UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] 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
Delaware No. 41-1807858
---------------------- -------------------------------
State of Incorporation IRS Employer Identification No.
1100 Landmark Towers
Saint Paul, Minnesota 55102-1639 (651) 293-3400
- -------------------------------------- --------------
Address of principal executive offices Telephone
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Shares of common stock outstanding as of April 30, 1999: 100
The Registrant meets the conditions set forth in general instruction
H(1)(a) and H(1)(b) to Form 10-Q. Accordingly, the disclosures in this filing
have been reduced as permitted by such instructions.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
March 31, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Actively managed fixed maturity securities at fair value (amortized cost: 1999 - $366.8;
1998 - $342.5).............................................................................. $ 344.8 $ 340.8
Interest-only securities at fair value (amortized cost: 1999 - $1,399.5; 1998 - $1,313.6)..... 1,369.5 1,305.4
Short-term investments........................................................................ 233.3 195.2
Cash held in segregated accounts for investors................................................ 895.8 843.7
Cash deposits, restricted under pooling and servicing agreements.............................. 195.9 205.2
Other invested assets ........................................................................ 21.0 16.8
Finance receivables........................................................................... 3,687.4 3,067.2
Other receivables............................................................................. 272.6 266.7
Receivables due from Conseco, Inc............................................................. 222.4 227.5
Servicing rights.............................................................................. 122.6 116.4
Goodwill ................................................................................... 52.4 53.2
Other assets.................................................................................. 207.1 190.2
-------- --------
Total assets.......................................................................... $7,624.8 $6,828.3
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Investor payables.......................................................................... $ 895.8 $ 843.7
Other liabilities.......................................................................... 992.6 705.6
Income tax liabilities..................................................................... 593.1 547.9
Notes payable and commercial paper......................................................... 1,915.2 1,584.9
Notes payable due to Conseco, Inc.......................................................... 819.0 854.0
-------- --------
Total liabilities.................................................................... 5,215.7 4,536.1
-------- --------
Shareholder's equity:
Common stock and additional paid-in capital................................................ 1,340.9 1,338.3
Accumulated other comprehensive loss:
Unrealized depreciation of actively managed fixed maturity securities and
interest-only securities (net of applicable deferred income taxes: 1999 - $(19.2);
1998 - $(3.3))......................................................................... (32.8) (6.6)
Minimum pension liability adjustment (net of applicable deferred income taxes:
1998 - $(2.7))......................................................................... - (4.4)
Retained earnings.......................................................................... 1,101.0 964.9
-------- --------
Total shareholder's equity........................................................... 2,409.1 2,292.2
-------- --------
Total liabilities and shareholder's equity........................................... $7,624.8 $6,828.3
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Net investment income:
Finance receivables and other............................................................... $ 85.6 $ 50.1
Interest-only securities.................................................................... 43.7 33.4
Gain on sale of finance receivables........................................................... 199.8 143.7
Fee revenue and other income.................................................................. 82.6 58.6
------ ------
Total revenues.......................................................................... 411.7 285.8
------ ------
Expenses:
Interest expense.............................................................................. 56.6 48.5
Other operating costs and expenses............................................................ 149.9 134.9
------ ------
Total expenses.......................................................................... 206.5 183.4
------ ------
Income before income taxes.............................................................. 205.2 102.4
Income tax expense............................................................................... 69.1 38.9
------ ------
Net income.............................................................................. $136.1 $ 63.5
====== ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
(unaudited)
Common stock Accumulated other
and additional comprehensive Retained
Total paid-in capital income (loss) earnings
----- --------------- ------------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1999....................................... $2,292.2 $1,338.3 $(11.0) $ 964.9
Comprehensive income, net of tax:
Net income................................................ 136.1 - - 136.1
Change in unrealized depreciation of actively managed
fixed maturity investments and interest-only securities
(net of applicable income tax benefit of $15.9)......... (26.2) - (26.2) -
Change in minimum pension liability (net of applicable
income tax expense of $2.7)............................. 4.4 - 4.4 -
--------
Total comprehensive income............................ 114.3
Tax benefit related to issuance of shares under
stock option plans........................................ 2.6 2.6 - -
-------- -------- ------ --------
Balance, March 31, 1999........................................ $2,409.1 $1,340.9 $(32.8) $1,101.0
======== ======== ====== ========
Balance, January 1, 1998....................................... $1,332.1 $ 237.8 $ 18.6 $1,075.7
Comprehensive income, net of tax:
Net income................................................ 63.5 - - 63.5
Change in unrealized appreciation (depreciation)
of interest-only securities (net of applicable income
tax benefit of $12.9)................................... (20.8) - (20.8) -
--------
Total comprehensive income............................ 42.7
Issuance of stock warrants in conjunction with
financing transaction..................................... 7.7 7.7 - -
Issuance of shares for stock options and for
employee benefit plans.................................... .6 .6 - -
Tax benefit related to issuance of shares under stock option
plans..................................................... 1.3 1.3 - -
Shares returned by executive due to recomputation
of bonus.................................................. (23.4) (23.4) - -
Dividends on common stock................................... (11.8) - - (11.8)
-------- -------- ------ --------
Balance, March 31, 1998........................................ $1,349.2 $ 224.0 $ (2.2) $1,127.4
======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................... $ 136.1 $ 63.5
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of finance receivables.................................................... (199.8) (143.7)
Points and origination fees received................................................... 110.5 53.0
Interest-only securities investment income............................................. (43.7) (33.4)
Cash received from interest-only securities............................................ 123.5 68.0
Servicing income....................................................................... (39.3) (33.1)
Cash received from servicing activities................................................ 41.7 35.1
Amortization and depreciation.......................................................... 12.3 10.1
Income taxes........................................................................... 61.9 28.8
Accrual and amortization of investment income.......................................... (4.2) (2.9)
Other.................................................................................. (33.4) (18.4)
--------- ---------
Net cash provided by operating activities............................................ 165.6 27.0
--------- ---------
Cash flows from investing activities:
Cash received from the sale of finance receivables, net of expenses...................... 2,972.6 2,941.4
Principal payments received on finance receivables....................................... 1,644.5 1,174.6
Finance receivables originated........................................................... (5,114.3) (4,277.2)
Other.................................................................................... (46.3) (11.7)
--------- ---------
Net cash used by investing activities ............................................... (543.5) (172.9)
--------- ---------
Cash flows from financing activities:
Issuance of shares related to stock options.............................................. - 0.6
Issuance of liabilities related to deposit products...................................... 121.0 -
Issuance of notes payable and commercial paper........................................... 3,235.4 2,553.7
Payments on notes payable and commercial paper........................................... (2,940.4) (2,354.0)
Common stock dividends paid ............................................................. - (11.8)
--------- ---------
Net cash provided by financing activities............................................ 416.0 188.5
--------- ---------
Net increase in short-term investments............................................... 38.1 42.6
Short-term investments, beginning of period................................................. 195.2 164.2
--------- ---------
Short-term investments, end of period....................................................... $ 233.3 $ 206.8
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following notes should be read in conjunction with the notes to the
consolidated financial statements included in the 1998 Form 10-K of Green Tree
Financial Corporation ("we", "Green Tree" or the "Company").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, that are necessary to present fairly
Green Tree's financial position and results of operations on a basis consistent
with that of our prior audited consolidated financial statements. As permitted
by rules and regulations of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, we have condensed or omitted certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP"). We have also
reclassified certain amounts from the prior periods to conform to the 1999
presentation. Results for interim periods are not necessarily indicative of the
results that may be expected for a full year.
Green Tree is a diversified financial services holding company that
originates, purchases, sells and services consumer and commercial finance loans
throughout the United States. Green Tree is a wholly owned subsidiary of
Conseco, Inc. ("Conseco"), a financial services holding company.
When we prepare financial statements in conformity with GAAP, we are
required to make estimates and assumptions that significantly affect various
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting periods. For example, we use significant estimates
and assumptions in calculating interest-only securities, servicing rights,
goodwill, liabilities related to litigation, gain on sale of finance receivables
and deferred income taxes. If our future experience differs from these estimates
and assumptions, our financial statements could be materially affected.
Our consolidated financial statements exclude the results of material
transactions between us and our consolidated affiliates, or among our
consolidated affiliates.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued in June
1998. SFAS 133 requires all derivative instruments to be recorded on the balance
sheet at estimated fair value. Changes in the fair value of derivative
instruments are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. SFAS 133 is effective
for year 2000. We are currently evaluating the impact of SFAS 133; at present,
we do not believe it will have a material effect on our consolidated financial
position or results of operations.
FINANCE RECEIVABLES, INTEREST-ONLY SECURITIES AND SERVICING RIGHTS
Finance receivables, summarized by type, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Manufactured housing......................................................... $ 463.2 $ 798.8
Mortgage services............................................................ 829.5 603.5
Consumer/credit card......................................................... 748.1 587.3
Commercial................................................................... 1,700.5 1,120.6
-------- --------
3,741.3 3,110.2
Less allowance for doubtful accounts......................................... (53.9) (43.0)
-------- --------
Net finance receivables................................................. $3,687.4 $3,067.2
======== ========
</TABLE>
6
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
We pool and securitize substantially all of the finance receivables we
originate. In a typical securitization, we establish a special-purpose entity
for the limited purpose of purchasing the finance receivables. This
special-purpose entity issues and sells interest-bearing securities that
represent interests in the receivables, collateralized by the underlying pool of
finance receivables. We, in turn, receive the proceeds from the sale of the
securities, which are typically sold at the same amount as the principal balance
of the receivables sold. We retain a residual interest, which represents the
right to receive, over the life of the pool of receivables: (i) the excess of
the principal and interest received on the receivables transferred to the
special purpose entity over the principal and interest paid to the holders of
other interests in the securitization; and (ii) servicing fees.
In some securitizations, we also retain certain lower-rated securities that
are senior in payment priority to the interest-only securities. Such retained
securities had a fair market value of $344.8 million at March 31, 1999, and were
classified as actively managed fixed maturity securities.
During the first three months of 1999 and 1998, the Company sold $2,965.0
million and $2,967.8 million, respectively, of finance receivables in various
securitized transactions and recognized gains of $199.8 million and $143.7
million, respectively.
We record the interest-only security initially at a value representing an
allocated portion of the cost basis of the finance receivables being sold. We
adjust this value to estimated fair value each quarter. We used the following
assumptions to determine the initial value of the interest-only securities
related to new securitizations in the first quarter of 1999. The difference
between estimated fair value and the security's book value is included in
unrealized depreciation of other investments.
<TABLE>
<CAPTION>
Manufactured Home equity/ Consumer/
housing home improvement equipment Total
------- ---------------- --------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Interest-only securities at fair value.............. $ 742.9 $ 456.5 $ 170.1 $ 1,369.5
Principal balance of sold finance receivables (a)... 21,263.7 8,132.0 3,722.0 33,117.7
Weighted average customer interest rate on sold
finance receivables (a).......................... 10.1% 11.4% 10.9%
Expected weighted average annual constant
prepayment rate as a percentage of principal
balance of sold finance receivables (a) (b)...... 11.5% 26.9% 22.2%
Expected nondiscounted credit losses as a
percentage of principal balance of sold
finance receivables (a) (b)...................... 6.1% 3.3% 2.5%
Weighted average discount rate used for
determining cost basis on the income statement... 15.0% 15.0% 15.0%
<FN>
- --------------------
(a) Excludes finance receivables sold in revolving trust securitizations.
(b) The valuation of interest-only securities is affected not only by the
projected level of prepayments of principal and net credit losses, but also
by the projected timing of such prepayments and net credit losses. Should
such timing differ materially from our projections, it could have a
material effect on the valuation of our interest-only securities.
</FN>
</TABLE>
The weighted average interest rate used to discount expected cash flows of
the interest-only securities in determining the fair value on the balance sheet
was 14 percent at March 31, 1999.
7
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Credit quality was as follows:
<TABLE>
<CAPTION>
March 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
60-days-and-over delinquencies as a percentage
of managed finance receivables at period end............................ 1.08% 1.00%
==== ====
Net credit losses incurred during the last twelve months as a percentage
of average managed finance receivables during the period................ 1.07% 1.06%
==== ====
Repossessed collateral inventory as a percentage of managed finance
receivables at period end............................................... 1.24% .97%
==== ====
</TABLE>
Activity in the interest-only securities account was as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Balance, beginning of period................................................ $1,305.4 $1,398.7
Additions resulting from securitizations during the period............... 165.7 171.1
Investment income........................................................ 43.7 33.4
Cash received............................................................ (123.5) (68.0)
Change in unrealized depreciation charged to shareholder's equity........ (21.8) (33.7)
-------- --------
Balance, end of period...................................................... $1,369.5 $1,501.5
======== ========
</TABLE>
In conjunction with certain sales of finance receivables, the Company has
provided guarantees aggregating approximately $1.8 billion at March 31, 1999. We
believe the likelihood of a significant loss from such guarantees is remote.
NOTES PAYABLE AND COMMERCIAL PAPER
Notes payable and commercial paper were as follows (interest rates as of
March 31, 1999):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Note payable to Conseco (5.20%)..................................................... $ 819.0 $ 854.0
Master repurchase agreements due on various dates in 1999
and 2000 (5.65%)................................................................. 1,165.7 780.6
Credit facility secured by interest-only securities due 2000 (6.94%)................ 245.0 300.0
10.25% senior subordinated notes due 2002........................................... 267.3 267.3
Medium term notes due October 1999 to April 2003 (6.58%)............................ 238.7 238.7
Other ........................................................................... 3.2 3.2
-------- --------
Total principal amount........................................................... 2,738.9 2,443.8
Less unamortized net discount....................................................... (4.7) (4.9)
-------- --------
Total ........................................................................... $2,734.2 $2,438.9
======== ========
</TABLE>
8
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
At March 31, 1999, we had $4.25 billion of master repurchase agreements (of
which $1,165.7 million was outstanding at March 31, 1999) with various
investment banking firms, subject to the availability of eligible collateral.
The agreements generally provide for one-year terms, which can be extended each
quarter by mutual agreement of the parties for an additional year, based upon
our financial performance.
RELATED PARTY TRANSACTIONS
Pursuant to a promissory note with Conseco, $819.0 million was payable at
March 31, 1999. The note bears interest at LIBOR plus a margin of .35 percent
and both the principal and interest are due on demand. The Company may borrow up
to $2.0 billion under the note. Interest expense incurred under the note totaled
$15.4 million for the three months ended March 31, 1999.
At March 31, 1999, $73.7 million par value of the 10.25% senior
subordinated notes were held by Conseco.
LITIGATION
Green Tree has been served with various related lawsuits which were filed
in the United States District Court for the District of Minnesota. These
lawsuits were filed as purported class actions on behalf of persons or entities
who purchased common stock or options of Green Tree during the alleged class
periods that generally run from February 1995 to January 1998. One such action
did not include class action claims. In addition to Green Tree, certain current
and former officers and directors of Green Tree are named as defendants in one
or more of the lawsuits. Green Tree and other defendants have obtained an order
from the United States District Court for the District of Minnesota
consolidating the lawsuits seeking class action status into two actions: one
which pertains to a purported class of common stockholders and the other which
pertains to a purported class of stock option traders. 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 Green Tree 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 Green
Tree (particularly with respect to prepayment assumptions and performance of
certain loan portfolios of Green Tree) which allegedly rendered Green Tree's
financial statements false and misleading. The Company believes that the
lawsuits are without merit and intends to defend such lawsuits vigorously.
However, the ultimate outcome of these lawsuits cannot be predicted with
certainty. Green Tree has filed motions, which are pending, to dismiss these
lawsuits.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in lawsuits related to their operations. Although the ultimate outcome of
certain of such matters cannot be predicted, such lawsuits currently pending
against the Company or its subsidiaries are not expected, individually or in the
aggregate, to have a material adverse effect on the Company's consolidated
financial condition, cash flows or results of operations.
CONSOLIDATED STATEMENT OF CASH FLOWS
In 1999, the tax benefit of $2.6 million related to the issuance of shares
under stock option plans was not reflected in the consolidated statement of cash
flows. The following non-cash items were not reflected in the consolidated
statement of cash flows in 1998: (i) the return of common stock to the Company
of $23.4 million pursuant to the recomputation of a former executive officer's
bonus for fiscal year 1996; (ii) the issuance of stock warrants totaling $7.7
million in conjunction with a financing transaction; and (iii) the tax benefit
of $1.3 million related to the issuance of common stock for option exercises.
9
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting our results
of operations. This discussion should be read in conjunction with the
consolidated financial statements and notes included herein and in our 1998 Form
10-K. The Registrant meets the conditions set forth in the General Instructions
(H)(1)(a) and (b) of the Form 10-Q and is therefore omitting certain information
otherwise required by Item 2.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------
1999 1998
---- ----
<S> <C> <C>
Contract originations:
Manufactured housing........................................................................ $ 1,411.1 $ 1,204.2
Mortgage services........................................................................... 1,437.6 1,038.2
Consumer/credit card........................................................................ 538.6 575.2
Commercial.................................................................................. 1,986.9 1,540.1
--------- ---------
Total..................................................................................... $ 5,374.2 $ 4,357.7
========= =========
Sales of finance receivables:
Manufactured housing........................................................................ $ 1,800.0 $ 1,200.0
Home equity/home improvement................................................................ 1,188.2 1,079.0
Consumer/equipment.......................................................................... - 371.0
Commercial and retail revolving credit...................................................... - 317.8
Retained bonds.............................................................................. (23.2) -
--------- ---------
Total..................................................................................... $ 2,965.0 $ 2,967.8
========= =========
Managed receivables (average):
Manufactured housing........................................................................ $21,447.3 $18,273.9
Mortgage services........................................................................... 8,685.6 5,203.1
Consumer/credit card........................................................................ 2,988.5 1,912.8
Commercial.................................................................................. 5,121.3 3,539.9
--------- ---------
Total..................................................................................... $38,242.7 $28,929.7
========= =========
Net investment income:
Finance receivables and other............................................................... $ 85.6 $ 50.1
Interest-only securities.................................................................... 43.7 33.4
Gain on sale of finance receivables............................................................ 199.8 143.7
Fee revenue and other income................................................................... 82.6 58.6
------ ------
Total revenues............................................................................ 411.7 285.8
------ ------
Interest expense............................................................................... 56.6 48.5
Other operating costs and expenses............................................................. 149.9 134.9
------ ------
Total expenses............................................................................ 206.5 183.4
------ ------
Operating income before income taxes...................................................... $205.2 $102.4
====== ======
</TABLE>
Contract originations in the first quarter of 1999 were $5.4 billion, up 23
percent over 1998.
Manufactured housing contract originations increased by $206.9 million, or
17 percent, during the first three months of 1999 over 1998. The increase in
1999 is due to an increase in both the average size and number of contracts
written.
Mortgage services contract originations increased by $399.4 million, or 38
percent, during 1999 over 1998. We have continued to expand our home equity
retail origination network.
10
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------
Consumer/credit card contract originations decreased by $36.6 million, or
6.4 percent, during 1999 because we focused on originating more profitable
business in 1999.
Commercial originations increased by $446.8 million, or 29 percent, during
1999 over 1998 reflecting higher production in all areas of commercial
financing.
Sales of receivables occur when we sell through securitizations the finance
receivables that we originate. The amount of receivables we sell in a particular
period depends on many factors, including: (i) the volume of recent
originations; (ii) market conditions; and (iii) the availability and cost of
alternative financing. The total finance receivables sold in the first quarter
of 1999 was approximately equal to the first quarter of 1998. Total finance
receivables held by the Company were $3.7 billion at March 31, 1999, an increase
of $1.5 billion over March 31, 1998, as a result of both: (i) an increase in the
pace of originations; and (ii) our election to hold more of the loans scheduled
for sale late in each quarter until early in the next quarter, when the market
supply of securitizations is usually lower and securitization spreads are
usually better.
Managed receivables include finance receivables we sell through
securitizations as well as the finance receivables and related interests we
retain. The average managed receivables increased to $38.2 billion in the first
quarter of 1999, up 32 percent over the same period in 1998.
Net investment income on finance receivables and other consists of: (i)
interest earned on unsold finance receivables; and (ii) interest income on
short-term and other investments. Such income increased by 71 percent, to $85.6
million, in the first quarter of 1999. The increase is consistent with the
increase in average finance receivables during the 1999 period. The weighted
average yields earned on finance receivables were 10.6 percent and 9.8 percent
during the first three months of 1999 and 1998, respectively.
Net investment income on interest-only securities is the accretion
recognized on the interest-only securities we retain after we sell finance
receivables. Such income increased by 31 percent, to $43.7 million, in the first
quarter of 1999. The increase is consistent with the change in the average
balance of interest-only securities and the increase in the discount rate
assumption we use to value our interest-only securities. The weighted average
yields earned on interest-only securities were 13.1 percent and 9.1 percent
during the first three months of 1999 and 1998, respectively.
Gain on sale of finance receivables is the difference between the proceeds
from the sale of receivables (net of related transaction costs) and the
allocated carrying amount of the receivables sold. We determine the allocated
carrying amount by allocating the original amount of the receivables between the
portion sold and any retained interests (securities classified as fixed
maturities, interest-only securities and servicing rights), based on their
relative fair values at the time of sale. Assumptions used in calculating the
estimated fair value of such retained interests are subject to volatility that
could materially affect operating results. Prepayment rates may vary from
expected rates as a result of competition, obligor mobility, general and
regional economic conditions and changes in interest rates. In addition, actual
losses incurred as a result of loan defaults may vary from projected
performance.
Our gain on sale of finance receivables increased by 39 percent, to $199.8
million, in the first quarter of 1999. Our gain recognized at the time of the
sale fluctuates when changes occur in: (i) the amount of loans sold; (ii) market
conditions (such as the market interest rates available on securities sold in
our securitizations); (iii) the amount and type of interest we retain in the
receivables sold; and (iv) assumptions used to calculate the gain. The gain
recognized in the first quarter of 1998 was reduced by $47 million for an
interest-only security valuation adjustment. In response to higher prepayment
rates and higher market yields on publicly traded securities similar to our
interest-only securities, we increased the assumed prepayment and discount rates
used to calculate the gain on sale of finance receivables for sales completed
after June 30, 1998. Accordingly, the amount of gain (before valuation
adjustments) as a percentage of closed-end loans sold decreased to 6.74 percent
in the first quarter of 1999 from 7.20 percent in the first quarter of 1998.
In recent periods, the Company has emphasized the inclusion of points and
origination fees in finance receivables originated, which increases the amount
of cash received when such receivables are sold in securitizations. Points and
origination fees collected upon the securitization of finance receivables
increased to $110.5 million (or 55 percent of the gain on sale recognized) in
the first quarter of 1999 compared to $53.0 million (28 percent of the gain on
sale recognized) in the first quarter of 1998.
11
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------
In recent periods, conditions in the credit markets have resulted in
less-attractive pricing of certain lower rated securities. As a result, we have
chosen to hold, rather than sell, certain securities having corporate guarantee
provisions. We recognize no gain on the sale of the securities we hold, but we
recognize greater interest income, net of related interest expense, over the
term we hold them. At March 31, 1999, we held $344.8 million of such securities
which are classified as actively managed fixed maturities.
Fee revenue and other income includes servicing income, commissions earned
on insurance policies written in conjunction with the financing transactions and
other income from late fees. Such income increased by 41 percent, to $82.6
million, in the first quarter of 1999. Our servicing portfolio (on which we earn
servicing income) grew and our net written insurance premiums grew along with
managed receivables.
Interest expense increased by 17 percent, to $56.6 million, in the first
quarter of 1999. Our borrowings increased to fund the increase in our average
inventory of finance receivables generated by increases in our loan
originations, commercial revolving credit and lease portfolio financings and
securities held from our securitizations. These increases were offset somewhat
by a decrease in our average borrowing rate to 6.4 percent in the first quarter
of 1999 from 7.7 percent in the first quarter of 1998.
Other operating costs and expenses include the costs associated with
servicing our managed receivables and non-deferrable costs related to
originating new loans. Such expense increased by 11 percent, to $149.9 million,
in the first quarter of 1999 reflecting: (i) the growth in our servicing
portfolio; and (ii) the increased volume of contracts originated.
YEAR-2000 MATTERS
Many computer programs were originally designed to identify each year using
two digits. If not corrected, these computer programs could cause system
failures or miscalculations in the year 2000, with possible adverse effects on
our operations. In 1996, we initiated a comprehensive corporate-wide program
designed to ensure that our computer programs function properly in the year
2000. A number of our employees (including several officers), as well as
external consultants and contract programmers, are working on various year-2000
projects. Under the program, we are analyzing our application systems, operating
systems, hardware, networks, electronic data interfaces and infrastructure
devices (such as facsimile machines and telephone systems). We also have been
working with vendors and other external business relations to help avoid
year-2000 problems related to the software or services they provide to us.
Our year-2000 projects are currently on schedule. We are conducting our
year-2000 projects in three phases: (i) an audit and assessment phase, designed
to identify year-2000 issues; (ii) a modification phase, designed to correct
year-2000 issues; and (iii) a testing phase, designed to test the modifications
after they have been installed. We have completed the audit and assessment phase
for all critical systems. We expect to substantially complete our modification
projects by the end of the second quarter of 1999. The testing phase of our
program is expected to be completed by the end of the third quarter of 1999. We
believe that we have provided for sufficient time in order to complete any
additional modifications, if necessary, before December 31, 1999.
For some of our year-2000 issues, we are working to complete the previously
planned conversions of older systems to the more modern, year-2000-ready systems
already used in other areas of the Company. In other cases, we are purchasing
new, more modern systems; these costs are being capitalized as assets and
amortized over their expected useful lives. In the remaining cases, we are
modifying existing systems; these costs are being charged to operating expense.
We currently estimate that the total expense of our year-2000 projects will
be approximately $16.2 million. This expense is not material to our financial
position and we are funding it through operating cash flows. Approximately 59
percent of this expense has been incurred through March 31, 1999. This expense
related primarily to modifying existing software systems.
The impact of year-2000 issues will depend not only on the corrective
actions we take, but also on the way in which year- 2000 issues are addressed by
governmental agencies, businesses and other third parties: (i) that provide
services, utilities or data to the Company; (ii) that receive services or data
from the Company; or (iii) whose financial condition or operating capability is
important to the Company. We are in the process of identifying risks and
updating assessments of potential year-2000 risks associated with our external
business relationships, such as third-party administrators, utilities and
financial institutions. These procedures are necessarily limited to matters over
which we are able to reasonably exercise control. We have been informed by our
key financial institutions and utilities that they will be year-2000 ready at
year-end 1999.
12
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GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------
We are also assessing what contingency plans will be needed if any of our
critical systems or those of external business relationships are not year-2000
ready at year-end 1999. We do not currently anticipate such a situation, but our
consideration of contingency plans will continue to evolve as new information
becomes available.
Our year-2000 projects are the highest priority for our information
technology and many other employees. Other systems projects continue while our
year-2000 projects are being completed, however, in many cases, we have
accelerated system upgrades when the new systems address year-2000 issues.
The failure to correct a material year-2000 problem could result in an
interruption in, or failure of, a number of normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year-2000 problem, including the uncertainty of the
preparedness of our external business relationships, we are not able to
currently determine whether the consequences of year-2000 failures will have a
material impact on the Company's results of operations, liquidity and financial
condition. However, we believe our year-2000 readiness efforts will minimize the
likelihood of a material adverse impact.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
report and elsewhere (such as in other filings by the Company with the
Securities and Exchange Commission, press releases, presentations by the Company
or its management or oral statements) relative to markets for the Company's
products and trends in the Company's operations or financial results, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "should," "could," "goal," "target," and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things: (i)
general economic conditions and other factors, including prevailing interest
rate levels, stock and credit market performance, which may affect (among other
things) the Company's ability to sell its products, its ability to make loans
and access capital resources and the costs associated therewith, the market
value of the Company's investments, and the level of defaults and prepayments of
loans made by the Company; (ii) the Company's ability to achieve anticipated
synergies and levels of operational efficiencies; (iii) customer response to new
products, distribution channels and marketing initiatives; (iv) changes in the
Federal income tax laws and regulations which may affect the relative tax
advantages of some of the Company's products; (v) increasing competition in the
finance business; (vi) regulatory changes or actions, including those relating
to regulation of financial services; (vii) the ability of the Company and its
vendors and other external parties to achieve Year 2000 readiness for
significant systems and operations on a timely basis; (viii) the availability
and terms of future acquisitions; and (ix) the risk factors or uncertainties
listed from time to time in the Company's filings with the Securities and
Exchange Commission.
13
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Green Tree has been served with various related lawsuits which were filed
in the United States District Court for the District of Minnesota. These
lawsuits were filed as purported class actions on behalf of persons or entities
who purchased common stock or options of Green Tree during the alleged class
periods that generally run from February 1995 to January 1998. One such action
did not include class action claims. In addition to Green Tree, certain current
and former officers and directors of Green Tree are named as defendants in one
or more of the lawsuits. Green Tree and other defendants have obtained an order
from the United States District Court for the District of Minnesota
consolidating the lawsuits seeking class action status into two actions: one
which pertains to a purported class of common stockholders and the other which
pertains to a purported class of stock option traders. 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 Green Tree 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 Green
Tree (particularly with respect to prepayment assumptions and performance of
certain loan portfolios of Green Tree) which allegedly rendered Green Tree's
financial statements false and misleading. The Company believes that the
lawsuits are without merit and intends to defend such lawsuits vigorously. The
ultimate outcome of these lawsuits cannot be predicted with certainty. Green
Tree has filed motions, which are pending, to dismiss these lawsuits.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in lawsuits related to its operations. Although the ultimate outcome of
certain of such matters cannot be predicted, such lawsuits currently pending
against the Company or its subsidiaries are not expected, individually or in the
aggregate, to have a material adverse effect on the Company's consolidated
financial condition, cash flows or results of operations.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. (a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K - None
14
<PAGE>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREEN TREE FINANCIAL CORPORATION
Dated: May 14, 1999 By: /s/ ROLLIN M. DICK
--------------------
Rollin M. Dick
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
15
<TABLE>
<CAPTION>
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
for the three months ended March 31, 1999 and the year ended December 31, 1998
(Dollars in millions)
Three months
ended Year ended
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Pretax income (loss) from operations:
Net income (loss) $ 136.1 $(87.3)
Add income tax expense (benefit) 69.1 (7.6)
Add extraordinary charge on extinguishment of debt - 11.5
------- ------
Pretax income (loss) from operations 205.2 (83.4)
------- ------
Add fixed charges:
Interest expense on long-term debt 56.6 213.7
Portion of rental(a) 1.6 5.5
------- ------
Fixed charges 58.2 219.2
------- ------
Adjusted earnings $ 263.4 $135.8
======= ======
Ratio of earnings to fixed charges 4.53X (b)
====== ======
<FN>
(a) Interest portion of rental is assumed to be 33 percent.
(b) For 1998, adjusted earnings were $83.4 million less than fixed charges.
Adjusted earnings for 1998 included an impairment charge of $549.4
million and nonrecurring charges of $108.0 million related to the
merger of the Company with Conseco, Inc.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,091,700 <F1>
<SECURITIES> 1,714,300 <F2>
<RECEIVABLES> 3,741,300
<ALLOWANCES> 53,900
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 280,900
<DEPRECIATION> 113,200
<TOTAL-ASSETS> 7,624,800
<CURRENT-LIABILITIES> 0
<BONDS> 506,000
0
0
<COMMON> 1,340,900
<OTHER-SE> 1,068,200 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 7,624,800
<SALES> 199,800
<TOTAL-REVENUES> 411,700
<CGS> 0
<TOTAL-COSTS> 149,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,600
<INCOME-PRETAX> 205,200
<INCOME-TAX> 69,100
<INCOME-CONTINUING> 136,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,100
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes $895,800 of cash held in segregated accounts for investors and
$195,900 of cash deposits, restricted under pooling and servicing
agreements.
<F2> Includes $344,800 of actively managed fixed maturity securities and
$1,369,500 of interest-only securities.
<F3> Includes retained earnings of $1,101,000 and accumulated other
comprehensive losses of $32,800.
</FN>
</TABLE>
