<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 g
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-08916
GREEN TREE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 41-1807858
(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:
(Name of Each Exchange
----------------------
(Title of Each Class) on Which Registered)
--------------------- ----------------------
Common Stock, $.01 par value New York Stock Exchange,
Pacific 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, 1997, the aggregate market value of voting stock held by
nonaffiliates of registrant was approximately $4,973,509,000.
As of February 28, 1997, the shares outstanding of the issuer's class of
Common Stock were as follows:
Common Stock 139,068,484
-------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Part of 10-K
Document Where Incorporated
-------- ------------------
Proxy Statement for the 1997 Annual III
Meeting of Stockholders
<PAGE>
PART I
------
Item 1. Business.
General
Green Tree Financial Corporation ("Green Tree" or the "Company")is a diversified
financial services company that provides financing for manufactured homes, home
equity, home improvements, consumer products and equipment and provides consumer
and commercial revolving credit. The Company's insurance agencies market
physical damage and term mortgage life insurance and other credit protection
relating to the customers' contracts it services. Green Tree is the largest
servicer of manufactured housing contracts in the United States. Through its
principal offices in Saint Paul, Minnesota and service centers throughout the
United States, Green Tree serves all 50 states.
Green Tree pools and securitizes substantially all of the contracts it
originates, retaining the servicing on the contracts. Such pools are structured
into asset-backed securities which are sold in the public securities markets. In
servicing the contracts, the Company collects payments from the borrower and
remits principal and interest payments to the holder of the contract or investor
certificate backed by the contracts.
The Company was originally incorporated under the laws of the State of Minnesota
in 1975. In 1995 the Company reincorporated under the laws of the State of
Delaware. Green Tree Financial Corporation'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 Fixed Term Contracts
The Company originates a variety of financing transactions on either a "direct"
or "indirect" basis. Under an "indirect" financing transaction, a dealer sells a
product to a customer and enters into a sales contract with the customer
evidencing a monetary obligation and providing security for that obligation. The
Company purchases such sales contracts from dealers and contractors in the
ordinary course of its business. Under a "direct" origination, the Company and
borrower are direct parties to the loan documentation which evidences the
borrower's obligation to the Company. References herein to the terms
"contracts," "sales contracts" or "loans" may be used to refer to either
"direct" or "indirect" financing transactions as the context requires. All
direct or indirect originations are written on forms provided or approved by the
Company and are originated on an individually approved basis in accordance with
Company underwriting guidelines.
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Manufactured Housing
"Manufactured housing" (MH) or a "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).
The majority of the Company's sales contracts for manufactured home purchases
are financed on a conventional basis, with a small number of units insured by
the FHA or partially guaranteed by the VA. With respect to manufactured housing,
the relative volume of conventional, FHA and VA contracts originated by the
Company depends on customer and dealer preferences as well as prevailing market
conditions. The Company has developed more cost effective conventional
manufactured housing lending programs and as a result, FHA and VA contracts
represented less than 1% of the Company's manufactured housing originations
during 1996. FHA and VA contracts constituted 5% of the Company's servicing
portfolio at December 31, 1996 with approximately 95% of these contracts being
FHA. Manufactured housing contracts are generally subject to minimum down
payments of at least 5% of the amount financed. The Company offers manufactured
housing contract terms of up to 30 years.
Through its regional service centers, the Company arranges to purchase MH
contracts from MH dealers located throughout the United States. The Company's
regional service center 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 installment loan agreements directly with customers. For the year ended
December 31, 1996, the Company's manufactured housing contract originations
consisted of 83% purchased from dealers, and 17% directly originated by the
Company.
The dealer or the customer submits the customer's credit application and, with
respect to new manufactured homes, the purchase order to a central or regional
service center where Company personnel make an analysis of the creditworthiness
of such customer. If the application meets the Company's guidelines and credit
is approved, the Company generally purchases the contract
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after the manufactured home is delivered, set up and the customer has moved in.
For manufactured housing contracts, the Company uses a proprietary automated
credit scoring system. The scoring system is statistically based, quantifying
information using variables obtained from customers' credit applications and
credit reports. As of December 31, 1996, this credit scoring system has been
used in making credit determinations on over two million applications.
In 1996, new manufactured housing shipments rose to approximately 363,000 units,
a 7% increase over 1995. The Company continues to benefit from this increase and
believes that it is maintaining its market share of contracts for financing new
manufactured homes. 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 Equity
The Company began originating and purchasing home equity loans in January 1996.
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of techniques. The Company also
reviews and re-underwrites loan applications forwarded by correspondent lenders.
During 1996, approximately 25% of home equity loan originations resulted from
the Company's personnel marketing directly to the consumer. The remaining loan
originations were primarily transactions between the Company and correspondents,
with a much smaller percentage of transactions occurring between the Company and
brokers. Typically, home equity loans are secured by first and second liens on
site-built homes. Homes used for collateral in securing home equity loans may be
either residential or investor owned one- to four-family homes having a minimum
appraised value of $25,000.
Home Improvement
The types of home improvements financed by the Company include exterior
renovations, including windows, siding and roofing; pools and spas; kitchen and
bath remodeling; and room additions and garages. The Company may also, under
certain limited conditions, extend additional credit beyond the purchase price
of the home improvement for the purpose of debt consolidation.
Through its centralized loan processing operations in Saint Paul, Minnesota, the
Company arranges to purchase certain contracts from home improvement contractors
located throughout the United States.
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The Company's sales personnel contact home improvement contractors and explain
the Company's available financing plans, terms, prevailing rates and credit and
financing policies. If the contractor wishes to utilize the Company's available
customer financing, the contractor must make an application for contractor
approval. The Company has a contractor approval process pursuant to which the
financial condition, business experience and qualifications of the contractor
are reviewed prior to his or her approval to sell contracts to the Company. The
Company occasionally will originate directly a home improvement promissory note
involving a home improvement transaction.
The Company finances both conventional home improvement (HI) contracts and HI
contracts insured through the FHA Title I program. Such contracts are generally
secured by first, second or, to a lesser extent, third liens on the improved
real estate. The Company has also implemented an unsecured conventional HI
lending program for certain customers which generally allows for loan amounts
ranging from $2,500 to $15,000. Unsecured loans account for less than 10% of the
home improvement servicing portfolio.
The contractor submits the customer's credit application and construction
contract to the Company's office where an analysis of the creditworthiness of
the customer is made using a proprietary credit scoring system that was
implemented by the Company in June 1993. If it is determined that the
application meets the Company's underwriting guidelines and applicable FHA
regulations (for FHA-insured contracts) and the credit is approved, the Company
purchases the contract from the contractor generally when the customer verifies
satisfactory completion of the work (usually funded in stages with multiple
checks).
Consumer
Green Tree provides consumer financing for the purchase of marine products
(including boats, boat trailers and outboard motors); motorcycles; recreational
vehicles; sport vehicles (including snowmobiles, personal watercraft and all-
terrain vehicles); pianos and organs; and horse and utility trailers.
The Company arranges to purchase certain contracts originated by dealers
throughout the United States. The Company's personnel contact dealers and
explain Green Tree'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 approval.
The dealer submits the customer's credit application and purchase order to the
Company's central service center where an analysis of the creditworthiness of
the proposed buyer is made. If the application meets the Company's guidelines
and credit is approved, the Company purchases the contract when the customer
completes the purchase transaction with the dealer.
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Equipment
Equipment financing is provided by the Company for the purchase of trucks,
trailers and aircraft. The Company also provides financing through the leasing
of commercial equipment such as copiers, fax machines, telecommunications
equipment, computers and other office equipment.
Company personnel contact dealers and vendors and provide explanation of the
available financing plans offered, including terms, prevailing interest rates,
credit, residual purchase options and financing policies. The dealer or vendor
submits an application for approval if he or she wishes to utilize Green Tree's
available customer financing.
Upon receipt of a customer's credit application and purchase order from the
dealer or vendor, the Company analyzes the creditworthiness of the applicant. If
the application meets the Company's guidelines and credit is approved, the
Company purchases the sales contracts or lease equipment at the time the
customer accepts delivery of the product.
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The volume of fixed term contracts originated by the Company during the past
five years and certain other information for each of those years is indicated
below:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992(a)
----------------- --------------- -------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Volume of contracts:
Manufactured
Housing $4,882,018 $4,159,836 $3,201,491 $2,449,121 $1,208,866
Home
Improvement/
Home Equity 1,490,720 626,986 465,523 169,443 75,287
Consumer/
Other 1,192,579 471,153 96,172 47,442 34,911
---------- ---------- ---------- ---------- ----------
Total $7,565,317 $5,257,975 $3,763,186 $2,666,006 $1,319,064
========== ========== ========== ========== ==========
Number of contracts:
Manufactured
Housing 143,145 133,398 117,742 96,934 53,484
Home
Improvement/
Home Equity 65,752 49,135 39,375 16,926 8,384
Consumer/
Other 77,834 38,828 11,333 6,161 4,235
------- ------- ------- ------- ------
Total 286,731 221,361 168,450 120,021 66,103
======= ======= ======= ======= ======
Weighted average
interest rates:
Manufactured
Housing 10.2% 10.7% 11.0% 10.1% 11.5%
Home
Improvement/
Home Equity 12.1 12.5 12.1 12.6 13.9
Consumer/
Other 11.2 11.8 11.7 13.2 14.7
---- ---- ---- ---- ----
Weighted average
interest rate 10.7% 11.0% 11.2% 10.3% 11.7%
==== ==== ==== ==== ====
- ------------------
</TABLE>
(a) Does not include $552,936,000 of conventional contracts purchased from the
Resolution Trust Corporation ("RTC").
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, 1996, no state accounted for more than 10% of all contracts
serviced by the Company.
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In 1996, no single dealer accounted for more than one percent of the total
number of contracts originated by the Company. Likewise, no single contractor,
dealer or vendor accounted for more than two percent of the total number of
contracts or leases originated by the Company.
Commercial and Consumer Revolving Credit
The Company provides commercial revolving credit to dealers, manufacturers and
distributors of various consumer and commercial products and provides consumer
revolving credit through selected merchants and dealers. Pursuant to the terms
of such revolving credit agreements, the Company funds product inventory or
customer purchases. Typically the inventory products secure the commercial
revolving credit transactions.
Reference herein to the term "revolving credit" may be used in reference to
commercial finance, floorplan receivables, asset-based receivables or retail
credit.
Commercial
Through its three regional lending centers, the Company extends credit generally
under revolving credit agreements with dealers, manufacturers and distributors
of various consumer and commercial products. "Floorplan Receivables" represent
the financing of product inventory for retail dealers of a variety of consumer
products. The products securing the Floorplan Receivables currently include
manufactured housing, recreational vehicles and marine products. "Asset-Based
Receivables" generally represent the financing of production and inventory by
manufacturers, such revolving credit arrangements being secured by finished
goods inventory, accounts receivable rising from the sale of such inventory,
certain work-in-process, raw materials and component parts, as well as other
assets of the borrower, and may include real estate. The gross outstanding
commercial finance receivables are $1.1 billion at December 31, 1996.
The Company will provide financing for products for a particular dealer,
manufacturer or distributor ("Dealer"), in most instances, only if the Company
has also entered into a floorplanning agreement with the manufacturer,
distributor or other vendor of such product. A Dealer requesting the
establishment of a credit line with Green Tree is required to submit an
application and financial information.
Advances made for the purchase of inventory are most commonly arranged in the
following manner: the Dealer will contact the manufacturer and place a purchase
order for a shipment of inventory. If the manufacturer has been advised that
Green Tree is the Dealer's inventory financing source, the manufacturer will
contact Green Tree to obtain an approval number with respect to
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such purchase order. Upon such request, the Company will determine whether (i)
the manufacturer is in compliance with its floorplan agreement, (ii) the Dealer
is in compliance with its program with Green Tree and (iii) such purchase order
is within the Dealer's credit limit. If all of such requirements are met, the
Company will issue an approval number to the manufacturer. The manufacturer will
then ship the inventory and directly submit its invoice for such purchase order
to Green Tree for payment. Interest or finance charges normally begin to accrue
on the Dealer's accounts as of the invoice date. The proceeds of the loan being
made by the Company to the Dealer are paid directly to the manufacturer in
satisfaction of the invoice price and are often funded a number of days
subsequent to the invoice date depending upon the Company's arrangements with
the manufacturer. Inventory inspections are performed to physically verify the
collateral used to secure a Dealer's loan, check the condition of the inventory,
account for any missing inventory and collect any funds due. Approximately two-
thirds of Green Tree's MH dealers are participants in this program.
Asset-Based Receivables are credit facilities provided to certain manufacturers
and distributors which typically involve a revolving line of credit, for a
contractually committed period of time, pursuant to which the borrower may draw
the lesser of the maximum amount of such line of credit or a specifically
negotiated loan availability amount, subject to the availability of adequate
collateral. The loan availability amount is determined by multiplying an agreed
upon advance rate against the value of certain types of assets. In these
facilities, Green Tree will most typically lend against finished inventory and
eligible accounts receivable arising from the sale of such inventory which are
free and clear of other liens and otherwise in compliance with specified
standards. Certain Asset-Based Receivables may also be secured by commercial
real estate.
Consumer
The Company began offering a private label retail credit program in 1996 and has
entered into program agreements with selected retailers to provide competitive
credit card services to the customers of such retailers. Green Tree has
chartered a limited purpose credit card bank to conduct its credit card
business. The bank, Green Tree Retail Services Bank, is a state chartered bank
located in Rapid City, South Dakota. The Company has a retailer approval process
pursuant to which the financial condition, business experience and customer
service reputation are reviewed. The Company also underwrites the credit of
individual customers for approval utilizing a credit scoring system. On December
31, 1996, the Company had $40.8 million in outstanding revolving credit
receivables.
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Pooling, Disposition and Related Sales Structures of Contracts, Net Interest
Margin Certificates and Floorplan Receivables
The Company regularly pools contracts for sale to investors. It is the Company's
policy to sell substantially all of the contracts it originates or purchases
through asset-backed securities. During 1995 and 1994, the Company securitized a
significant portion of its excess servicing rights receivable in the form of
securitized Net Interest Margin Certificates ("NIM Certificates"), and in 1996
and 1995 securitized a significant portion of its outstanding floorplan and
asset-based receivables.
Manufactured housing, home improvement, home equity and consumer and equipment
finance contracts are pooled and sold by the Company through securitized asset
sales which have been either single class or senior/subordinated pass-through
structures. Under certain securitized sales structures corporate guarantees,
bank letters of credit, surety bonds, cash deposits or other equivalent
collateral have been provided by the Company as credit enhancements. 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. 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 and availability and effectiveness
of the various enhancement methods. Customer principal and interest payments are
deposited in separate bank accounts as received by the Company and are held for
monthly distribution to the certificateholders.
In previous years Green Tree sold a substantial portion of its excess servicing
rights receivable, representing net cash flows retained from the securitization
of its manufactured housing contracts, in the form of securitized NIM
Certificates through public offerings. A subordinated interest in those
certificates was retained by the Company. As a result of these transactions,
certain net cash flows that formerly were retained by Green Tree are now passed
through to investors with the exception of a servicing fee which Green Tree
retains out of available monthly net cash flows. Payments on the subordinated
interests retained do not commence until the senior certificateholders have been
paid all principal and interest due them under the terms of the transaction.
Interest will continue to accrue to the balance of such subordinated
certificates until payments commence.
In initially valuing its excess servicing rights receivable, the Company
establishes an allowance for expected losses and calculates that allowance on
the basis of historical experience and management's best estimate of future
credit losses likely to be incurred. If there are defaults on contracts not sold
as part of the NIM Certificate sales, any net losses on the liquidation of
underlying collateral are charged against the reserves that have
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been established. Losses in excess of those projected in the valuation of the
NIM Certificates have the effect of reducing the value of the subordinate
interest retained by Green Tree. The dollar amount of potential contractual
recourse to the Company exceeds both the amount of projected losses factored
into the subordinated certificate valuation and the amount established by the
Company as an "allowance for losses on contracts sold."
During 1995 the Company formed a Master Trust for purposes of selling its
commercial finance receivables. In 1996 and 1995 the Company sold certificates
out of this trust totaling approximately $500 million and $428 million,
respectively. Estimated losses relating to the Company's commercial finance
receivables are recorded at the time the loans are made. Commercial finance
receivables as shown on the balance sheet are net of the related allowance for
losses and net of amounts securitized.
Information on the Company's securitized asset sales is as follows:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Contracts sold:
Manufactured Housing $5,033 $4,020 $3,226 $2,303 $1,716(a)
Home Equity/
Home Improvement 1,324 579 544 43 72
Consumer/Other 1,556 -- -- -- 84
------ ------ ------ ------ ------
7,913 4,599 3,770 2,346 1,872
NIM Certificates -- 308 600 -- --
Floorplan/Asset-Based
Receivables 500 428 -- -- --
------ ------ ------ ------ ------
Total $8,413 $5,335 $4,370 $2,346 $1,872
====== ====== ====== ====== ======
(a) Includes $533 million of contracts purchased from RTC.
Year ended December 31
---------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Weighted average yield to
investors on contracts
sold:
Manufactured Housing 7.4% 7.3% 8.1% 6.5% 7.7%
Home Improvement/
Home Equity 7.2 7.0 8.0 6.4 7.3
Consumer/Other 6.0 -- -- -- 6.4
------ ------ ------ ------ ------
Weighted average yield 7.1% 7.2% 8.1% 6.5% 7.6%
====== ====== ====== ====== ======
</TABLE>
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Servicing
The Company services all of the contracts and consumer and commercial revolving
credit receivables 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.
The following table reflects the composition of the Company's servicing
portfolio at December 31 for the years indicated on contracts it originated.
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Fixed term
contracts $ 18,965 $ 13,314 $ 9,653 $ 7,194 $ 5,623
Revolving
credit 1,108 574 168 -- --
-------- -------- -------- -------- --------
Total $ 20,073 $ 13,888 $ 9,821 $ 7,194 $ 5,623
======== ======== ======== ======== ========
Number of
contracts
serviced 826,863 656,845 511,519 406,393 340,315
</TABLE>
Delinquency and Loss Experience
A fixed term contract is considered delinquent by the Company if any payment of
$25 or more is past due 30 days or more. Commencing in mid-1996, manufactured
housing contracts for which the obligor was in bankruptcy and was current under
their bankruptcy payment plan were generally not considered delinquent.
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 fixed term contracts the Company originated.
<TABLE>
<CAPTION>
At or for the year ended
December 31
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of contracts delinquent(a) 2.33% 1.92% 1.49% 1.55% 1.86%
Repossessed contracts sold(b) 2.05 1.51 1.55 1.87 2.53
Annual net repossession losses(c) .82 .60 .63 .85 1.16
Repossession inventory(d) .69 .51 .43 .51 .58
</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.
The Company considers commercial and consumer revolving credit receivables with
due and unpaid balances in excess of 30 days to be delinquent. At December 31,
1996 delinquent commercial and consumer revolving credit receivables were .14%
and 1.9% of outstandings, respectively.
Insurance
Through certain subsidiaries, the Company markets physical damage insurance on
manufactured homes, certain consumer and equipment products and dealer inventory
which collateralize contracts and receivables serviced by the Company. The
Company also markets term mortgage and credit life insurance to its manufactured
housing, home improvement, home equity and equipment finance customers and
provides retail credit insurance to consumer cardholders. In addition, the
Company owns a reinsurance subsidiary which functions as a reinsurer 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
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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
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net written premiums:
Physical damage $ 91,883 $82,438 $63,979 $48,172 $35,500
Credit/Mortgage
Insurance 12,125 10,154 7,240 5,683 5,303
-------- ------- ------- ------- -------
Total $104,008 $92,592 $71,219 $53,855 $40,803
======== ======= ======= ======= =======
</TABLE>
Regulation
The Company's operations are subject to supervision by various state authorities
(typically state mortgage lending, financial institutions, 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 Title I manufactured home and home improvement
lending programs are subject to compliance with detailed federal regulations
governing originations, servicing, and loss claim payments by the FHA to cover a
portion of losses due to default and repossessions or foreclosures. Other
governmental programs such as VA also contain similar detailed regulations
governing loan origination and servicing responsibilities.
The Federal Consumer Credit Protection Act ("FCCPA") requires, among other
things, a written disclosure showing the cost of credit to debtors when consumer
credit contracts are executed. The Federal Equal Credit Opportunity Act requires
certain disclosures to applicants for credit concerning information that is used
as a basis for denial of credit and 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,
consumer credit 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 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 home equity lending program, the
combination land-and-home program, the
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land-in-lieu program and the home improvement lending program are subject to the
Federal Real Estate Settlement and Procedures Act. In addition, the Company is
subject to the reporting requirements of the Home Mortgage Disclosure Act for
its manufactured home, purchase money mortgage and home improvement lending
products.
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, mortgage
lending and home improvement products, although certain states have enacted
legislation superseding federal law. To be eligible for the federal preemption,
the Company's contract form must comply with certain consumer protection
provisions. The Company offers its products within the limitations set by the
state usury laws and federal preemption of these laws.
The Company has chartered a limited purpose credit card bank, Green Tree Retail
Services Bank, which is subject to regulation by the Federal Deposit Insurance
Corporation and the Department of Banking of the State of South Dakota. The
ownership of the Bank does not subject the Company to regulation by the Federal
Reserve Board as a bank holding company. The Bank is authorized only to engage
in the credit card business.
The regulatory procedures discussed above are subject to changes by the
regulatory authorities. There are no assurances that future regulatory changes
will not occur. These regulatory changes could place additional burdens on the
Company's programs.
Competition and Other Factors
The Company is affected by consumer demand for manufactured housing, home equity
financing, home improvements, consumer and equipment products, and consumer and
commercial revolving credit as well as its insurance products. Consumer and
commercial demand, in turn, are partially influenced by regional trends,
economic conditions and personal preferences. The Company competes primarily
with banks, finance companies, savings and loan associations, and credit unions.
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.
-14-
<PAGE>
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.
Employees
As of December 31, 1996, the Company had 3,769 full-time and 313 part-time
employees and considers its employee relations to be satisfactory. None of its
employees are represented by a union.
Item 2. Properties.
At December 31, 1996, the Company operated 51 manufactured housing regional
service centers and three commercial finance business centers. Such offices are
leased, typically for a term of three to five years, and range in size from
1,700 to 22,000 square feet. The Company also operates a central servicing
center in Rapid City, South Dakota. The lease on this facility is for a term of
five years with an option to purchase and consists of 137,000 square feet. The
Company's home improvement and consumer products divisions lease their main
office in Saint Paul, Minnesota. The lease is for a term of five years and
consists of 125,000 square feet. (See Note I of Notes to Consolidated Financial
Statements for annual rental obligations.) The Company's home equity business
has operations in 5 regional locations and 40 regional satellite offices with a
service center in Mesa, Arizona which opened in February, 1997. The Company owns
the building which houses its equipment finance, retail credit and insurance
businesses and its corporate offices.
Item 3. Legal Proceedings.
The nature of the Company's business is such that it is routinely a party or
subject to items of pending or threatened litigation. Although the ultimate
outcome of certain of these matters cannot be predicted, management believes,
based upon information currently available that the resolution of these routine
legal matters will not result in any material adverse effect on its consolidated
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-15-
<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>
1995 High Low
---- -------- ---------
<S> <C> <C>
First quarter $ 20-1/2 $ 14-3/8
Second quarter 23-5/16 18-3/4
Third quarter 31-7/16 21-11/16
Fourth quarter 32-3/8 25
1996 High Low
---- -------- ---------
First quarter $ 36 $ 23-1/4
Second quarter 35-1/8 30-3/8
Third quarter 39-1/4 30-1/8
Fourth quarter 41-7/8 36-5/8
</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 the
two-for-one stock splits effected in the form of stock dividends in June 1994
and October 1995.
On February 28, 1997, the Company had approximately 1,058 stockholders of record
of its Common Stock including the nominee of The Depository Trust Company which
held approximately 132,960,580 shares of Common Stock.
The Company has paid cash dividends since December 1986. The 1996 quarterly
dividend rate for the first three quarters was $0.0625 per share. In September
1996, the Board of Directors approved an increase in the quarterly dividend rate
to $0.075 per share effective for the December 1996 dividend. 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 a letter
of credit agreement, the Company is subject to restrictions limiting the payment
of dividends and Common Stock repurchases. At December 31, 1996, such payments
were limited to $118,330,000, which represents 50% of consolidated net earnings
for the most recently concluded four fiscal quarter periods less dividends paid.
-16-
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(dollars in thousands except per-share data)
<S> <C> <C> <C> <C> <C>
Income $ 924,111 $ 711,320 $ 497,427 $ 366,680 $ 246,615
Earnings before
income taxes 497,961 409,628 302,131 200,537 118,806
Earnings before
extraordinary
loss(a) 308,736 253,969 181,279 116,423 72,472
Net earnings 308,736 253,969 181,279 116,423 55,015
Earnings per common
share:
Before
extraordinary
loss(a) 2.20 1.81 1.31 .90 .61
Net earnings 2.20 1.81 1.31 .90 .45
Cash dividends per
common share .26 .20 .12 .09 .08
At year-end:
Excess servicing
rights
receivable $1,651,061 $ 764,617 $ 533,182 $ 843,489 $ 640,647
Total assets 3,791,920 2,383,546 1,771,839 1,739,502 1,167,055
Total debt 762,529 383,546 309,319 515,004 376,043
Allowance for
losses on
contracts sold 493,876 163,337 84,016 222,135 189,669
Stockholders'
equity 1,245,454 925,022 725,891 549,429 298,834
</TABLE>
(a) Before extraordinary loss relating to the debt exchange in 1992.
Item 7. Management's Discussion and Analysis.
Introduction
Green Tree Financial Corporation is a diversified financial services company
that provides financing for manufactured homes, home equity, home improvements,
consumer products and equipment and provides consumer and commercial revolving
credit. The Company's insurance agencies market physical damage, term mortgage
life insurance and other credit protection relating to the customers' contracts
it services. In 1996 the Company continued to diversify its operations in a
number of areas, including the addition of a limited-purpose bank for its new
consumer revolving credit product as well as the acquisition of an equipment
leasing business.
-17-
<PAGE>
The Company records "net gains on contract sales" at the time of sale of its
fixed term contracts and defers service income, recognizing it as servicing is
performed. Income from floorplan and asset-based financing is recognized as
realized. 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 discounted to a present value. The subordinated certificates
retained by the Company from the securitized Net Interest Margin Certificate
("NIM Certificate") sales are shown net of projected losses and are included in
excess servicing rights receivable. Excess servicing rights receivable,
excluding the subordinated certificates, 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. Excess servicing
rights receivable is calculated using prepayment, default, and interest rate
assumptions which the Company believes market participants would use. Excess
servicing rights receivable has not been reduced for potential loss provisions
of the sales. 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.
In initially valuing its excess servicing rights receivable, the Company
establishes an allowance for expected losses, based upon historical experience
and management's best estimate of future credit losses likely to be incurred.
The amount of this allowance is reviewed quarterly and adjustments are made if
actual experience or other factors indicate management's estimate of losses
should be revised. While the Company retains a substantial amount of risk of
default on the loan portfolios that it sells, such risk has been substantially
reduced through the sales of the NIM Certificates. The Company believes that its
allowance for losses on contracts sold is adequate and consistent with current
economic conditions as well as historical default and loss experiences of the
Company's entire loan portfolio. The allowance for losses on contracts sold is
shown separately as a liability. The allowance has been discounted using an
interest rate equivalent to the risk-free market rate for securities with a
duration consistent with the estimated timing of losses. The outstanding
security balances of
-18-
<PAGE>
contracts at December 31, 1996 were $1,046,490,000 of GNMA certificates and
$16,784,024,000 related to securitized transactions and whole loan sales.
The Company records the amount to be remitted to the investors/owners of the
contracts or investor certificates 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 has provided the investors in pools of contracts with a variety of
additional forms of credit enhancements on its securitized sales. These credit
enhancements include corporate guarantees, letters of credit 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 additional credit enhancement.
The carrying value of the subordinated interest in the NIM Certificates retained
by the Company is determined using prepayment, default and interest rate
assumptions generally consistent with those used in the marketplace. The
subordinated certificates are shown net of the effect of projected losses.
Payments on the subordinated certificates will not be made until such time as
the senior certificateholders have been paid all principal and interest due them
under the terms of the transactions. As such, interest on the subordinated
certificates will continue to accrue to the outstanding balance until payments
commence. Green Tree collects a monthly servicing fee on the underlying contract
balance to the extent that adequate funds are available based on cash flows
provided by each underlying securitized sale.
The Company's expectations used in calculating its excess servicing rights
receivable and allowance for losses on contracts sold, as well as the value of
the subordinated interest in the NIM Certificates, 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 current earnings. The Company
reflects favorable portfolio experience prospectively as realized.
-19-
<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 1995 1994
--------------------------- to to
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income:
Net gains on contract
sales 101.9% 94.4% 91.4% 40.2% 47.7%
Provision for losses
on contract sales (38.1) (31.4) (27.0) 57.7 65.9
Interest 23.3 24.8 22.4 22.3 58.0
Service 7.9 7.5 8.1 36.8 33.7
Commissions and other 5.0 4.7 5.1 38.5 29.3
----- ----- -----
Total income 100.0% 100.0% 100.0%
===== ===== =====
Expenses:
Interest 7.6% 8.1% 8.4% 22.2 37.7
Cost of servicing 5.7 5.5 6.2 35.4 26.9
General and
administrative 32.8 28.8 24.7 47.7 67.1
Earnings before
income taxes 53.9 57.6 60.7 21.6 35.6
Net earnings 33.4 35.7 36.4 21.6 40.1
</TABLE>
Net gains on contract sales increased 40.2% and 47.7% for the years ended
December 31, 1996 and 1995, respectively, as a result of increased dollar volume
of contracts sold, and longer average terms on the manufactured home, home
equity and home improvement contracts sold in 1996. This increase in net gains
on contract sales was partially offset by decreased interest rate spreads on the
contracts sold and a change in mix of contracts sold. During 1996 and 1995,
total contract sales increased $3,314,270,000 or 72.1% and $829,317,000, or
22.0%, respectively. The Company's net gains on contract sales in 1995 reflect
higher interest rate spreads on contracts sold while 1994's net gain on contract
sales was partially offset by decreased interest rate spreads on contracts sold.
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
-20-
<PAGE>
and sale of contracts, the Company's ability to sell contracts is generally not
affected by changes in interest rates, although the amount of earnings may be
affected. Average excess servicing spreads were 3.6%, 3.8% and 3.1% for 1996,
1995 and 1994, respectively. Excess servicing spreads decreased during 1996 as
the rates on the Company's sales of securitized loans increased faster than the
rates on the contracts originated by the Company, partially offset by a changing
mix of contracts sold.
The increase in the provision for losses on contract sales of 57.7% in 1996
reflects the growth in total contract sales and the Company's increased
provision for losses on manufactured housing contract sales as a percentage of
contracts sold. The increased loss provision as a percentage of manufactured
housing contracts sold is a result of increasing average contract terms and the
changing mix of originations to loans which have a lower down payment. The 65.9%
increase in the provision for losses on contract sales during 1995 is a result
of increasing average contract terms and the changing mix of originations to a
higher percentage of conventional contracts and to loans which have a lower down
payment. An important factor in controlling the Company's credit risk is the
geographic dispersion of the portfolio. At December 31, 1996, 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 often
more severely felt in certain geographic areas than others.
In previous years the Company sold a substantial portion of its excess servicing
rights receivable, representing net cash flows retained from the securitization
of its manufactured housing contracts, in the form of securitized NIM
Certificates through public offerings. Green Tree Securitized Net Interest
Margin Trusts 1994-A, 1994-B and 1995-A, sold certificates representing
approximately 72% to 78% of the estimated present value of future excess
servicing cash flows derived from the Company's sales of certain manufactured
housing contracts between 1978 and 1995. The estimated present value of these
future excess servicing cash flows was previously recorded on the Company's
balance sheet as part of "Excess servicing rights receivable", "Contracts and
collateral" and "Allowance for losses on contracts sold". The remaining
interests retained by the Company, representing subordinated certificates,
continue to be recorded as part of excess servicing rights receivable and are
shown net of projected losses.
The manufactured housing market experienced a 7% increase in new home shipments
during 1996 compared to 1995. The Company continues to benefit from this
increase as its dollar volume of MH contract originations rose 17.4% during 1996
over 1995 to $4,882,018,000, and believes that it is maintaining its market
share of contracts for financing new manufactured homes. The Company's dollar
volume of new manufactured housing contract originations rose 15.9% during
-21-
<PAGE>
1996 over 1995. The dollar volume of previously owned MH contract originations
also rose 39.1% year over year. Although small compared to total volume, the
dollar volume of refinanced contracts decreased in 1996 compared to 1995. In
addition to the increase in the number of new MH contracts originated by the
Company, the average contract size has also increased due to a shift in the
Company's manufactured home financing to more land-and-home contracts and price
increases by the MH manufacturers.
The dollar volume of home equity/home improvement contracts rose 138% during
1996 over 1995 to $1,490,720,000. Consumer products and other contract
originations rose 153% to $1,192,579,000 in 1996. The overall growth in these
originations resulted from expanding the number of relationships with dealers
and the growth in the Company's home equity originations network.
Interest income is realized from the amortization of the present value discount
relating to excess servicing rights receivable, commercial finance receivables,
cash deposits and short-term investments, as well as contract and other
revolving credit inventory. Interest income grew 22.3% during 1996 over 1995
primarily from increased earnings on the Company's commercial finance
receivables. Amortization of the present value discount during 1996 increased in
comparison to 1995 due to the growth of the Company's average excess servicing
rights receivable. Contracts held for sale during the year was higher on average
than during 1995 due to higher production levels, resulting in an increase in
interest income. Interest income increased 58% for the year ended December 31,
1995 compared to 1994. Interest income relating to the increased earnings on the
Company's commercial finance receivables during 1995 increased compared to 1994.
The Company's interest income was lower in 1994 primarily as a result of the NIM
certificate sales. Earnings on short-term investment activity relating to the
cash generated by the NIM Certificate sales and an increase in average contracts
held for sale due to substantially higher production levels during 1994 also
partially offset that decrease.
Service income increased in 1996, 1995 and 1994 by 36.8%, 33.7% and 28.3%,
respectively. These increases resulted from the 38.8%, 36.5% and 32.4% growth in
the Company's total average servicing portfolio for 1996, 1995 and 1994,
respectively. The Company expects service income to continue to increase as its
portfolio grows.
Commissions and other income, which includes commissions earned on new insurance
policies written and renewals on existing policies, as well as other income from
late fees, grew during 1996, 1995 and 1994 primarily as a result of the increase
in net written insurance premiums as the Company's contract originations and
servicing portfolio continue to grow.
-22-
<PAGE>
Interest expense increased 22.2% and 37.7% during 1996 and 1995, respectively,
as a result of the Company maintaining a significantly higher level of
borrowings to fund its loan originations and commercial finance portfolio. In
1994 interest expense was lower as the Company maintained a lower level of
borrowings to fund its loan originations and as a result of converting a
substantial portion of its excess servicing rights receivable to cash through
the NIM Certificate sales.
Green Tree's dollar amount of cost of servicing has increased over the past
three years as its total average servicing portfolio during the years ended
December 31, 1996, 1995 and 1994 grew 38.8%, 36.5% and 32.4%, respectively. The
Company's cost of servicing as a percentage of contracts serviced has decreased
over each of the past three years.
General and administrative expenses rose 47.7% and 67.1% during 1996 and 1995,
respectively. The primary reason for these increases in both 1996 and 1995
relates to the compensation of the chief executive officer pursuant to the terms
of an employment agreement, the majority of such expense being paid in stock. As
a percentage of contract originations, however, general and administrative
expenses have remained relatively constant.
The Company's effective tax rate during 1996 and 1995 was 38%. The effective tax
rate in 1994 was 40%.
The Company is affected by consumer demand for manufactured housing, home equity
financing, home improvements, and consumer and equipment products and consumer
and commercial revolving credit as well as its insurance products. Consumer and
commercial demand, in turn, are 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 its
servicing portfolio.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) was issued in October 1995 and requires that the
impact of the fair value of employee stock-based compensation plans on net
income and earnings per share be disclosed on a pro forma basis in a footnote to
the consolidated financial statements for awards granted in fiscal years
beginning after December 15, 1994, if the accounting for such awards continues
to be in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25). Alternatively, SFAS No. 123 permits
a company to record the fair value of employee stock-based compensation plans as
a component of compensation expense in the statement of income as of the date of
grant of awards related to such plans. Adoption of SFAS No. 123 is required for
fiscal years beginning after December
-23-
<PAGE>
15, 1994. In adopting SFAS No. 123, the Company has disclosed the impact on net
income and earnings per share on a pro forma basis in a footnote to the
consolidated financial statements.
Inflation has not had a material effect on the Company's income or earnings over
the past three fiscal years.
Capital Resources and Liquidity
The Company'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.
Under certain securitized sales structures, corporate guarantees, bank letters
of credit, surety bonds, cash deposits or other equivalent collateral have been
provided by the Company as credit enhancements. 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. 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 and availability and effectiveness of the various
enhancement methods. During 1996, the Company used a senior/subordinated
structure for each of its ten manufactured home loan sales and enhanced a
portion of the subordinated certificates sold with a corporate guarantee. During
1996, the Company's home improvement and home equity loan sales included two
separate but cross-collateralized loan pools, both of which employed a
senior/subordinated structure with a limited guarantee on a portion of the
subordinate certificates. The Company's first quarter sale of consumer products
and equipment finance loans employed a multi-class credit tranched grantor trust
structure with a limited corporate guarantee on the most junior tranche. In the
second and third quarters of 1996, the Company's consumer products and equipment
finance loan sales employed a multi-class credit tranched owner trust structure
with floating rate senior certificates and a limited corporate guarantee on the
most junior fixed rate certificates. In addition, the Company completed, in the
fourth quarter of 1996, a sale of consumer product, equipment finance, non-lien
home improvement and certain home equity loans which employed a multi-class
credit-tranched owner trust structure with fixed and floating rate senior
certificates and a limited corporate guarantee on the most junior fixed rate
certificates. The Company also sold in the fourth quarter of 1996 approximately
$500 million of floorplan and asset-based receivables through a revolving trust.
-24-
<PAGE>
Another liquidity source for the Company is its ability to sell portions of its
excess servicing rights receivable in the form of securitized NIM Certificates.
During 1995 and 1994 the Company sold $308,000,000 and $600,400,000 of NIM
Certificates, respectively. These certificates represent approximately 72% to
78% of the estimated present value of future excess servicing cash flows derived
from the Company's sales of certain manufactured housing contracts between 1978
and 1995. Net proceeds to the Company from these sales were used to reduce
short-term borrowings supporting ongoing loan originations.
Servicing fees and net interest payments collected increased during the year
ended December 31, 1996 and 1995 and decreased during 1994 as a result of the
timing and size of the NIM Certificate sales, the proceeds of which are shown
separately on the Company's statements of cash flows. Net interest payments
collected on the transactions underlying the NIM Certificates, after certain
deductions, are remitted directly to the senior certificateholders. Payments on
the subordinated certificates will not commence until the senior
certificateholders have been paid in full. For the year ended December 31, 1996,
1995 and 1994, servicing fees and net interest payments collected consist of
servicing fees collected on the NIM Certificates, plus servicing fees and net
interest payments on all existing securitizations in which the Company has not
yet sold a portion of the related excess servicing rights.
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.
Interest income on cash, commercial finance receivables and investments
increased during 1996 and 1995 primarily as a result of the increase in
commercial finance receivables outstanding. Gross commercial finance receivables
outstanding at December 31, 1996, 1995 and 1994 were $1.1 billion, $574 million
and $168 million, respectively.
Repossession losses, net of recoveries, increased in 1996 due to the impact of
the Company's growing portfolio. Reported losses were reduced in 1996, 1995 and
1994 as a result of the sale of the NIM Certificates. There were no additional
sales of NIM Certificates in 1996. Repossession losses on contracts whose net
cash flows were sold as part of these transactions are not borne by the Company
but, instead, reduce the amount of cash available to pay the senior
certificateholders. To the extent that such losses should exceed projected
levels, the impact would first be borne by Green Tree through charges to the
valuation of its subordinated certificates, and thereafter by the holders of the
senior certificates, not through charges to the allowance for losses on
-25-
<PAGE>
contracts sold. In the future, repossession losses net of recoveries will
continue to include activity relating to all future securitizations and GNMA
pools in which the Company does not sell or has not yet sold a portion of the
related excess servicing rights.
During 1995, the Company repurchased 2,051,000 shares of its common stock for
$53,913,000. These shares are currently held as treasury shares. Dividends paid
by the Company increased 30% in 1996 compared to 1995 as the Company's 1996
quarterly average dividend rate increased 29% over the 1995 rate.
Net cash provided by operating activities increased significantly in 1996
compared to 1995 as the Company began securitizing its home equity, consumer and
equipment loans. Net cash from operating activities decreased in 1995 over 1994
as a result of increased volumes of contract purchases and commercial finance
loans disbursed. In 1994, proceeds from the sale of contracts was greater than
the purchase of contracts held for sale as the Company began the securitization
of home improvement loans.
In 1996, net cash used for investing activities included the acquisition of the
net assets of FINOVA Acquisition I, Inc. In 1995 net cash used for investing
activities included leasehold improvements on its Rapid City servicing center
and in 1994, the renovation of certain floors in its corporate office building
and the buyout and upgrade of the Company's mainframe computer.
Net cash provided by financing activities was positive in 1996 as borrowings on
credit facilities and proceeds from the issuance of common stock exceeded debt
repayments and dividends. Cash used for financing activities in 1995 was a
result of the common stock repurchases, a 73.3% increase in the common stock
dividend rate and the retirement of the senior subordinated debentures in June.
The Company used cash from financing activities during 1994 as it repaid all of
its borrowings on credit facilities and increased its common stock dividend rate
33.3% in May.
The Company has a $500,000,000 unsecured bank credit agreement. This credit
facility is a three-year committed revolving line of credit which expires April
15, 1999. In addition, the Company currently has $1.8 billion in master
repurchase agreements with various investment banking firms for the purpose of
financing its contract and commercial finance loan production. At December 31,
1996, the Company had $39,000,000 of borrowings outstanding under the unsecured
bank credit agreement and no borrowings outstanding under the repurchase
agreements. There was $1,800,000,000 available, subject to the availability of
eligible collateral. The master repurchase agreements generally provide for
annual terms that are extended each quarter by mutual agreement of the parties
for an additional annual term based upon receipt of updated quarterly financial
information from the Company. The Company believes that these agreements will
continue to be renewed.
-26-
<PAGE>
The Company also has a commercial paper program through which it is authorized
to issue up to $1 billion in notes of varying terms (not to exceed 270 days) to
meet its liquidity needs. This program is backed by the bank credit agreement
and master repurchase agreements referred to above. As of December 31, 1996, the
Company had issued and outstanding, net of interest discount, $431,242,000 in
notes under this program. Commercial paper is expected to be an ongoing source
of liquidity for purposes of meeting the Company's funding needs between sales
of its contract and commercial loan production.
Other Matters
Certain information included in this Form 10-K and Annual Report may include
"forward-looking" information, as defined in the Private Securities Litigation
Reform Act of 1995 (the "Act"). Such forward-looking information may involve
risks or uncertainties which are described in the Cautionary Statements
contained in the Company's Form 8-K filed with the Securities and Exchange
Commission on July 12, 1996. Investors are specifically referred to the
Cautionary Statements for a discussion of factors which could affect the
Company's operations and financial performance. Factors referenced in the
Cautionary Statements include: prevailing economic conditions; ability to access
capital resources; short-term interest rate fluctuations; the level of defaults
and prepayments on loans made by the Company; competition; and regulatory
changes. Any forward looking information is based upon management's reasonable
estimate of future results or trends. The Company does not undertake, and the
Act specifically relieves the Company from, any obligation to update any
forward-looking statements.
-27-
<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, 1996, 1995 AND 1994
--------------------------------------------
-28-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Green Tree Financial Corporation
Saint Paul, Minnesota:
We have audited the accompanying consolidated balance sheets of Green Tree
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996 and
the financial statement schedule listed in the Index at Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Minneapolis, Minnesota
January 24, 1997
-29-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31
--------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note A) $ 442,071,000 $ 295,767,000
Cash deposits, restricted (Note F) 171,484,000 159,311,000
Other investments (Note A) 11,925,000 19,880,000
Receivables:
Excess servicing rights
(Notes A and B) 1,651,061,000 764,617,000
Lease (Note B) 570,407,000 --
Commercial finance (Note B) 212,920,000 141,793,000
Revolving credit (Note B) 40,803,000 --
Other 85,503,000 52,546,000
Contracts and collateral
(Notes C, E and F) 453,008,000 884,303,000
Property, furniture and fixtures
(Note D) 77,859,000 57,104,000
Goodwill (Note A) 58,950,000 --
Other assets 15,929,000 8,225,000
-------------- --------------
Total assets $3,791,920,000 $2,383,546,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable (Note E) $ 472,181,000 $ 93,662,000
Senior/Senior subordinated
notes (Note E) 290,348,000 289,884,000
Allowance for losses on contracts
sold (Notes A and F) 493,876,000 163,337,000
Accounts payable and accrued
liabilities 404,427,000 266,131,000
Investor payable 346,272,000 238,448,000
Income taxes, principally deferred
(Note K) 539,362,000 407,062,000
-------------- --------------
Total liabilities 2,546,466,000 1,458,524,000
Commitments and contingencies (Notes F and I)
Stockholders' equity (Notes E and G):
Common stock, $.01 par; authorized
400,000,000 and 150,000,000 shares,
respectively, issued 139,782,706
and 137,534,266 shares, respectively 1,398,000 1,375,000
Additional paid-in capital 373,573,000 323,564,000
Retained earnings 926,695,000 653,996,000
Minimum pension liability adjustments (2,299,000) --
-------------- --------------
1,299,367,000 978,935,000
Less treasury stock, 2,051,000 shares
at cost (53,913,000) (53,913,000)
-------------- --------------
Total stockholders' equity 1,245,454,000 925,022,000
-------------- --------------
Total liabilities and
stockholders' equity $3,791,920,000 $2,383,546,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
-30-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INCOME:
Net gains on contract
sales $ 941,486,000 $ 671,741,000 $ 454,831,000
Provision for losses on
contract sales (351,743,000) (223,039,000) (134,416,000)
Interest 215,315,000 175,990,000 111,376,000
Service 73,263,000 53,572,000 40,077,000
Commissions and other 45,790,000 33,056,000 25,559,000
------------- ------------- -------------
924,111,000 711,320,000 497,427,000
EXPENSES:
Interest 70,050,000 57,313,000 41,619,000
Cost of servicing 53,022,000 39,168,000 30,857,000
General and administrative 303,078,000 205,211,000 122,820,000
------------- ------------- -------------
426,150,000 301,692,000 195,296,000
------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES 497,961,000 409,628,000 302,131,000
INCOME TAXES (Note K) 189,225,000 155,659,000 120,852,000
------------- ------------- -------------
NET EARNINGS $ 308,736,000 $ 253,969,000 $ 181,279,000
============= ============= =============
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $2.20 $1.81 $1.31
===== ===== =====
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 140,561,830 140,089,656 138,668,338
</TABLE>
See notes to consolidated financial statements.
-31-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Additional Minimum Total
Common paid-in Treasury Retained pension stockholders'
stock capital stock earning liability equity
---------- --------- --------- --------- ---------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 $1,340 $285,726 $ -- $262,363 $ -- $ 549,429
Common stock issuance of
1,200,000 shares 12 11,006 -- -- -- 11,018
Minimum pension liability
adjustments -- --
Dividends on common stock -- -- -- (15,835) -- (15,835)
Net earnings -- -- -- 181,279 -- 181,279
------ -------- -------- -------- ------- ----------
BALANCES, December 31, 1994 1,352 296,732 -- 427,807 -- 725,891
Common stock issuance of
2,300,000 shares 23 26,832 -- -- -- 26,855
Cost of 2,051,000 shares of
treasury stock acquired -- -- (53,913) -- -- (53,913)
Minimum pension liability
adjustments -- --
Dividends on common stock -- -- -- (27,780) -- (27,780)
Net earnings -- -- -- 253,969 -- 253,969
------ -------- -------- -------- ------- ----------
BALANCES, December 31, 1995 1,375 323,564 (53,913) 653,996 -- 925,022
Common stock issuance of
2,300,000 shares 23 50,009 -- -- -- 50,032
Minimum pension liability
adjustments (2,299) (2,299)
Dividends on common stock -- -- -- (36,037) -- (36,037)
Net earnings -- -- -- 308,736 -- 308,736
------ -------- -------- -------- ------- ----------
BALANCES, December 31, 1996 $1,398 $373,573 $(53,913) $926,695 $(2,299) $1,245,454
====== ======== ======== ======== ======= ==========
</TABLE>
See notes to consolidated financial statements.
-32-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Servicing fees and net
interest payments collected $ 253,753,000 $ 165,886,000 $ 93,119,000
Net proceeds from sale of net
interest margin certificates -- 302,312,000 583,800,000
Net principal payments
collected 77,810,000 40,571,000 693,000
Interest on contracts 56,857,000 70,169,000 61,007,000
Interest on cash, commercial
finance receivables and
investments 69,685,000 55,328,000 15,002,000
Commissions 26,340,000 18,616,000 16,609,000
Other 6,161,000 2,558,000 2,491,000
--------------- --------------- ---------------
490,606,000 655,440,000 772,721,000
--------------- --------------- ---------------
Cash paid to employees
and suppliers (252,625,000) (171,935,000) (136,796,000)
Interest paid on debt (66,381,000) (55,214,000) (38,604,000)
Repossession losses net
of recoveries (35,831,000) (6,351,000) (1,538,000)
Income taxes paid (44,182,000) (37,496,000) (28,385,000)
FHA insurance premiums (2,377,000) (2,074,000) (2,181,000)
--------------- --------------- ---------------
(401,396,000) (273,070,000) (207,504,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY
OPERATIONS 89,210,000 382,370,000 565,217,000
Purchase of contracts
held for sale (7,564,745,000) (5,210,560,000) (3,718,545,000)
Net proceeds from sale of
contracts held for sale 7,864,008,000 4,562,468,000 3,764,569,000
Principal collections on
contracts held for sale 144,716,000 120,989,000 71,382,000
Commercial finance loans
disbursed (2,868,508,000) (1,579,568,000) (368,873,000)
Principal collections on
commercial finance loans 2,289,916,000 1,187,431,000 233,771,000
Net proceeds from sale of
commercial finance loans 499,115,000 426,304,000 --
Cash deposits provided as
credit enhancements (27,285,000) (18,956,000) (36,176,000)
Cash deposits returned 7,612,000 5,702,000 14,936,000
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED
FOR) OPERATING ACTIVITIES 434,039,000 (123,820,000) 526,281,000
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary (620,566,000) -- --
Purchase of property,
furniture and fixtures (31,231,000) (31,478,000) (18,911,000)
Net sales (purchases) of
investment securities 7,955,000 1,040,000 (1,904,000)
--------------- --------------- ---------------
NET CASH USED FOR
INVESTING ACTIVITIES (643,842,000) (30,438,000) (20,815,000)
--------------- --------------- ---------------
</TABLE>
(continued)
-33-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(continued)
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit
facilities 7,514,398,000 4,633,237,000 1,418,011,000
Repayments on credit
facilities (7,128,379,000) (4,539,575,000) (1,624,922,000)
Common stock issued 6,125,000 2,346,000 2,562,000
Common stock repurchased -- (53,913,000) --
Dividends paid (36,037,000) (27,780,000) (15,835,000)
Payments of debt -- (20,246,000) --
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED
FOR) FINANCING ACTIVITIES 356,107,000 (5,931,000) (220,184,000)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 146,304,000 (160,189,000) 285,282,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 295,767,000 455,956,000 170,674,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 442,071,000 $ 295,767,000 $ 455,956,000
=============== =============== ===============
RECONCILIATION OF NET EARNINGS TO
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net earnings $ 308,736,000 $ 253,969,000 $ 181,279,000
Deferred taxes 133,630,000 109,686,000 90,572,000
Depreciation and
amortization 22,427,000 13,518,000 9,762,000
Net proceeds from sale of
net interest margin
certificates -- 302,312,000 583,800,000
Net contract payments
collected, less excess
servicing rights recorded (394,021,000) (331,882,000) (302,610,000)
Amortization of deferred
service income (30,594,000) (14,689,000) (6,599,000)
Net amortization of present
value discount (77,223,000) (51,267,000) (33,316,000)
Net increase in cash
deposits (19,673,000) (13,254,000) (21,240,000)
Sales and principal collections,
net of purchase of contracts
held for sale 443,978,000 (527,103,000) 117,406,000
Commercial finance loans
disbursed, net of sales
and principal collections (79,477,000) 34,167,000 (135,102,000)
Net discount on sale of
loans 50,900,000 38,852,000 36,816,000
Increase in tax accrual 55,595,000 45,973,000 30,280,000
Other 19,761,000 15,898,000 (24,767,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED
FOR) OPERATING ACTIVITIES $ 434,039,000 $ (123,820,000) $ 526,281,000
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
-34-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------
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.
Securitized Asset Sales
The Company originates sales contracts for manufactured homes, home
improvements, consumer products and equipment financing, and also
originates home equity and mortgage loans. These contracts and loans are
typically sold at or near par to investors. The Company retains the
servicing rights and participation in certain excess cash flows from the
contracts and 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 which the Company believes market participants would use for
similar instruments. The excess servicing rights receivable has not been
reduced for potential losses under recourse provisions of the sales. The
allowance for losses on contracts sold is shown separately as a liability
on the Company's consolidated 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 consistent with the estimated timing of losses.
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates are
revised as necessary for any reductions in expected future cash flows
arising from adverse prepayment and loss experience by recording a charge
to current earnings.
The Company has also sold portions of its excess servicing rights
receivable to investors in the form of securitized Net Interest Margin
("NIM Certificates") Certificates. The subordinated certificates retained
by the Company are included in excess servicing rights receivable at
present value, net of expected losses. No gain or loss was recorded as a
result of these
-35-
<PAGE>
transactions, such certificates being valued in the marketplace using
prepayment, default and interest rate assumptions generally consistent with
those recorded by the Company.
Interest payments received on the contracts, less interest payments paid to
investors (including payments on the NIM Certificates), are reported on the
consolidated statements of cash flows as "servicing fees and net interest
payments collected." Principal payments received on the contracts, less
non-defeasance principal payments paid to investors, are 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 and recognizes income over the life of
the contracts. The Company discounts cash flows on its sales at the rate
it believes a purchaser would require as a rate of return. The cash flows
were discounted to present value using discount rates which averaged
approximately 9.2% in 1996, 9.4% in 1995 and 9.5% in 1994. The Company has
developed its assumptions based on experience with its own portfolio,
available market data (including market estimates utilized in the sales of
the NIM Certificates) and ongoing consultation with its investment bankers.
The Company believes that the assumptions used in estimating cash flows are
similar to those which would be used by an outside investor.
The Company's commercial finance receivables generally represent revolving
credit and asset-based financing arrangements with dealers, manufacturers
and other commercial entities for which a loss reserve is established at
the time of origination. During 1996 and 1995 a portion of these
receivables were sold in the form of a revolving Master Trust. No gain or
loss was recorded at the time of sale. The Company's policy is to record
income on these receivables as realized.
Depreciation
Property, furniture and fixtures are carried at cost and are depreciated
over their estimated useful lives on a straight-line basis.
Earnings per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed by dividing
net earnings 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 splits the Company
effected in June 1994 and October 1995. Earnings per share and fully
diluted earnings per share are substantially the same.
-36-
<PAGE>
Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB No.
25 and provide pro forma disclosure provisions of SFAS No. 123.
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 include United States
Treasury funds, commercial paper or bank money market accounts. At December 31,
1996 and 1995, cash of approximately $341,936,000 and $239,617,000,
respectively, was held in trust for subsequent payment to investors. In
addition, cash of approximately $3,101,000 and $2,809,000 was restricted and
held by the Company's subsidiaries pursuant to master repurchase agreements and
government requirements at December 31, 1996 and 1995, respectively.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, generally 20 years.
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 and Agency Bonds, and certificates of deposit,
and are stated at cost plus accrued interest, which approximates market value.
At December 31, 1996 and 1995, investments of approximately $11,925,000 and
$19,880,000, respectively, were held in trust for FDIC requirements and policy
and claim reserves and a master repurchase agreement for the Company's bank and
insurance subsidiaries.
Allowance for Losses
The allowance for losses on contracts sold represents the Company's best
estimate of future credit losses likely to be incurred over
-37-
<PAGE>
the entire life of contracts sold. Amounts representing losses on the contracts
underlying the NIM Certificates are reflected in the carrying value of the
subordinated certificates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. Receivables
Excess Servicing Rights Receivable
Excess servicing rights receivable consists of net excess cash expected to be
collected over the life of the contracts sold. In previous years, portions of
these gross cash flows were sold to investors through securitized NIM
Certificate sales in which the Company retained a subordinated interest. As of
December 31 excess servicing rights receivable consisted of:
<TABLE>
<CAPTION>
Excess
Servicing
Gross NIM Rights
Cash Flows Certificates Receivable
---------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C>
1996
- ----
Gross cash flows receivable
on contracts sold $ 6,954,175 $(2,631,994) $ 4,322,181
Less:
Prepayment reserve (3,187,749) 989,733 (2,198,016)
FHA insurance and
other fees (39,835) 31,022 (8,813)
Deferred service income (471,609) 190,308 (281,301)
Discount to present value (952,514) 447,217 (505,297)
Subordinated interest in
NIM Certificates -- 322,307 322,307
----------- ----------- -----------
$ 2,302,468 $ (651,407) $ 1,651,061
=========== =========== ===========
1995
- ----
Gross cash flows receivable
on contracts sold $ 4,706,540 $(3,299,121) $ 1,407,419
Less:
Prepayment reserve (1,918,532) 1,243,757 (674,775)
FHA insurance and
other fees (52,369) 41,269 (11,100)
Deferred service income (337,184) 244,732 (92,452)
Discount to present value (769,214) 586,082 (183,132)
Subordinated interest in
NIM Certificates -- 318,657 318,657
----------- ----------- -----------
$ 1,629,241 $ (864,624) $ 764,617
=========== =========== ===========
</TABLE>
-38-
<PAGE>
In previous years, the Company sold a substantial portion of its excess
servicing rights receivable in the form of securitized NIM Certificates. The
Securitized Net Interest Margin Trusts sold certificates representing
approximately 72% to 78% of the estimated present value of future excess
servicing cash flows derived from the Company's sales of certain manufactured
housing contracts between 1978 and 1995. The remaining interests in the Net
Interest Margin Trusts were retained by the Company as subordinated interests.
This subordinated interest will continue to accrue interest as no payments of
principal or interest will be made until the senior certificateholders have been
paid in full. The carrying value of the subordinated interest is analyzed
quarterly to determine the impact, if any, of adverse prepayment or loss
experience. However, the carrying value will continue to reflect the discount
rates utilized at the time of sale.
The carrying value of excess servicing rights receivable is analyzed quarterly
to determine the impact of prepayments, if any.
During the years ended December 31, 1996, 1995 and 1994, the Company sold
$7,913,357,000, $4,586,851,000 and $3,724,102,000, respectively, of contracts in
various securitized transactions, and during 1995 and 1994 the Company sold
$308,000,000 and $600,400,000 of NIM Certificates, respectively. At December 31,
1996 and 1995, the outstanding principal balance of all loans sold was
$16,784,024,000 and $10,941,384,000, respectively.
During the years ended December 31, 1995 and 1994, the Company sold $12,236,000
and $45,668,000, respectively, of GNMA guaranteed certificates secured by FHA-
insured and VA-guaranteed contracts. There were no such sales made by the
Company in 1996. At December 31, 1996 and 1995, the outstanding principal
balance on GNMA certificates issued by the Company was $1,046,490,000 and
$1,290,750,000, respectively.
Lease Receivables
Generally all lease receivables are direct financing leases as defined in FASB
No. 13. The carrying value of lease receivables represents the present value of
both the future minimum lease payments and related residual value less an
allowance for expected losses. The allowance at December 31, 1996 was
$13,334,000. Revenue is recognized in interest income as a constant percentage
return on the asset carrying value.
Commercial Finance Receivables
The Company's commercial finance receivables generally represent dealer
floorplan and asset-based financing arrangements with dealers, manufacturers and
other commercial entities. Commercial
-39-
<PAGE>
real estate loans are also included in the commercial finance receivables. A
loss reserve is established at the time of origination. As of December 31, 1996
and 1995 the outstanding principal balance on commercial finance receivables
serviced by the Company was $1,067,600,000 and $574,100,000, respectively. The
commercial finance allowance for doubtful accounts pertaining to unsold
commercial finance receivables at December 31, 1996 and 1995 was $687,000 and
$1,071,000, respectively. During 1996 and 1995 the Company sold $500,300,000 and
$427,800,000, respectively, of these receivables in the form of a revolving
Master Trust.
Revolving Credit Receivables
- ----------------------------
Revolving credit receivables consists of retail credit card arrangements with
merchants and dealers and their customers. As of December 31, 1996, the year in
which this business commenced, the outstanding balance totaled $40,803,000. The
allowance for doubtful accounts for revolving credit receivables is adjusted
monthly based on the aging of the revolving credit receivables. The allowance
for doubtful accounts was $239,000 at December 31, 1996.
<TABLE>
<CAPTION>
C. Contracts and Collateral
Contracts and collateral consist of:
December 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Contracts held for sale $359,858,000 $844,573,000
Other contracts held 25,680,000 17,095,000
Collateral in process
of liquidation 57,155,000 12,418,000
Contracts held as collateral 10,315,000 10,217,000
------------ ------------
$453,008,000 $884,303,000
============ ============
</TABLE>
Collateral in process of liquidation includes collateral related only to
contracts which have not been included in the MH securitizations underlying the
NIM Certificate sales. Gross collateral in process of liquidation was
$166,241,000 and $89,007,000 as of December 31, 1996 and 1995, respectively.
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).
-40-
<PAGE>
D. Property, Furniture and Fixtures
Property, furniture and fixtures consist of:
<TABLE>
<CAPTION>
December 31
Estimated ----------------------------
useful life 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Cost:
Building 35 years $ 20,648,000 $ 21,453,000
Furniture and equipment 3-7 years 87,686,000 54,086,000
Leasehold improvements 3-10 years 11,779,000 6,391,000
Land and improvements 1,724,000 1,724,000
------------ ------------
121,837,000 83,654,000
Less accumulated depreciation (43,978,000) (26,550,000)
------------ ------------
$ 77,859,000 $ 57,104,000
============ ============
</TABLE>
Depreciation expense for 1996, 1995 and 1994 was $17,932,000, $10,956,000 and
$5,656,000, respectively.
E. Debt
The Company has a $1,000,000,000 commercial paper program which is used
primarily for purposes of financing its loan production inventory prior to sale
of those receivables in the form of securitization. This program is backed by
both committed bank facilities and master repurchase agreements with various
investment banking firms. As of December 31, 1996 the Company had notes
outstanding net of interest discount totaling $431,242,000 which bore interest
at a weighted average discount rate of 5.68%.
The Company has a three-year unsecured revolving line of credit totaling
$500,000,000 which expires April 15, 1999. As of December 31, 1996 it had
borrowings totaling $39,000,000 outstanding under this facility with a weighted
average interest rate of 5.63%. The credit agreement contains certain
restrictive covenants which include maintenance of a minimum net worth (as
defined in the agreement) and a debt to net worth ratio not to exceed 5 to 1. In
addition, master repurchase agreements are in place with a variety of investment
banking firms totaling $1,800,000,000 which are subject to the availability of
eligible collateral. There were no outstanding balances under these facilities
as of December 31, 1996.
The Company has a $2,000,000 promissory note which contains a balloon payment
due on April 9, 2001, bearing interest at an annual rate of 2%. A balance of
$1,939,000 was outstanding on this note at December 31, 1996.
The Company also has a $250,000,000 medium term note program under which it may
issue senior notes bearing either fixed or floating rates of interest with
maturities in excess of nine months. Notes were outstanding under this program
as of December 31, 1996 totaling $26,650,000 bearing a weighted average rate of
interest of 7.27% with maturities ranging from 1998 to 2003. Interest on these
notes is payable semi-annually.
-41-
<PAGE>
The Senior Subordinated Notes due June 1, 2002 were issued in connection with a
debt exchange completed in April 1992. The effective interest rate on these
notes is 10.8%. There is unamortized original issue discount of $3,556,000 and
$4,020,000 at December 31, 1996 and 1995, respectively. The Company must
maintain net worth of $80,000,000 or will be required, through the use of a
sinking fund, to redeem $25,000,000 on such contingent sinking fund payment
date. Interest on these notes is payable semi-annually.
At December 31, 1996, aggregate maturities of debt for the following five years
are $24,572,000, payable as follows: $0 in 1997, $8,000,000 in 1998, $12,000,000
in 1999, $3,000,000 in 2000, and $1,572,000 in 2001.
<TABLE>
<CAPTION>
Debt is as follows:
December 31
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Notes payable $472,181,000 $ 93,662,000
Senior/Senior Subordinated Notes 290,348,000 289,884,000
------------ ------------
$762,529,000 $383,546,000
============ ============
</TABLE>
F. Allowance for Losses on Contracts Sold
In initially valuing its excess servicing rights receivable at the time of
securitization, the Company establishes an allowance for expected losses on
contracts sold. The Company calculates that allowance on the basis of historical
experience and management's best estimate of future credit losses likely to be
incurred. The allowance is reviewed quarterly and adjustments are made if actual
experience or other factors indicate management's estimate of losses should be
revised. While the Company retains a substantial amount of risk of default on
the loan portfolios that it sells, such risk has been substantially reduced
through the sales of the NIM Certificates.
The GNMA guaranteed certificates which have been sold by the Company 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.
In addition to its excess servicing rights receivable, the Company has provided
a variety of credit enhancements on its securitized sales. These credit
enhancements have included corporate guarantees, letters of credit 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. At December 31, 1996 and 1995, the
Company had bank letters of credit and surety bonds outstanding of $140,972,000
and $156,617,000, respectively. Cash deposits held in interest bearing accounts
-42-
<PAGE>
totaled $171,484,000 and $159,311,000, and contracts pledged aggregated
$10,315,000 and $10,217,000 at December 31, 1996 and 1995, 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 for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Gross NIM Net
Allowance Certificates Allowance
-------------- --------------------- --------------
1996
- ----
<S> <C> <C> <C>
Allowance at
beginning of year $ 497,491,000 $(334,154,000) $ 163,337,000
Provision for losses 351,743,000 -- 351,743,000
Losses net of
recoveries (129,696,000) 93,865,000 (35,831,000)
Amortization of
present value
discount on loss
reserve 30,560,000 (15,933,000) 14,627,000
------------- ------------- ------------
Allowance at end
of year $ 750,098,000 $(256,222,000) $ 493,876,000
============= ============= =============
1995
- ----
Allowance at
beginning of year $ 320,299,000 $(236,283,000) $ 84,016,000
Sale of NIM
Certificates -- (143,364,000) (143,364,000)
Provision for losses 223,039,000 -- 223,039,000
Losses net of
recoveries (62,179,000) 55,828,000 (6,351,000)
Amortization of present
value discount on loss
reserve 16,332,000 (10,335,000) 5,997,000
------------- ------------- -------------
Allowance at end
of year $ 497,491,000 $(334,154,000) $ 163,337,000
============= ============= =============
1994
- ----
Allowance at
beginning of year $ 222,135,000 $ -- $ 222,135,000
Sale of NIM
Certificates -- (273,093,000) (273,093,000)
Provision for losses 134,416,000 -- 134,416,000
Losses net of
recoveries (45,406,000) 43,868,000 (1,538,000)
Amortization of
present value
discount on loss
reserve 9,154,000 (7,058,000) 2,096,000
------------- ------------- -------------
Allowance at end
of year $ 320,299,000 $(236,283,000) $ 84,016,000
============= ============= =============
</TABLE>
-43-
<PAGE>
G. Stockholders' Equity
Common Stock
In May 1996, the Board of Directors and shareholders approved the authorization
of 250,000,000 additional shares of Common Stock for general corporate purposes,
including stock dividends, raising additional capital, and issuances pursuant to
employee stock option plans and possible future acquisitions.
In May 1994 and September 1995, the Board of Directors declared two-for-one
stock splits, in the form of stock dividends, payable on June 30, 1994 and
October 15, 1995 to stockholders of record as of June 15, 1994 and September 30,
1995, respectively. 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
splits.
In February 1995, the Company's Board of Directors approved and authorized the
repurchase of up to 7,000,000 shares of the Company's Common Stock from time to
time in the open market or in private transactions.
Preferred Stock
The Company's authorized shares of capital stock include 15,000,000 shares of
stock designated as Preferred Stock. The Company had previously designated a
series of Junior Preferred Stock in connection with its Stockholders Rights Plan
(the "Plan"). As of October 31, 1995 the term of the Plan expired and the
Company determined not to extend the term of the Plan. At December 31, 1996 and
1995 there were no shares of 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 in connection with
the Plan. As of October 31, 1995 the rights expired as the term of the Plan
expired.
Stock Bonus Plan
In 1988, the Company's stockholders approved a key executive compensation stock
bonus plan. Shares issued under this plan are pursuant to an employment
agreement and the stock is valued at $2.96875 per share which represents the
closing market price of the stock on the date of the employment agreement. Total
shares issued under this plan during 1996, 1995 and 1994 were 1,998,745,
1,349,216 and 886,428, respectively. In 1997, shares will be issued for the 1996
year under the employment agreement which expires on December 31, 1996.
-44-
<PAGE>
Stock Option Plans
In 1988, the Company's stockholders approved two stock option plans: an
employee stock option plan and an outside director plan. In 1992, the
Board of Directors approved a supplemental stock option plan for its
outside directors and in 1995, the Company's stockholders approved an
Employee Stock Incentive Plan.
In 1996, the Company's stockholders approved a chief executive plan which
included a two million share stock option plan. The options granted under
this plan provide for an exercise price equal to the fair market value of
the Company's stock on February 9, 1996, of $30.875. The term of the
option, which commences in 1997, is for ten years, with a five-year vesting
schedule providing vesting of 20 percent per year for each full year of
service.
Options for 18,709,884 shares were available for future grant under these
plans. The Company's Board of Directors has reserved 13,833,752 shares for
future issuance under all plans as of December 31, 1996.
A summary of the stock option plan activity is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
shares Exercise price
----------- ----------------
<S> <C> <C>
Outstanding at
December 31, 1993 5,843,536 $ 4.19
Granted 168,000 14.28
Exercised (699,740) 4.07
Expired (165,328) 4.58
----------
Outstanding at
December 31, 1994 5,146,468 4.45
Granted 3,015,000 24.00
Exercised (1,794,936) 4.39
Expired (110,000) 24.00
----------
Outstanding at
December 31, 1995 6,256,532 13.60
Granted 5,632,500 32.02
Exercised (1,196,500) 4.69
Expired (620,500) 26.49
----------
Outstanding at
December 31, 1996 10,072,032 $23.91
==========
</TABLE>
Of the 10,072,032 options outstanding at December 31, 1996, 9,952,032
options relate to the employee and chief executive stock option plans and
120,000 options relate to the outside director plan. The exercise price
per share represents the market value of the Company's stock on the date of
grant except for certain options granted in 1996 and 1995. The option
price per share on 850,000 options granted in 1996 represents approximately
77% of the market value of the Company's stock on the date of grant and
370,000 options granted in 1995 represents approximately 79% of the market
value of the Company's stock on the date of grant.
-45-
<PAGE>
A summary of stock options outstanding at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding:
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ 2.96-23.37 2,342,032 5.41 $ 5.90
24.00-24.00 2,134,000 8.57 24.00
25.00-30.62 1,894,000 9.58 29.27
30.87-38.37 3,702,000 9.27 32.39
------------ --------- ----- ------
$ 2.96-38.37 10,072,032 8.28 $23.91
</TABLE>
Options Exercisable:
<TABLE>
<CAPTION>
Range of Number Weighted Average
Exercise Prices Outstanding Exercise Price
--------------- ----------- ----------------
<S> <C> <C> <C>
$ 2.96-23.37 1,880,368 $ 4.37
24.00-24.00 413,200 24.00
25.00-30.62 33,000 25.00
30.87-38.37 0 --
------------ --------- ------
$ 2.96-38.37 2,326,568 $ 8.15
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, and related
Interpretations in accounting for its stock incentive plans. Proceeds from
stock options exercised are credited to common stock and paid in capital.
There are no charges or credits to expense with respect to the granting or
exercise of options that were issued at fair market value on their
respective dates of grant. Had compensation costs for the Company's stock-
based compensation plans been determined consistent with Statement of
Financial Accounting Standards No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C> <C>
Net Earnings As Reported $308,736,000 $253,969,000
Pro Forma 298,147,000 250,805,000
Primary Earnings
Per Share As Reported $ 2.20 $ 1.81
Pro Forma 2.12 1.79
Fully Diluted
Earnings Per Share As Reported $ 2.19 $ 1.81
Pro Forma 2.12 1.79
</TABLE>
-46-
<PAGE>
The fair value for each option granted in 1996 and 1995 utilized in the
foregoing pro forma amounts is estimated on the date of grant using an
option pricing model. The model incorporates the following assumptions in
1996 and 1995: .8% dividend yield; 39.7% and 38.45% expected volatility,
respectively; risk-free interest rates ranging from 5.2% to 7.7%; and
expected option term beyond vesting of 2 years.
Dividends
During 1996, 1995 and 1994 the Company declared and paid dividends of $.26,
$.20 and $.12 per share, respectively, on its Common Stock. Under a letter
of credit agreement, the Company is subject to restrictions limiting the
payment of dividends and common stock repurchases. At December 31, 1996,
such payments were limited to $118,330,000, which represents 50% of
consolidated net earnings for the most recently concluded four fiscal
quarter period less dividends paid.
H. Fair Value Disclosure of Financial Instruments
Statement of Financial Accounting Standards No. 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. The initially established
discount rate is fixed for the life of the transaction. As such, the fair
value of excess servicing rights receivable primarily includes
consideration of a current 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, excluding its subordinated interest in the NIM
Certificates, to approximate its carrying value, shown net of the related
allowance for losses which is disclosed separately as a liability on the
balance sheet.
-47-
<PAGE>
The carrying value of excess servicing relating to the subordinated
interest retained in the NIM Certificates sold during 1994 and 1995 is
calculated using prepayment and default assumptions which the Company
believes market participants would use currently, but using the interest
rate determined at the time of sale. For purposes of computing fair value,
the Company consulted with its investment bankers and obtained an estimate
of market interest rate as of December 31, 1996 and 1995. Using these
rates, the carrying value exceeds the fair value for this component of
excess servicing rights receivable by $13,080,000 at December 31, 1996, and
at December 31, 1995, the fair value exceeded the carrying value by
$56,600,000.
Leases Receivables
Lease receivables generally consist of a large number of individually small
finance leases with average remaining terms of less than 36 months. Fair
value approximates carrying value.
Commercial Finance Receivables
Commercial finance receivable consists primarily of loans which reprice
monthly, typically in accordance with the prime lending rate offered by
banks. Given this repricing structure, the Company estimates the fair
value of these receivables to approximate their carrying value.
Revolving Credit Receivables
Revolving credit receivables consist of retail credit and the applicable
interest from credit card agreements applied to revolving credit. The
Company estimates the fair value of these receivables to approximate their
carrying value.
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 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.
Collateral in Process of Liquidation
Collateral in the process of liquidation is valued on an individual unit
basis after inspection of such collateral. Shown net of the related
allowance for losses on contracts sold, fair value approximates carrying
value.
-48-
<PAGE>
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.
Notes Payable
Notes payable consists of amounts payable under the Company's commercial
paper program, line of credit 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 and Senior Subordinated Notes
The fair value of the Company's senior notes is estimated based on their
quoted market price or on the current rates offered to the Company for debt
of a similar maturity.
The Company's senior subordinated notes are valued at quoted market prices.
The carrying amounts and estimated fair values of the Company's financial
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
-------- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents,
cash deposits and other
investments $ 625,480 $ 625,480 $474,958 $474,958
Excess servicing rights
receivable (net of
allowance for losses) 1,176,467 1,163,387 602,728 659,328
Lease receivables 570,407 570,407 -- --
Commercial finance
receivables 212,920 212,920 141,793 141,793
Revolving credit
receivables 40,803 40,803 -- --
Contracts held for sale
and as collateral 370,174 379,058 854,790 880,434
Collateral in process
of liquidation 37,873 37,873 10,970 10,970
Other contracts held 25,679 16,890 17,095 11,945
Financial liabilities:
Notes payable 472,181 472,181 93,662 93,662
Senior notes/senior
subordinated notes 290,348 331,580 289,884 344,778
</TABLE>
-49-
<PAGE>
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 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 proprietary credit
scoring systems, which contribute to the Company's ongoing profitability
and neither of which is considered a financial instrument.
I. Commitments and Contingencies
Lease Commitments
At December 31, 1996, aggregate minimum rental commitments under
noncancelable leases having terms of more than one year were $25,628,000,
payable $7,523,000 (1997), $6,446,000 (1998), $5,154,000 (1999), $3,785,000
(2000), and $2,720,000 (2001). Total rental expense for the years ended
December 31, 1996, 1995 and 1994 was $8,664,000, $6,101,000 and $5,065,000,
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
The nature of the Company's business is such that it is routinely a party
or subject to items of pending or threatened litigation. Although the
ultimate outcome of certain of these matters cannot be predicted,
management believes, based upon information currently available, that the
resolution of these routine legal 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, 1996 and 1995, net assets
-50-
<PAGE>
available for plan benefits were $7,075,000 and $7,790,000, and the accumulated
benefit obligation was $8,341,000 and $6,393,000, respectively. As of December
31, 1996 and 1995, the projected benefit obligation of the plan was $17,034,000
and $12,466,000, 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, 1996 and 1995 was $22,841,000 and $13,023,000, respectively. Total
pension expense for the plans in 1996, 1995 and 1994 was $5,347,000, $3,091,000
and $3,585,000, respectively.
The Company also has a 401(k) Retirement Savings Plan available to all eligible
employees. To be eligible for the plan, the employee must be at least 21 years
of age and have completed six months of employment at Green Tree during which
the employee worked at least 1,000 hours. Eligible employees may contribute to
the plan up to 15% of their earnings with a maximum of $9,500 for 1996 based on
the Internal Revenue Service annual contribution limit. The Company will match
50% of the employee contributions for an amount up to 6% of each employee's
earnings. Contributions are invested at the direction of the employee in one or
more funds. Company contributions vest after three years. Company contributions
to the plan were $1,316,000, $859,000 and $713,000 in 1996, 1995 and 1994,
respectively.
K. Income Taxes
Income taxes consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 51,908,000 $ 43,883,000 $ 27,077,000
State 3,687,000 2,090,000 3,203,000
------------ ------------ ------------
55,595,000 45,973,000 30,280,000
Deferred:
Federal 114,334,000 92,870,000 76,100,000
State 19,296,000 16,816,000 14,472,000
------------ ------------ ------------
133,630,000 109,686,000 90,572,000
------------ ------------ ------------
$189,225,000 $155,659,000 $120,852,000
============ ============ ============
</TABLE>
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, 1996 and 1995 are presented
below.
-51-
<PAGE>
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Excess servicing rights $527,051,000 $402,461,000
Other 40,772,000 22,933,000
------------ ------------
Gross deferred tax liabilities 567,823,000 425,394,000
------------ ------------
Deferred tax assets:
Net operating loss carryforward 20,347,000 12,960,000
Other 8,114,000 6,703,000
------------ ------------
Gross deferred tax assets 28,461,000 19,663,000
Valuation allowance -- --
------------ ------------
Gross deferred tax assets, net
of valuation 28,461,000 19,663,000
------------ ------------
Net deferred tax liability $539,362,000 $405,731,000
============ ============
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $58,000,000 which are
available to offset future federal taxable income and expire no earlier
than 2003. No valuation allowance was required as of December 31, 1996 or
1995 since it is likely that the deferred tax asset will be realized
against future taxable income.
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
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State tax, net of federal benefit 3.0 3.0 3.8
Other -- -- 1.2
---- ---- ----
38.0% 38.0% 40.0%
==== ==== ====
</TABLE>
M. Recent Accounting Pronouncement
In June 1996, the Financial Accounting Standards Board issued No. 125 (SFAS
No. 125), Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996 and is to be applied prospectively. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a financial-components approach that focuses on control.
Management of the Company does not expect that adoption of SFAS No. 125
will have a material impact on the Company's financial position, results of
operations or liquidity.
-52-
<PAGE>
N. Business Acquisition
On December 1, 1996, the Company purchased the Net Assets of FINOVA
Acquisition I, Inc. for approximately $620,000,000. The business acquired
under a stock purchase agreement provides equipment leases, loans and
related services to manufacturers and dealers and their customers. Goodwill
totaling $59,201,000, was recorded as part of this acquisition. The
December, 1996 financial operations of this leasing/loan business is
included in the Company's December 31, 1996 financial statements.
-53-
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (unaudited)
-------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(dollars in thousands except per-share amounts)
1996:
Income $168,118 $196,102 $219,665 $340,226
Net earnings 66,362 75,422 85,581 81,434
Net earnings per share .48 .54 .61 .58
1995:
Income $128,199 $153,274 $174,374 $255,473
Net earnings 50,729 61,712 72,037 69,491
Net earnings per share .36 .44 .51 .50
1994:
Income $104,798 $112,289 $126,049 $154,291
Net earnings 38,492 44,226 52,066 46,495
Net earnings per share .28 .32 .37 .34
</TABLE>
Item 9. Disagreements on Accounting and Financial Disclosures.
- ---------------------------------------------------------------
None.
-54-
<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 1997 Annual
Meeting of Stockholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1997.
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 1997 Annual
Meeting of Stockholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1997.
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 1997 Annual
Meeting of Stockholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1997.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
None.
-55-
<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:
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report 29
Consolidated Balance Sheets - December 31,
1996 and 1995 30
Consolidated Statements of Operations - years
ended December 31, 1996, 1995 and 1994 31
Consolidated Statements of Stockholders' Equity -
years ended December 31, 1996, 1995 and 1994 32
Consolidated Statements of Cash Flows - years
ended December 31, 1996, 1995 and 1994 33
Notes to Consolidated Financial Statements 35
(2) Financial statement schedules
The following consolidated financial statement schedule of Green Tree
Financial Corporation and subsidiaries is included in Part IV of this
report:
Schedule II - Valuation and qualifying accounts 61
</TABLE>
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 notes thereto.
(3) Exhibits
Exhibit
No.
-------
3(a) Certificate of Incorporation of Green Tree Financial
Corporation (incorporated by reference to the Company's
Registration Statement on Form S-1; File No.33-60869).
3(b) Certificate of Merger of Incorporation of Green Tree
Financial Corporation, as filed with the Delaware Secretary
of State on June 30, 1995 (incorporated by reference to the
Company's Registration Statement on Form S-1; File No. 33-
60869.)
-56-
<PAGE>
3(c) Bylaws of Green Tree Financial Corporation (incorporated by
reference to Company's Registration Statement on Form S-1;
File No. 33-60869).
4(a) 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(b) 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-l; File No. 2 -82880).
10(b) 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(c) 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).
10(d) 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(e) 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); as amended by
Amendment to the Master Repurchase Agreement dated May 10,
1993 (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 1994; File No. 0-11652); as amended by Amendment to the
Master Repurchase Agreement dated August 8, 1995
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995; File No. 0-11652).
10(f) Credit Agreement dated as of April 16, 1996 between Green
Tree Financial Corporation and The
-57-
<PAGE>
First National Bank of Chicago (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996; File No. 1-08916).
10(g) 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); as amended by Amended and Restated Insurance
and Indemnity Agreement dated March 11, 1994 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1994; File No. 0-11652).
10(h) 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); as amended by
Amendment to the Master Repurchase Agreement dated June 30, 1995
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995; File No. 0-11652).
10(i) 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); as amended by
Amendment to the Plan Agreement dated November 23, 1994 (filed
herewith); as amended by Amendment to the Plan Agreement dated August
22, 1996 (filed herewith); as amended by Amendment to the Plan
Agreement dated December 30, 1996 (filed herewith).
10(j) Green Tree Financial Corporation 1992 Supplemental Stock Option Plan
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993; File No. 0-11652).
10(k) Master Repurchase Agreement dated as of September 1, 1995 between
Merrill Lynch Mortgage Capital, Inc. and Green Tree Financial
Corporation (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995; File No. 1-08916).
10(l) Master Repurchase Agreement dated as of November 9, 1995 between
Salomon Brothers Holding Company and Green Tree Financial Corporation
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995; File No. 1-08916).
-58-
<PAGE>
10(m) Green Tree Financial Corporation 1995 Employee Stock Incentive Plan
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995; File No. 1-08916).
10(n) Employment Agreement, dated February 9, 1996 between the Company and
Lawrence Coss and related Noncompetition Agreement, dated February 9, 1996
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996; File No. 1-08916).
10(o) Green Tree Financial Corporation Chief Executive Cash Bonus and Stock
Option Plan and related Stock Option Agreement, dated February 9, 1996
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996; File No. 1-08916).
10(p) Green Tree Financial Corporation 1996 restated Supplemental Pension Plan
dated May 15, 1996 (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).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of KPMG Peat Marwick LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (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.
-59-
<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/Edward L. Finn
-------------------------- ---------------------------
Lawrence M. Coss Edward L. Finn
Chairman and Chief Executive Vice President
Executive Officer and Chief Financial
(principal executive Officer (principal
officer) financial officer)
By: /s/Scott T. Young
----------------------------
Scott T. Young
Vice President and
Controller (principal
accounting officer)
Dated: March 14, 1997
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 14, 1997
/s/Richard G. Evans
- --------------------------
Richard G. Evans, Director March 14, 1997
/s/Robert D. Potts
- -------------------------
Robert D. Potts, Director March 14, 1997
By: /s/Joel H. Gottesman
-------------------------
Joel H. Gottesman
Attorney-in-Fact
W. Max McGee, Director ) Dated: March 14, 1997
)
Robert S. Nickoloff, Director )
-60-
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
<TABLE>
<CAPTION>
Additions-
Balance at reductions Balance
beginning to income at end
Description of period recognized Deductions of period
- -------------------------------- ---------- ---------- ------------- ---------
(dollars in thousands)
<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, 1996 $ 92,452 $219,958 $ 31,109(b) $ 281,301
Year ended December 31, 1995 68,918 146,237 111,731(a) 92,452
10,972(b)
Year ended December 31, 1994 161,407 124,015 212,243(a) 68,918
4,261(b)
Reserves which support balance
sheet caption reserves:
- -----------------------------------
Allowance for losses on contracts
sold with recourse:
Year ended December 31, 1996 $163,337 $351,743 $ 35,831(c) $ 493,876
14,627(b)
Year ended December 31, 1995 84,016 223,039 143,364(a) 163,337
5,997(b) 6,351(c)
Year ended December 31, 1994 222,135 134,416 273,093(a) 84,016
2,096(b) 1,538(c)
</TABLE>
Notes:
(a) Reduced as a result of the NIM Certificate sales.
(b) Amortization and discount.
(c) Amounts charged off.
-61-
<PAGE>
<TABLE>
<CAPTION>
GREEN TREE FINANCIAL CORPORATION
Securities and Exchange Commission
Form 10-K
(For the Fiscal Year Ended December 31, 1996)
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
<S> <C> <C>
10(i) Restated First Amendment of
Green Tree Financial Corporation
401(k) Plan Trust Agreement,
dated November 23, 1994, Second
Amendment of Green Tree Financial
Corporation 401(k) Plan Trust
Agreement, dated August 22, 1996
Third Amendment to Green Tree
Financial Corporation 401(k)
Plan Trust Agreement dated
December 30, 1996 63
10(p) Green Tree Financial Corporation
1996 Restated Supplemental
Pension Plan, dated May 15, 1996 74
11(a) Computation of Primary Earnings
Per Share 81
11(b) Computation of Fully Diluted
Earnings Per Share 82
12 Computation of Ratio of Earnings
to Fixed Charges 83
21 Subsidiaries of Registrant 84
23 Consent of KPMG Peat Marwick LLP 86
24 Powers of Attorney 87
27 Financial Data Schedule 88
</TABLE>
-62-
<PAGE>
Exhibit 10(i)
-------------
RESTATED FIRST AMENDMENT
OF
GREEN TREE FINANCIAL CORPORATION
401(k) PLAN TRUST AGREEMENT
THIS AGREEMENT, Made and entered into as of November 23, 1994, by and
between GREEN TREE FINANCIAL CORPORATION, a Minnesota corporation (the
"Principal Sponsor"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking
association organized under the laws of the United States, as trustee (together
with its successors, the "Trustee");
WITNESSETH: That
WHEREAS, The Principal Sponsor has heretofore established and maintained a
profit sharing plan (the "Plan") which, in most recent amended and restated
form, is embodied in a document dated October 1, 1992 and entitled "Green Tree
Financial Corporation 401(k) Plan Trust Agreement" (the "Plan Statement"); and
WHEREAS, The Principal Sponsor has reserved to itself the power to make
amendments of the Plan Statement; and
NOW, THEREFORE, The Plan Statement is hereby amended as follows:
1. COMMITTEE NAME CHANGE. Effective January 1, 1994, Section 1.1.6 of the
Plan Statement shall be amended by replacing "401(k)" with the word "Benefits."
2. ANNUAL COMPENSATION LIMIT. Effective for determining the amount of
Recognized Compensation during Plan Years beginning on or after January 1, 1994,
Section 1.1.24(h) of the Plan Statement shall be amended to read in full as
follows:
(h) Annual Maximum. A Participant's Recognized Compensation for a Plan
Year shall not exceed the annual compensation limit under section
401(a)(17) of the Code. In determining a Participant's Recognized
Compensation, the rules of section 414(q)(6) of the Code apply, except
that in applying such rules, the term "family" shall include only the
spouse of the Participant and lineal descendants of the Participant
who have not attained age nineteen (19) years before the close of the
Plan Year; provided, however, that the rule in this sentence shall not
apply to the Seven Thousand Dollar ($7,000) limit specified in Section
2.4. If Participants are aggregated as such family members (and do
not otherwise agree in writing), the Recognized Compensation of each
family member shall equal the annual compensation limit under section
401(a)(17) of the Code multiplied by a fraction, the numerator of
which is such family member's Recognized Compensation (before
application of such annual compensation limit) and the denominator of
which is the total Recognized Compensation (before application of such
-63-
<PAGE>
annual compensation limit) of all such family members. For purposes
of the foregoing, the annual compensation limit under section
401(a)(17) of the Code shall be Two Hundred Thousand Dollars
($200,000) (as adjusted under the Code for cost of living increases)
for Plan Years beginning before January 1, 1994, and shall be One
Hundred and Fifty Thousand Dollars ($150,000) (as so adjusted) for
Plan Years beginning on or after January 1, 1994.
3. COVERAGE OF EMPLOYEES. Effective for determining which persons are
employed in Recognized Employment during Plan Years beginning on or after
October 1, 1992, Section 1.1.25 of the Plan Statement shall be amended by adding
at the end of the introductory sentence the words "employment classified by the
Employer as".
4. ADP TESTING. Effective for testing the amount of elective contributions
and other optional amounts during Plan Years beginning on or after January 1,
1994, Section 2.6.2(b) of the Plan Statement shall be amended to read in full as
follows:
(b) Family Member. If a highly compensated eligible employee is subject
to the family aggregation rules of section 414(q)(6) of the Code
because such employee is either a five percent (5%) owner or one of
the ten (10) most highly compensated employees (as defined in Appendix
D to this Plan Statement), the combined deferral percentage for the
family group (which is treated as one highly compensated eligible
employee) shall be determined by combining the amounts described in
Section 2.6.1(c)(i) and by combining the compensation described in
section 2.6.1(d) of all family members who are eligible employees.
The family members who are aggregated with respect to a highly
compensated eligible employee shall be disregarded as separate
eligible employees in determining the average deferral percentage of
highly compensated eligible employees and the average deferral
percentage of all other eligible employees. If an eligible employee
is required to be aggregated as a member of more than one family group
in the Plan, all eligible employees who are members of those family
groups that include that eligible employee are aggregated as one
family group. With respect to any highly compensated eligible
employee, "family" shall mean the employee's spouse and lineal
ascendants and descendants and the spouses of such lineal ascendants
and descendants. The annual compensation limit under section
401(a)(17) of the Code applies to the above deferral percentage
determination except that for purposes of that limit, the term
"family" shall include only the spouse of the eligible employee and
lineal descendants of the eligible employee who have not attained age
nineteen (19) years before the close of that Plan Year. For purposes
of the foregoing, the annual compensation limit under section
401(a)(17) of the Code shall be Two Hundred Thousand Dollars
($200,000) (as adjusted under the Code for cost of living increases)
for Plan Years beginning before
2
<PAGE>
January 1, 1994, and shall be One Hundred and Fifty Thousand Dollars
($150,000) (as so adjusted) for Plan Years beginning on or after
January 1, 1994.
5. DIRECT ROLLOVERS ACCEPTED. Effective with respect to rollover
contributions made on or after January 1, 1993, Section 3.6.2 of the Plan
Statement shall be amended to read as follows:
3.6.2. Eligible Contributions. Each Participant may contribute to the
Plan, within such time and in such form and manner as may be prescribed by the
Committee in accordance with those provisions of federal law relating to
rollover contributions, cash (or the cash proceeds from distributed property)
received by the Participant in an eligible rollover distribution from a
qualified plan or from an individual retirement account or annuity established
solely to hold such eligible rollover distribution. Also, the Committee may
establish rules and conditions regarding the acceptance of direct rollovers
under Section 401(a)(31) of the Code from trustees or custodians of other
qualified pension, profit sharing or stock bonus plans.
6. ACP TEST. Effective with respect to contributions made for Plan Years
beginning on or after January 1, 1994, Section 3.7.2(b) of the Plan Statement
shall be amended to read in full as follows:
(b) Family Member. If a highly compensated eligible employee is subject
to the family aggregation rules of section 414(q)(6) of the Code
because such employee is either a five percent (5%) owner or one of
the ten (10) most highly compensated employees (as defined in Appendix
D), the combined contribution percentage for the family group (which
is treated as one highly compensated eligible employee) shall be
determined by combining the amounts described in Section 3.7.1(c)(i)
and by combining the compensation described in section 3.7.1(d) of all
family members who are eligible employees. The family members who are
aggregated with respect to a highly compensated eligible employee
shall be disregarded as separate eligible employees in determining the
average contribution percentage of highly compensated eligible
employees and the average contribution percentage of all other
eligible employees. If an eligible employee is required to be
aggregated as a member of more than one family group in the Plan, all
eligible employees who are members of those family groups that include
that eligible employee are aggregated as one family group. With
respect to any highly compensated eligible employee, "family" shall
mean the employee's spouse and lineal ascendants and descendants and
the spouses of such lineal ascendants and descendants. The limit on
annual compensation under section 401(a)(17) of the Code applies to
the above contribution percentage determination except that for
purposes of that limit, the term "family" shall include only the
spouse of the eligible employee and lineal descendants of the eligible
employee who have not attained age nineteen (19) years before the
close of that Plan Year. For purposes of the
3
<PAGE>
foregoing, the annual compensation limit under section 401(a)(17) of
the Code shall be Two Hundred Thousand Dollars ($200,000) (as adjusted
under the Code for cost of living increases) for Plan Years beginning
before January 1, 1994, and shall be One Hundred and Fifty Thousand
Dollars ($150,000) (as so adjusted) for Plan Years beginning on or
after January 1, 1994.
7. ESTABLISHMENT OF SUBFUNDS. Effective January 1, 1994, Section 4.1 of the
Plan Statement shall be amended by adding a new Section 4.1.4 which shall read
in full as follows:
4.1.4. ERISA Section 404(c) Compliance. If the Committee and the Trustee
agree, the Committee may establish investment subfunds and operational rules
which are intended to satisfy section 404(c) of ERISA and the regulations
thereunder. Such investment subfunds shall permit Participants and Beneficiaries
the opportunity to choose from at least three investment alternatives, each of
which is diversified, each of which present materially different risk and return
characteristics, and which, in the aggregate, enable Participants and
Beneficiaries to achieve a portfolio with appropriate risk and return
characteristics consistent with minimizing risk through diversification. Such
operational rules shall provide the following, and shall otherwise comply with
section 404(c) of ERISA and the regulations and rules promulgated thereunder
from time to time:
(a) Participants and Beneficiaries may give investment instructions to the
Trustee at least once every three months;
(b) the Trustee must follow the investment instructions of Participants
and Beneficiaries that comply with the Plan's operational rules,
provided that the Trustee may in any event decline to follow any
investment instructions that:
(i) would result in a prohibited transaction described in section
406 of ERISA or section 4975 of the Code;
(ii) would result in the acquisition of an asset that might generate
income which is taxable to the Plan;
(iii) would not be in accordance with the documents and instruments
governing the Plan insofar as they are consistent with Title I
of ERISA;
4
<PAGE>
(iv) would cause a fiduciary to maintain indicia of ownership of any
assets of the Plan outside of the jurisdiction of the district
courts of the United States other than as permitted by section
404(b) of ERISA and Department of Labor regulation section
2050.404b-1;
(v) would jeopardize the Plan's tax status under the Code;
(vi) could result in a loss in excess of a Participant's or
Beneficiary's Account balance;
(c) Participants and Beneficiaries shall be periodically informed of
actual expenses to their Accounts which are imposed by the Plan and
which are related to their Plan investment decisions.
(d) with respect to any subfund consisting of Employer securities and
intended to satisfy the requirements of section 404(c) of ERISA, (i)
Participants and Beneficiaries shall be entitled to all voting, tender
and other rights appurtenant to the ownership of such securities, (ii)
procedures shall be established to ensure the confidential exercise of
such rights, except to the extent necessary to comply with federal and
state laws not preempted by ERISA, and (iii) the Trustee shall ensure
the sufficiency of and compliance with such confidentiality
procedures.
8. DIRECT ROLLOVER RULES. Effective for distributions payable on or after
January 1, 1993, Section 7.1 of the Plan Statement shall be amended by adding
thereto new Sections 7.1.4 and 7.1.5 which shall read in full as follows:
7.1.4. Notices. The Committee will issue such notices as may be
required under sections 402(f), 411(a)(11) and other sections of the Code in
connection with distributions from the Plan. No distribution will be made
unless it is consistent with such notice requirements. Distribution may
commence less than thirty (30) days after the notice required under section
1.411(a)-11(c) of the Income Tax Regulations or the notice required under
section 1.402(f)-2T of the Income Tax Regulations is given, provided that:
(a) The Committee clearly informs the Distributee that the Distributee has
a right to a period of at least thirty (30) days after receiving the
notice to consider the decision of whether or not to elect
distribution and, if applicable, a particular distribution option);
and
(b) The Distributee, after receiving the notice, affirmatively elects a
distribution.
7.1.5. Direct Rollover. A Distributee who is eligible to elect a
direct rollover may elect, at the time and in the manner prescribed by the
Committee, to have all or any portion of an
5
<PAGE>
eligible rollover distribution paid directly to an eligible retirement plan
specified by the Distributee in a direct rollover. A Distributee who is eligible
to elect a direct rollover includes only a Participant, a Beneficiary who is the
surviving spouse of a Participant and a Participant's spouse or former spouse
who is the alternate payee under a qualified domestic relations order, as
defined in Appendix C.
(a) Eligible rollover distribution means any distribution of all or any
portion of a Total Account to a Distributee who is eligible to elect a
direct rollover except (i) any distribution that is one of a series of
substantially equal installments payable not less frequently than
annually over the life expectancy of such Distributee or the joint and
last survivor life expectancy of such Distributee and such
Distributee's designated Beneficiary, and (ii) any distribution that
is one of a series of substantially equal installments payable not
less frequently than annually over a specified period of ten (10)
years or more, and (iii) any distribution to the extent such
distribution is required under section 401(a)(9) of the Code, and (iv)
the portion of any distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(b) Eligible retirement plan means (i) an individual retirement account
described in section 408(a) of the Code, or (ii) an individual
retirement annuity described in section 408(b) of the Code, or (iii)
an annuity plan described in section 403(a) of the Code, or (iv) a
qualified trust described in section 401(a) of the Code that accepts
the eligible rollover distribution. However, in the case of an
eligible rollover distribution to a Beneficiary who is the surviving
spouse of a Participant, an eligible retirement plan is only an
individual retirement account or individual retirement annuity as
described in section 408 of the Code.
(c) Direct rollover means the payment of an eligible rollover distribution
by the Plan to the eligible retirement plan specified by the
Distributee who is eligible to elect a direct rollover.
9. REENROLLMENT. Effective October 1, 1992, the third sentence of Section
7.7.4 of the Plan Statement shall be amended to read in full as follows:
Thereafter, the Participant may, upon giving written notice to the Committee,
enter into a new Retirement Savings Agreement effective as of the payday on or
after any subsequent Enrollment Date following such twelve (12) month period,
provided the Participant is in Recognized Employment on that date.
6
<PAGE>
10. ANCILLARY SERVICES. Effective for Plan Years beginning on or after October
1, 1992, Section 10.6(d) of the Plan Statement shall be amended to read in full
as follows:
(d) To hold uninvested reasonable amounts of cash whenever it is deemed
advisable to do so, and to deposit the same, with or without interest,
in the commercial or savings departments of any corporate Trustee
serving hereunder or of any other bank, trust company or other
financial institution including those affiliated in ownership
with the Trustee named in the Plan Statement.
11. SECTION 415 APPENDIX. Effective for Plan Years beginning on or after
October 1, 1992, the Appendix A to the Plan Statement shall be amended by
substituting therefore the Appendix A attached to this Amendment.
12. TOP HEAVY APPENDIX. Effective for Plan Years beginning on or after October
1, 1992, the Appendix B to the Plan Statement shall be amended by substituting
therefore the Appendix B attached to this Amendment.
13. QDRO APPENDIX. Effective for Plan Years beginning on or after January 1,
1993, the Appendix C to the Plan Statement shall be amended by substituting
therefore the Appendix C attached to this Amendment.
14. HCE APPENDIX. Effective for Plan Years beginning on or after October 1,
1992, the Appendix D to the Plan Statement shall be amended by substituting
therefore the Appendix D attached to this Amendment.
15. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan
Statement shall continue in full force and effect.
IN WITNESS WHEREOF, Each of the parties hereto has caused these presents to
be executed, all as of the day and year first above written.
FIRST TRUST NATIONAL GREEN TREE FINANCIAL
ASSOCIATION CORPORATION
By //s// Harold Orcutt By //s// Barbara J. Didrikson
------------------- -----------------------------
Its Vice President Its Vice President
-------------- ----------------------
And //s//Debra Rosenberg And
-------------------- -------------------------
Its Vice President Its
-------------- ----------------------
7
<PAGE>
SECOND AMENDMENT
OF
GREEN TREE FINANCIAL CORPORATION
401(k) PLAN TRUST AGREEMENT
THIS AGREEMENT, Made and entered into as of August 22, 1996, by and between
GREEN TREE FINANCIAL CORPORATION, a Minnesota corporation (the "Principal
Sponsor"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking association
organized under the laws of the United States, as trustee (together with its
successors, the "Trustee");
WITNESSETH: That
WHEREAS, The Principal Sponsor has heretofore established and maintained a
profit sharing plan (the "Plan") which, in most recent amended and restated
form, is embodied in a document dated October 1, 1992 and entitled "Green Tree
Financial Corporation 401(k) Plan Trust Agreement" (the "Plan Statement"), as
amended by a First Amendment dated November 23, 1994; and
WHEREAS, The Principal Sponsor has reserved to itself the power to make
amendments of the Plan Statement; and
NOW, THEREFORE, The Plan Statement is hereby further amended as follows:
1. ELIGIBILITY. Effective for each employee whose first Hour of Service for
Green Tree Financial Corporation occurs on or after January 2, 1996, Section 2.1
of the Plan Statement shall be amended to read in full as follows:
2.1. General Eligibility Rule.
2.1.1. General Rule. Each employee who: (a) has attained age twenty-one
(21) years, (b) is initially hired into Recognized Employment, and (c) is then
scheduled to have at least one thousand (1,000) Hours of Service in the first
twelve (12) months of employment, shall become a Participant on the first
Enrollment Date that is coincident with or next following the date that is six
(6) months after the employee's first day of Recognized Employment. However, if
the employee is not scheduled to have at least one thousand (1,000) Hours of
Service in the first twelve (12) months of employment on the date that is six
(6) months after the employee's first day of Recognized Employment, this
paragraph shall not apply to that employee.
2.1.2. ERISA Fail-Safe Rule. Notwithstanding the foregoing, an employee
shall become a Participant on the Enrollment Date coincident with or next
following the date as of which the employee has attained age twenty-one (21)
years and completed one (1) year of Eligibility Service, if the employee is then
employed in Recognized Employment. If the employee is not then employed in
Recognized Employment, the employee shall become a Participant on the first date
thereafter upon which such employee enters Recognized Employment.
<PAGE>
DEFERRAL LIMITATION. Effective for Retirement Savings elections made on or
after October 1, 1996, Section 2.4 of the Plan Statement shall be amended to
read in full as follows:
2.4. Retirement Savings Agreement. Subject to the following rules, the
Retirement Savings Agreement which each Participant may execute shall provide
for elective contributions through a reduction equal to not less than one
percent (1%) nor more than fifteen percent (15%) of the amount of Recognized
Compensation which otherwise would be paid to the Participant by the Employer
each payday. Such elective contributions, however, shall not exceed Seven
Thousand Dollars ($7,000) under the Plan and any other plan of the Employer and
Affiliates for that Participant's taxable year. Such Seven Thousand Dollar
($7,000) limit shall be adjusted for cost of living at the same time and in the
same manner as under section 415(d) of the Code. The Committee may, from time to
time under rules, change the minimum and maximum allowable elective
contributions. The reductions in earnings for elective contributions agreed to
by the Participant shall be made by the Employer from the Participant's
remuneration each payday on and after the Enrollment Date for so long as the
Retirement Savings Agreement remains in effect.
2. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan
Statement shall continue in full force and effect.
IN WITNESS WHEREOF, Each of the parties hereto has caused these presents to
be executed, all as of the day and year first above written.
FIRST TRUST NATIONAL GREEN TREE FINANCIAL
ASSOCIATION CORPORATION
By //s// Harold Orcutt By //s// Barbara Didrikson
------------------------------ ------------------------------
Its Vice President Its Vice President
--------------------------- ---------------------------
And //s// Scott C. Curtiss And //s// Richard G. Evans
----------------------------- -----------------------------
Its Vice President Its Executive Vice President
---------------------------- ---------------------------
2
<PAGE>
THIRD AMENDMENT
OF
GREEN TREE FINANCIAL CORPORATION
401(k) PLAN TRUST AGREEMENT
THIS AGREEMENT, Made and entered into as of December 30, 1996, by and
between GREEN TREE FINANCIAL CORPORATION, a Minnesota corporation (the
"Principal Sponsor"), and FIRST TRUST NATIONAL ASSOCIATION, a national banking
association organized under the laws of the United States, as trustee (together
with its successors, the "Trustee");
WITNESSETH: That
WHEREAS, The Principal Sponsor has heretofore established and maintained a
profit sharing plan (the "Plan") which, in most recent amended and restated
form, is embodied in a document dated October 1, 1992 and entitled "Green Tree
Financial Corporation 401(k) Plan Trust Agreement" (the "Plan Statement"), as
amended by a First Amendment dated November 23, 1994 and by a Second Amendment
dated September 17, 1996; and
WHEREAS, The Principal Sponsor has reserved to itself the power to make
further amendments of the Plan Statement; and
NOW, THEREFORE, The Plan Statement is hereby further amended as follows:
1. SPECIAL RULES FOR EMPLOYEES TRANSFERRED FROM FINOVA. Effective as of
October 19, 1996, Section 1 of the Plan Statement shall be amended by adding a
new Section 1.4 to read in full as follows:
1.4. Special Rules for Employees Transferred From FINOVA. Any employee who:
(a) is a "Transferred Employee" as defined in Section 5.6(a) of the Stock
Purchase Agreement dated as of October 19, 1996, between the Principal
Sponsor and FINOVA Capital Corporation,
(b) enters Recognized Employment, and
(c) was immediately before such entry a participant in a plan sponsored by
FINOVA Capital Corporation that is qualified under Code section 401(a)
and 401(k),
shall become a Participant upon the date of such entry (and such date shall,
with respect to such employee, be considered an Enrollment Date under Section
1.1.11). For any Transferred Employee described in Section 1.4(a) above, all
prior service with FINOVA Capital Corporation (or any member of its "controlled
group" under Code sections 414(b) or (c)) shall be considered service with an
Affiliate for all purposes of this Plan.
<PAGE>
2. SAVINGS CLAUSE. Save and except as herein expressly amended, the Plan
Statement shall continue in full force and effect.
IN WITNESS WHEREOF, Each of the parties hereto has caused these presents to
be executed, all as of the day and year first above written.
FIRST TRUST NATIONAL ASSOCIATION GREEN TREE FINANCIAL CORPORATION
By //s// Scott C. Curtiss By //s// Richard G. Evans
---------------------- ----------------------
Its Vice President Its Executive Vice President
-------------- ------------------------
And //s//Deb Marchoff And //s// Barbara Didrikson
----------------- -----------------------
Its Senior Vice President Its Vice President
--------------------- --------------
2
<PAGE>
Exhibit 10(p)
-------------
GREEN TREE FINANCIAL CORPORATION
1996 RESTATED SUPPLEMENTAL PENSION PLAN
WHEREAS, This corporation has heretofore adopted a tax-qualified defined
benefit pension plan called the "GREEN TREE ACCEPTANCE, INC. PENSION PLAN" (the
"Pension Plan") for the purpose of providing retirement benefits to its
employees and employees of certain affiliated corporations; and
WHEREAS, The Pension Plan is subject to the Employee Retirement Income
Security Act of 1974, as amended, ("ERISA") and is intended to qualify under
section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, By operation of section 401(a) of the Code, benefits under the
Pension Plan are restricted so that they do not exceed maximum benefits allowed
under section 415 of the Code; and
WHEREAS, ERISA authorizes the establishment of an unfunded, nonqualified
plan of deferred compensation maintained by an employer solely for the purpose
of providing benefits for certain employees in excess of the limitations on
benefits imposed by section 415 of the Code; and
WHEREAS, This corporation therefore adopted the GREEN TREE ACCEPTANCE, INC.
SUPPLEMENTAL PENSION PLAN (the "Supplemental Plan") to pay such excess benefits;
and
WHEREAS, For benefits accruing under the Pension Plan during plan years
beginning after December 31, 1988, the maximum amount of annual compensation
which may be taken into account for any employee may not exceed a fixed dollar
amount (initially $200,000) which is established under section 401(a)(17) of the
Code; and
WHEREAS, By reason of any compensation which was voluntarily deferred
pursuant to a prior irrevocable agreement under a nonqualified deferred
compensation plan maintained by the corporation, the benefits under the Pension
Plan may be less than if such compensation had not been deferred; and
WHEREAS, ERISA authorizes the establishment of an unfunded, nonqualified
plan maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees; and
WHEREAS, The Supplemental Plan was amended to provide benefits on
compensation above the compensation limitation imposed by section 401(a)(17) of
the Code and on compensation which is voluntarily deferred pursuant to a prior
irrevocable agreement under a nonqualified deferred compensation plan maintained
by the corporation;
-74-
<PAGE>
WHEREAS, The State Taxation of Pension Income Act of 1995 (the "Act")
prohibits states from taxing certain retirement income of an individual who is
not a resident or domiciliary of the state even if the retirement income was
earned while the individual worked in such state; and
WHEREAS, The Act provides that such a state may not impose a tax on a
payment made from a plan maintained solely for the purpose of providing
retirement benefits for employees in excess of the limitations imposed under
certain sections of the Code, including sections 415 and 401(a)(17).
WHEREAS, The Act does not protect payments made from a nonqualified
deferred compensation plan relating to compensation which is voluntarily
deferred;
WHEREAS, The corporation has not established a nonqualified deferred
compensation plan under which a participant can voluntarily defer compensation
pursuant to a prior irrevocable agreement;
WHEREAS, This corporation desires to make clear that, for purposes of state
taxation, all payments under the Supplemental Plan are solely for the purpose of
providing retirement benefits for employees in excess of the limitations imposed
under sections 415 and 401(a)(17) of the Code by removing all references to a
nonqualified deferred compensation plan; and
WHEREAS, This corporation changed its name from Green Tree Acceptance, Inc.
to Green Tree Financial Corporation, effective May 27, 1992;
NOW, THEREFORE, This corporation does hereby amend and restate the
Supplemental Plan to read in full as follows:
1. Plan Name. This plan shall be referred to as the GREEN TREE FINANCIAL
CORPORATION 1996 RESTATED SUPPLEMENTAL PENSION PLAN (formerly known as the GREEN
TREE ACCEPTANCE, INC. 1987 RESTATED SUPPLEMENTAL PENSION PLAN) (hereinafter the
"Plan").
2. Participants. The individuals eligible to participate in and receive
benefits under the Plan are those management or highly compensated employees of
Green Tree Financial Corporation and its affiliates who are (i) participants in
the GREEN TREE FINANCIAL CORPORATION PENSION PLAN and (ii) actively employed by
Green Tree Financial Corporation and (iii) highly compensated employees as
defined in section 414(q) of the Internal Revenue Code at the time of their
retirement from Green Tree Financial Corporation and its affiliates and (iv)
affirmatively selected for participation in this Plan by the Board of Directors
of Green Tree Financial Corporation.
2
<PAGE>
3. Benefit for Participants. This Plan shall pay to participating
employees the excess, if any, of
(i) the amount that would have been payable under the Pension Plan
if such benefit had been determined without regard to the
benefit limitations under section 415 of the Code and without
regard to compensation limitation of section 401(a)(17) of the
Code, over
(ii) the amount actually paid from the Pension Plan after taking into
account the benefit limitations under section 415 of the Code
and the compensation limitation of section 401(a)(17) of the
Code.
Except as provided in paragraph 5 below, this benefit (minus any withholding and
payroll taxes which must be deducted therefrom) shall be paid to the
participating employee directly from the general assets of Green Tree Financial
Corporation. Unless the Participant elects otherwise in a writing filed with the
Pension Committee within thirty (30) days following the later of (a) the date of
adoption of this restated Plan document, or (b) the date the Participant is
informed that he has been selected for participation in this Plan under Section
2(iv) hereof, such benefit shall be paid in a single lump sum determined by the
actuary of the Pension Plan under the actuarial factors then in effect for the
Pension Plan. If the Participant so elects not to receive a lump sum, then the
benefit hereunder will be paid in the same manner, at the same time, for the
same duration and in the same form as if such benefit had been paid directly
under the Pension Plan; provided, however, that, if the Participant elects a
lump sum from the Pension Plan, then the benefit hereunder shall be paid as if
the Participant had made no election under the Pension Plan (that is, as if the
Participant received the presumptive form of benefit under the Pension Plan).
All elections and optional forms of settlement in effect and all other rules
governing the payment of benefits under the Pension Plan shall, to the extent
practicable, be given effect under this Plan so that the participating employee
will receive from a combination of the Pension Plan and this Plan the same
benefit (minus any withholding and payroll taxes which must be deducted
therefrom) which would have been received under the Pension Plan if the
limitation on benefits under section 415 of the Code and the compensation
limitation of section 401(a)(17) of the Code had not been in effect.
4. Benefit to Beneficiaries. Unless the Participant has received a lump
sum under Section 3 hereof, there shall be paid under this Plan and to the
surviving spouse or other joint or contingent annuitant or beneficiary the
excess, if any, of
3
<PAGE>
(i) the amount which would have been payable under the Pension Plan
if such benefit had been determined without regard to the
benefit limitations of section 415 of the Code and without
regard to compensation limitation of section 401(a)(17) of the
Code, over
(ii) the amount actually paid from the Pension Plan after taking into
account the benefit limitations under section 415 of the Code
and the compensation limitation of section 401(a)(17) of the
Code.
Except as provided in paragraph 5 below, this benefit (minus any withholding and
payroll taxes which must be deducted therefrom) shall be paid to such person
directly from the general assets of Green Tree Financial Corporation in the same
manner, at the same time, for the same duration and in the same form as if such
benefit had been paid directly from the Pension Plan. Any elections and optional
forms of settlement in effect and all other rules governing the payment of
benefits under the Pension Plan shall, to the extent practicable, be given
effect under this Plan so that such person will receive from a combination of
the Pension Plan and this Plan the same benefit (minus any withholding and
payroll taxes which must be deducted therefrom) which would have been received
under the Pension Plan if the limitation on benefits under section 415 of the
Code and the compensation limitation of section 401(a)(17) of the Code had not
been in effect.
5. Commutation of Excess Benefits. Notwithstanding anything apparently to
the contrary in paragraphs 3 or 4 above, at the election of the Pension
Committee of Green Tree Financial Corporation, and for the sole purpose of
minimizing employer payroll or other taxes due on benefits payable under this
Plan, such Pension Committee may (without the consent of the Participant, joint
or contingent annuitant or beneficiary) commute the value of benefits payable
with respect to the Participant at the time of the retirement, quit, discharge,
death or other termination of employment to an actuarially equivalent benefit
payable in fifteen (15) or fewer annual installments (with no life
contingencies). Such conversion shall be made by the actuary of the Pension Plan
under actuarial factors then in effect for the Pension Plan. Any commuted amount
remaining unpaid at the death of the recipient shall be paid to the estate of
the recipient. If the Pension Committee elects to commute the benefits payable
to or with respect to the Participant, the Pension Committee shall cause the
Participant or the person to whom such benefits are payable to be immediately
notified in writing of that commutation.
6. Funding. All benefits payable under this Plan shall be paid
exclusively from the general assets of Green Tree Financial Corporation and no
fund or trust shall be established apart from
4
<PAGE>
the general assets of such corporation for this purpose nor shall any assets or
property be segregated or set apart from such corporation's general assets for
the purposes of funding this Plan.
7. Amendment and General Matters. The Board of Directors of Green Tree
Financial Corporation may amend this Plan prospectively, retroactively, or both,
at any time and for any reason deemed sufficient by it; provided, however, that
such amendment cannot reduce the then accrued benefit of any person without such
person's written consent. Green Tree Financial Corporation shall be the Plan
Administrator of this Plan. This Plan shall not alter, enlarge or diminish any
person's employment rights or rights or obligations under the Pension Plan.
8. Claims Procedure. An application for benefits under Sections 3 or 4
shall be considered as a claim for the purposes of this section.
8.1. Original Claim. Any employee, former employee, joint annuitant
or beneficiary of the Participant may, if he so desires, file with the
Pension Committee of Green Tree Financial Corporation a written claim for
benefits under the Plan. Within ninety (90) days after the filing of such a
claim, the Pension Committee shall notify the claimant in writing whether
his claim is upheld or denied in whole or in part or shall furnish the
claimant a written notice describing specific special circumstances
requiring a specified amount of additional time (but not more than one
hundred eighty days from the date the claim was filed) to reach a decision
on the claim. If the claim is denied in whole or in part, the Pension
Committee shall state in writing:
(a) the specific reasons for the denial;
(b) the specific references to the pertinent provisions of this
Plan statement on which the denial is based;
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary;
and
(d) an explanation of the claims review procedure set forth in
this section.
8.2 Claims Review Procedure. Within sixty (60) days after receipt of
notice that his claim has been denied in whole or in part, the claimant may
file with the Pension Committee a written request for a review and may, in
conjunction therewith, submit written issues and comments.
5
<PAGE>
Within sixty (60) days after the filing of such a request for review, the
Pension Committee shall notify the claimant in writing whether, upon
review, the claim was upheld or denied in whole or in part or shall furnish
the claimant a written notice describing specific special circumstances
requiring a specified amount of additional time (but not more than one
hundred twenty days from the date the request for review was filed) to
reach a decision on the request for review.
8.3. General Rules.
(a) No inquiry or question shall be deemed to be a claim or a
request for a review of a denied claim unless made in
accordance with the claims procedure. The Pension Committee
may require that any claim for benefits and any request for
a review of a denied claim be filed on forms to be furnished
by the Pension Committee upon request.
(b) All decision on claims and on requests for a review of
denied claims shall be made by the Pension Committee.
(c) The Pension Committee may, in its discretion, hold one or
more hearings on a claim or a request for a review of a
denied claim.
(d) Claimants may be represented by a lawyer or other
representative (at their own expense), but the Pension
Committee reserves the right to require the claimant to
furnish written authorization. A claimant's representative
shall be entitled to receive copies of notices sent to the
claimant.
(e) The decision of the Pension Committee on a claim and on a
request for a review of a denied claim shall be served on
the claimant in writing. If a decision or notice is not
received by a claimant within the time specified, the claim
or request for a review of a denied claim shall be deemed to
have been denied.
(f) Prior to filing a claim or a request for a review of a
denied claim, the claimant or his representative shall have
a reasonable opportunity to review a copy of this Plan
statement and all other pertinent documents in
6
<PAGE>
the possession of Green Tree Financial Corporation and the
Pension Committee.
9. Construction. This Plan is adopted with the understanding that it is
an unfunded excess benefit plan within the meaning of section 3(36) of ERISA.
Each provision hereof shall be interpreted and administered accordingly. This
Plan is adopted in the State of Minnesota and shall be construed and enforced
according to the laws of that State to the extent such laws are not preempted by
federal law.
IN WITNESS WHEREOF, This Restated Supplemental Pension Plan has been
executed by proper officers of Green Tree Financial Corporation pursuant to
authority of its Board of Directors granted on May 15, 1996.
GREEN TREE FINANCIAL CORPORATION
By //s// Robert D. Potts
------------------------------
Robert D. Potts
Its President and Chief
Operating Officer
And //s// Joel H. Gottesman
-----------------------------
Joel H. Gottesman
Its Senior Vice President,
General Counsel
and Secretary
7
<PAGE>
Exhibit 11.(a)
--------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF PRIMARY EARNINGS PER SHARE
-----------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net Earnings $308,736,000 $253,969,000 $181,279,000
============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding:
Weighted average common
shares outstanding 136,995,701 136,644,397 134,941,996
Dilutive effect of stock
options after application
of treasury-stock method 3,566,129 3,445,259 3,726,342
------------ ------------ ------------
140,561,830 140,089,656 138,668,338
------------ ------------ ------------
Earnings per share:
Net earnings $2.20 $1.81 $1.31
===== ===== =====
</TABLE>
-81-
<PAGE>
Exhibit 11.(b)
--------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
-----------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net earnings $308,736,000 $253,969,000 $181,279,000
============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding:
Weighted average common
shares outstanding 136,995,701 136,644,397 134,941,996
Dilutive effect of stock
options after application
of treasury-stock method
assuming full dilution 3,726,183 3,465,972 3,905,550
------------ ------------ ------------
140,721,884 140,110,369 138,847,546
------------ ------------ ------------
Earnings per share: $2.19 $1.81 $1.31
===== ===== =====
</TABLE>
-82-
<PAGE>
Exhibit 12.
-----------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings before
income taxes $497,961,000 $409,628,000 $302,131,000 $200,537,000 $118,806,000
Fixed charges:
Interest 70,050,000 57,313,000 41,619,000 51,155,000 44,868,000
One-third rent 2,888,000 2,034,000 1,688,000 1,483,000 1,652,000
------------ ------------ ------------ ------------ ------------
72,938,000 59,347,000 43,307,000 52,638,000 46,520,000
------------ ------------ ------------ ------------ ------------
$570,899,000 $468,975,000 $345,438,000 $253,175,000 $165,326,000
============ ============ ============ ============ ============
Fixed charges:
Interest $ 70,050,000 $ 57,313,000 $ 41,619,000 $ 51,155,000 $ 44,868,000
One-third rent 2,888,000 2,034,000 1,688,000 1,483,000 1,652,000
------------ ------------ ------------ ------------ ------------
$ 72,938,000 $ 59,347,000 $ 43,307,000 $ 52,638,000 $ 46,520,000
============ ============ ============ ============ ============
Ratio of earnings
to fixed charges (1) 7.83 7.90 7.98 4.81 3.55
==== ==== ==== ==== ====
</TABLE>
(1) For purposes of computing the ratio, earnings consist of earnings before
income taxes plus fixed charges.
-83-
<PAGE>
Exhibit 21.
-----------
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 Servicing Corporation Delaware
Green Tree Financial Corp.- Alabama Delaware
Green Tree Financial Corp.- Texas Delaware
Green Tree Credit Corp. New York
Green Tree Consumer Discount Company Pennsylvania
Consolidated Acceptance Corporation Nevada
Piper Financial Services, Inc. Minnesota
Green Tree Retail Services Bank South Dakota
Green Tree Capital Finance Utah
Green Tree Vendor Services Corporation Delaware
Green Tree Finance Corp.-One Minnesota
Green Tree Finance Corp.-Two Minnesota
Green Tree Finance Corp.-Three Minnesota
Green Tree Finance Corp.-Five Minnesota
Green Tree Manufactured Housing Net
Interest Margin Finance Corp. I Delaware
Green Tree Manufactured Housing Net
Interest Margin Finance Corp. II Delaware
Green Tree Floorplan Funding Corp. Delaware
Green Tree Vehicles Guaranty Corporation Minnesota
MaHCS Guaranty Corporation Delaware
-84-
<PAGE>
State of
Name of Subsidiary Incorporation
- ------------------ -------------
Green Tree RECS Guaranty Corporation Minnesota
Green Tree First GP Inc. Minnesota
Green Tree Second GP Inc. Minnesota
Green Tree Agency, Inc. Minnesota
Green Tree Agency of Alabama, Inc. Alabama
Green Tree Agency of Kentucky, Inc. Kentucky
Green Tree Agency of Nevada, Inc. Nevada
GTA Agency, Inc. New York
Crum-Reed General Agency, Inc. Texas
Dealer Service Trust Corporation Minnesota
Consolidated Casualty Insurance Company Arizona
G.T. Reinsurance Limited Turks and Caicos
Island
Rice Park Properties Corporation Minnesota
Woodgate Consolidated Incorporated Texas
Woodgate Utilities Incorporated Texas
-85-
<PAGE>
Exhibit 23.
-----------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors
Green Tree Financial Corporation:
We consent to incorporation by reference of our report dated January 24, 1997,
relating to the consolidated balance sheets of Green Tree Financial Corporation
and subsidiaries as of December 31, 1996 and 1995 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, 1996, which report appears in
the December 31, 1996 Form 10-K of Green Tree Financial Corporation, in the
following Registration Statements of Green Tree Financial Corporation; No. 2-
88293 on Form S-8, No. 33-26498 on Form S-8/S-3, No. 33-60541 on Form S-8/S-3,
No. 33-51804 on Form S-3, No. 33-64185 on Form S-3, No. 33-64183 on Form S-3,
No. 333-18343 on Form S-3, No. 333-20335 on Form S-3, No. 333-15437 on Form S-3
and No. 333-21191 on Form S-8/S-3.
Minneapolis, Minnesota
March 11, 1997
-86-
<PAGE>
Exhibit 24.
-----------
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Lawrence M. Coss and Joel H. Gottesman, 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 1996 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/ W. Max McGee March 14, 1997
-------------------------
W. Max McGee
/s/ Robert S. Nickoloff March 14, 1997
-------------------------
Robert S. Nickoloff
-87-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
financial statements of Green Tree Financial Corporation and Subsidiaries for
the year ended December 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 613,555,000
<SECURITIES> 11,925,000
<RECEIVABLES> 923,893,000
<ALLOWANCES> 14,260,000
<INVENTORY> 453,008,000
<CURRENT-ASSETS> 0
<PP&E> 121,837,000
<DEPRECIATION> 43,978,000
<TOTAL-ASSETS> 3,791,920,000
<CURRENT-LIABILITIES> 0
<BONDS> 290,348,000
<COMMON> 1,398,000
0
0
<OTHER-SE> 1,244,056,000
<TOTAL-LIABILITY-AND-EQUITY> 3,791,920,000
<SALES> 941,486,000
<TOTAL-REVENUES> 924,111,000
<CGS> 0
<TOTAL-COSTS> 356,100,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (351,743,000)
<INTEREST-EXPENSE> 70,050,000
<INCOME-PRETAX> 497,961,000
<INCOME-TAX> 189,225,000
<INCOME-CONTINUING> 308,736,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308,736,000
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.19
</TABLE>
