<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K/A
(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
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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 Saint 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.
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
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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 or 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 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 363,0000
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.
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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 purposes 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.
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
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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.
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.
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 tan two percent of the total number of
contracts or leases originated by the Company.
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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 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.
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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.
POOLING, DISPOSITION AND RELATED SALES STRUCTURES OF CONTRACTS, NET INTEREST
MARGIN CERTIFICATES AND FLOOPLAN 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/subordinate 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,
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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 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
========== ========== ========== ========== ==========
</TABLE>
(a) Includes $533 million of contracts purchased from the RTC.
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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%
==== ==== ==== ==== ====
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.
December 31
------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- -------- ----------
(dollars in millions)
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
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.
At or for the year ended December 31
--------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- -------- --------
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
(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 new written
premiums (gross premiums on new or renewal policies issued less cancellations of
previous policies) on policies written by the Company. The Company acts as an
agent with respect to the sale of such policies and, in some cases, the Company
also acts as reinsurer of such policies.
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------
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>
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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 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 laws 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
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<PAGE>
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.
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.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company has been served with various lawsuits which were filed against the
Company in United States District Court for the District of Minnesota. These
Lawsuits were filed by certain stockholders of the Company as purported class
actions on behalf of persons or entities who purchased common stock of the
Company during the alleged class periods that generally run from February 1995
to January 1998. In addition to the Company, certain current and former officers
and directors of the Company are named as defendants in one or more of the
lawsuits. The Company and the other defendants intend to seek consolidation of
each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
In addition, the nature of the Company's business is such that it is routinely a
party or subject to items of pending or threatened litigation. Although the
ultimate outcome of certain of these matters cannot be predicted, management
believes, based upon information currently available that the resolution of
these legal matters will not result in any material adverse effect on its
consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<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, the periods indicated,
the range of the high and low sale prices.
1995 High Low
- --------------------- ---------------- -----------------
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
The above stock prices, as well as all other share and per share amounts
referenced in this Annual Report on Form 10-K/A 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 $64,350,000, which represents 50% of consolidated net earnings
for the most recently concluded four fiscal quarter periods less dividends paid.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------
1996(b) 1995 1994 1993 1992
------------- ------------- ------------- ------------- --------------
(dollars in thousands except per-share data)
<S> <C> <C> <C> <C> <C>
Income $724,111 $711,320 $497,427 $366,680 $246,615
Earnings before income
taxes 323,829 409,628 302,131 200,537 118,806
Earnings before
extraordinary loss (a) 200,774 253,969 181,279 116,423 72,472
Net earnings 200,774 253,969 181,279 116,423 55,015
Earnings per common share:
Before extraordinary
loss (a) 1.43 1.81 1.31 .90 .61
Net earnings 1.43 1.81 1.31 .90 .45
Cash dividends per
common share .26 .20 .12 .09 .08
At year-end:
Excess servicing
rights receivables $1,451,061 $ 764,617 $ 533,182 $ 843,489 $ 640,647
Total assets 3,591,920 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 1,137,492 925,022 725,891 549,429 298,834
</TABLE>
(a) Before extraordinary loss relating to the debt exchange in 1992.
(b) Financial information for 1996 has been restated. (See Note O to
Consolidated Financial Statements)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
INTRODUCTION
As more fully described in the Notes to Consolidated Financial Statements,
financial information in this Report has been restated to correct the December
31, 1996 valuation of the Company's excess servicing rights and the expense
related to the Chief Executive Officers' stock bonus plan.
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.
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<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 loses. The outstanding security
balances of 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
16
<PAGE>
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.
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 income for increase (decrease)
the year ended December 31 ------------------------
------------------------------------- 1995 to 1994 to
1996 1995 1994 1996 1996
--------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Income:
Net gains on contract sales 102.4% 94.4% 91.4% 10.4% 47.7%
Provision for losses on contract
sales (48.6) (31.4) (27.0) 57.7 65.9
Interest 29.8 24.8 22.4 22.3 58.0
Service 10.1 7.5 8.1 36.8 33.7
Commissions and other 6.3 4.7 5.1 38.5 29.3
----------- ----------- -----------
Total income 100.0% 100.0% 100.0%
=========== =========== ===========
Expenses:
Interest 9.7% 8.1% 8.4% 22.2 37.7
Cost of servicing 7.3 5.5 6.2 35.4 26.9
General and administrative 38.3 28.8 24.7 35.1 67.1
Earnings before income taxes 44.7 24.7 60.7 (20.9) 35.6
Net earnings 27.7 35.7 36.4 (20.9) 40.1
</TABLE>
17
<PAGE>
Net gains on contract sales increased 10.4% 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 includes the impact of a write down to the carrying value of
the Company's excess servicing rights receivable of $200 million. Excluding the
impact of this write down, net gains on contract sales increased 40.2% for the
year. In addition, net gains on contract sales for 1996 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 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 contracts 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.
18
<PAGE>
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 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.
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.
19
<PAGE>
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 35.1% 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 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 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
20
<PAGE>
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.
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 to 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.
21
<PAGE>
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
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.
22
<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/A 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.
23
<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/A
AND
INDEPENDENT AUDITORS' REPORT
YEARS ENDED DECEMER 31, 1996, 1995 AND 1994
24
<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 of 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.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
January 24, 1997, Except as to notes B, G, H, I, K and O, which
are as of January 27, 1998.
25
<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, B, and O) 1,451,061,000 764,617,000
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 $3,591,920,000 $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 378,559,000 266,131,000
Investors payable 346,272,000 238,448,000
Income taxes, principally deferred (Note K) 473,192,000 407,062,000
------------------ ------------------
Total liabilities 2,454,428,000 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, respective 1,398,000 1,375,000
Additional paid-in capital 373,573,000 323,564,000
Retained earnings 818,733,000 653,996,000
Minimum pension liability adjustments (2,299,000) --
------------------ ------------------
1,191,405,000 978,935,000
Less treasury stock, 2,051,000 shares at cost (53,913,000) (53,913,000)
------------------ ------------------
Total stockholders' equity 1,137,492,000 925,022,000
------------------ ------------------
Total liabilities and stockholders' equity $3,591,920,000 $2,383,546,000
================== ==================
</TABLE>
See notes to consolidated financial statements.
26
<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 (Note O) $ 741,486,000 $ 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
---------------- ---------------- ----------------
724,111,000 711,320,000 497,427,000
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 277,210,000 205,211,000 122,820,000
---------------- ---------------- ----------------
400,282,000 301,692,000 195,296,000
---------------- ---------------- ----------------
EARNINGS BEFORE INCOME
TAXES 323,829,000 409,628,000 302,131,000
INCOME TAXES (Note K) 123,055,000 155,659,000 120,852,000
---------------- ---------------- ----------------
NET EARNINGS $ 200,774,000 $ 253,969,000 $ 181,279,000
================ ================ ================
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $1.43 $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.
27
<PAGE>
GREEN TREE FINANCIAL CORPORATIOIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Additional Minimum Total
Common paid-in Treasury Retained pension stockholders'
Stock capital stock earnings 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
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)
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 issuances of
2,300,000 shares 23 50,009 -- -- -- 50,032
Minimum pension liability
adjustments (2,299) (2,299)
Dividends on common stock -- -- -- (30,037) -- (36,037)
Net earnings -- -- -- 200,774 -- 200,774
-------- ---------- --------- ---------- ---------- -----------
BALANCES, December 31, 1996 $1,398 $373,573 $(53,913) $818,733 $ (2,299) $1,137,492
======== ========== ========= ========== ========== ===========
</TABLE>
See notes to consolidated financial statements
28
<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
------------------ ----------------- -----------------
NET 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)
29
<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 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 $200,774,000 $253,969,000 $181,279,000
Deferred taxes 67,460,000 109,686,000 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 (194,021,000) (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 (6,107,000) 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.
30
<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 originated
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 Certificates ("NIM
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 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.
31
<PAGE>
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 earning per share are substantially the
same.
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.
32
<PAGE>
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 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.
33
<PAGE>
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 receivables consisted of:
<TABLE>
<CAPTION>
Excess
Servicing
Gross NIM Rights
Cash Flows Certificates Receivables
--------------- --------------- ---------------
(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 (3,387,749) 1,166,733 (2,221,016)
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 -- 145,307 145,307
-------------- -------------- -------------
$2,102,468 $ (651,407) $1,451,061
============== ============== =============
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>
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. The carrying value of excess servicing rights receivable is
34
<PAGE>
analyzed quarterly to determine the impact of prepayments, if any. However, the
carrying value will continue to reflect the discount rates utilized at the time
of sale. During the year, the company reduced the carrying value of the
subordinated NIM certificates and it's non-NIM excess servicing rights by $177
million and $23 million, respectively, due to adverse prepayment experience.
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 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.
35
<PAGE>
C. CONTRACTS AND COLLATERAL
Contracts and collateral consist of:
December 31
---------------------------------------
1996 1995
----------------- -----------------
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
================= =================
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).
D. PROPERTY, FURNITURE AND FIXTURES
Property, furniture and fixtures consist of:
December 31
Estimated ----------------------------
useful life 1996 1995
-------------- ------------ ------------
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
============ ============
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
36
<PAGE>
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.
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.
Debt is as follows:
December 31
---------------------------------------
1996 1995
----------------- -----------------
Notes payable $472,181,000 $93,662,000
Senior/Senior Subordinated Notes 290,348,000 289,884,000
----------------- -----------------
$762,529,000 $383,546,000
================= =================
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 for the basis of
historical experience and management's best estimate
37
<PAGE>
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
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.
38
<PAGE>
Gross NIM Net
Allowance Certificates Allowance
-------------- -------------- -------------
1996
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 $497,191,000 $(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
============== ============== =============
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.
39
<PAGE>
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 Shareholders 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.
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.
40
<PAGE>
A summary of the stock option plan activity is as follows:
Number of Weighted Average
Shares Exercise Price
-------------- ---------------------
Outstanding at December 31, 1993 5,843,536 $ 4.29
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
==============
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.
A summary of stock options outstanding at December 31, 1996 is as follows:
Options Outstanding:
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ---------------- -------------- ------------------ ------------------
$ 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
41
<PAGE>
Options Exercisable:
Range of Number Weighted Average
Exercise Prices Outstanding Exercise Price
- --------------------- ----------------- ----------------------
$ 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
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.
1996 1995
------------- -----------------
Net Earnings As Reported $200,774,000 $253,969,000
Pro Forma 190,185,000 250,805,000
Primary Earnings
Per Share As Reported $1.43 $1.81
Pro Forma $1.35 1.79
Fully Diluted Earnings
Per Share As Reported $1.43 $1.81
Pro Forma $1.35 1.79
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 $64,350,000, which represents 50% of
42
<PAGE>
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.
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
$7,860,000 at December 31, 1996, and at December 31, 1995, the fair value
exceeded the carrying value by $56,600,000.
LEASE 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.
43
<PAGE>
COMMERCIAL FINANCE RECEIVABLES
Commercial finance receivables 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.
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 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.
44
<PAGE>
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
--------------------------- ------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair 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) 976,467 968,607 602,728 659,328
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>
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.
45
<PAGE>
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 Company has been served with various lawsuits in United States Distict
Court. These lawsuits were filed by certain stockholders of the Company as
purported class actions on behalf of persons or entities who purchased common
stock of the Company during the alleged class periods. In addition to the
Company, certain current and former officers and directors of the Company are
named as defendants in one or more of the lawsuits. The Company and the other
defendants intend to seek consolidation of each of the lawsuits in the United
States District Court for the District of Minnesota. Plaintiffs in the lawsuits
assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. In each case, plaintiffs allege that the Company and the other defendants
violated federal securities laws by, among other things, making false and
misleading statements about the current state and future prospects of the
Company (particularly with respect to prepayment assumptions and performance of
certain of the Company's loan portfolios) which allegedly rendered the Company's
financial statements false and misleading. The Company believes that the
lawsuits are without merit and intends to defend such lawsuits vigorously.
In addition, the nature of the Company's business is such that it is routinely a
party or subject to items of pending or threatening 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 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
46
<PAGE>
certain key employees as designated by the Board of Directors. This plans 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 to one or
more funds. Company contributions vest after three year. 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:
Year ended December 31
------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
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 56,201,000 92,870,000 76,100,000
State 11,259,000 16,816,000 14,472,000
------------- ------------ -------------
67,460,000 109,686,000 90,572,000
------------- ------------ -------------
$123,055,000 $155,659,000 $120,852,000
============= ============ =============
47
<PAGE>
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.
December 31
--------------------------------------
1996 1995
----------------- -----------------
Deferred tax liabilities:
Excess servicing rights $451,051,000 $402,461,000
Other 50,602,000 22,933,000
----------------- -----------------
Gross deferred tax liabilities 501,653,000 425,394,000
----------------- -----------------
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 $473,192,000 $405,731,000
================= =================
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:
Year ended December 31
-------------------------------------
1996 1995 1994
-------- --------- ---------
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%
======== ========= =========
48
<PAGE>
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.
N. BUSINESS ACQUISITION
On December 1, 1996, the Company purchased the Net Assets of FINOVA Acquisition
I, Inc. for approximately $620,000,000. The business acquired under a stock
purchase agreement provides equipment leases, loans and related services to
manufacturers and dealers and their customers. Goodwill totaling $59,201,000,
was recorded as part of this acquisition. The December, 1996 financial
operations of this leasing/loan business is included in the Company's December
31, 1996 financial statements.
O. SUBSEQUENT EVENTS - RESTATEMENT OF 1996 FINANCIAL STATEMENTS
During the fourth quarter of 1997, the Company determined that its processes for
assessing the valuation of its excess servicing rights had not fully considered
the effects of partial prepayments on projected future interest collections and
the impact of changes in projected future interest due to investors on a
weighted average basis on the bonds outstanding. In consideration of these
items, the Company has restated its previously reported financial statements for
1996. The Company reduced the carrying value of its excess servicing rights $200
million. In addition, general and administrative expenses were reduced $25.9
million related to its executive bonus program. The effect on the Company's
previously reported financial statements for 1996 is as follows:
Decrease net gains on contract sales and excess servicing rights $200,000,000
Decrease in general and administrative expense
and accrued liabilities $ 25,868,000
Decrease in earnings before income taxes $174,132,000
Decrease in provision for income
taxes and deferred tax liability $ 66,170,000
Decrease in net earnings for 1996 and decrease in
retained earnings as of December 31, 1996 $107,962,000
Decrease in net earnings per common share $ 0.77
49
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth
quarter quarter quarter quarter
----------- ------------ ------------ ------------
(dollars in thousands expect
per-share amounts)
1996:
Income $168,118 $196,102 $219,665 $140,226
Net earnings (loss) 66,362 75,422 85,518 (26,528)
Net earnings (loss) per share .48 .54 .61 (.19)
1995:
Income $128,199 $153,274 $174,374 $255,473
Net earnings 50,729 61,712 72,037 69,491
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
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
50
<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.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial statements
The following consolidated financial statements of Green Tree Financial
Corporation and subsidiaries are included in Part II, Item 8 of this
report:
PAGE(S)
Independent Auditors' Report 25
Consolidated Balance Sheets - December 31, 1996 and 1995 26
Consolidated Statements of Operations - years ended
December 31, 1996, 1995 and 1994 27
Consolidated Statements of Stockholders' Equity - years ended
December 31, 1996, 1995 and 1994 28
Consolidated Statements of Cash Flows - years ended
December 31, 1996, 1995 and 1994 29
Notes to Consolidated Financial Statements 31
(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 57
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).
3 (c) Bylaws of Green Tree Financial Corporation
(incorporated by reference to the Company's Registration
Statement on Form S-1; File No. 33-60869).
52
<PAGE>
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-1; 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 Mater 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 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).
53
<PAGE>
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
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996; File No. 1-08916).
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).
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 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996; File No. 1-08916).
54
<PAGE>
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 Restated Financial Data Schedule (filed herewith).
PURSUANT TO ITME 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.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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 Executive Vice President and
Officer (principal executive Chief Financial Officer (principal
officer) financial officer)
By: /S/ SCOTT T. YOUNG
------------------------------
Scott T. Young
Senior Vice President and Controller
(principal accounting officer)
Dated: March 18, 1998
Pursuant to the requirements of the Securities and 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
- ----------------------------- March 18, 1998
Lawrence M. Coss, Director
/S/ RICHARD G. EVANS
- ----------------------------- March 18, 1998
Richard G. Evans, Director
W. Max McGee, Director ) By: /S/ JOEL H. GOTTESMAN
) --------------------------
) Joel H. Gottesman
Robert S. Nickoloff, Director ) Attorney-in-Fact
Dated: March 18, 1998
56
<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.
57
<PAGE>
GREEN TREE FINANCIAL CORPORATION
Securities and Exchange Commission
Form 10-K/A
(For the Fiscal Year Ended December 31, 1996)
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT PAGE NO.
11 (a) Computation of Primary Earnings Per Share 59
11 (b) Computation of Fully Diluted Earnings Per Share 60
12 Computation of Ratio of Earnings to Fixed Charges 61
21 Subsidiaries of Registrant 62
23 Consent of KPMG Peat Marwick LLP 64
24 Powers of Attorney 65
27 Restated Financial Data Schedule 66
<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 $200,774,000 $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 $1.43 $1.81 $1.31
===== ===== =====
</TABLE>
<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 $200,774,000 $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: $1.43 $1.81 $1.31
===== ===== =====
</TABLE>
<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 $323,829,000 $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
------------ ------------ ------------ ------------ ------------
$396,767,000 $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) 5.44 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.
<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
<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 an Caicos
Island
Rice Park Properties Corporation Minnesota
Woodgate Consolidated Incorporated Texas
Woodgate Utilities Incorporated Texas
<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,
except as to Notes B, G, H, I,K and O, which are as of January 27, 1998,
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/A 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.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
March 18, 1998
<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/A 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 an 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.
/S/ W. MAX MCGEE March 18, 1998
- ---------------------------------
W. Max McGee
/S/ ROBERT S. NICKOLOFF March 18, 1998
- ---------------------------------
Robert S. Nickoloff
<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 DOCUMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<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> 3,591,920
<CURRENT-LIABILITIES> 0
<BONDS> 290,348,000
0
0
<COMMON> 1,398,000
<OTHER-SE> 1,136,094
<TOTAL-LIABILITY-AND-EQUITY> 3,591,920
<SALES> 741,486,000
<TOTAL-REVENUES> 724,111,000
<CGS> 0
<TOTAL-COSTS> 330,232,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (351,743,000)
<INTEREST-EXPENSE> 70,050,000
<INCOME-PRETAX> 323,829,000
<INCOME-TAX> 123,055,000
<INCOME-CONTINUING> 200,774,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,774,000
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
</TABLE>
