHTED AVERAGE ORIGINAL
TERMS (IN MONTHS):
MH-Conventional 205 197 180 181 180
MH-FHA/VA 201 204 202 206 199
HI 143 132 129 129 134
SP(c) 55 56 56 56 69
--------- -------- ------- ------- --------
Weighted average
original term 198 191 183 185 184
========== ========== ========== ======== =========
_____________________
(a) Does not include $545,842,000 of conventional contracts
purchased from the Resolution Trust Corporation ("RTC").
(b) Does not include $66,980,000 of conventional contracts
purchased from other originators.
(c) Consists mainly of motorcycle contracts for all years except
1993, which includes other special products, and 1989 which
includes RV's.
</TABLE>
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<PAGE>
The Company believes that, in addition to an individual analysis of each
contract, it is important to achieve a geographic dispersion of contracts
in order to reduce the impact of regional economic conditions on the
overall performance of the Company's portfolio. Accordingly, the Company
seeks to maintain a portfolio of contracts dispersed throughout the United
States. At December 31, 1993, no state accounted for more than 10% of all
contracts serviced by the Company.
In 1993, the Company originated manufactured housing contracts through over
3,000 active dealers, with no single MH dealer accounting for more than one
percent of the total number of MH contracts originated by the Company.
Likewise, in its home improvement business, the Company originated
contracts through approximately 1,400 active contractors, and in its
special products business, the Company originated contracts through
approximately 600 active dealers. No single contractor or dealer accounted
for more than three percent of the total number of HI or SP contracts
originated by the Company.
Pooling, Disposition and Related Sales Structures of Contracts
--------------------------------------------------------------
The Company pools contracts for sale to investors, generally on a quarterly
or more frequent basis. It is the Company's policy to sell substantially
all of the contracts it originates or purchases. Conventional manufactured
housing contracts are generally sold through asset-backed securities. FHA-
insured and VA-guaranteed manufactured housing contracts are converted into
GNMA certificates. The GNMA certificates, which are secured by the FHA and
VA contracts, are then sold in the secondary market. The GNMA certificates
provide for payment by the Company to registered holders of the
certificates of monthly principal and interest, as well as the "pass-
through" of any principal prepayments on the contracts. The Company also
pools FHA-insured and conventional home improvement contracts for sale in
the secondary market. Special products loans have also been pooled and sold
to investors, although the Company chose to inventory its 1993 special
products production. In 1994, the Company also securitized a significant
portion of its excess servicing rights receivable in the form of net
interest margin certificates.
Principal and interest payments made by borrowers on the manufactured
housing contracts securing each GNMA certificate are the source of funds
for payments due on the GNMA certificates. The Company is required to
advance its own funds in order to make timely payment of all amounts due on
the GNMA certificates if, due to defaults or delinquencies on contracts,
the payments received by the Company on the contracts securing such
certificates are less than the amounts due on the certificates. If the
Company was unable to make payments on the GNMA certificates as they became
due, it would promptly notify GNMA and request GNMA to make such payments
and, upon such notification and request, GNMA would make such payments
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<PAGE>
directly to the registered holders of the certificates and would seek
reimbursement from the Company, FHA or the VA as appropriate. The GNMA
certificates are secured by manufactured housing contracts which are either
FHA-insured or VA-guaranteed. For FHA manufactured housing contracts, the
maximum amount of insurance benefits paid by FHA is equal to approximately
90% of the net unpaid principal and uncollected interest earned to the date
of default on the contract, subject to certain adjustments, less the
greater of the actual net sales price or FHA appraisal of the home. The
amounts reimbursable by FHA are further limited to an aggregate amount
representing reserves FHA has established. These reserves, which
approximated $134.4 million at December 31, 1993, are based on the
Company's origination and loss experience, and the Company is required to
make scheduled premium payments to maintain the benefit of the reserve. If
losses on FHA-insured contracts exceed the established reserve, the Company
would not be reimbursed by FHA but would still be required to make payments
on the GNMA certificates. For VA manufactured housing contracts, the
maximum guarantee that may be issued is the lesser of: (1) the lesser of
$20,000 or 40% of the principal amount of the contract, or (2) the maximum
amount of guarantee entitlement available to the veteran (which may range
from $20,000 to zero).
Conventional manufactured housing, home improvement and special products
contracts are pooled and sold by the Company through securitized asset
sales which have been either single class or senior/subordinated pass-
through structures. Certain senior/ subordinated structures retain a
portion of the Company's excess servicing spread as additional credit
enhancement or stipulate accelerated principal repayments to subordinated
certificateholders. The Company reflects the cash flows unique to each
transaction when measuring the net gains on contract sales. Under these
structures, the Company has provided a bank letter of credit, surety bond,
cash or a corporate guarantee to cover specified losses. Customer principal
and interest payments are deposited to separate bank accounts as received
by the Company and are held for monthly distribution to the
certificateholders. The Company establishes reserves for estimated losses
on the contracts comprising each pool. Upon a default under a contract and
liquidation of the underlying collateral, any net losses are charged
against the reserves that have been established. The dollar amount of
potential contractual recourse to the Company exceeds the amount
established by the Company as an "allowance for losses on contracts sold
with recourse." The Company establishes an allowance for expected losses
under the recourse provisions with investors/owners and calculates that
allowance on the basis of historical experience as well as management's
best estimate of future credit losses likely to be incurred.
The underlying assets of the net interest margin certificates are the
residual interest, guarantee fees, excess servicing fees, and GNMA excess
spread related to certain pools of manufactured housing
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contracts sold by the Company. The net interest margin certificates issued
by the Company in March, 1994 represent approximately 78% of the estimated
present value of these assets. The Company has retained the remaining 22%,
which is subordinate to the net interest margin certificates. The
certificates will be payable from the cash flows of these assets, which are
subject to prepayment and loan loss risk.
"Contracts sold" represents the face amount of the contracts sold but not
necessarily settled during the same year. Information on contracts sold is
as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------
1993 1992 1991 1990 1989
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Contracts sold:
MH-Conventional $2,090 $1,447(a) $ 486(b) $ 455 $458
MH-GNMA 213 269 500 474 305
HI 43 72 112 81 --
SP -- 84 41 23 11
------ ------ ------ ------ ----
Total $2,346 $1,872 $1,139 $1,033 $774
====== ====== ====== ====== ====
</TABLE>
(a) Includes $533,159,000 of contracts purchased from the RTC.
(b) Includes $52,108,000 of contracts purchased from other originators,
but does not include $87,515,000 of contracts sold pursuant to a
joint venture agreement with Merrill Lynch Mortgage Capital, Inc.
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------
1993 1992 1991 1990 1989
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Weighted average yield to
investors:
MH-Conventional 6.5% 7.7% 8.7% 10.3% 10.3%
MH-GNMA 6.4 7.4 8.5 9.6 9.9
HI 6.4 7.3 8.7 9.7 --
SP -- 6.4 7.6 9.6 9.3
---- ---- ---- ---- ----
Weighted average yield 6.5% 7.6% 8.6% 9.9% 10.1%
==== ==== ==== ==== ====
Servicing
---------
</TABLE>
The Company services all of the contracts that it originates or purchases
from other originators, collecting loan payments, taxes and insurance
payments, where applicable, and other payments from borrowers and remitting
principal and interest payments to the holders of the asset-backed
securities or of the GNMA certificates.
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The following table shows the composition of the Company's servicing
portfolio at December 31 for the years indicated on contracts it
originated.
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Unpaid principal
amount of
contracts being
serviced(in
millions) $ 6,922 $ 5,278 $ 4,754 $ 4,098 $ 3,599
Average unpaid
principal
balance $ 17,864 $ 16,638 $ 16,394 $ 16,456 $ 16,589
Number of
contracts
serviced 387,509 317,251 289,960 249,038 216,962
</TABLE>
During 1990 and 1991, the Company acquired servicing on manufactured
housing contracts originated by other lenders. The Company did not acquire
servicing on manufactured housing contracts originated by other lenders
during 1992 or 1993, and does not expect to acquire such servicing in the
near future. The Company has no loss risk on these contracts and charges a
service fee based on principal outstanding. The following table shows the
composition of this servicing portfolio at December 31 for the years
indicated.
<TABLE>
<CAPTION>
December 31
--------------------------------------
1993 1992 1991 1990
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Unpaid principal amount
of contracts being
serviced (in thousands) $272,394 $345,421 $517,866 $558,811
Average unpaid principal
balance $ 14,425 $ 14,977 $ 15,897 $ 17,435
Number of contracts
serviced 18,884 23,064 32,576 32,051
Delinquency and Loss Experience
-------------------------------
</TABLE>
A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more. Delinquent contracts are subject to
acceleration, and repossession or foreclosure of the underlying collateral.
Losses associated with such actions are charged against applicable reserves
upon disposition of the collateral.
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The following table provides certain information with respect to the
delinquency and loss experience of contracts the Company originated.
<TABLE>
<CAPTION>
At or for the year ended
December 31
----------------------------------------
1993 1992 1991 1990 1989
------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Number of contracts
delinquent(a) 1.55% 1.86% 2.20% 2.09% 2.25%
Repossessed contracts
sold (b) 1.87 2.53 2.42 2.46 3.14
Annual net repossession
losses(c) .85 1.16 .93 .94 1.27
Repossession inventory(d) .51 .58 .88 .88 .86
</TABLE>
(a) As a percentage of the total number of contracts serviced at period end
(other than contracts already in repossession).
(b) As a percentage of the average number of contracts serviced
during the period.
(c) As a percentage of the average principal amount of contracts
serviced during the period. Annual net repossession losses
represent the loss amount at the time the repossession is sold, and
has not been reduced for amounts subsequently recovered from either
customers or investors.
(d) As a percentage of the total number of contracts serviced at
period end.
Insurance
---------
Through certain subsidiaries, the Company markets physical damage insurance
on manufactured homes and special products which collateralize contracts
serviced by the Company and markets term life insurance to its MH and HI
customers. In addition, the Company owns Green Tree Life Insurance Company,
a life and disability reinsurance company, and Consolidated Casualty
Insurance Company, a property and casualty reinsurance company, which
function as reinsurers for policies written by selected other insurers
covering individuals whose contracts are serviced by the Company.
The following table provides certain information with respect to net
written premiums (gross premiums on new or renewal policies issued less
cancellations of previous policies) on policies written by the Company.
The Company acts as an agent with respect to the sale of such policies and,
in some cases, the Company also acts as reinsurer of such policies.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net written premiums:
Physical damage $48,172 $35,500 $31,400 $29,200 $23,100
Term life 5,683 5,303 4,510 3,700 3,000
------- ------- ------- ------- -------
Total $53,855 $40,803 $35,910 $32,900 $26,100
======= ======= ======= ======= =======
</TABLE>
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Regulation
----------
The Company's operations are subject to supervision by state authorities
(typically state banking, consumer credit and insurance authorities) that
generally require that the Company be licensed to conduct its business. In
many states, issuance of licenses is dependent upon a finding of public
convenience, and of financial responsibility, character and fitness of the
applicant. The Company is generally subject to state regulations,
examinations and reporting requirements, and licenses are revocable for
cause.
Contracts insured under the FHA manufactured home and home improvement
lending programs are subject to compliance with detailed federal
regulations governing originations, servicing, and payment of contract
insurance proceeds from the FHA to cover a portion of losses due to default
and repossessions or foreclosures. These lending regulations were amended
in November 1991 to add additional requirements such as equity requirements
for home improvement contracts of over $15,000 and a pre-underwriting
customer interview to verify the credit application for both programs.
These changes have had the effect of making program compliance more
burdensome for the Company, dealers and contractors. The FHA is presently
studying other aspects of the program, and there are no assurances that
future regulatory changes will not occur. Other governmental programs such
as FNMA and VA also contain similar detailed regulations governing loan
origination and servicing responsibilities.
The FHA increased the maximum loan amounts for Title I manufactured home
loans effective for credit applications completed and received after August
30, 1993. The maximum loan amounts have been increased to $48,600 for
manufactured home loans, $16,200 for manufactured home lot loans and
$64,800 for land-and-home loans. This represents a 20% increase over
previously established maximum loan amounts. The FHA Title I maximum for
single-family home improvement loans is $25,000.
The Federal Consumer Credit Protection Act ("FCCPA") requires a written
statement showing the annual percentage rate of finance charges, and
requires that other information be presented to debtors when consumer
credit contracts are executed. The Fair Credit Reporting Act requires
certain disclosures to applicants for credit concerning information that is
used as a basis for denial of credit. The Federal Equal Credit Opportunity
Act prohibits discrimination against applicants with respect to any aspect
of a credit transaction on the basis of sex, race, color, religion,
national origin, age, marital status, derivation of income from a public
assistance program, or the good faith exercise of a right under the FCCPA,
of which it is a part. By virtue of a Federal Trade Commission rule,
conditional sales contracts must contain a provision that the holder of the
contract is subject to all claims and defenses which the debtor could
assert against the seller, but
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the debtor's recovery under such provisions cannot exceed the amount paid
under the contract.
The Company is also required to comply with other federal disclosure laws
for certain of its lending programs. The combination land-and-home program
complies with the federal Real Estate Settlement and Procedures Act. In
addition, the Company complies with the reporting requirements of the Home
Mortgage Disclosure Act for its manufactured home and home improvement
contracts.
The construction of manufactured housing is subject to compliance with
governmental regulation. Changes in such regulations may occur from time
to time and such changes may affect the cost of manufactured housing. The
Company cannot predict whether any regulatory changes will occur or what
impact such future changes would have on the manufactured housing industry.
The Company is subject to state usury laws. Generally, state law has been
preempted by federal law with respect to certain manufactured home and home
improvement contracts, although individual states are permitted to enact
legislation superseding federal law. To be eligible for the federal
preemption, the manufactured home or home improvement contract form must
comply with certain consumer protection provisions. A few states have
elected to override federal law, but have established maximum rates that
either fluctuate with changes in prevailing rates or are high enough so
that, to date, no state's maximum interest rate has precluded the Company
from continuing business in that state.
Competition and Other Factors
-----------------------------
The Company is affected by consumer demand for manufactured housing,
home improvements, special products and its insurance products. Consumer
demand, in turn, is partially influenced by regional trends, economic
conditions and personal preferences. The Company competes with banks,
savings and loan associations, finance companies, finance subsidiaries of
certain manufacturing companies, credit unions and others seeking to
purchase contracts. Prevailing interest rates are typically affected by
economic conditions. Changes in rates, however, generally do not inhibit
the Company's ability to compete, although from time to time in particular
geographic areas, local competition may choose to offer more favorable
rates. The Company competes by offering superior service, prompt credit
review, and a variety of financing programs.
The Company's business is generally subject to seasonal trends, reflecting
the general pattern of sales of manufactured housing and site-built homes.
Sales typically peak during the spring and summer seasons and decline to
lower levels from mid-November through January.
-13-
<PAGE>
Employees
---------
As of December 31, 1993, the Company had 1,645 full-time and 208 part-time
employees, and considers its employee relations to be satisfactory. None
of the employees are represented by a union.
ITEM 2. PROPERTIES.
--------------------
At December 31, 1993, the Company operated 40 manufactured housing regional
service centers located in 34 states. The Company plans to open three
additional regional servicing centers in 1994. Such offices are leased,
typically for a term of three years, and range in size from 1,600 to 10,500
square feet to accommodate a staff of approximately 8 to 46 employees. In
February 1994, the Company's home improvement division entered into a lease
for its main office in Saint Paul, Minnesota. The lease is for a term of
five years and consists of 77,000 square feet to accommodate their staff of
approximately 230 employees. (See Note I of Notes to Consolidated
Financial Statements for annual rental obligations.)
In January 1993, the Company purchased the remaining commercial floors of
the building which houses its corporate offices. (See Note D of Notes to
Consolidated Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS.
---------------------------
Reference is made to Note I, Litigation, of Notes to Consolidated
Financial Statements contained in Item 8 hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
None.
-14-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
--------------------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The Company's Common Stock is traded on the New York and Pacific Stock
Exchanges under the symbol "GNT." The following table sets forth, for the
periods indicated, the range of the high and low sale prices.
<TABLE>
<CAPTION>
1992 High Low
- ------------------------------ -------- --------
<S> <C> <C>
First quarter $ 25 $ 17-1/8
Second quarter 21-1/4 15-1/16
Third quarter 18 15-1/2
Fourth quarter 25-15/16 16-5/8
1993 High Low
- ------------------------------ -------- --------
First quarter $ 36-1/2 $23-3/16
Second quarter 42-3/4 32-1/4
Third quarter 55 39-1/2
Fourth quarter 62-1/2 44-1/8
</TABLE>
The above stock prices, as well as all other share and per share amounts
referenced in this Annual Report on Form 10-K, have been restated to
reflect a two-for-one stock split effected in the form of a stock dividend
during January 1993.
On February 28, 1994, the Company had approximately 453 shareholders of
record of its Common Stock including the nominee of The Depository Trust
Company which held approximately 32,296,314 shares of Common Stock.
The Company has paid cash dividends since December 1986. The 1993
quarterly dividend rate through the third quarter was $0.08125 per share.
In September 1993, the Board of Directors approved an increase in the
quarterly dividend rate to $0.09375 per share effective December 1993. The
payment of future dividends will depend on the Company's financial
condition, prospects and such other factors as the Board of Directors may
deem relevant. Under certain debt agreements, the Company is subject to
restrictions limiting the payment of dividends and Common Stock
repurchases. At December 31, 1993, under the most restrictive agreement,
such payments were limited to $43,585,000, which represents 50% of
consolidated net earnings for the most recently concluded four fiscal
quarter periods less dividends paid and prepayment of subordinated debt
during such period.
-15-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
---------------------------------
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(dollars in thousands except per-share data)
Income $ 366,680 $ 246,615 $214,765 $175,675 $143,953
Earnings before income taxes 200,537 118,806 92,176 59,418 47,733
Earnings before extraordinary loss(a) 116,423 72,472 56,688 36,542 29,356
Net earnings 116,423 55,015 56,688 36,542 29,356
Earnings per common share:
Before extraordinary loss(a) 3.62 2.41 2.00 1.17 .87
Net earnings 3.62 1.82 2.00 1.17 .87
Cash dividends per common share .34 .31 .30 .30 .30
At year-end:
Excess servicing rights receivable $ 843,489 $ 640,647 $513,881 $429,098 $365,193
Total assets 1,739,502 1,167,055 969,161 814,662 743,800
Total debt 515,004 376,043 361,410 335,757 329,157
Allowance for losses on contracts sold with recourse 222,135 189,669 134,681 91,945 83,171
Stockholders' equity 549,429 298,834 237,544 192,478 171,323
</TABLE>
(a) Before extraordinary loss relating to the debt exchange in 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
----------------------------------------------
Introduction
------------
The Company originates conditional sales contracts for manufactured homes
("MH"), home improvements ("HI") and special products ("SP") (primarily
motorcycles to date). In early 1993, the Company began to expand the types of
special products it finances to include snowmobiles, personal watercraft, all-
terrain vehicles, and trailers for recreational activities,
such as horse, boat and snowmobile trailers. The Company also markets physical
damage and term life insurance relating to the customers' contracts it
services, and acts as servicer on manufactured housing contracts originated by
other lenders.
The Company records "net gains on contract sales" at the time of sale of its
contracts and defers service income, recognizing it as servicing is
-16-
<PAGE>
performed. The Company's net gains on contract sales are an amount equal to
the present value of the expected excess servicing rights receivable to be
collected during the term of the contracts, plus or minus any premiums or
discounts realized on the sale of the contracts and less any selling expenses.
"Excess servicing rights receivable" represents cash expected to be received
by the Company over the life of the contracts. Excess servicing rights
receivable is calculated by aggregating the contractual payments to be
received pursuant to the contracts and subtracting: (i) the estimated amount
to be remitted to the investors/owners of the contracts, (ii) the estimated
amount that will not be collected as a result of prepayments, (iii) the
estimated amount to be remitted for FHA insurance and other credit enhancement
fees and (iv) the estimated amount that represents deferred service income.
Deferred service income represents the amount that will be earned by the
Company for servicing the contracts. Concurrently with recognizing such
gains, the Company also records the present value of excess servicing rights
as an asset on the Company's balance sheet. The excess servicing rights
receivable is calculated using prepayment, default, and interest rate
assumptions that the Company believes market participants would use for
similar instruments. The excess servicing rights receivable has not been
reduced for expected losses under recourse provisions of the sales, but such
rights are subordinated to the rights of investors/owners of the contracts.
The Company believes that the excess servicing rights receivable recognized at
the time of sale does not exceed the amount that would be received if it were
sold in the marketplace. The Company records the amount to be remitted to the
investors/owners of the contracts for the activity related to the current
month, payable the next month, as "investor payable" and it is shown
separately as a liability on the Company's balance sheet.
The Company establishes an allowance for expected losses under the recourse
provisions with investors/owners of contracts or investor certificates and
calculates that allowance on the basis of historical experience and
management's best estimate of future credit losses likely to be incurred. The
amount of this provision is reviewed quarterly and adjustments are made if
actual experience or other factors indicate management's estimate of losses
should be revised. The Company retains a substantial amount of risk of
default on the loan portfolios that it sells. The Company has provided the
investors/owners of pools of contracts with a variety of additional forms of
credit enhancements. These credit enhancements have included letters of
credit, corporate guarantees and surety bonds that provide limited recourse to
the Company, and letters of credit that if drawn, are entitled to
reimbursement only from the future excess cash flows of the underlying
transactions. Furthermore, certain securitized sales structures use cash
reserve funds and certain cash flows from the underlying pool of contracts as
the credit enhancement. The Company believes that its allowance for losses on
contracts sold with recourse is adequate and consistent with current economic
conditions as well as historical default and loss experiences of the
Company's entire loan portfolio. The outstanding security balances of
contracts at December 31, 1993 were $1,793,908,000 of GNMA certificates and
$4,713,012,000 related to securitized transactions,
-17-
<PAGE>
including whole loan sales. The allowance for losses on contracts sold with
recourse is shown separately as a liability. For contracts sold prior to
October 1, 1992, the allowance has been recorded on a nondiscounted basis.
For contracts sold subsequent to September 30, 1992, the allowance has been
discounted using an interest rate equivalent to the risk-free market rate for
securities with a duration similar to that estimated for the underlying
contracts based on guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in "EITF Issue 92-2".
The Company's expectations used in calculating its excess servicing rights
receivable and allowance for losses on contracts sold with recourse are
subject to volatility that could materially affect operating results.
Prepayments resulting from obligor mobility, general and regional economic
conditions, and prevailing interest rates, as well as actual losses incurred,
may vary from the performance the Company projects. The Company recognizes the
impact of adverse prepayment and loss experience by recording a charge to
earnings immediately. The Company reflects favorable portfolio experience
prospectively as realized.
During March 1994, the Company concluded its first public sale of a
significant portion of its excess servicing rights receivable. The sale was
in the form of senior/subordinated net interest margin certificates whereby
the senior certificates were issued by a trust, supported by the cash flows
from previous manufactured housing securitizations and GNMA sales, whose only
assets are the cash flows derived from certain excess servicing rights and the
proceeds therefrom. The subordinated certificates were retained by the
Company. The effect of this transaction was to monetize a significant portion
of the Company's excess servicing rights receivable and to begin to establish
a public market for such net interest margin certificates.
-18-
<PAGE>
Results of operations
---------------------
The following table shows, for the periods indicated, the percentage
relationships to income of certain income and expense items and the
percentage changes in such items from period to period.
<TABLE>
<CAPTION>
Period-to-period
As a percentage of increase (decrease)
income for the year -------------------
ended December 31 1992 1991
---------------------------- to to
1993 1992 1991 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income:
Net gains on contract
sales 76.1% 91.9% 85.5% 23.1% 23.4%
Provision for losses
on contract sales (21.0) (42.7) (34.8) (26.8) 40.8
Interest 30.7 31.4 29.5 45.2 22.1
Service 8.5 11.9 13.0 6.8 4.9
Commissions and other 5.7 7.5 6.8 13.5 26.9
-------- -------- --------
Total income 100.0% 100.0% 100.0%
======== ======== ========
Expenses:
Interest 14.0 18.2 22.8 14.0 (8.4)
Cost of servicing 7.1 9.5 9.2 10.7 20.0
General and
administrative 24.2 24.1 25.1 49.7 10.0
Earnings before
income taxes and
extraordinary loss 54.7 48.2 42.9 68.8 28.9
Earnings before
extraordinary loss 31.8 29.4 26.4 60.6 27.8
Net earnings 31.8 22.3 26.4 111.6 (3.0)
</TABLE>
Net gains on contract sales, when netted with the Company's provision for
losses on contract sales, increased 66.3% in 1993 as the dollar volume of
contracts originated and sold rose over 1992. During the year ended
December 31, 1993, total contract sales increased $474,274,000, or 25.3%.
Also contributing to the increase in net gains on contract sales for both
1993 and 1992 was an increase in the average contract size and term due to
a shift in manufactured home sales to more expensive multi-section homes
versus single-wide homes. These increases for 1993 were partially offset
by decreased interest rate spreads on contracts sold and an increase in
prepayment reserves as a result of falling interest rates and the ongoing
evaluation of the Company's prepayment projections based on year-to-date
activity. The increase in net gains on contract sales in 1992 is a
reflection of the higher percentage of conventional versus GNMA contracts
sold. In addition, during the first quarter of 1992, the Company purchased
portfolios from the Resolution Trust Corporation ("RTC") which resulted in
gains at the time of sale primarily due to purchase discounts. The gain on
RTC contract sales was substantially offset by recourse liabilities assumed
at the same time which were included in the provision for losses on
contracts sales (see below). For 1991, net gains on contract sales
reflects
-19-
<PAGE>
increased interest rate spreads on contracts sold and the impact of
securitization of portfolios purchased from other originators at discounts.
Prevailing interest rates are typically affected by economic conditions.
Changes in interest rates generally do not inhibit the Company's ability to
compete, although from time to time, in particular geographic areas, local
competition may be able to offer more favorable rates. Because of the size
of the excess servicing spread (which enables the Company to absorb changes
in interest rates) and the relatively short period of time between
origination of contracts and sale by the Company of such contracts, the
Company's ability to sell contracts is generally not affected by gradual
changes in interest rates, although the amount of earnings may be affected.
Average excess servicing spreads were 3.8%, 4.8% and 4.5% for 1993, 1992
and 1991, respectively. Excess servicing spreads decreased during 1993 as
the rates on the contracts originated by the Company declined faster than
the rates on the Company's sales of securitized loans. Excess servicing
spreads increased during 1992 as the rates on contracts purchased,
primarily from the RTC, were higher than the rates on the contracts
originated by the Company during 1992. Excluding the contracts purchased
from the RTC, the servicing spread was 4.1% for 1992, which is reflective
of interest rate movements during the year and interest rates at the time
of sale. Excess servicing spreads increased during 1991 as the rates on
contracts originated by the Company declined more slowly than the rates on
the Company's sales of securitized loans. In addition, the inclusion of
seasoned portfolios in the Company's securitized program reduced the
expected lives of contracts sold, further contributing to the increased
spreads. Traditionally, changes in interest rates have less of an impact
on the Company's prepayment level as compared to conventional housing
prepayment levels. The changes in the interest rate environment, however,
did cause an increase in prepayments on the portfolio underlying the
Company's excess servicing rights receivable during 1993 and 1992. The
weighted average customer interest rate on the underlying portfolio of the
Company decreased during 1993 and 1992 due to lower rates on originations
for those years. A lower interest rate portfolio should add even greater
prepayment stability to the Company's portfolio.
The 26.8% decrease in the provision for losses on contract sales for 1993
is a result of the increased provision for losses incurred in 1992 for the
recourse liabilities assumed as a result of the RTC repurchase and as a
result of discounting the provision for losses on contracts sold during all
of 1993 compared to just one quarter in 1992. The decrease in the
provision also reflects the shift in manufactured home sales to more
expensive multi-section homes and land-and-home sales from single-wide
homes, as well as the continued use of the Company's proprietary credit
scoring system and the resulting improvement in loan performance. The
40.8% increase in the provision for losses on contract sales for 1992
reflects the effect of the RTC repurchase as well as the higher dollar
volume of
-20-
<PAGE>
contracts sold including a higher percentage of conventional versus GNMA
contracts sold. The Company's provision for losses on contract sales
increased by 134.6% from 1990 to 1991 as a result of an increase in
contract sales of $105,829,000, additional losses incurred in 1991 as a
result of the unexpected length and severity of the recession, additional
provisions for the expected impact of a continuing recession, as well as
additions for anticipated losses on portfolios purchased at a discount from
other originators which the Company estimates will perform less favorably
than the Company's originated product. The Company feels that its credit
underwriting standards and servicing procedures will stabilize its loss
experience. A very important factor in the reduction of the Company's
credit risk is the geographic dispersion of the portfolio. At December 31,
1993, no state accounted for more than 10% of all contracts serviced by
the Company. The Company continually monitors its dispersion of contracts
as economic downturns are more severely felt in certain geographic areas
than others.
Interest income is realized from contracts held for sale, cash deposits and
amortization of the present value discount established for the excess
servicing rights receivable. Interest income grew 45.2% during 1993 due to
interest earned on the increased dollar amount of contracts held for sale
during 1993 compared to 1992, and due to an increase in the amortization of
present value discount on the Company's increasing excess servicing rights
receivable. Interest income grew during 1992 and 1991 primarily due to
increases in the amortization of present value discount on the excess
servicing rights receivable.
The increase in service income of 6.8% during 1993 and 4.9% during 1992
resulted from the increase in the Company's growing servicing portfolio.
The Company's average servicing portfolio grew 20.3% during 1993 and 12.2%
during 1992. Offsetting this increase in revenue was a decline in
servicing revenue on contracts originated by others. The average unpaid
principal balance of contracts being serviced for others during 1993 and
1992 decreased 23.0% and 19.8%, respectively. The Company expects this
decline in outside servicing to continue in the future. Servicing income
in 1991 included additional amortization of deferred service income as a
result of increasing the rate at which such income is deferred to reflect
44 basis points over the entire portfolio, higher fees collected under
outside servicing agreements and growth in the Company's servicing
portfolio.
Commissions and other income, which represents commissions earned on new
insurance policies written and renewals on existing policies, as well as
other income from late fees, grew during 1993, 1992 and 1991 as a result of
the increase in the Company's contract originations and servicing
portfolio. Excluding a nonrecurring loss in the third quarter of 1991,
commissions and other income increased 12.7% in 1992.
-21-
<PAGE>
The Company's interest expense increased 14.0% in 1993 as a result of the
higher amount of average outstanding borrowings supporting the Company's
increased contract inventory levels. The increase was, however, partially
offset by lower credit facility borrowing rates and the lower effective
interest rate on the Company's senior subordinated debt as a result of the
Company's debt exchange in April 1992. Interest expense decreased 8.4%
during 1992 primarily as a result of the April 1992 debt exchange which
reduced the blended effective cost of the Company's publicly held
subordinated debt from 13.1% to 10.8%. In addition, average interest rates
on the Company's line of credit borrowings decreased substantially from
1991, although the average amount outstanding rose. Interest expense
declined in 1991 due to the cancellation of long-term debt related to the
office building the Company previously owned, and a decline in short-term
borrowing rates.
While the dollar amount of cost of servicing has increased over the past
three years, the cost of servicing as a percentage of contracts serviced
remained relatively constant during 1991 and 1992 , and decreased modestly
in 1993.
General and administrative expenses rose 49.7% during 1993, however, as a
percentage of revenue, these expenses have remained consistent with the
previous two years. The dollar growth is due primarily to an increase in
personnel and other origination costs related to the significant growth in
the number of contracts the Company has originated during the year. The
number of contracts originated during 1993 increased 81.6% over 1992. The
increase in general and administrative costs during 1992 and 1991 are
related to the centralization and growth in the Company's home improvement
division and the growth in manufactured home loan originations. The
Company continues to actively manage and control these expenses, although
increases are expected as the volume of business grows.
During the third quarter of 1993, the Company took a one-time charge to
earnings of $4,685,000 as a result of the August enactment of the new
federal corporate income tax rate. The charge reflects the increase in the
federal corporate income tax rate on the Company's deferred tax liability
and increased the Company's effective tax rate during the year to 41.9%.
Going forward, the Company's effective tax rate is expected to be 40%,
compared to 39% in 1992 and 38.5% in 1991.
The Company is affected by consumer demand for manufactured housing, home
improvements, special products and its insurance products. Consumer
demand, in turn, is partially influenced by regional trends, economic
conditions and personal preferences. The Company can make no prediction
about any particular geographic area in which it does business. These
regional effects, however, are mitigated by the national geographic
dispersion of the Company's servicing portfolio.
-22-
<PAGE>
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," does not affect the
Company as the Company does not provide postretirement benefits other than
its pension plans.
Inflation has not had a material effect on the Company's income or earnings
over the past three fiscal years.
Capital resources and liquidity
-------------------------------
Green Tree's business requires continued access to the capital markets for
the purchase, warehousing and sale of contracts. To satisfy these needs,
the Company employs a variety of capital resources.
Historically, the most important liquidity source for the Company has been
its ability to sell contracts in the secondary markets through loan
securitizations and sales of GNMA certificates. Under certain securitized
sales structures, bank letters of credit, surety bonds, cash deposits or
other equivalent collateral are provided by the Company as credit
enhancements. Certain senior/subordinated structures retain a portion of
the Company's excess servicing spread as additional credit enhancement or
for accelerated principal repayments to subordinated certificateholders.
The Company analyzes the cash flows unique to each transaction, as well as
the marketability and earnings potential of such transactions when choosing
the appropriate structure for each securitized loan sale. In addition, the
structure of each securitized sale depends, to a great extent, on
conditions of the fixed income markets at the time of sale, as well as cost
considerations, availability and effectiveness of the various enhancement
methods. During 1993, the Company utilized a combination of
senior/subordinated structures and corporate guarantees in its manufactured
home asset securitizations, and did not utilize any outside sources of
credit enhancement to effect its sales. The home improvement loan sales in
1993 were enhanced with a cash deposit.
During March 1994, the Company added another liquidity source as it
completed its first public sale of a significant portion of its excess
servicing rights receivable. Net proceeds to the Company from the sale are
expected to be approximately $493,000,000 and will be used to pay down
short-term debt and fund the Company's future growth.
In February 1992, the Company replaced letters of credit and cash deposits
held as credit enhancements for certain existing securitized transactions
with financial guaranty insurance policies issued by a credit bond insurer
for an annual fee approximately equal to the Company's cost of maintaining
the letters of credit and cash deposits. The financial guaranty insurance
polices are noncancelable for the lives of the securitized transactions.
The effect of this transaction was to make available to the Company
-23-
<PAGE>
previously restricted cash deposits approximating $20 million. In
addition, the Company's outstanding letters of credit were reduced by
approximately $62 million.
Servicing fees and net interest payments collected, which is the Company's
principal source of cash, increased in each of the last three years. These
increases are a result of the increased amount of servicing spread
collected as the Company's servicing portfolio continues to grow. With the
completion of the sale of net interest margin certificates in March 1994,
the Company will show an increase in servicing fees and net interest
payments collected for the first quarter of 1994. Thereafter, servicing
fees and net interest payments collected will consist of servicing fees
collected only from the net interest margin certificates, plus servicing
fees and net interest payments on all existing HI and SP securitizations,
and all future securitizations in which the Company does not sell the
related excess servicing rights. After the first quarter of 1994,
repossession losses net of recoveries will likewise only consist of losses
on existing HI and SP securitizations, plus losses on future
securitizations, and losses on the first five MH securitizations (1987
through the first quarter of 1988), as such losses have been excluded from
the net interest margin certificate sale.
Net principal payments collected have been positive in each of the last
three years as a result of an increase in the contract principal payments
collected by the Company as of the end of each year but not yet remitted to
the investors/owners of the contracts. These increases are a result of
customer payoffs and the growth of the Company's servicing portfolio. The
significant increase in net principal payments collected in 1992 compared
to 1991 occurred in conjunction with the purchase and resale of the
contracts from the RTC in which the Company recouped approximately
$18,000,000 of previously advanced principal. The Company expects net
principal payments collected to decrease in 1994 as payoffs are expected to
stabilize.
Accelerated principal repayments to subordinated certificateholders
("defeasance payments") increased during 1993 and 1992. Defeasance
structures were used on the Company's securitized sales in the fourth
quarter of 1990 through the second quarter of 1992. Generally, defeasance
payments will decline as the securitization balances on these securitized
loan sales decrease.
Net cash used for operating activities increased in 1993 due largely to the
increase in dollar volume of contracts held for sale. This increase in
contract inventory was a result of the Company's decision not to securitize
any SP loans, any HI loans after the second quarter, and through increases
in MH production. Although the Company purchased more contracts than it
sold, resulting in a usage of cash, this usage was offset by positive cash
flows from other operating items, including an increase in servicing and
net payments collected, an increase in interest on contracts and GNMA
certificates held for sale, and a reduction in repossession losses.
-24-
<PAGE>
During 1992, the additional servicing fees and net interest and principal
payments collected, as well as the reduction in net cash deposits provided,
contributed to the Company's positive cash flows from operating activities.
These increased operating cash flows in 1992 were offset by repossession
losses net of recoveries which increased 57% in 1992 over 1991 as a result
of management's action to reduce the Company's aged repossession inventory
levels and poor economic conditions in California. Negative cash flows
from operating activities in 1991 were primarily due to cash deposits that
the Company was required to provide as credit enhancements for newly issued
and existing securitized sales. To a lesser extent, 1993, 1992 and 1991
cash flows from operating activities were also reduced by income taxes
paid. The Company expects it will use its remaining net operating loss
carryforward during 1994 and 1995, and accordingly will be paying
additional taxes on its taxable income thereafter.
Net cash used for investing activities for the year ended December 31, 1993
included the purchase of certain floors of the building where its corporate
offices are located. The positive cash flows from investing activities in
1991 are a result of the sale of GNMA certificates previously held for
investment and the sale of other assets.
Net cash provided by financing activities was positive in 1993 and 1991 as
borrowings on credit facilities and proceeds from the issuance of common
stock and debt exceeded debt repayments and dividends, while in 1992, debt
repayments, dividends and other financing activities exceeded borrowings.
The Company has a $60 million bank warehousing credit agreement for the
purpose of financing its manufactured home, home improvement and
motorcycle contract production under which $58,725,000 was available,
subject to the availability of appropriate collateral, at December 31,
1993. This agreement expires November 30, 1994. In addition, the Company
currently has $950 million in master repurchase agreements with various
investment banking firms for the purpose of financing its contract
production. At December 31, 1993, the Company had $765,535,000 available
under these master repurchase agreements, subject to the availability of
appropriate collateral. These agreements expire during 1994, however, the
Company believes, based on discussions with the lenders, that these
agreements will be renewed. At December 31, 1993, the Company also had
$21,171,000 of notes payable outstanding through a GNMA reverse repurchase
agreement. These notes were collateralized by GNMA certificates.
In September 1993, the Company completed a 2,500,000 share common stock
offering, and sold an additional 375,000 shares to cover over-allotments.
The net proceeds of approximately $138,000,000 were used to finance the
Company's continued growth in its manufactured home, home improvement and
special products contract inventory, to temporarily reduce notes payable
under the Company's borrowing agreements, and for other general corporate
purposes. During the
-25-
<PAGE>
first quarter of 1992, the Company completed a 6,000,000 share common stock
offering, and in April 1992, the Company sold an additional 614,800 shares
to cover over-allotments. The net proceeds of approximately $115,000,000
were used to purchase and retire all of the Company's outstanding preferred
stock (which had a liquidation value of $143,495,000) for $102,000,000 as
part of the settlement of litigation between the Company and the RTC, and
for general corporate purposes. The preferred stock had a $9,300,000
annual cash dividend requirement which terminated upon its repurchase.
In September 1992, the Securities and Exchange Commission declared
effective the Company's $250 million shelf registration which enables the
Company to offer, from time to time, medium-term notes with maturities in
excess of nine months. The notes may bear interest at fixed or floating
rates. In October 1992, the Company sold $12 million of 7.55% notes due
1999. In April 1993, the Company sold $14,650,000 of medium-term notes.
The notes were issued at varying rates (6.69% to 7.62%) with terms ranging
from 5 to 10 years. The proceeds from the issuance of these notes were
used to pay down the Company's notes payable. The issuance of these notes
lengthened the Company's debt maturity schedule at an interest rate which
the Company believes to be favorable.
In April 1992, the Company completed an exchange offer related to its
8 1/4% Senior Subordinated Debentures due 1995 (the "Debentures"). Of the
$287,500,000 of Debentures, $267,254,000 were tendered and accepted for
exchange by the Company for its new 10 1/4% Senior Subordinated Notes due
2002. The result of the exchange was to reduce the blended effective cost
of the Company's outstanding subordinated debt from 13.1% to 10.8%. An
extraordinary charge of $17,457,000 was recognized in the second quarter as
a result of the exchange. The extraordinary charge resulted from the
accelerated write-down of the original issue discount and deferred debt
expense, net of income taxes of $11,161,000, relating to the Debentures
exchanged.
-26-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS FURNISHED PURSUANT
TO THE REQUIREMENTS OF FORM 10-K
AND
INDEPENDENT AUDITORS' REPORT
-------------------------------------
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
--------------------------------------------
-27-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
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, 1993 and 1992,
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, 1993 and the financial statement schedules listed in the Index
at Item 14(a)(2). These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules 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, 1993 and
1992, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1993 in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly,
in all material respects, information set forth therein.
KPMG Peat Marwick
Minneapolis, Minnesota
March 22, 1994
-28-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31
------------------------------
1993 1992
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note A) $ 170,674,000 $ 133,435,000
Cash deposits, restricted (Note F) 124,817,000 117,067,000
Other investments (Note A) 19,016,000 13,504,000
Receivables:
Excess servicing rights
(Notes A and B) 843,489,000 640,647,000
Other accounts receivable 58,604,000 51,773,000
Contracts, GNMA certificates and
collateral(Notes C, E and F) 495,225,000 193,969,000
Property, furniture and fixtures
(Note D) 23,275,000 12,770,000
Other assets (including deferred
debt expense of $2,816,000 and
$3,206,000, respectively) 4,402,000 3,890,000
-------------- --------------
Total assets $1,739,502,000 $1,167,055,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable (Note E) $ 206,911,000 $ 79,438,000
Senior notes (Note E) 26,650,000 12,000,000
Senior subordinated notes due 2002
(Note E) 262,435,000 262,093,000
Senior subordinated debentures due
1995 (Note E) 19,008,000 18,262,000
Subordinated note (Note E) -- 4,250,000
Allowance for losses on contracts
sold with recourse (Notes A and F) 222,135,000 189,669,000
Accounts payable and accrued
liabilities 103,598,000 49,228,000
Investor payable 139,655,000 108,207,000
Income taxes, principally deferred
(Note K) 209,681,000 145,074,000
-------------- --------------
Total liabilities 1,190,073,000 868,221,000
Commitments and contingencies (Notes F and I)
Stockholders' equity (Notes E and G):
Common stock, $.01 par; authorized
50,000,000 shares, issued and
outstanding 33,517,392 shares
(1993) and 30,401,374 shares (1992) 335,000 304,000
Additional paid-in capital 286,731,000 142,000,000
Retained earnings 262,363,000 156,530,000
-------------- --------------
Total stockholders' equity 549,429,000 298,834,000
-------------- --------------
$1,739,502,000 $1,167,055,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
-29-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
1993 1992 1991
------------- ------------ --------------
<S> <C> <C> <C>
INCOME:
Net gains on contract
sales $279,061,000 $226,754,000 $183,689,000
Provision for losses on
contract sales (77,135,000) (105,357,000) (74,845,000)
Interest 112,495,000 77,461,000 63,441,000
Service 31,249,000 29,252,000 27,895,000
Commissions and other 21,010,000 18,505,000 14,585,000
------------- ------------ --------------
366,680,000 246,615,000 214,765,000
EXPENSES:
Interest 51,155,000 44,868,000 48,957,000
Cost of servicing 26,078,000 23,557,000 19,637,000
General and administrative 88,910,000 59,384,000 53,995,000
------------- ------------ --------------
166,143,000 127,809,000 122,589,000
------------- ------------ --------------
EARNINGS BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS 200,537,000 118,806,000 92,176,000
INCOME TAXES (Note K) 84,114,000 46,334,000 35,488,000
------------- ------------ --------------
EARNINGS BEFORE EXTRAORDINARY LOSS 116,423,000 72,472,000 56,688,000
EXTRAORDINARY LOSS ON DEBT EXCHANGE
(Net of income taxes of
$11,161,000) (Note E) -- (17,457,000) --
------------- ------------ --------------
NET EARNINGS $116,423,000 $ 55,015,000 $ 56,688,000
============= ============ ==============
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Earnings before extraordinary
loss $3.62 $2.41 $2.00
Extraordinary loss -- (.59) --
------------- ------------ --------------
Net earnings $3.62 $1.82 $2.00
============= ============ ==============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 32,187,409 29,199,970 23,641,446
</TABLE>
See notes to consolidated financial statements.
-30-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Preferred Common paid-in Retained stockholders'
stock stock capital earnings equity
---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1990 $ 14,000 $232,000 $ 120,259,000 $ 71,973,000 $ 192,478,000
Common stock issuance -- 4,000 4,724,000 -- 4,728,000
Dividends on:
Preferred stock -- -- -- (9,310,000) (9,310,000)
Common stock -- -- -- (7,040 000) (7,040,000)
Net earnings -- -- -- 56,688,000 56,688,000
--------- -------- ------------- ------------ -------------
BALANCES, December 31, 1991 14,000 236,000 124,983,000 112,311,000 237,544,000
Common stock issuance -- 68,000 119,003,000 -- 119,071,000
Preferred stock repurchased (14,000) -- (101,986,000) -- (102,000,000)
Dividends on:
Preferred stock -- -- -- (1,995,000) (1,995,000)
Common stock -- -- -- (8,801,000) (8,801,000)
Net earnings -- -- -- 55,015,000 55,015,000
--------- -------- ------------- ------------ -------------
BALANCES, December 31, 1992 -- 304,000 142,000,000 156,530,000 298,834,000
Common stock issuance -- 31,000 144,731,000 -- 144,762,000
Dividends on common stock -- -- -- (10,590,000) (10,590,000)
Net earnings -- -- -- 116,423,000 116,423,000
--------- -------- ------------- ------------ -------------
BALANCES, December 31, 1993 $ -- $335,000 $ 286,731,000 $262,363,000 $ 549,429,000
========= ======== ============= ============ =============
</TABLE>
See notes to consolidated financial statements.
-31-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------
1993 1992 1991
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Servicing fees and net
interest payments
collected $ 249,884,000 $ 205,900,000 $ 143,246,000
Net principal payments
collected 28,316,000 45,256,000 9,906,000
Interest on contracts and
GNMA certificates 52,016,000 27,184,000 28,307,000
Interest on cash and
investments 5,517,000 5,731,000 7,105,000
Commissions 13,665,000 16,254,000 11,272,000
Other 2,092,000 3,096,000 2,402,000
--------------- --------------- ---------------
351,490,000 303,421,000 202,238,000
--------------- --------------- ---------------
Cash paid to employees
and suppliers (87,864,000) (75,905,000) (68,001,000)
Defeasance payments (32,177,000) (29,725,000) (5,166,000)
Interest paid on debt (48,472,000) (40,099,000) (40,195,000)
Repossession losses net
of recoveries (46,325,000) (50,369,000) (32,109,000)
FHA insurance premiums (19,681,000) (17,888,000) (16,316,000)
Income taxes paid (17,800,000) (9,622,000) (11,585,000)
--------------- --------------- ---------------
(252,319,000) (223,608,000) (173,372,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY
OPERATIONS 99,171,000 79,813,000 28,866,000
Purchase of contracts
held for sale (2,665,594,000) (1,879,934,000) (1,155,067,000)
Proceeds from sale of
contracts held for sale 2,319,268,000 1,866,896,000 1,145,681,000
Principal collections on
contracts held for sale 40,789,000 19,214,000 16,494,000
Cash deposits provided as
credit enhancements (12,133,000) (44,304,000) (46,832,000)
Cash deposits returned 4,384,000 22,131,000 5,758,000
--------------- --------------- ---------------
NET CASH (USED FOR)
PROVIDED BY OPERATING
ACTIVITIES (214,115,000) 63,816,000 (5,100,000)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property,
furniture and fixtures (11,658,000) (1,694,000) (886,000)
Purchase of investment
securities (5,512,000) (2,020,000) (3,127,000)
Proceeds from sale of
other assets -- -- 10,172,000
Proceeds from sale of GNMA
certificates held for
investment -- -- 1,268,000
Principal collections on
GNMA certificates held
for investment -- -- 94,000
--------------- --------------- ---------------
NET CASH (USED FOR)
PROVIDED BY INVESTING
ACTIVITIES (17,170,000) (3,714,000) 7,521,000
--------------- --------------- ---------------
</TABLE>
-32-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------
1993 1992 1991
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit
facilities 2,379,552,000 1,188,115,000 1,061,179,000
Repayments on credit
facilities (2,252,079,000) (1,208,864,000) (1,017,927,000)
Common stock issued 141,028,000 116,286,000 3,259,000
Repurchase of preferred
stock -- (102,000,000) --
Dividends paid (10,590,000) (13,123,000) (16,350,000)
Proceeds from debt issuance 14,650,000 12,000,000 --
Payments of debt (4,037,000) (6,983,000) (8,926,000)
Fees paid for debt
exchange and issuance -- (2,968,000) --
--------------- --------------- ---------------
NET CASH PROVIDED BY
(USED FOR) FINANCING
ACTIVITIES 268,524,000 (17,537,000) 21,235,000
--------------- --------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 37,239,000 42,565,000 23,656,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 133,435,000 90,870,000 67,214,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 170,674,000 $ 133,435,000 $ 90,870,000
=============== =============== ===============
RECONCILIATION OF NET EARNINGS TO
NET CASH (USED FOR) PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 116,423,000 $ 55,015,000 $ 56,688,000
Deferred taxes 63,743,000 26,554,000 25,795,000
Extraordinary loss on debt
exchange -- 28,618,000 --
Depreciation and
amortization 5,291,000 6,711,000 12,987,000
Net contract payments
collected, less excess
servicing rights recorded (58,844,000) 34,557,000 (18,356,000)
Amortization of deferred
service income (26,318,000) (21,240,000) (17,508,000)
Net amortization of present
value discount (54,793,000) (44,625,000) (28,503,000)
Net increase in cash
deposits (7,749,000) (22,173,000) (41,074,000)
Purchase of contracts held
for sale, net of sales
and principal collections (305,537,000) 6,176,000 7,108,000
Net discount (gain) on sale
of loans 16,496,000 (9,720,000) 1,222,000
Other 37,173,000 3,943,000 (3,459,000)
--------------- --------------- ---------------
NET CASH (USED FOR) PROVIDED
BY OPERATING ACTIVITIES $ (214,115,000) $ 63,816,000 $ (5,100,000)
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
-33-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
--------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of 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.
Contract sales
--------------
The Company originates directly, or indirectly through dealers, conditional
sales contracts. It typically sells the contracts at or near par to
investors with servicing retained (the Company retains a participation in
cash flows from the loans). The present value of expected cash flows from
this participation which exceeds normal servicing fees is recorded at the
time of sale as "excess servicing rights receivable." The excess servicing
rights receivable is calculated using prepayment, default and interest
rate assumptions that the Company believes market participants would use
for similar instruments but is not reduced for expected losses under
recourse provisions of the sales. The Company believes that the excess
servicing rights receivable recognized at the time of sale does not exceed
the amount that would be received if it were sold in the marketplace. The
allowance for losses on contracts sold with recourse is shown separately as
a liability on the Company's balance sheet. For contracts sold prior to
October 1, 1992, the allowance is shown on a nondiscounted basis. For
contracts sold after September 30, 1992, the allowance has been discounted
using an interest rate equivalent to the risk-free market rate for
securities with a duration similar to that estimated for the underlying
contracts based on guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force ("EITF") in "EITF Issue 92-2."
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates are
revised as necessary using the original discount rate and any losses
arising from adverse prepayment and loss experience are recognized by
recording a charge to earnings immediately. Favorable experience is
recognized prospectively as realized.
Interest payments received on the contracts, less interest payments paid to
investors, is reported on the consolidated statements of cash flows as
"servicing fees and net interest payments collected."
-34-
<PAGE>
Principal payments received on the contracts, less non-defeasance principal
payments paid to investors is reported as "net principal payments
collected" on the consolidated statements of cash flows. Interest income
and service income are recognized by systematically amortizing the present
value discount and deferred service income, respectively.
The Company defers service income at an annual rate of 0.44%. The Company
discounts cash flows on sales at the rate it believes a purchaser would
require as a rate of return. The cash flows are discounted to present
value using discount rates which averaged approximately 9.3% in 1993, 9.6%
in 1992 and 9.5% in 1991. The Company has developed its assumptions based
on experience with its own portfolio, available market data and
consultation with its investment bankers. The Company believes that the
assumptions used in estimating cash flows are similar to that which would
be used by an outside investor.
Depreciation
------------
Property, furniture and fixtures are carried at cost and are depreciated
over their estimated useful lives on a straight-line basis.
Deferred debt expenses
----------------------
Expenses associated with the issuance of long-term debt are amortized on a
straight-line basis over the term of the debt. Amortization was $389,000
in 1993, $494,000 in 1992 and $838,000 in 1991.
Earnings per common and common equivalent share
-----------------------------------------------
Earnings per common and common equivalent share are computed by dividing
net earnings less preferred dividends ($1,995,000 in 1992 and $9,310,000 in
1991) by the weighted average number of shares of Common Stock and Common
Stock equivalents outstanding during each year. Common Stock equivalents
consist of the dilutive effect of Common Stock which may be issued upon
exercise of stock options. All share and per-share amounts have been
restated to reflect the two-for-one stock split the Company effected in
January 1993. Earnings per share and fully diluted earnings per share are
substantially the same.
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. These temporary investments are
held in United States Treasury Funds or bank money market accounts. At
December 31, 1993 and 1992, cash of approximately $140,528,000 and
$107,117,000, respectively, was held
-35-
<PAGE>
in trust for subsequent payment to investors. In addition, cash of
approximately $2,404,000 and $2,525,000 was restricted and held by the
Company's subsidiaries pursuant to master repurchase agreements and
government requirements at December 31, 1993 and 1992, respectively.
Other investments
-----------------
Other investments consist of highly liquid investments with original
maturities of more than three months. Other investments are held in
United States Treasury Bills, United States Government Bonds, corporate
bonds and certificates of deposit, and are stated at cost plus accrued
interest, which approximates market value. At December 31, 1993 and 1992,
investments of approximately $17,865,000 and $12,275,000, respectively,
were held in trust for policy and claim reserves for the Company's
insurance subsidiaries. In addition, investments of approximately
$1,151,000 and $1,229,000 were restricted and held by the Company's
subsidiaries pursuant to a master repurchase agreement and government
requirements at December 31, 1993 and 1992, respectively.
Allowance for losses
--------------------
Recourse of investors against the Company is governed by the agreements
between the investor and the Company (Note F). The allowance for losses on
contracts sold with recourse represents the Company's best estimate of
future credit losses likely to be incurred over the entire life of the
contracts, pursuant to recourse provided to investors.
Reclassifications
-----------------
Certain reclassifications have been made to the December 31, 1992 and 1991
financial statements to conform to the classifications used in the December
31, 1993 financial statements. These reclassifications had no effect on
net earnings or stockholders' equity as previously reported.
B. EXCESS SERVICING RIGHTS RECEIVABLE
Excess servicing rights receivable consists of:
<TABLE>
<CAPTION>
December 31
--------------------------------
1993 1992
--------------- ---------------
<S> <C> <C>
Gross cash flows receivable on
contracts sold $2,307,735,000 $1,788,594,000
Less:
Prepayment reserve (761,732,000) (567,007,000)
FHA insurance and other fees (83,706,000) (95,944,000)
Deferred service income (161,407,000) (119,487,000)
Discount to present value (457,401,000) (365,509,000)
-------------- --------------
$ 843,489,000 $ 640,647,000
============== ==============
</TABLE>
-36-
<PAGE>
The carrying value of excess servicing rights receivable is analyzed
quarterly to determine the impact of prepayments, if any. The adjustments
required as a result of adverse prepayment activity, net of refinancings,
were approximately $22,000,000 and $14,000,000 in 1993 and 1992,
respectively.
During the years ended December 31, 1993, 1992 and 1991, the Company sold
$213,368,000, $268,916,000 and $499,780,000, respectively, of GNMA
guaranteed certificates secured by FHA-insured and VA-guaranteed contracts.
At December 31, 1993 and 1992, the outstanding principal balance on GNMA
certificates issued by the Company was $1,793,908,000 and $1,893,363,000,
respectively.
During the years ended December 31, 1993, 1992 and 1991, the Company sold
$2,132,472,000, $1,602,650,000 and $638,886,000, respectively, of
contracts in various securitized transactions and in sales to private
investors. At December 31, 1993 and 1992, the outstanding principal
balance on all conventional securitized and private investor sales was
$4,713,012,000 and $3,272,988,000, respectively.
C. CONTRACTS, GNMA CERTIFICATES AND COLLATERAL
Contracts, GNMA certificates and collateral consist of:
<TABLE>
<CAPTION>
December 31
--------------------------
1993 1992
------------ ------------
<S> <C> <C>
Contracts held for sale $428,092,000 $126,411,000
Other contracts held 9,570,000 11,652,000
Collateral in process
of liquidation 47,847,000 46,252,000
Contracts held as collateral 9,716,000 9,654,000
------------ ------------
$495,225,000 $193,969,000
============ ============
</TABLE>
The aggregate method is used in determining the lower of cost or market
value of contracts held for sale and contracts held as collateral. See fair
value disclosure of financial instruments in Note H.
Potential losses on the liquidation of the collateral are included in
determining the allowance for losses on contracts sold with recourse (Notes
F and H).
Included in other accounts receivable as of December 31, 1993 and 1992 was
approximately $34,055,000 and $24,687,000, respectively, of GNMA
certificates which were sold during 1993 and 1992 for settlement in
January 1994 and 1993, respectively. These GNMA certificates along with
contracts held for sale are used in full or in part as collateral on the
Company's warehousing credit agreement and master repurchase agreements
(Note E).
-37-
<PAGE>
D. PROPERTY, FURNITURE AND FIXTURES
Property, furniture and fixtures consist of:
<TABLE>
<CAPTION>
December 31
Estimated --------------------------
useful life 1993 1992
----------- ------------ ------------
<S> <C> <C> <C>
Cost:
Building 35 years $ 17,268,000 $ 8,472,000
Furniture and equipment 3-7 years 14,213,000 7,983,000
Leasehold improvements 3-5 years 485,000 2,550,000
Land and improvements 1,795,000 1,798,000
------------ -----------
33,761,000 20,803,000
Less accumulated depreciation (10,486,000) (8,033,000)
------------ -----------
$ 23,275,000 $12,770,000
============ ===========
</TABLE>
In January 1993, the Company purchased the remaining commercial floors of
the building where its corporate offices are located. The total purchase
price was $5,800,000.
Depreciation expense for 1993, 1992 and 1991 was $2,482,000, $1,668,000
and $1,579,000, respectively.
E. DEBT
The Company has a $60 million bank warehousing credit agreement under which
$58,725,000 was available, subject to the availability of appropriate
collateral, at December 31, 1993, and borrowings under this agreement were
$1,275,000. This committed facility is to be used for financing the
Company's manufactured home, home improvement and motorcycle contract
production and expires November 30, 1994. The agreement provides for
interest at variable rates (4.31% at December 31, 1993) and certain fee
provisions, the costs of which are included in interest expense. The
borrowings are collateralized by manufactured housing, home improvement and
motorcycle contracts totaling $1,417,000 as of December 31, 1993. The
credit agreement contains certain restrictive covenants which include
maintaining minimum net worth (as defined in the agreement) and a debt to
net worth ratio not to exceed 5 to 1. In addition, the Company currently
has $950 million in master repurchase agreements with various investment
banking firms for the purpose of financing its contract production. At
December 31, 1993, the amount available, subject to the availability of
appropriate collateral, was $765,535,000. The borrowings of $184,465,000
under these agreements were collateralized by $207,810,000 of manufactured
housing, home improvement and special products contracts at December 31,
1993. The rates under these agreements ranged from 3.44% to 4.66% at
December 31, 1993. These agreements expire during 1994, however, the
Company believes, based on discussions with the lenders, that these
agreements will be renewed. At December 31, 1993, the Company also had
$21,171,000 of notes payable outstanding through a GNMA reverse repurchase
agreement. The rate under this agreement was 3.63% at December 31, 1993
and was collateralized by $22,286,000 of GNMA certificates.
-38-
<PAGE>
Debt is as follows:
<TABLE>
December 31
--------------------------
1993 1992
------------ ------------
<S> <C> <C>
Notes payable $206,911,000 $ 79,438,000
Senior notes 26,650,000 12,000,000
Senior subordinated notes, 10 1/4%,
due 2002 (see below), less
unamortized original issue
discount of $4,819,000 and
$5,161,000, respectively 262,435,000 262,093,000
Senior subordinated debentures,
8 1/4%, due 1995 (see below), less
unamortized original issue
discount of $1,238,000 and
$1,984,000, respectively 19,008,000 18,262,000
Subordinated note, 8% -- 4,250,000
------------ ------------
$515,004,000 $376,043,000
============ ============
</TABLE>
The Company has on file a shelf registration to issue up to $250 million of
senior notes with maturities in excess of nine months. The notes may bear
interest at fixed or floating rates. The senior notes outstanding at
December 31, 1993 bear interest at a weighted average rate of 7.27% and
have maturities ranging from 1998 to 2003. Interest on these notes is
payable semi-annually.
The 8 1/4% senior subordinated debentures due 1995 (the "Debentures") were
issued in connection with a public offering in June 1985. The effective
interest rate on the Debentures is 13.1% and interest is payable semi-
annually. In April 1992, the Company completed an offer to exchange a new
issue of 10 1/4% Senior Subordinated Notes due June 1, 2002 (the "Notes")
for its outstanding Debentures. Of the Company's $287,500,000 of
Debentures, $267,254,000 were tendered and accepted for exchange by the
Company for its new Notes. The effective interest rate on the Notes is
10.8%. The Company must maintain a net worth of $80,000,000 or will be
required, through the operation of a sinking fund, to redeem $25,000,000 on
such contingent sinking fund payment date. Interest is payable semi-
annually. An extraordinary charge of $17,457,000 was recognized in the
second quarter of 1992 as a result of the exchange. The extraordinary
charge resulted from the accelerated write-down of the original issue
discount and deferred debt expense, net of income taxes of $11,161,000,
relating to the Debentures exchanged.
In May 1993, the Company retired the subordinate note at a 5% discount.
At December 31, 1993, aggregate maturities of debt other than notes payable
for the following five years were $28,246,000, payable as follows:
$20,246,000 in 1995 and $8,000,000 in 1998.
-39-
<PAGE>
F. ALLOWANCE FOR LOSSES ON CONTRACTS SOLD WITH RECOURSE
The Company sells GNMA guaranteed certificates which are secured by FHA-
insured and VA-guaranteed contracts. The majority of credit losses
incurred on these contracts are covered by FHA insurance or VA guarantees
with the remainder borne by the Company.
The Company establishes an allowance for expected losses under the recourse
provisions with investors/owners and calculates that allowance on the basis
of historical experience and management's best estimate of future credit
losses likely to be incurred. For contracts sold prior to October 1, 1992,
the allowance is shown on a nondiscounted basis. For contracts sold after
September 30, 1992, the allowance has been discounted using an interest
rate equivalent to the risk-free market rate for securities with a duration
similar to that estimated for the underlying contracts. The amount of this
provision is reviewed quarterly and adjustments are made if actual
experience or other factors indicate management's estimate of losses should
be revised. The Company retains substantial amounts of risk of default on
the loan portfolios that it sells. The Company has provided the
investors/owners of pools of contracts with a variety of additional forms
of credit enhancements. These credit enhancements have included letters of
credit and surety bonds that provided limited recourse to the Company, and
letters of credit that, if drawn, are entitled to reimbursement only from
the future excess cash flows of the underlying transactions. Furthermore,
certain securitized sales structures use cash reserve funds and certain
cash flows from the underlying pool of contracts as the credit enhancement.
At December 31, 1993 and 1992, the Company had bank letters of credit and
surety bonds outstanding of $141,052,000 and $161,344,000, respectively.
Cash deposits held in interest bearing accounts totaled $124,817,000 and
$117,067,000, and contracts pledged aggregated $9,716,000 and $9,654,000 at
December 31, 1993 and 1992, respectively, and are maintained as part of
credit enhancement features under certain sales structures.
Allowances are provided for the Company's best estimate of future credit
losses likely to be incurred over the entire life of the contracts.
Estimated losses are based on an analysis of the underlying loans and do
not reflect the maximum recourse provided to investors. The following
table presents an analysis of the allowance for losses on contracts sold
with recourse for 1993, 1992 and 1991.
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Allowance at
beginning of year $189,669,000 $134,681,000 $ 91,945,000
Provision for losses 77,135,000 105,357,000 74,845,000
Losses net of
recoveries (46,325,000) (50,369,000) (32,109,000)
Amortization of
present value
discount on loss
reserve 1,656,000 -- --
------------ ------------ ------------
Allowance at end
of year $222,135,000 $189,669,000 $134,681,000
============ ============ ============
</TABLE>
-40-
<PAGE>
G. STOCKHOLDERS' EQUITY
Common Stock
------------
In September 1993, the Company completed a 2,500,000 share Common Stock
offering, and sold an additional 375,000 shares to cover over-allotments.
The net proceeds of approximately $138,000,000 were used to finance the
Company's continued growth in its manufactured home, home improvement and
special products contract inventory, to temporarily reduce certain
borrowings under the Company's bank warehousing agreement and master
repurchase agreements and for other general corporate purposes.
During the first quarter of 1992, the Company completed a 6,000,000 share
Common Stock offering and in April 1992, the Company sold an additional
614,800 shares to cover over-allotments. The net proceeds of approximately
$115,000,000 were used to purchase and retire all of the Company's
outstanding Preferred Stock discussed below, and for general corporate
purposes.
In December 1992, the Board of Directors declared a two-for-one stock
split, in the form of a stock dividend, payable on January 31, 1993 to
shareholders of record as of January 15, 1993. 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.
Preferred Stock
---------------
During 1992, the Company repurchased 50,012 shares of its Preferred Series
B Stock, 712,562 shares of its Preferred Series C Stock and 672,376 shares
of its Preferred Series D Stock which represented all of the Company's
outstanding Preferred Stock. These shares, which had a liquidation value
of $100 per share, or $143,495,000, were repurchased and retired for
$102,000,000 as part of the settlement of litigation between the Company
and the Resolution Trust Corporation (the "RTC"). The Preferred Stock had
a $9,300,000 annual cash dividend requirement which terminated upon its
repurchase.
In connection with the issuance of the rights discussed below, the Company
authorized shares of Junior Preferred Stock. If issued, the stock will be
nonredeemable. Each share of Junior Preferred Stock will have a minimum
cumulative, preferential quarterly dividend rate of $25 per share, but will
be entitled to an aggregate dividend of 100 times the dividend declared on
the Common Stock. In the event of liquidation, the holders of the Junior
Preferred Stock will receive a minimum preferred liquidation payment of
$100 per share, but will be entitled to receive an aggregate liquidation
payment equal to 100 times the payment made per share of Common Stock.
Each share of Junior Preferred Stock will have 100 votes, voting together
-41-
<PAGE>
with the Common Stock. In the event of any merger, consolidation or other
transaction in which Common Stock is exchanged, each share of Junior
Preferred Stock will be entitled to receive 100 times the amount received
per share of Common Stock. At December 31, 1993, there were no shares of
Junior Preferred Stock outstanding.
Rights
------
In October 1985, the Company issued one Preferred Stock purchase right for
each share of Common Stock and amended the rights in August 1990. The
rights become exercisable if a person or group either acquires or makes an
offer to acquire 20% or more of Green Tree's Common Stock (10% in the case
of an "adverse person" designated by the Board of Directors).
If the rights become exercisable, a holder will be entitled to purchase for
the exercise price ($125) the number of shares of Common Stock that could
be purchased at a price per share equal to one-half of the then-current
market price per share of Common Stock. If the Company is involved in a
merger or other business combination, the rights will be modified so as to
entitle a holder to buy a number of shares of Common Stock of the acquiring
company having a market value of twice the exercise price of each right.
The rights may be redeemed upon approval of a majority of the independent
directors of the Company for $.10 per right at any time prior to the tenth
day after a public announcement that a person or group has acquired
beneficially 20% or more of Green Tree's Common Stock.
Stock option plans
------------------
Under the terms of two previous stock option plans, a total of 6,065,880
shares of Green Tree's Common Stock were initially reserved for grant to
eligible employees and directors.
A summary of stock activity related to these stock option plans is as
follows:
<TABLE>
<CAPTION>
Number of Option price
shares per share
---------- ------------
<S> <C> <C>
Outstanding at December 31, 1990 153,504 $4.13- 6.44
Exercised (116,504) 4.13- 6.44
--------
Outstanding at December 31, 1991 37,000 6.44
Exercised (5,000) 6.44
--------
Outstanding at December 31, 1992 32,000 6.44
Exercised (12,000) 6.44
--------
Outstanding at December 31, 1993 20,000 $6.44
========
</TABLE>
-42-
<PAGE>
As of December 31, 1993, all of the outstanding options were exercisable.
No additional options will be granted under these plans.
In 1988, the Company's shareholders approved three new stock option plans:
an employee stock option plan, a key executive plan and an outside director
plan. In 1992, the Board of Directors approved a new supplemental stock
option plan for its outside directors. The number of shares reserved under
those plans is 8,200,000.
A summary of the three stock option plans is as follows:
<TABLE>
<CAPTION>
Number of Option price
shares per share
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1990 458,000 $ 3.25- 8.25
Granted 1,658,804 6.44-19.50
Exercised (353,804) 5.00- 6.88
---------
Outstanding at December 31, 1991 1,763,000 3.25-19.50
Granted 185,384 6.44-24.00
Exercised (240,384) 3.25-20.69
Expired (100,000) 18.31
---------
Outstanding at December 31, 1992 1,608,000 3.25-24.00
Granted 217,310 11.88-54.00
Exercised (274,428) 6.44-18.31
Expired (89,998) 18.31
---------
Outstanding at December 31, 1993 1,460,884 $ 3.25-54.00
=========
</TABLE>
Of the 1,460,884 options outstanding at December 31, 1993, 1,408,884
options related to the employee stock option plan, and 52,000 options
related to the outside director plan. The director options and 832,227
shares of certain employee options were exercisable as of December 31,
1993. Options for 5,525,450 shares were available for future grant. The
option price per share represents the market value of the Company's stock
on the date of grant except for those options issued pursuant to an
employment agreement and certain options granted in 1993. The option price
per share on the options related to the employment agreement represents the
market value of the stock on the date of the employment agreement. The
option price per share on 85,000 options granted in 1993 represents 50% of
the market value of the Company's stock on the date of grant.
Dividends
---------
During 1993, 1992 and 1991 the Company declared and paid dividends of
$.34, $.31 and $.30 per share, respectively, on its Common Stock. Under
certain debt agreements, the Company is subject to restrictions limiting
the payment of dividends and common stock repurchases. At December 31,
1993, under the most restrictive agreement, such payments were limited to
$43,585,000, which
-43-
<PAGE>
represents 50% of consolidated net earnings for the most recently concluded
four fiscal quarter period less dividends paid and prepayment of
subordinated debt during such period.
H. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial Instruments," requires that the
Company disclose the estimated fair values of its financial instruments.
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.
Excess servicing rights receivable
----------------------------------
Excess servicing rights receivable is calculated using prepayment, default
and interest rate assumptions that the Company believes market participants
would use for similar instruments at the time of sale. Projected
performance is monitored on an ongoing basis. However, the Company does
not change the underlying rate at which future estimated cash flows are
discounted once the initial sale has been recorded. As such, the fair
value of excess servicing rights receivable primarily includes
consideration of an appropriate discount rate to be applied to the
financial instrument as a whole.
The Company has consulted with investment bankers and obtained an estimate
of a market discount rate. Utilizing this market discount rate, and such
other assumptions as the Company believes market participants would use for
similar instruments, the Company has estimated the fair value of its excess
servicing rights receivable to approximate its carrying value.
Contracts held for sale and as collateral
-----------------------------------------
Contracts held for sale and as collateral are generally recent originations
which will be sold during the following quarter. The Company does not
charge origination fees or points and, as such, its contracts have
origination rates generally in excess of rates on the securities into which
they will be pooled. Since these contracts have not been converted into
securitized pools, the Company estimates the fair value to be the carrying
amount plus the cost of origination.
-44-
<PAGE>
Collateral in process of liquidation
------------------------------------
Collateral in the process of liquidation is valued on an individual unit
basis after inspection of such collateral. The difference between carrying
amount and fair value is carried as a liability by the Company in the
allowance for losses on contracts sold with recourse.
Other contracts held
--------------------
Pursuant to investor sale agreements, certain contracts are repurchased by
the Company as a result of delinquency before they are repossessed, and are
included in other contracts held. The loss has been estimated on an
aggregate basis, and is included on the balance sheet in allowance for
losses on contracts sold with recourse.
Notes payable
-------------
Notes payable consists of amounts payable under the Company's warehouse
line or repurchase agreements and, given its short-term nature, is at a
rate which approximates market. As such, fair value approximates the
carrying amount.
Senior notes
------------
The fair value of the Company's senior notes is estimated based on the
quoted market price of similar issues or on the current rates offered to
the Company for debt of a similar maturity.
Senior subordinated notes and debentures
----------------------------------------
The Company's senior subordinated notes and debentures are valued at quoted
market prices.
-45-
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
------------------- -------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
-------- --------- -------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents,
cash deposits and other
investments $314,507 $314,507 $264,006 $264,006
Excess servicing rights
receivable 843,489 843,489 640,647 640,647
Contracts held for sale
and as collateral 437,808 448,753 136,065 140,827
Collateral in process
of liquidation 47,847 32,202 46,252 31,339
Other contracts held 9,570 6,441 11,652 7,895
Financial liabilities:
Notes payable 206,911 206,911 79,438 79,438
Senior notes 26,650 28,136 12,000 12,000
Senior subordinated notes
due 2002 262,434 318,032 262,093 277,944
Senior subordinated
debentures due 1995 19,008 21,132 18,262 20,246
</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
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has a
regional branch network with significant dealer relationships and a
proprietary credit scoring system, both of which contribute heavily to the
Company's ongoing profitability and neither of which is considered a
financial instrument.
-46-
<PAGE>
I. COMMITMENTS AND CONTINGENCIES
Lease commitments
-----------------
At December 31, 1993, aggregate minimum rental commitments under
noncancelable leases having terms of more than one year were $11,453,000,
payable $3,558,000 (1994), $2,771,000 (1995), $2,055,000 (1996), $1,850,000
(1997) and $1,219,000 (1998). Total rental expense for the years ended
December 31, 1993, 1992 and 1991 was $4,449,000, $4,955,000 and $4,402,000,
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.
Litigation
----------
Shareholder Class Action
In December 1988, a Green Tree shareholder commenced an action in the U.S.
District Court in Minnesota against the Company and certain of its present
and former officers and directors alleging violations of Sections 10(b) and
20 of the Securities Exchange Act of 1934, as amended. Several additional
shareholders were joined as party plaintiffs in the case, which was
certified as a class action in July 1990. The class consists of
shareholders of the Company who purchased Common Stock from May 20, 1985
through March 28, 1989.
In March 1994, the Company reached an agreement to settle the action. The
settlement, which is subject to court approval, will not have a material
impact on the Company's financial condition or results of operation.
-47-
<PAGE>
General
The nature of the Company's business is such that it is routinely a party
or subject to other items of pending or threatened litigation. Although
the ultimate outcome of certain of these matters cannot be predicted,
management of the Company believes, based upon information currently
available and the advice of counsel, that the resolution of these routine
matters will not result in any material adverse effect on its consolidated
financial condition.
J. 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.
As of December 31, 1993 and 1992, net assets available for plan benefits
were $5,242,000 and $4,056,000, and the accumulated benefit obligation was
$4,305,000 and $3,484,000, respectively. As of December 31, 1993 and 1992,
the projected benefit obligation of the plan was $8,169,000 and $6,973,000,
respectively. In addition, the Company maintains a nonqualified pension
plan for certain key employees as designated by the Board of Directors.
This plan is not currently funded and the projected benefit obligation at
December 31, 1993 and 1992 was $9,158,000 and $5,741,000, respectively.
Total pension expense for the plans in 1993, 1992 and 1991 was $2,340,000,
$1,619,000 and $1,347,000, respectively.
In July 1992, the Company's Board of Directors approved a 401(k) Retirement
Savings Plan available to all eligible employees. The plan commenced on
October 1, 1992. To be eligible for the plan, the employee must be at
least 21 years of age and have completed one year of employment at Green
Tree during which the employee worked at least 1,000 hours. Eligible
employees may contribute to the plan up to 10% of their earnings with a
maximum of $8,994 for 1993 based on the Internal Revenue Service annual
contribution limit. The
-48-
<PAGE>
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 in one or more funds. Company contributions generally
vest after three years, although contributions for those employees already
having three years of service vest immediately. Company contributions to
the plan were $575,000 and $208,000 in 1993 and 1992, respectively.
<TABLE>
<CAPTION>
K. INCOME TAXES
<S> <C>
</TABLE>
Income taxes consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $17,253,000 $16,843,000 $ 7,938,000
State 3,118,000 2,937,000 1,755,000
----------- ----------- -----------
20,371,000 19,780,000 9,693,000
Deferred:
Federal 53,826,000 21,769,000 21,511,000
State 9,917,000 4,785,000 4,284,000
----------- ----------- -----------
63,743,000 26,554,000 25,795,000
----------- ----------- -----------
$84,114,000 $46,334,000 $35,488,000
=========== =========== ===========
</TABLE>
For the year ended December 31, 1992, a current tax benefit of $11,161,000
is included in the extraordinary loss from the Company's debt exchange so
that net tax expense was $35,173,000.
Deferred income taxes are provided for temporary differences between pretax
income for financial reporting purposes and taxable income. The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1993
and 1992 are presented below.
<TABLE>
<CAPTION>
December 31
------------------------------
1993 1992
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Excess servicing rights $ 234,721,000 $ 164,323,000
Other 3,272,000 5,088,000
------------- -------------
Gross deferred tax liabilities 237,993,000 169,411,000
------------- -------------
Deferred tax assets:
Net operating loss carryforward 23,571,000 23,030,000
Other 8,918,000 1,964,000
------------- -------------
Gross deferred tax assets 32,489,000 24,994,000
Valuation allowance -- --
------------- -------------
Gross deferred tax assets,
net of valuation 32,489,000 24,994,000
------------- -------------
Net deferred tax liability $ 205,504,000 $ 144,417,000
============= =============
</TABLE>
At December 31, 1993, the Company has net operating loss carryforwards for
federal income tax purposes of approximately
-49-
<PAGE>
$60,000,000 which are available to offset future federal taxable income and
expire no earlier than 2001.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Statutory rate 35.0% 34.0% 34.0%
State tax, net of federal benefit 4.2 4.3 4.3
Adjustments to deferred tax assets
and liabilities for enacted
changes in tax laws and rates 1.9 -- --
Other .8 .7 .2
------ ------ ------
41.9% 39.0% 38.5%
====== ====== ======
</TABLE>
L. SUBSEQUENT EVENT
In March 1994, the Company sold, through a public transaction,
approximately $508,000,000 of securitized Net Interest Margin Certificates
("the Certificates"). The Certificates represent 78% of the estimated
present value of future cash flows from certain pools of manufactured
housing contracts sold by the Company between 1978 and 1993. The estimated
present value of these future cash flows are recorded on the Company's
December 31, 1993 balance sheet as part of "Excess servicing rights
receivable," "Contracts, GNMA certificates and collateral" and "Allowance
for losses on contracts sold with recourse." The remaining 22% equity
interest will be held by the Company and recorded as part of excess
servicing rights receivable. The following unaudited pro forma balance
sheet assumes the transaction closed on December 31, 1993 and the proceeds
were used to provide a 4% cash deposit, pay off outstanding notes payable,
and invest the remainder in cash and cash equivalents.
<TABLE>
<CAPTION>
Pro Forma Condensed Balance Sheet
December 31, 1993
-------------------------------------------------
Pro forma Pro forma
As reported adjustments (unaudited)
--------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 170,674 $ 265,529 $ 436,203
Cash deposits 124,817 20,320 145,137
Excess servicing rights
receivable 843,489 (657,760) 185,729
Contracts and collateral 495,225 (43,000) 452,225
All other assets 105,297 105,297
--------------- --------------- ---------------
Total assets $1,739,502 $(414,911) $1,324,591
=============== =============== ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Notes payable $ 206,911 $(206,911) $ --
Allowance for losses 222,135 (208,000) 14,135
All other liabilities 761,027 761,027
Stockholders' equity 549,429 549,429
--------------- --------------- ---------------
Total liabilities and
stockholders' equity $1,739,502 $(414,911) $1,324,591
=============== =============== ===============
</TABLE>
-50-
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (unaudited)
-------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands
except per-share amounts) First Second Third Fourth
quarter quarter quarter quarter
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1993:
Income $66,645 $82,613 $98,925 $118,497
Net earnings 22,061 29,187 32,320 32,855
Net earnings per share .71 .93 1.02 .95
1992:
Income $51,907 $60,700 $66,302 $ 67,706
Earnings before
extraordinary loss 12,695 19,730 23,097 16,950
Net earnings 12,695 2,273 23,097 16,950
Per share:
Earnings before
extraordinary loss .43 .65 .76 .55
Net earnings .43 .07 .76 .55
1991:
Income $40,423 $56,368 $58,018 $ 59,956
Net earnings 8,317 16,557 17,591 14,223
Net earnings per share .26 .60 .64 .50
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
- ---------------------------------------------------------------
None.
-51-
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------------------------------
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive proxy statement for its 1994 Annual
Meeting of Shareholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1994.
ITEM 11. EXECUTIVE COMPENSATION.
---------------------------------
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive proxy statement for its 1994 Annual
Meeting of Shareholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
------------------------------------------------------------
MANAGEMENT.
-----------
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive proxy statement for its 1994 Annual
Meeting of Shareholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------
Reference is made to Note I of Notes to Consolidated Financial Statements
contained in Item 8 hereof.
-52-
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
----------------------------------------------------------------
FORM 8-K.
---------
(a)(l) Financial statements
The following consolidated financial statements of Green
Tree Financial Corporation and subsidiaries are included
in Part II, Item 8 of this report:
Page(s)
-------
Independent Auditors' Report 28
Consolidated Balance Sheets - December 31,
1993 and 1992 29
Consolidated Statements of Operations - years
ended December 31, 1993, 1992 and 1991 30
Consolidated Statements of Stockholders' Equity -
years ended December 31, 1993, 1992 and 1991 31
Consolidated Statements of Cash Flows - years
ended December 31, 1993, 1992 and 1991 32-33
Notes to Consolidated Financial Statements 34-50
(2) Financial statement schedules
The following consolidated financial statement
schedules of Green Tree Financial Corporation and
subsidiaries are included in Part IV of this report:
Schedule II - Amounts receivable from related
parties 58
Schedule VIII - Valuation and qualifying accounts 59
Schedule IX - Short-term borrowings 60
Schedules other than those listed above are omitted because of the
absence of the conditions under which they are required or because
the information required is included in the consolidated financial
statements or noted thereto.
(3) Exhibits
Exhibit
No.
-------
3(a) Articles of Incorporation (incorporated by reference to
Company's Registration Statement on Form S-4; File No.
33-42249).
-53-
<PAGE>
3(b) Bylaws (incorporated by reference to Company's
Registration Statement on Form S-4; File No.
33-42249).
4(a) Amended and Restated Rights Agreement dated as of
August 16, 1990 relating to amendments to the Company's
Shareholders Rights Plan originally adopted on October 9,
1985 (incorporated by reference to the Company's quarterly
report on Form 10-Q for the quarter ended September 30,
1990; File No. 0-11652).
4(b) Indenture dated as of June 1, 1985 relating to $287,500,000
of 8 1/4% Senior Subordinated Debentures due June 1, 1995
(incorporated by reference to the Company's Registration
Statement on Form S-4; File No. 33-42249).
4(c) Indenture dated as of March 15, 1992 relating to
$287,500,000 of 10 1/4% Senior Subordinated Notes due
June 1, 2002 (incorporated by reference to the Company's
Registration Statement on Form S-4; File No. 33-42249).
4(d) Indenture dated as of September 1, 1992 relating to
$250,000,000 of Medium-Term Notes, Series A, Due Nine
Months or More From Date of Issue (incorporated by
reference to the Company's Registration Statement on Form
S-3; File No. 33-51804).
10(a) Company's Key Executive Bonus Program (incorporated
by reference to the Company's Registration
Statement on Form S-1; File No. 2-82880).
10(b) Nonqualified Option Plan dated May 19, 1984 (incorporated
by reference to the Company's Registration Statement on
Form S-2; File No. 2-85303).
10(c) Employment Agreement, dated April 20, 1991 between
the Company and Lawrence M. Coss (incorporated by
reference to the Company's Registration Statement
on Form S-4; File No. 33-42249).
10(d) Green Tree Financial Corporation 1987 Stock Option
Plan (incorporated by reference to the Company's
Registration Statement on Form S-4; File No.
33-42249).
-54-
<PAGE>
10(e) Green Tree Financial Corporation Key Executive Stock Bonus
Plan (incorporated by reference to the Company's
Registration Statement on Form S-4; File No. 33-42249).
10(f) 1987 Supplemental Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form
S-4; File No. 33-42249).
10(g) Master Repurchase Agreement dated as of August 1, 1990
between Green Tree Finance Corp.-Three and Merrill Lynch
Mortgage Capital Inc. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990; File No. 0-11652).
10(h) Warehousing Credit Agreement dated as of November 30,
1990 among Green Tree Financial Corporation and certain
banks and First Bank National Association, Administrative
Agent (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990;
File No. 0-11652); as amended by a Consent and Third
Amendment to Warehousing Credit Agreement dated November
27, 1991 (incorporated by reference to the Company's
Registration Statement on Form S-4; File No. 33-42249); as
amended by a Consent to Warehousing Credit Agreement dated
February 13, 1992 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991; File No. 0-11652); as amended by Fourth
Amendment to Warehousing Credit Agreement dated November
30,1992 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992;
File No. 0-11652).
10(i) Master Repurchase Agreement dated as of May 17, 1991
between Green Tree Finance Corp.-Four and First Boston
Mortgage Capital Corp. (incorporated by reference to the
Company's Registration Statement on Form S-4; File No. 33-
42249).
10(j) Insurance and Indemnity Agreement dated as of February 13,
1992 among Green Tree Financial Corporation, MaHCS Guaranty
Corporation and Financial Security Assurance Inc.
(incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991; File No.
0-11652).
-55-
<PAGE>
10(k) Master Repurchase Agreement dated as of October 15, 1992
between Green Tree Finance Corp.-Five and Lehman Commercial
Paper, Inc. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992; File No. 0-11652).
10(l) 401(k) Plan Trust Agreement effective as of October 1,
1992 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992;
File No. 0-11652).
10(m) Green Tree Financial Corporation 1992 Supplemental Stock
Option Plan (filed herewith).
11(a) Computation of Primary Earnings Per Share (filed
herewith).
11(b) Computation of Fully Diluted Earnings per Share (filed
herewith).
12 Computation of Ratio of Earnings to Fixed Charges (filed
herewith).
22 Subsidiaries of the Registrant (filed herewith).
24 Consent of KPMG Peat Marwick (filed herewith).
25 Powers of Attorney (filed herewith).
PURSUANT TO ITEM 601(b)(4) OF REGULATION S-K, THERE HAS BEEN EXCLUDED FROM
THE EXHIBITS FILED PURSUANT TO THIS REPORT, INSTRUMENTS DEFINING THE RIGHTS
OF HOLDERS OF LONG-TERM DEBT OF THE COMPANY WHERE THE TOTAL AMOUNT OF THE
SECURITIES AUTHORIZED UNDER SUCH INSTRUMENTS DOES NOT EXCEED TEN PERCENT OF
THE TOTAL ASSETS OF THE COMPANY. THE COMPANY HEREBY AGREES TO FURNISH A
COPY OF ANY SUCH INSTRUMENTS TO THE COMMISSION UPON REQUEST.
(b) Reports on Form 8-K
None.
-56-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Green Tree Financial Corporation has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GREEN TREE FINANCIAL CORPORATION
By: /s/Lawrence M. Coss By: /s/John W. Brink
----------------------- ---------------------------
Lawrence M. Coss John W. Brink
Chairman, President and Executive Vice President,
Chief Executive Officer Treasurer and Chief
(principal executive Financial Officer
officer) (principal financial
officer)
By: /s/Robley D. Evans
---------------------------
Robley D. Evans
Vice President and
Controller (principal
accounting officer)
Dated: March 28, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/Lawrence M. Coss
-------------------------------
Lawrence M. Coss, Director March 28, 1994
/s/Richard G. Evans
-------------------------------
Richard G. Evans, Director March 28, 1994
/s/Robert D. Potts
-------------------------------
Robert D. Potts, Director March 28, 1994
By: /s/Richard G. Evans
---------------------------
Richard G. Evans,
Attorney-in-Fact
C. Thomas May, Jr., Director ) Dated: March 28, 1994
)
W. Max McGee, Director )
)
Robert S. Nickoloff, Director )
)
Kenneth S. Roberts, Director )
-57-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
-----------------------------------------------------
<TABLE>
<CAPTION>
Balance at Balance at Balance at
December 31, Amount December 31, Amount December 31,
1990 Additions collected 1991 collected 1992
------------ --------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Boyle, Greg $310,825 $10,000 $ (20,825) $300,000 $(300,000) 0
Evans, Richard 215,877 (15,877) 200,000 (200,000) 0
Evans, Robley 119,205 (119,205) 0 0
Hegstrom, Robert 385,125 (25,125) 360,000 (360,000) 0
Imsdahl, James 200,371 (125,671) 74,700 (74,700) 0
Jordan, Hugh 108,381 (108,381) 0 0
Roberts, Kenneth 500,000 (500,000) 0 0
</TABLE>
The above notes were executed by certain officers and directors of the Company
to purchase Company stock or as personal loans. The stock certificates were
held as collateral as long as the loans were outstanding. The notes were due on
demand and carried an interest rate of prime plus 1/2% on personal loans, and
on the stock loans, the greater of 6% or the Internal Revenue Service applicable
federal rate for officer borrowings. No notes were executed during 1993.
-58-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
<TABLE>
<CAPTION>
Additions-
Balance at reductions Balance at
beginning to income end
Description of period recognized Deductions of period
- ------------------------------------------------- ---------- ---------- ------------- ----------
(thousands of dollars)
<S> <C> <C> <C> <C>
Valuation and qualifying
accounts which are deducted
from the assets
to which they apply:
- -------------------------------------------------
Deferred service income:
Year ended December 31, 1993 $119,487 $ 68,238 $26,318(a) $161,407
Year ended December 31, 1992 107,592 33,135 21,240(a) 119,487
Year ended December 31, 1991 65,564 59,536 17,508(a) 107,592
Reserves which support balance
sheet caption reserves:
- -------------------------------------------------
Allowance for losses on contracts
sold with recourse:
Year ended December 31, 1993 189,669 78,791 46,325(b) 222,135
Year ended December 31, 1992 134,681 105,357 50,369(b) 189,669
Year ended December 31, 1991 91,945 74,845 32,109(b) 134,681
</TABLE>
Notes:
(a) Amortization and discount.
(b) Amounts charged off.
-59-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE IX - SHORT-TERM BORROWINGS
-----------------------------------
<TABLE>
<CAPTION>
Weighted Maximum Average Weighted
average amount amount average
Balance interest outstanding outstanding interest
Category of aggregate at end rate at during during rate during
short-term borrowings of period end of period the period the period(2) the period(3)
- ----------------------------------------- --------- ------------- ----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993:
Notes payable to banks (1) $ 1,275 4.31% $ 53,650 $ 11,101 4.29%
GNMA reverse repurchase agreements 21,171 3.63 52,779 20,834 3.38
Merrill Lynch Mortgage Capital
reverse repurchase agreement 73,995 4.66 400,595 118,583 3.80
First Boston Mortgage Capital
reverse repurchase agreement 22,250 4.13 205,750 63,392 3.79
Lehman Commercial Paper
reverse repurchase agreement 88,220 3.44 350,022 139,044 3.51
YEAR ENDED DECEMBER 31, 1992:
Notes payable to banks (1) 8,300 4.50 43,975 9,831 4.82
GNMA reverse repurchase agreements -- -- 35,452 6,368 3.70
Merrill Lynch Mortgage Capital
reverse repurchase agreement 35,799 3.83 167,145 77,080 4.95
First Boston Mortgage Capital
reverse repurchase agreement -- -- 100,000 55,651 4.40
Lehman Commercial Paper
reverse repurchase agreement 35,339 3.56 155,057 15,236 3.56
YEAR ENDED DECEMBER 31, 1991:
Notes payable to banks (1) 24,490 6.79 57,250 16,765 8.73
GNMA reverse repurchase agreements -- -- 44,199 5,533 6.70
Merrill Lynch Mortgage Capital
reverse repurchase agreement 75,697 7.50 188,065 92,798 7.37
First Boston Mortgage Capital
reverse repurchase agreement -- -- 94,600 24,187 7.04
</TABLE>
Notes:
(1) These notes represent borrowings under committed lines of credit for
contract financing. The calculations of the weighted average interest rates
include commitment and usage fees on borrowings.
(2) Average amount outstanding during the period was computed by totaling the
daily outstanding balances and dividing the sum by the number of days in
the period.
(3) Weighted average interest rate during the period was computed by dividing
the interest expense for the year by the average daily amount of
outstanding borrowings.
-60-
<PAGE>
GREEN TREE FINANCIAL CORPORATION
Securities and Exchange Commission
Form 10-K
(For the Fiscal Year Ended December 31, 1993)
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
----------- ------- --------
10(m) 1992 Supplemental Stock Option Plan 62-66
11(a) Computation of Primary Earnings
Per Share 67
11(b) Computation of Fully Diluted
Earnings Per Share 68
12 Computation of Ratio of Earnings
to Fixed Charges 69
22 Subsidiaries of Registrant 70-71
24 Consent of KPMG Peat Marwick 72
25 Powers of Attorney 73
-61-
<PAGE>
Exhibit 10(m).
--------------
GREEN TREE ACCEPTANCE, INC.
1992 SUPPLEMENTAL STOCK OPTION PLAN
1. Purpose of Plan.
---------------
This Plan shall be known as the "Green Tree Acceptance, Inc. 1992
Supplemental Stock Option Plan" and is hereinafter referred to as the
"Plan." The purpose of the Plan is to attract and retain the services of
experienced and knowledgeable non-employee directors of Green Tree
Acceptance, Inc. (the "Company") and to provide additional incentive for
such directors to increase their interest in the Company's long term
success and progress. Options granted under this Plan shall be non-
qualified stock options which do not qualify as Incentive Stock Options
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code").
2. Stock Subject to Plan.
---------------------
Subject to the provisions of Section 11 hereof, the stock to be subject
to options under the Plan (the "Shares") shall be the Company's authorized
Common Stock, par value $0.01 per share (the "Common Stock"). Such shares
will be authorized but unissued shares. Subject to adjustment as provided
in Section 11 hereof, the maximum number of shares on which options may be
exercised under this Plan shall be 50,000 shares. If an option under the
Plan expires, or for any reason is terminated or unexercised with respect
to any Shares, such Shares shall again be available for options thereafter
granted during the term of the Plan.
3. Administration of Plan.
----------------------
The Plan shall be administered by the Board of Directors of the Company.
The Board of Directors shall have plenary authority in its discretion, but
subject to the express provisions of this Plan, to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to the Plan,
and to make all other determinations necessary or advisable for the
administration of the Plan. The Board of Directors' determinations on the
foregoing matters shall be final and conclusive.
4. Eligibility.
-----------
An "Eligible Director" shall be a director of the Company who is not
otherwise an employee of the Company or any subsidiary of the Company;
provided, however, that so long as any director of the Company is serving
as a representative of another organization and any options issued to such
director under the Plan are required to be remitted to such organization,
such
-62-
<PAGE>
director shall not be deemed to be an Eligible Director for purposes of the
Plan.
5. Grant of Options.
----------------
Upon approval of the Plan by the Board of Directors, but subject to
approval of the Plan by the stockholders of the Company pursuant to Section
14 hereof, each Eligible Director who completes a full fiscal quarter of
service as a director of the Company after December 31, 1992 shall
automatically be granted on the last business day of each such quarter an
option to acquire 500 Shares under the Plan.
6. Price.
-----
The option price for all options granted under the Plan shall be the fair
market value of the Shares covered by the option at the time the option is
granted. For the purpose of the preceding sentence and for all other
valuation purposes under the Plan, the "fair market value" of the Common
Stock as of any date shall be (i) the closing price of the Common Stock on
such date, as reported on the consolidated reporting system for the New
York Stock Exchange or such other national securities exchange as is then
the primary exchange for trading in the Common Stock, or (ii) if the Common
Stock is not then listed on a national securities exchange, the last sale
price or highest closing bid price (whichever is applicable) as reported on
the National Association of Securities Dealers Automated Quotation System.
If, on the date of determination of fair market value, the Common Stock is
not publicly traded, the Board of Directors shall make a good faith attempt
to determine the fair market value of the Common Stock as required by this
Section 6 and in connection therewith shall take such action as it deems
necessary or advisable.
7. Term.
----
Each option and all rights and obligations thereunder shall, subject to
the provisions of Section 9 herein, expire ten (10) years from the date of
granting of the option.
8. Exercise of Option.
------------------
(a) Options granted under the Plan shall not be exercisable for a period
of six months after the date of grant, or until stockholder approval of the
Plan has been obtained, whichever occurs later, but thereafter will be
exercisable in full at any time or from time to time during the term of the
option, subject to the provisions of Section 9 hereof.
-63-
<PAGE>
(b) The exercise of any option granted hereunder shall only be effective
at such time as counsel to the Company shall have determined that the
issuance and delivery of Common Stock pursuant to such exercise will not
violate any state or federal securities or other laws. An optionee
desiring to exercise an option may be required by the Company, as a
condition of the effectiveness of any exercise of an option granted
hereunder, to agree in writing that all Common Stock to be acquired
pursuant to such exercise shall be held for his or her own account without
a view to any further distribution thereof, that the certificates for such
shares shall bear an appropriate legend to that effect and that such shares
will not be transferred or disposed of except in compliance with applicable
federal and state securities laws.
(c) An optionee electing to exercise an option shall give written notice
to the Company of such election and of the number of Shares subject to such
exercise. The full purchase price of such Shares shall be tendered with
such notice of exercise. Payment shall be made to the Company either (i)
in cash (including check, bank draft or money order), or (ii) by delivering
shares of Common Stock already owned by the optionee having a fair market
value equal to the full purchase price of the Shares, or (iii) by any
combination of cash and such shares; provided, however, that an optionee
shall not be entitled to tender shares of Common Stock pursuant to
successive, substantially simultaneous exercises of options granted under
this or any other stock option plan of the Company. For purposes of the
preceding sentence, the "fair market value" of such tendered shares shall
be determined as provided in Section 6 herein as of the date of exercise.
Until such person has been issued the Shares subject to such exercise, he
or she shall possess no rights as a stockholder with respect to such
Shares.
9. Effect of Termination of Directorship or Death or Disability.
------------------------------------------------------------
(a) In the event that an optionee shall cease to be a director of the
Company for any reason other than removal for cause due to his or her
serious misconduct or his or her death or disability, such optionee shall
have the right to exercise the option at any time within seven months after
such termination of directorship to the extent of the full number of Shares
he or she was entitled to purchase under the option on the date of
termination, subject to the condition that no option shall be exercisable
after the expiration of the term of the option.
(b) In the event that an optionee shall be removed for cause as a
director of the Company by reason of his or her serious misconduct during
the course of his or her service as a director of the Company, the option
shall be terminated as of the date of the misconduct.
-64-
<PAGE>
(c) If the optionee shall die while serving as a director of the Company
or within three months after termination of his or her directorship for any
reason other than removal for cause due to his or her serious misconduct,
or become disabled (as determined by the Board of Directors in its sole
discretion) while serving as a director of the Company and such optionee
shall not have fully exercised the option, such option may be exercised at
any time within twelve months after his or her death or disability by the
personal representatives, administrators, or, if applicable, guardian, of
the optionee or by any person or persons to whom the option is transferred
by will or the applicable laws of descent and distribution, to the extent
of the full number of shares he or she was entitled to purchase under the
option on the date of death, disability, or termination of directorship, if
earlier, and subject to the condition that no option shall be exercisable
after the expiration of the term of the option.
10. Non-Transferability.
-------------------
No option granted under the Plan shall be transferable by the optionee,
otherwise than by will or the laws of descent and distribution as provided
in Section 9(c) herein. Except as provided in Section 9(c) herein with
respect to disability of the optionee, during the lifetime of an optionee
the option shall be exercisable only by such optionee.
11. Dilution or Other Adjustments.
-----------------------------
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend (of
whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options shall be made
by the Board of Directors. In the event of any such changes, adjustments
shall include, where appropriate, changes in the aggregate number of shares
subject to the Plan, the number of shares and the price per share subject
to outstanding options in order to prevent dilution or enlargement of
option rights.
12. Amendment or Discontinuance of Plan.
-----------------------------------
The Board of Directors may amend or discontinue the Plan at any time.
However, subject to the provisions of Section 11 no amendment of the Plan
shall, without stockholder approval: (i) increase the maximum number of
Shares with respect to which options may be granted under the Plan as
provided in Section 2 hereof, (ii) modify the eligibility requirements for
participation in the Plan as provided in Section 4 hereof, or (iii) change
the date of grant or exercise price of, or the number of Shares subject to,
options granted or to be granted to
-65-
<PAGE>
Eligible Directors, as provided in Sections 5 and 6 hereof. The Board of
Directors shall not alter or impair any option theretofore granted under
the Plan without the consent of the holder of the option. Notwithstanding
any other provision of the Plan or any option, without the approval of
stockholders of the Company, no such amendment shall be made that, absent
such approval, would cause the exemptions of Rule 16b-3 to become
unavailable with respect to the options hereunder or with respect to the
ability of the Eligible Directors to satisfy the disinterested person
requirements of Rule 16b-3 in administering any other stock-based
compensation plan of the Company (this limitation on amendments to the Plan
shall include, without limitation, a prohibition on any contemplated
amendment within six months of any prior amendment, other than to comport
with changes in the Code, the Employee Retirement Income Security Act, or
the rules thereunder).
13. Time of Granting.
----------------
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the stockholders of the Company,
and no action taken by the Board of Directors (other than the execution and
delivery of an option), shall constitute the granting of an option
hereunder.
14. Effective Date and Termination of Plan.
--------------------------------------
(a) The Plan was approved by the Board of Directors on March 10, 1992
and shall be approved by the stockholders of the Company within twelve (12)
months thereafter. The effective date of the Plan shall be the date of
stockholder approval.
(b) Unless the Plan shall have been discontinued as provided in Section
12 hereof, the Plan shall terminate on December 31, 1997. No option may
be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee, alter or impair any rights or
obligations under any option theretofore granted.
-66-
<PAGE>
Exhibit 11.(a)
--------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF PRIMARY EARNINGS PER SHARE
-----------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------
1993 1992 1991
------------ ------------ -----------
<S> <C> <C> <C>
Earnings before
extraordinary loss $116,423,000 $ 72,472,000 $56,688,000
Extraordinary loss on
debt exchange -- (17,457,000) --
------------ ------------ -----------
Net earnings 116,423,000 55,015,000 56,688,000
Less cumulative dividends
on preferred stock -- 1,995,000 9,310,000
------------ ------------ -----------
$116,423,000 $ 53,020,000 $47,378,000
============ ============ ===========
Weighted average number of
common and common equivalent
shares outstanding:
Weighted average common
shares outstanding 31,297,576 28,852,762 23,418,712
Dilutive effect of stock
options after application
of treasury-stock method 889,833 347,208 222,734
------------ ------------ -----------
32,187,409 29,199,970 23,641,446
------------ ------------ -----------
Earnings per share:
Earnings before extraordinary
loss $ 3.62 $ 2.41 $ 2.00
Extraordinary loss on debt
exchange -- (.59) --
------------ ------------ -----------
Net earnings $ 3.62 $ 1.82 $ 2.00
============ ============ ===========
</TABLE>
-67-
<PAGE>
Exhibit 11.(b)
--------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
-----------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------
1993 1992 1991
------------ ------------ -----------
<S> <C> <C> <C>
Earnings before
extraordinary loss $116,423,000 $ 72,472,000 $56,688,000
Extraordinary loss on
debt exchange -- (17,457,000) --
------------ ------------ -----------
Net earnings 116,423,000 55,015,000 56,688,000
Less cumulative dividends
on preferred stock -- 1,995,000 9,310,000
------------ ------------ -----------
$116,423,000 $ 53,020,000 $47,378,000
============ ============ ===========
Weighted average number of
common and common equivalent
shares outstanding:
Weighted average common
shares outstanding 31,297,576 28,852,762 23,418,712
Dilutive effect of stock
options after application
of treasury-stock method
assuming full dilution 943,756 347,208 260,894
------------ ------------ -----------
32,241,332 29,199,970 23,679,606
------------ ------------ -----------
Earnings per share:
Earnings before extraordinary
loss $ 3.61 $ 2.41 $ 2.00
Extraordinary loss on debt
exchange -- (.59) --
------------ ------------ -----------
Net earnings $ 3.61 $ 1.82 $ 2.00
============ ============ ===========
</TABLE>
-68-
<PAGE>
Exhibit 12.
-----------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings before
income taxes $200,537,000 $118,806,000 $ 92,176,000 $ 59,418,000 $47,733,000
Fixed charges:
Interest 51,155,000 44,868,000 48,957,000 51,193,000 44,147,000
One-third rent 1,483,000 1,652,000 1,467,000 812,000 780,000
------------ ------------ ------------ ------------ -----------
52,638,000 46,520,000 50,424,000 52,005,000 44,927,000
------------ ------------ ------------ ------------ -----------
$253,175,000 $165,326,000 $142,600,000 $111,423,000 $92,660,000
============ ============ ============ ============ ===========
Fixed charges:
Interest $ 51,155,000 $ 44,868,000 $ 48,957,000 $ 51,193,000 $44,147,000
One-third rent 1,483,000 1,652,000 1,467,000 812,000 780,000
------------ ------------ ------------ ------------ -----------
$ 52,638,000 $ 46,520,000 $ 50,424,000 $ 52,005,000 $44,927,000
============ ============ ============ ============ ===========
Ratio of earnings
to fixed charges (1) 4.81 3.55 2.83 2.14 2.06
==== ==== ==== ==== ====
</TABLE>
(1) For purposes of computing the ratios, earnings consist of earnings before
income taxes plus fixed charges.
-69-
<PAGE>
Exhibit 22.
-----------
GREEN TREE FINANCIAL CORPORATION
SUBSIDIARIES
The following is a list of the Company's subsidiaries which are all owned
100% by Green Tree Financial Corporation who is the ultimate or immediate
parent:
STATE OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Green Tree Financial Corp.- Kentucky Delaware
Green Tree Financial Corp.- Louisiana Delaware
Green Tree Financial Corp. - Mississippi Delaware
Green Tree Financial Corp.- North Carolina Delaware
Green Tree Financial Corp.- Ohio Delaware
Green Tree Financial Corp.- Texas Delaware
Green Tree Credit Corp. New York
Green Tree Consumer Discount Company Pennsylvania
Consolidated Acceptance Corporation Nevada
Rice Park Properties Corporation Minnesota
Woodgate Consolidated Incorporated Texas
Woodgate Utilities Incorporated Texas
Woodgate Place Owners Association Texas
Green Tree Finance Corp.-One Minnesota
Green Tree Finance Corp.-Two Minnesota
Green Tree Finance Corp.-Three Minnesota
Green Tree Finance Corp.-Four Minnesota
Green Tree Finance Corp.-Five Minnesota
Green Tree Agency, Inc. Minnesota
Green Tree Agency of Montana, Inc. Montana
Green Tree Agency of Nevada, Inc. Nevada
GTA Agency, Inc. New York
-70-
<PAGE>
STATE OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Crum-Reed General Agency, Inc. Texas
Green Tree Life Insurance Company Arizona
Consolidated Casualty Insurance Company Arizona
Green Tree Guaranty Corporation Minnesota
Green Tree Vehicles Guaranty Corporation Minnesota
MaHCS Guaranty Corporation Delaware
Green Tree Manufactured Housing Net Interest
Margin Finance Corp. I Delaware
Green Tree Manufactured Housing Net Interest
Margin Finance Corp. II Delaware
-71-
<PAGE>
Exhibit 24
----------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors
Green Tree Financial Corporation:
We consent to incorporation by reference of our report dated March 22, 1994,
relating to the consolidated balance sheets of Green Tree Financial Corporation
and subsidiaries as of December 31, 1993 and 1992 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, 1993, which report appears in
the December 31, 1993 Form 10-K of Green Tree Financial Corporation, and in the
following Registration Statements of Green Tree Financial Corporation: No. 33-
26498 on Form S-8/S-3, No. 2-88293 on Form S-8, No. 33-51804 on Form S-3 and
No. 33-50527 on Form S-3/S-11.
KPMG Peat Marwick
Minneapolis, Minnesota
March 22, 1994
<PAGE>
Exhibit 25.
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POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Lawrence M. Coss and Richard G.
Evans, and each or either one of them, his true and lawful attorney(s)-in-
fact and agent(s), with full power of substitution and resubstitution for
him and in his name, place, and stead, in any and all capacities, to sign
the 1993 Annual Report on Form 10-K of Green Tree Financial Corporation,
and any and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s), and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney(s)-in-fact
and agent(s), or either of them, or his or their substitutes, may lawfully
do or cause to be done by virtue hereof.
SIGNATURE DATE
--------- ----
/s/ C. Thomas May, Jr.
------------------------- February 22, 1994
C. Thomas May, Jr.
/s/ W. Max McGee
------------------------- February 22, 1994
W. Max McGee
/s/ Robert S. Nickoloff
------------------------- February 22, 1994
Robert S. Nickoloff
/s/ Kenneth S. Roberts
------------------------- February 22, 1994
Kenneth S. Roberts
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