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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
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FORMForm 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION[ X ] Annual report pursuant to Section
13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OFor 15(d) of the Securities Exchange Act
of 1934 FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December
31, 1993
OR
( ) TRANSITION REPORT PURSUANT TO SECTION2001 or
[ ] Transition report pursuant to Section 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OFor 15(d) of
the Securities Exchange Act of 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-11652
GREEN TREE FINANCIAL CORPORATION
(Exact name[No Fee Required]
For the transition period_____from to_____
Commission file number: 1-08916
CONSECO FINANCE CORP.
Delaware No. 41-1807858
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State of registrant as specified in its charter)
Minnesota 41-1263905
(State or other jurisdiction of (I.R.S.Incorporation IRS Employer incorporation or organization) Identification No.)
1100 Landmark Towers
345 St. Peter Street,
Saint Paul, Minnesota 55102-1639 (Address(651) 293-3400
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 293-3400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE
- --------------------- ----------------------
ON WHICH REGISTERED)
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Common Stock, $.01 par value New York Stock Exchange,
Pacific Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange,
Pacific Stock Exchange
8 1/4% Senior Subordinated Debentures due
June 1, 1995 New York Stock Exchange
10 1/offices Telephone
Securities registered pursuant to Section 12(b)of the Act:
Name of each exchange
Title of each class on which registered
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10-1/4% Senior Subordinated Notes due June 1, 2002 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONENone
The Registrant meets the conditions set forth in the General Instructions
(I)(1)(a) and (b) on Form 10-K and is therefore filing this form with the
reduced disclosure.
Indicate by check mark whether the registrantRegistrant (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.days: Yes ____X____[ 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'sRegistrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X)
As of February 28, 1994, the aggregate[ X ]
Aggregate market value of votingcommon stock held by nonaffiliates of registrant was approximately $1,487,568,000.
As of February 28, 1994,nonaffiliates: Effective
July 1, 1998, the shares outstanding of the issuer's classCompany's common stock is no longer traded on an established
public trading market.
Shares of common stock wereoutstanding as follows:
Common Stock 33,671,661
-------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Part of 10-K
Document Where Incorporated
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Proxy Statement for the 1994 Annual Meeting of Shareholders IIIMarch 22, 2002: 103
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PART I
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ITEM 1. BUSINESS.
------------------BUSINESS OF CONSECO FINANCE
The Registrant meets the conditions set forth in the General -------Instructions
(I) (1) (a) and (b) of Form 10-K and is therefore omitting the information
otherwise required by Item 1, except for a brief description of the business
done by the Registrant and its subsidiaries during the most recent fiscal year.
Conseco Finance Corp. ("Conseco Finance", formerly Green Tree Financial
Corporation ("Green Tree" or "the Company")prior to its name change in November 1999) is a financial services
holding company that originates, conditional sales contracts for manufactured homes, home improvementssecuritizes and special products. The Company's insurance agencies also market physical
damage and term life insurance relating to the customers' contracts it
services and acts as servicer on manufactured housing,
contracts originated
by other lenders. Through its principal offices in Saint Paul, Minnesotahome equity, home improvement, retail credit and 43 regional service centersfloorplan extension throughout
the United States, Green Tree
serves all 50 states.
The Company finances both newStates. As used in this report, the terms "we," "Conseco Finance" or
the "Company" refer to Conseco Finance Corp. and previously owned manufactured homes, and
originates conventional contracts as well as contracts insured by the
Department of Housing and Urban Development's Federal Housing
Administration ("FHA") and contracts partially guaranteed by the
Department of Veterans' Affairs ("VA"). The Company's home improvement
loans are financed either on a conventional basis or insured through the
FHA Title I program. In April 1993, the Company was approved as a seller
and servicer of mortgages for the Federal National Mortgage Association
("FNMA"). The Company believes this new program may improve its flexibility in serving the home improvement lending market.
The Company's special products contracts have historically consisted
primarily of conventional contracts originated through established
motorcycle dealers. In early 1993, the Company began to expand the types
of special products it finances to include snowmobiles, personal
watercraft, all-terrain vehicles, and trailers for recreational activities,
such as horse, boat and snowmobile trailers. While the Company believes its
special products will augment its overall growth, it currently does not
expect special products to represent a substantial component of the
Company's overall business in the foreseeable future.
Green Tree pools and securitizes the contracts it originates, retaining the
servicing on the contracts, and issues and sells asset-backed securities
through public offerings and private placements. Substantially all FHA and
VA manufactured housing contracts are converted into pass-through
certificates ("GNMA certificates") guaranteed by the Government National
Mortgage Association ("GNMA"),consolidated subsidiaries.
Conseco Finance became a wholly owned corporate instrumentalitysubsidiary of Conseco, Inc. ("Conseco"), a
financial services holding company, on June 30, 1998, as a result of Conseco's
acquisition (the "Merger") of Conseco Finance.
During the last two years, Conseco has taken a number of actions with
respect to the Company, including: (i) the sale, closing or runoff of several
business units (including asset-based lending, vendor leasing, bankcards,
transportation and park construction); (ii) monetization of certain on-balance
sheet financial assets through sales or as collateral for additional borrowings;
and (iii) cost savings and restructuring of ongoing businesses such as the
streamlining of credit origination operations in the manufactured housing and
home equity lending divisions. In addition, we moved a significant number of
jobs to India, where a highly-educated, low-cost, English-speaking labor force
is available. These actions had a significant effect on the Company's operating
results during 2000 and 2001. In early 2002, we announced our decision to reduce
the size of our floorplan lending business.
In March 2002, we completed a tender offer pursuant to which we purchased
$75.8 million par value of our senior subordinated notes due June 2002. The
purchase price was equal to 100 percent of the United States withinprincipal amount of the Departmentnotes
plus accrued interest. The remaining principal amount outstanding of Housing and Urban Development.
The GNMA certificates, which are secured by the FHA and VA contracts, are
then sold in the secondary market. Conventional contracts are pooled and
such pools are structured into asset-backed securities which are sold in
the public securities markets. The Company also pools FHA-insured and
conventional home improvement contracts for
-1-
sale in the secondary market. In servicing contracts, the Company collects
payments from the borrower and remits principal and interest paymentssenior
subordinated notes after giving effect to the holdertender offer and other debt
repurchases completed prior to the tender offer is $58.4 million (of which $23.7
million is held by Conseco). Also, during the first quarter of 2002, we
announced the tendering for all our remaining public debt - $167 million due in
September 2002 and $4 million due in April 2003. (Such amounts reflect all 2002
debt repurchases completed prior to announcing the tender offer). Such offer
expires on April 12, 2002. The tender offer price is equal to 100 percent of the
contract or investor certificate secured byprincipal amount of the contracts.notes plus accrued interest.
The Company was originally incorporated as Green Tree Acceptance, Inc. under the laws of the State of
Minnesota in 1975. In 1992,1995, the Company changed its name
to Green Tree Financial Corporation.reincorporated under the laws of the
State of Delaware. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St.Saint Peter Street, Saint Paul, Minnesota 55102-1639, and
itsour telephone number is (612)(651) 293-3400.
MARKETING AND DISTRIBUTION
Conseco Finance, with nationwide operations and managed finance
receivables of $43.0 billion at December 31, 2001, is one of America's largest
consumer finance companies, with leading market positions in retail home equity
mortgages, home improvement loans, private label credit cards and manufactured
housing credit. Originations to customers in the following states accounted for
at least 5 percent of our 2001 originations: Texas (8.5 percent), California
(8.2 percent), Florida (6.4 percent) and Michigan (5.2 percent). Unless
otherwise noted, references to loans we have made may include purchase by us of
credit contracts between dealers and buyers.
During 2001, 43 percent of our finance products came indirectly from
customers through intermediary channels such as dealers, contractors, retailers
and correspondents. The remaining products were marketed directly to our
customers through our regional offices and service centers. A description of the
context otherwise requires, "Green Tree" or "the Company" meansprimary distribution channels is as follows:
Dealers, Contractors, Retailers and Correspondents. Manufactured housing,
home improvement and home equity receivables are purchased from and originated
by selected dealers and contractors after being underwritten and analyzed via
one of the Company's automated credit scoring systems at one of our regional
service centers. During 2001, these marketing channels accounted for the
following percentages of total loan originations: 93 percent of manufactured
housing, 72 percent of home improvement and 6 percent of home equity.
2
Regional Service Centers, Retail Satellite Offices and Telemarketing
Center. We market and originate manufactured housing loans through 33 regional
offices and 3 origination and processing centers. We originate home equity loans
through a system of 128 retail satellite offices and 6 regional centers. We also
market private label retail credit products through selected retailers and
process the contracts through Conseco Bank, Inc. ("Conseco Bank"), a Utah
industrial loan company, and through Green Tree Financial CorporationRetail Services Bank, Inc.
("Retail Bank"), a South Dakota limited purpose credit card bank, both of which
are subsidiaries of the Company. We also utilize direct mail to originate home
improvement loans and its subsidiaries.
Purchase and Originationhome equity loans. During 2001, these marketing channels
accounted for the following percentages of Contracts
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Conditional sales contracts are the typical means of financing the purchasetotal loan originations: 7 percent of
manufactured homes ("MH")housing, 28 percent of home improvement, 94 percent of home equity
and special100 percent of retail credit contracts.
Our products ("SP"), and can also be
used to finance home improvements ("HI") to existing single-family homes.include the following product lines:
Manufactured Housing. We provide financing for consumer purchases of
manufactured housing. During 2001, we originated $2.5 billion of contracts for
manufactured housing purchases, or 22 percent of our total originations. At
December 31, 2001, our managed receivables included $25.6 billion of contracts
for manufactured housing purchases, or 59 percent of total managed receivables.
A
"contract" or "conditional sales contract" refers to an agreement
evidencing a monetary obligation and providing security for the obligation.
MH contracts grant the owner of the contract a security interest in the
related manufactured home (and any other personal property described
therein), and SP contracts grant a security interest in the related special
product. For HI contracts, a mortgage or deed of trust on the single-
family home to which the improvements relate serves as security for the
payment obligation under the contract (except for unsecured contracts which
may be offered on loans of $10,000 or less).
All contracts that the Company originates directly or indirectly are
written on forms provided by the Company and are originated on an
individually approved basis in accordance with Company underwriting
guidelines.
Manufactured Housing
--------------------
"Manufactured housing" or "manufactured home" is a structure, transportable in one or more sections, which is
designed to be a dwelling with or without a permanent foundation. Since most manufactured homes are never moved once
the home has reached the homesite, the wheels and axles are removable and
have not been designed for continuous use. Manufactured
housing does not include either modular housing (which typically involves more
sections, greater assembly and a separate means of transporting the sections) or
recreational vehicles ("RV's") (which are either self-propelled vehicles or
units towed by passenger vehicles).
Conditional sales contracts for manufactured home purchases may be financed
on a conventional basis, insured by the FHA or partially guaranteed by the
VA. With respect to manufactured housing, the
-2-
relative volume of conventional, FHA and VA contracts originated by the
Company depends on customer and dealer preferences as well as prevailing
market conditions. Over the last five years, the percentage of FHA and VA
contracts in the Company's manufactured home contract portfolio has ranged
from 29% to 39%, and at December 31, 1993, such contracts constituted 29%
of the Company's portfolio, of which approximately 94% were FHA contracts.
Conventional and VA contracts are generally subject to minimum down
payments of approximately 5% of the amount financed, while FHA contracts
may require a minimum of 10% for down payment. Manufactured housing
contract terms may be for 7 to 25 years.vehicles.
Through itsour regional service centers, the Company originates MHwe purchase manufactured housing
contracts throughfrom dealers located throughout the United States. The Company'sOur regional
service center personnel contactsolicit dealers located in their region and explain the
Company's available financing plans, terms, prevailing rates, and credit
and financing policies.region. If the dealer wishes
to utilize the Company's
available customerour financing, the dealer must makecompletes an application for
dealer approval.application. Upon satisfactory results of the Company's investigation
of the dealer's creditworthiness and general business reputation, the
Company and the dealer executeapproval, a
dealer agreement. The Companyagreement is executed. We also originatesoriginate manufactured housing installment
loan agreements directly with customers
following the same general procedures for approval as it does with
originations through dealers.customers. For the year ended December 31, 1993, the
Company's2001,
93 percent of our manufactured housing contractloan originations consisted of 87%
originated throughwere purchased from
dealers and 13%7 percent were originated directly originated by us.
Our manufactured housing contracts are secured by either the Company.
The dealermanufactured
home or, customer submitsin the customer's credit application and
purchase order to onecase of land-and-home contracts, by a lien on the Company's service centersreal estate
where the Company's
personnel conduct an analysismanufactured home is permanently affixed. In 2001, approximately 27
percent of our manufactured housing originations were for land-and-home
contracts. Customers who finance their homes with us are required to make a
minimum down payment of 5 percent. For manufactured housing originations, the
creditworthiness of the proposed
buyer. The analysis includes a review of the applicant's paying habits,
length and likelihood of continued employment, and certain other factors.average loan-to-value ratio was approximately 88 percent in 2001.
Customers' credit applications for new manufactured homes are reviewed in
our service centers. If the application meets our guidelines, we generally
purchase the Company's guidelines and credit is approved,contract after the Company agrees to fundcustomer has moved into the contract.
For manufactured housing contracts, the Company useshome.
We use a proprietary automated credit scoring system which was initially implemented in 1987 and
subsequently refined and statistically re-validated. Itto evaluate manufactured
housing contracts. The scoring system is a statistically based, scoring system which quantifies responsesquantifying
information using variables obtained from customers'customer credit applications. Asapplications and
credit reports. We perform monthly audits on samples of December
31, 1993,new loan originations to
measure adherence to our underwriting policies and procedures.
Mortgage Services. Products within this credit scoring system has been used in making credit
determinations on approximately 1,140,000 applications. The Company
believes the use of this proprietary credit scoring system has contributed
to the reduction in the number of repossessions incurred as a percentage
of the Company's servicing portfolio.
In 1993, the manufactured housing market's shipments rose to approximately
254,000 units, a 21% increase over 1992. The Company
-3-
has benefitted from the increase in the market's shipmentscategory include home equity and
has
increased its market sharehome improvement loans. During 2001, we originated $3.0 billion of contracts for
new manufactured homes without
compromising itsthese products, or 27 percent of our total originations. At December 31, 2001,
our managed receivables included $11.9 billion of contracts for home equity and
home improvement loans, or 28 percent of total managed receivables.
We originate home equity loans through 128 retail satellite offices and 6
regional centers, and through a network of correspondent and broker originators
throughout the United States. The retail offices are responsible for
originating, processing and funding the loan transaction. Underwriting of the
application is handled through central locations. Subsequently, loans are
re-underwritten on a test basis by a third party to ensure compliance with our
credit standards. Competitionpolicy. After the loan has closed, the loan documents are forwarded to
our loan servicing center. The servicing center is responsible for handling
customer service and performing document handling, custodial, quality control
and collection functions.
During 2001, approximately 94 percent of our home equity finance manufacturedloans
were originated directly with the borrower. The remaining finance volume was
originated through a few correspondent lenders. The Company decreased the volume
of loans originated through the correspondent channel in 2000.
Typically, home purchases continuesequity loans are secured by first or second liens. Homes
used for collateral in securing home equity loans may be either residential or
investor owned, one-to-four-family properties having a minimum appraised value
of $25,000. During 2001, approximately 81 percent of the loans originated were
secured by first liens. The average loan to be strong, and there can be no assurance that
such competition will not intensifyvalue for loans originated in 2001
was approximately 90 percent. Approximately 97 percent of our home equity loan
originations during 2001 were fixed rate closed-end loans.
3
We originate 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 resultsmajority of operations.
Home Improvement and Special Products
Through its centralized operations in Saint Paul, Minnesota, the Company
arranges to originateour home improvement loan contracts
indirectly through a network of home improvement contractors and
special products dealers. The Company's available financing plans, terms,
prevailing rates, and credit and financing policies are explained to the
contractors and dealers. If they wish to utilize the Company's available
customer financing, the contractor/dealer ("dealer") must make an
application for approval. Upon satisfactory results of the Company's
investigation of the dealer's creditworthiness and general business
reputation, the Company and the dealer execute a dealer agreement. The
Company occasionally originates home improvement loans directly.
The growth in the Company's home improvement originations during the year
ended December 31, 1993 is attributable primarily to the centralization of
its home improvement business, the addition of business development
managerslocated throughout
the United StatesStates. We review the financial condition, business experience and
the implementationqualifications of aall contractors through which we obtain loans.
We finance conventional home improvement lending program in September 1992. Prior to
September 1992, the Company only financed home improvement contracts
insured through the FHA Title I program. This focused organizational
structure has enabled the Company to provide quality financial services to
its expanding base of customers.
The Company's home improvement contracts are generally secured by
first, second or, to a lesser extent, third mortgagesliens on single-family homes. For
the year ended December 31, 1993, over 99% of the Company'simproved real estate.
We also finance unsecured conventional home improvement contracts were originated through contractors.
In April 1993, the Company wasloans (generally from
$2,500 to $15,000).
Typically, an approved as a seller and servicer of
secondary mortgages for FNMA. The Company believes this program may
improve the Company's flexibility in serving the home improvement lending
market, and expects to begin utilizing this program in 1994.
The contractor dealer or customer submits the customer's credit
application and purchase orderconstruction contract to the Company's home improvement officeour centralized service center where personnel conduct an
analysis of the creditworthiness of the proposed
buyer.customer is made using a proprietary
credit scoring system. If it is determined that the application meets our
underwriting guidelines, we typically purchase the contract from the contractor
when the customer verifies satisfactory completion of the work.
We also originate home improvement loans directly with borrowers. After
receiving a mail solicitation, the customer calls our telemarketing center and
our sales representative explains the available financing plans, terms and rates
depending on the customer's needs. The analysis includes factors similar to thatmajority of the loans are secured by a
MH application.
Insecond or third lien on the casereal estate of the customer. Direct distribution
accounted for approximately 28 percent of the home improvement loan originations
during 2001.
The types of home improvements we finance include exterior renovations
(such as windows, siding and roofing); pools and spas; kitchen and bath
remodeling; and room additions and garages. We may also extend additional credit
beyond the purchase price of the home improvement for the purpose of debt
consolidation.
Private Label Credit Card. During 2001, we originated $3.6 billion of
private label credit card receivables primarily through our bank subsidiaries,
or 32 percent of our total originations. At December 31, 2001, our managed
receivables included $2.7 billion of contracts for credit card loans, or 6
percent of total managed receivables.
We originate private label credit card receivables through contractual
relationships with selected retailer and dealer partners. Our core relationships
are with retailers and dealers of home improvement -4-
financing, the Company agrees to fund the contract if the application meets
the Company's underwriting guidelines for credit approval (and applicable
FHA regulations if FHA insured)products, powersports
vehicles (motorcycles, all-terrain-vehicles, snowmobiles and if stipulated funding guidelinespersonal
watercraft) and outdoor power equipment.
We perform an initial review on all retailer and dealer partners as well
as periodic monitoring of their financial condition. Credit card applications
are met. As to special products, the Company agrees to fund the contract once
credit is approvedgenerated primarily through retail and dealer outlets and the customer accepts delivery of the unit.
For home improvement contracts, the Company has developedinternet. We
utilize a proprietary automated credit scoring system which was initially implementedto review the credit of
individual customers seeking credit cards. We periodically monitor payment
behavior trends within our credit card portfolio through the use of automated
portfolio management tools. If we make poor credit decisions with respect to our
partners and borrowers, it could have a material adverse effect on our business.
ITEM 2. PROPERTIES.
The Company's headquarters are based in June 1993. This scoring system
is similar to the system the Company usesSt. Paul, Minnesota in MH financing.
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The volume of contracts originateda building
owned by the Company (120,000 square feet of which are occupied by the Company).
We lease additional space in downtown St. Paul (185,000 square feet), which is
used by our mortgage services and private credit card divisions. We own a
building in Rapid City, South Dakota (137,000 square feet), which is used by our
manufactured housing services units. We also lease office space in Rapid City
(75,000 square feet) which is used by our private label credit card and retail
bank servicing units. We also lease buildings in Tempe, Arizona (200,000 square
feet) and Atlanta, Georgia (96,000 square feet) which serve as collection and
service centers. We lease 33 regional manufactured housing division offices and
128 mortgage services branch offices across the United States; the lease terms
generally range from three to five years.
ITEM 3. LEGAL PROCEEDINGS.
Conseco Finance was served with various related lawsuits filed in the
United States District Court for the District of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities who
purchased common stock or options to purchase common stock of Conseco Finance
during alleged class periods that generally run from July 1995 to January 1998.
One action (Florida State Board of Admin. v. Green Tree Financial Corp., et. al,
Case No. 98- 1162) was brought not on behalf of a class, but by the past five
yearsFlorida
State Board of Administration, which invests and reinvests retirement funds for
the benefit of state employees. In addition to Conseco Finance, certain current
and former officers and directors of Conseco Finance are named as defendants in
one or more of the lawsuits. Conseco Finance and other informationdefendants obtained an
order consolidating the lawsuits seeking class action status into two actions,
one of which pertains to a purported class of common stockholders (In re Green
Tree Financial Corp. Stock Litig., Case No. 97-2666) and the other of which
4
pertains to a purported class of stock option traders (In re Green Tree
Financial Corp. Options Litig., Case No. 97-2679). Plaintiffs in the lawsuits
assert claims under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that Conseco Finance 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 Conseco Finance (particularly with respect to
prepayment assumptions and performance of certain loan portfolios of Conseco
Finance) which allegedly rendered Conseco Finance's financial statements false
and misleading. On August 24, 1999, the United States District Court for eachthe
District of those years, are indicated
below:
Year ended December 31,
-------------------------------------------------------------------
1993 1992(a) 1991(b) 1990 1989
------------- ------------- ------------- --------- ------------
COST OF CONTRACTS
(IN THOUSANDS):
MH-Conventional $2,196,655 $ 942,874 $ 432,060 $459,466 $446,728
MH-FHA/VA 252,466 265,992 507,879 426,689 324,137
HI 169,443 75,287 112,135 78,272 12,413
SP(c) 47,442 34,911 22,340 19,575 19,827
---------- ---------- ---------- -------- ---------
Total $2,666,006 $1,319,064 $1,074,414 $984,002 $803,105
========== ========== ========== ======== =========
NUMBER OF CONTRACTS:
MH-Conventional 87,327 43,162 23,126 24,694 23,895
MH-FHA/VA 9,607 10,322 20,716 17,702 13,756
HI 16,926 8,384 12,975 9,286 1,499
SP(c) 6,161 4,235 2,924 2,675 2,465
---------- ---------- ---------- -------- ---------
Total 120,021 66,103 59,741 54,357 41,615
========== ========== ========== ======== =========
AVERAGE SIZE OF CONTRACTS:
MH-Conventional $ 25,154 $ 21,845 $ 18,683 $ 18,606 $ 18,695
MH-FHA/VA 26,279 25,769 24,516 24,104 23,563
HI 10,011 8,980 8,642 8,429 8,281
SP(c) 7,700 8,243 7,640 7,318 8,043
---------- ---------- ---------- -------- ---------
Average size $ 22,213 $ 19,955 $ 17,985 $ 18,103 $ 19,298
========== ========== ========== ======== =========
WEIGHTED AVERAGE INTEREST RATES:
MH-Conventional 10.2% 11.7% 13.5% 14.2% 14.1%
MH-FHA/VA 9.7 10.7 12.1 12.9 12.8
HI 12.6 13.9 15.3 15.5 15.5
SP(c) 13.2 14.7 16.3 16.3 15.6
---------- ----------- ---------- ------- ---------
Weighted average 10.3% 11.7% 13.1% 13.8% 13.6%
interest rate ========== =========== ========== ======= =========
WEIGHTED AVERAGE ORIGINAL
TERMS (IN MONTHS):
MH-Conventional 205 197 180 181 180
MH-FHA/VA 201 204 202 206 199
HI 143 132 129 129 134
SP(c) 55 56 56 56 69
--------- -------- ------- ------- --------
Weighted average
original term 198 191 183 185 184
========== ========== ========== ======== =========
_____________________
(a) Does not include $545,842,000 of conventional contracts
purchased from the Resolution Trust Corporation ("RTC").
(b) Does not include $66,980,000 of conventional contracts
purchased from other originators.
(c) Consists mainly of motorcycle contracts for all years except
1993, which includes other special products, and 1989 which
includes RV's.
-6-
Minnesota issued an order dismissing with prejudice all claims
alleged in the lawsuits. The plaintiffs subsequently appealed the decision to
the U.S. Court of Appeals for the 8th Circuit. A three judge panel issued an
opinion on October 25, 2001, reversing the United States District Court's
dismissal order and remanding the actions to the United States District Court.
Pretrial discovery is expected to commence in all three lawsuits approximately
in April 2002. The Company believes that the lawsuits are without merit and
intends to continue to defend them vigorously. The ultimate outcome of these
lawsuits cannot be predicted with certainty.
Conseco Finance is a defendant in additiontwo arbitration proceedings in South
Carolina (Lackey v. Green Tree Financial Corporation, n/k/a Conseco Finance
Corp. and Bazzle v. Green Tree Financial Corporation, n/k/a Conseco Finance
Corp.) where the arbitrator, over Conseco Finance's objection, allowed the
plaintiffs to an individual analysispursue purported class action claims in arbitration. The two
purported arbitration classes consist of each
contract, it is important to achieve a geographic dispersion of contracts
in order to reduce the impact of regional economic conditions on the
overall performance of the Company's portfolio. Accordingly, the Company
seeks to maintain a portfolio of contracts dispersed throughout the United
States. At December 31, 1993, no state accounted for more than 10% of all
contracts serviced by the Company.
In 1993, the Company originated manufactured housing contracts through over
3,000 active dealers, with no single MH dealer accounting for more than one
percent of the total number of MH contracts originated by the Company.
Likewise, in its home improvement business, the Company originated
contracts through approximately 1,400 active contractors,South Carolina residents who obtained
real estate secured credit from Conseco Finance's Manufactured Housing Division
(Lackey) and in its
special products business, the Company originated contracts through
approximately 600 active dealers. No single contractor or dealer accounted
for more than three percent of the total number of HI or SP contracts
originated by the Company.
Pooling, Disposition and Related Sales Structures of Contracts
--------------------------------------------------------------
The Company pools contracts for sale to investors, generally on a quarterly
or more frequent basis. It is the Company's policy to sell substantially
all of the contracts it originates or purchases. Conventional manufactured
housing contracts are generally sold through asset-backed securities. FHA-
insured and VA-guaranteed manufactured housing contracts are converted into
GNMA certificates. The GNMA certificates, which are secured by the FHA and
VA contracts, are then soldHome Improvement Division (Bazzle) in the secondary market.early and mid 1990s, and
did not receive a South Carolina specific disclosure form relating to selection
of attorneys and insurance agents in connection with the credit transactions.
The GNMA certificates
provide for payment by the Company to registered holdersarbitrator, in separate awards issued on July 24, 2000, awarded a total of
the
certificates of monthly principal$26.8 million in penalties and interest,attorneys' fees. The awards were confirmed as
well as the "pass-
through" of any principal prepayments on the contracts. The Company also
pools FHA-insuredjudgments in both Lackey and conventional home improvement contracts for sale in
the secondary market. Special products loans have also been pooled and sold
to investors, although the Company chose to inventory its 1993 special
products production. In 1994, the Company also securitized a significant
portion of its excess servicing rights receivable in the form of net
interest margin certificates.
Principal and interest payments made by borrowers on the manufactured
housing contracts securing each GNMA certificate are the source of funds
for payments due on the GNMA certificates. The Company is required to
advance its own funds in order to make timely payment of all amounts due on
the GNMA certificates if, due to defaults or delinquencies on contracts,
the payments received by the Company on the contracts securing such
certificates are less than the amounts due on the certificates. If the
Company was unable to make payments on the GNMA certificates as they became
due, it would promptly notify GNMA and request GNMA to make such payments
and, upon such notification and request, GNMA would make such payments
-7-
directly to the registered holders of the certificates and would seek
reimbursement from the Company, FHA or the VA as appropriate. The GNMA
certificates are secured by manufactured housing contracts which are either
FHA-insured or VA-guaranteed. For FHA manufactured housing contracts, the
maximum amount of insurance benefits paid by FHA is equal to approximately
90% of the net unpaid principal and uncollected interest earned to the date
of default on the contract, subject to certain adjustments, less the
greater of the actual net sales price or FHA appraisal of the home. The
amounts reimbursable by FHA are further limited to an aggregate amount
representing reserves FHA has established.Bazzle. These reserves, which
approximated $134.4 million at December 31, 1993, are based on the
Company's origination and loss experience, and the Company is required to
make scheduled premium payments to maintain the benefit of the reserve. If
losses on FHA-insured contracts exceed the established reserve, the Company
would not be reimbursed by FHA but would still be required to make payments
on the GNMA certificates. For VA manufactured housing contracts, the
maximum guarantee that may be issued is the lesser of: (1) the lesser of
$20,000 or 40% of the principal amount of the contract, or (2) the maximum
amount of guarantee entitlement available to the veteran (which may range
from $20,000 to zero).
Conventional manufactured housing, home improvement and special products
contracts are pooled and sold by the Company through securitized asset
sales whichcases have been either single class or senior/subordinated pass-
through structures. Certain senior/ subordinated structures retain a
portion of the Company's excess servicing spread as additional credit
enhancement or stipulate accelerated principal repayments to subordinated
certificateholders. The Company reflects the cash flows unique to each
transaction when measuring the net gains on contract sales. Under these
structures, the Company has provided a bank letter of credit, surety bond,
cash or a corporate guarantee to cover specified losses. Customer principal
and interest payments are deposited to separate bank accounts as received
by the Company and are held for monthly distribution to the
certificateholders. The Company establishes reserves for estimated losses
on the contracts comprising each pool. Upon a default under a contract and
liquidation of the underlying collateral, any net losses are charged
against the reserves that have been established. The dollar amount of
potential contractual recourse to the Company exceeds the amount
established by the Company as an "allowance for losses on contracts sold
with recourse." The Company establishes an allowance for expected losses
under the recourse provisions with investors/owners and calculates that
allowance on the basis of historical experience as well as management's
best estimate of future credit losses likely to be incurred.
The underlying assets of the net interest margin certificates are the
residual interest, guarantee fees, excess servicing fees, and GNMA excess
spread related to certain pools of manufactured housing
-8-
contracts sold by the Company. The net interest margin certificates issued
by the Company in March, 1994 represent approximately 78% of the estimated
present value of these assets. The Company has retained the remaining 22%,consolidated into one
case which is subordinatecurrently on appeal before the South Carolina Supreme Court. Oral
argument was heard on March 21, 2002. Conseco Finance has posted appellate
bonds, including $20 million of cash, for these cases. Conseco Finance intends
to vigorously challenge the net interest margin certificates.awards and believes that the arbitrator erred by,
among other things, conducting class action arbitrations without the authority
to do so and misapplying South Carolina law when awarding the penalties. The
certificates will be payable from the cash flows of these assets, which are
subject to prepayment and loan loss risk.
"Contracts sold" represents the face amount of the contracts sold but not
necessarily settled during the same year. Information on contracts sold is
as follows:
Year ended December 31
--------------------------------------------
1993 1992 1991 1990 1989
(dollars in millions)
Contracts sold:
MH-Conventional $2,090 $1,447(a) $ 486(b) $ 455 $458
MH-GNMA 213 269 500 474 305
HI 43 72 112 81 --
SP -- 84 41 23 11
------ ------ ------ ------ ----
Total $2,346 $1,872 $1,139 $1,033 $774
====== ====== ====== ====== ====
(a) Includes $533,159,000 of contracts purchased from the RTC.
(b) Includes $52,108,000 of contracts purchased from other originators,
but does not include $87,515,000 of contracts sold pursuant to a
joint venture agreement with Merrill Lynch Mortgage Capital, Inc.
Year ended December 31
---------------------------------
1993 1992 1991 1990 1989
----- ----- ----- ----- -----
Weighted average yield to
investors:
MH-Conventional 6.5% 7.7% 8.7% 10.3% 10.3%
MH-GNMA 6.4 7.4 8.5 9.6 9.9
HI 6.4 7.3 8.7 9.7 --
SP -- 6.4 7.6 9.6 9.3
---- ---- ---- ---- ----
Weighted average yield 6.5% 7.6% 8.6% 9.9% 10.1%
==== ==== ==== ==== ====
Servicing
---------
The Company services all of the contracts that it originates or purchases
from other originators, collecting loan payments, taxes and insurance
payments, where applicable, and other payments from borrowers and remitting
principal and interest payments to the holders of the asset-backed
securities or of the GNMA certificates.
-9-
The following table shows the composition of the Company's servicing
portfolio at December 31 for the years indicated on contracts it
originated.
December 31
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
Unpaid principal
amount of
contracts being
serviced(in
millions) $ 6,922 $ 5,278 $ 4,754 $ 4,098 $ 3,599
Average unpaid
principal
balance $ 17,864 $ 16,638 $ 16,394 $ 16,456 $ 16,589
Number of
contracts
serviced 387,509 317,251 289,960 249,038 216,962
During 1990 and 1991, the Company acquired servicing on manufactured
housing contracts originated by other lenders. The Company did not acquire
servicing on manufactured housing contracts originated by other lenders
during 1992 or 1993, and does not expect to acquire such servicing in the
near future. The Company has no loss risk on these contracts and charges a
service fee based on principal outstanding. The following table shows the
compositionultimate outcome of this servicing portfolio at December 31 for the years
indicated.
December 31
--------------------------------------
1993 1992 1991 1990
-------- -------- -------- --------
Unpaid principal amount
of contracts being
serviced (in thousands) $272,394 $345,421 $517,866 $558,811
Average unpaid principal
balance $ 14,425 $ 14,977 $ 15,897 $ 17,435
Number of contracts
serviced 18,884 23,064 32,576 32,051
Delinquency and Loss Experience
-------------------------------
A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more. Delinquent contracts are subject to
acceleration, and repossession or foreclosure of the underlying collateral.
Losses associatedproceeding cannot be predicted with such actions are charged against applicable reserves
upon disposition of the collateral.
-10-
The following table provides certain information with respect to the
delinquency and loss experience of contracts the Company originated.
At or for the year ended
December 31
----------------------------------------
1993 1992 1991 1990 1989
------- ------ ------ ------ -------
Number of contracts
delinquent(a) 1.55% 1.86% 2.20% 2.09% 2.25%
Repossessed contracts
sold (b) 1.87 2.53 2.42 2.46 3.14
Annual net repossession
losses(c) .85 1.16 .93 .94 1.27
Repossession inventory(d) .51 .58 .88 .88 .86
(a) As a percentage of the total number of contracts serviced at period end
(other than contracts already in repossession).
(b) As a percentage of the average number of contracts serviced
during the period.
(c) As a percentage of the average principal amount of contracts
serviced during the period. Annual net repossession losses
represent the loss amount at the time the repossession is sold, and
has not been reduced for amounts subsequently recovered from either
customers or investors.
(d) As a percentage of the total number of contracts serviced at
period end.
Insurance
---------
Through certain subsidiaries, the Company markets physical damage insurance
on manufactured homes and special products which collateralize contracts
serviced by the Company and markets term life insurance to its MH and HI
customers.certainty.
In addition, the Company owns Green Tree Life Insurance Company,
a life and disability reinsurance company, and Consolidated Casualty
Insurance Company, a property and casualty reinsurance company, which
function as reinsurers for policies written by selectedits subsidiaries are involved on an ongoing
basis in other insurers
covering individuals whose contracts are serviced by the Company.lawsuits (including purported class actions) related to their
operations. The following table provides certain information with respect to net
written premiums (gross premiums on new or renewal policies issued less
cancellationsultimate outcome of previous policies) on policies written by the Company.
The Company acts as an agent with respect to the saleall of such policies and,
in some cases,these other legal matters pending
against the Company also acts as reinsurer ofor its subsidiaries cannot be predicted, and, although such
policies.
Year ended December 31
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
(in thousands)
Net written premiums:
Physical damage $48,172 $35,500 $31,400 $29,200 $23,100
Term life 5,683 5,303 4,510 3,700 3,000
------- ------- ------- ------- -------
Total $53,855 $40,803 $35,910 $32,900 $26,100
======= ======= ======= ======= =======
-11-
Regulation
----------
The Company's operationslawsuits are subjectnot expected to supervision by state authorities
(typically state banking, consumer credit and insurance authorities) that
generally require thatindividually have a material adverse effect on the
Company, be licensed to conduct its business. In
many states, issuance of licenses is dependent uponsuch lawsuits could have, in the aggregate, a finding of public
convenience, and of financial responsibility, character and fitness of the
applicant. The Company is generally subject to state regulations,
examinations and reporting requirements, and licenses are revocable for
cause.
Contracts insured under the FHA manufactured home and home improvement
lending programs are subject to compliance with detailed federal
regulations governing originations, servicing, and payment of contract
insurance proceeds from the FHA to cover a portion of losses due to default
and repossessions or foreclosures. These lending regulations were amended
in November 1991 to add additional requirements such as equity requirements
for home improvement contracts of over $15,000 and a pre-underwriting
customer interview to verify the credit application for both programs.
These changes have had thematerial adverse effect of making program compliance more
burdensome for the Company, dealers and contractors. The FHA is presently
studying other aspects of the program, and there are no assurances that
future regulatory changes will not occur. Other governmental programs such
as FNMA and VA also contain similar detailed regulations governing loan
origination and servicing responsibilities.
The FHA increased the maximum loan amounts for Title I manufactured home
loans effective for credit applications completed and received after August
30, 1993. The maximum loan amounts have been increased to $48,600 for
manufactured home loans, $16,200 for manufactured home lot loans and
$64,800 for land-and-home loans. This represents a 20% increase over
previously established maximum loan amounts. The FHA Title I maximum for
single-family home improvement loans is $25,000.
The Federal Consumer Credit Protection Act ("FCCPA") requires a written
statement showing the annual percentage rate of finance charges, and
requires that other information be presented to debtors when consumer
credit contracts are executed. The Fair Credit Reporting Act requires
certain disclosures to applicants for credit concerning information that is
used as a basis for denial of credit. The Federal Equal Credit Opportunity
Act prohibits discrimination against applicants with respect to any aspect
of a credit transaction
on the basisCompany's consolidated financial condition, cash flows or results of
sex, race, color, religion,
national origin, age, marital status, derivation of income from a public
assistance program, or the good faith exercise of a right under the FCCPA,
of which it is a part. By virtue of a Federal Trade Commission rule,
conditional sales contracts must contain a provision that the holder of the
contract is subject to all claims and defenses which the debtor could
assert against the seller, but
-12-
the debtor's recovery under such provisions cannot exceed the amount paid
under the contract.
The Company is also required to comply with other federal disclosure laws
for certain of its lending programs. The combination land-and-home program
complies with the federal Real Estate Settlement and Procedures Act. In
addition, the Company complies with the reporting requirements of the Home
Mortgage Disclosure Act for its manufactured home and home improvement
contracts.
The construction of manufactured housing is subject to compliance with
governmental regulation. Changes in such regulations may occur from time
to time and such changes may affect the cost of manufactured housing. The
Company cannot predict whether any regulatory changes will occur or what
impact such future changes would have on the manufactured housing industry.
The Company is subject to state usury laws. Generally, state law has been
preempted by federal law with respect to certain manufactured home and home
improvement contracts, although individual states are permitted to enact
legislation superseding federal law. To be eligible for the federal
preemption, the manufactured home or home improvement contract form must
comply with certain consumer protection provisions. A few states have
elected to override federal law, but have established maximum rates that
either fluctuate with changes in prevailing rates or are high enough so
that, to date, no state's maximum interest rate has precluded the Company
from continuing business in that state.
Competition and Other Factors
-----------------------------
The Company is affected by consumer demand for manufactured housing,
home improvements, special products and its insurance products. Consumer
demand, in turn, is partially influenced by regional trends, economic
conditions and personal preferences. The Company competes with banks,
savings and loan associations, finance companies, finance subsidiaries of
certain manufacturing companies, credit unions and others seeking to
purchase contracts. Prevailing interest rates are typically affected by
economic conditions. Changes in rates, however, generally do not inhibit
the Company's ability to compete, although from time to time in particular
geographic areas, local competition may choose to offer more favorable
rates. The Company competes by offering superior service, prompt credit
review, and a variety of financing programs.
The Company's business is generally subject to seasonal trends, reflecting
the general pattern of sales of manufactured housing and site-built homes.
Sales typically peak during the spring and summer seasons and decline to
lower levels from mid-November through January.
-13-
Employees
---------
As of December 31, 1993, the Company had 1,645 full-time and 208 part-time
employees, and considers its employee relations to be satisfactory. None
of the employees are represented by a union.
ITEM 2. PROPERTIES.
--------------------
At December 31, 1993, the Company operated 40 manufactured housing regional
service centers located in 34 states. The Company plans to open three
additional regional servicing centers in 1994. Such offices are leased,
typically for a term of three years, and range in size from 1,600 to 10,500
square feet to accommodate a staff of approximately 8 to 46 employees. In
February 1994, the Company's home improvement division entered into a lease
for its main office in Saint Paul, Minnesota. The lease is for a term of
five years and consists of 77,000 square feet to accommodate their staff of
approximately 230 employees. (See Note I of Notes to Consolidated
Financial Statements for annual rental obligations.)
In January 1993, the Company purchased the remaining commercial floors of
the building which houses its corporate offices. (See Note D of Notes to
Consolidated Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS.
---------------------------
Reference is made to Note I, Litigation, of Notes to Consolidated
Financial Statements contained in Item 8 hereof.operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
None.
-14-The Registrant meets the conditions set forth in the General Instructions
(I)(1)(a) and (b) of Form 10-K and is therefore omitting the information
otherwise required by Item 4.
5
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITYSTOCK AND RELATED --------------------------------------------------------------
STOCKHOLDER
MATTERS.
--------------------
The Company's Common StockEffective July 1, 1998, the Company became a wholly owned subsidiary of
Conseco and its common stock is no longer traded on the New York and Pacific Stock
Exchanges under the symbol "GNT." The following table sets forth, for the
periods indicated, the range of the high and low sale prices.
1992 High Low
- ------------------------------ -------- --------
First quarter $ 25 $ 17-1/8
Second quarter 21-1/4 15-1/16
Third quarter 18 15-1/2
Fourth quarter 25-15/16 16-5/8
1993 High Low
- ------------------------------ -------- --------
First quarter $ 36-1/2 $23-3/16
Second quarter 42-3/4 32-1/4
Third quarter 55 39-1/2
Fourth quarter 62-1/2 44-1/8
The above stock prices, as well as all other share and per share amounts
referenced in this Annual Report on Form 10-K, have been restated to
reflect a two-for-one stock split effected in the form of a stock dividend
during January 1993.
On February 28, 1994, the Company had approximately 453 shareholders of
record of its Common Stock including the nominee of The Depository Trust
Company which held approximately 32,296,314 shares of Common Stock.
The Company has paid cash dividends since December 1986. The 1993
quarterly dividend rate through the third quarter was $0.08125 per share.
In September 1993, the Board of Directors approved an increase in the
quarterly dividend rate to $0.09375 per share effective December 1993. The
payment of future dividends will depend on the Company's financial
condition, prospects and such other factors as the Board of Directors may
deem relevant. Under certain debt agreements, the Company is subject to
restrictions limiting the payment of dividends and Common Stock
repurchases. At December 31, 1993, under the most restrictive agreement,
such payments were limited to $43,585,000, which represents 50% of
consolidated net earnings for the most recently concluded four fiscal
quarter periods less dividends paid and prepayment of subordinated debt
during such period.
-15-
established public
trading market.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
---------------------------------
Year ended December 31
------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- -------- -------- --------
(dollars in thousands except per-share data)
Income $ 366,680 $ 246,615 $214,765 $175,675 $143,953
Earnings before income taxes 200,537 118,806 92,176 59,418 47,733
Earnings before extraordinary loss(a) 116,423 72,472 56,688 36,542 29,356
Net earnings 116,423 55,015 56,688 36,542 29,356
Earnings per common share:
Before extraordinary loss(a) 3.62 2.41 2.00 1.17 .87
Net earnings 3.62 1.82 2.00 1.17 .87
Cash dividends per common share .34 .31 .30 .30 .30
At year-end:
Excess servicing rights receivable $ 843,489 $ 640,647 $513,881 $429,098 $365,193
Total assets 1,739,502 1,167,055 969,161 814,662 743,800
Total debt 515,004 376,043 361,410 335,757 329,157
Allowance for losses on contracts sold with recourse 222,135 189,669 134,681 91,945 83,171
Stockholders' equity 549,429 298,834 237,544 192,478 171,323
The Registrant meets the conditions set forth in the General Instructions
(I)(1)(a) Before extraordinary loss relating toand (b) of Form 10-K and is therefore omitting the debt exchange in 1992.information
otherwise required by Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
----------------------------------------------
Introduction
------------ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Registrant meets the conditions set forth in the General Instructions
(I) (1) (a) and (b) of Form 10-K and is therefore omitting the information
otherwise required by Item 7, except for management's narrative analysis of the
results of operations explaining the reasons for material changes in the amount
of revenue and expense items between 2001, 2000 and 1999.
In this section, we review the consolidated results of operations of
Conseco Finance for the three years ended December 31, 2001, and where
appropriate, provide explanations for material changes in the amount of revenue
and expense items during such periods. Please read this discussion in
conjunction with the accompanying consolidated financial statements and notes.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in 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," "project," "intend," "may," "will," "would," "contemplate,"
"possible," "attempts," "seeks," "should," "could," "goal," "target," "on
track," "comfortable with," "optimistic," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are subject to known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from the future results,
performance or achievements, expressed or implied by the forward-looking
statements. Assumptions and other important factors that could cause our actual
results to differ materially from those anticipated in our forward-looking
statements include, among other things: (i) general economic conditions and
other factors, including prevailing interest rate levels and 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, including from our process excellence initiatives; (iii) customer
response to new products, distribution channels and marketing initiatives; (iv)
performance of our investments; (v) changes in the Federal income tax laws and
regulations which may affect the relative tax advantages of some of the
Company's products; (vi) increasing competition in the finance business; (vii)
regulatory changes or actions, including those relating to regulation of
financial services; (viii) the outcome of the Company's efforts to sell assets
and reduce, refinance or modify indebtedness and the availability and cost of
capital in connection with this process; (ix) actions by rating agencies and the
effects of past or future actions by these agencies on the Company's business;
(x) the ultimate outcome of lawsuits filed against the Company; and (xi) the
risk factors or uncertainties listed from time to time in the filings of the
Company or its parent, Conseco, Inc., with the Securities and Exchange
Commission. Other factors and assumptions not identified above are also relevant
to the forward-looking statements, and if they prove incorrect, could also cause
actual results to differ materially from those projected.
All written or oral forward-looking statements attributable to us are
expressly qualified in their entirety by the foregoing cautionary statement. Our
forward-looking statements speak only as of the date made. We assume no
obligation to update or to publicly announce the results of any revisions to any
of the forward-looking statements to reflect actual results, future events or
developments, changes in assumptions or changes in other factors affecting the
forward-looking statements.
6
CRITICAL ACCOUNTING POLICIES
The accounting policies described below require management to make
significant estimates and assumptions using information available at the time
the estimates are made. Such estimates and assumptions significantly affect
various reported amounts of assets and liabilities. Management has made
estimates in the past that we believed to be appropriate, but were subsequently
revised to reflect actual experience. If our future experience differs
materially from these estimates and assumptions, our results of operations and
financial condition could be affected. Accordingly, we consider them to be
critical in preparing our consolidated financial statements. A more detailed
description of our accounting policies is included in the notes to our
consolidated financial statements.
Retained Interests in Securitization Trusts
Retained interests in securitization trusts represent the right to
receive certain future cash flows from securitization transactions structured
prior to September 8, 1999. Such cash flows generally are equal to the value of
the principal and interest to be collected on the underlying financial contracts
of each securitization in excess of the sum of the principal and interest to be
paid on the securities sold and contractual servicing fees. These interests
include interests represented by: (i) actively managed fixed maturities of
$528.5 million; and (ii) interest-only securities of $141.7 million. We carry
these retained interests at estimated fair value. We determine fair value by
discounting the projected cash flows over the expected life of the receivables
sold using current estimates of future prepayment, default, loss and interest
rates. We record any unrealized gain or loss determined to be temporary, net of
tax, as a component of shareholder's equity. Declines in value are considered to
be other than temporary when: (i) the fair value of the security is less than
its carrying value; and (ii) the timing and/or amount of cash expected to be
received from the security has changed adversely from the previous valuation
which determined the carrying value of the security. When declines in value
considered to be other than temporary occur, we reduce the amortized cost to
estimated fair value and recognize a loss in the statement of operations. The
assumptions used to determine new values are based on our internal evaluations
and consultation with external advisors having significant experience in valuing
these securities.
The determination of the value of our retained interests requires
significant judgment. The Company originates conditionalhas recognized significant impairment charges
when the interest-only securities did not perform as well as anticipated based
on our assumptions and expectations.
Our current valuation of retained interests may prove inaccurate in
future periods. In the securitizations to which these interest-only securities
relate, we have retained certain contingent risks in the form of guarantees of
certain lower rated securities issued to third parties by the securitization
trusts. As of December 31, 2001, the total amount of these guarantees was $1.5
billion. If we have to make more payments on these guarantees than anticipated,
or we experience higher than anticipated rates of loan prepayments, including
those due to foreclosures or charge-offs, or any adverse changes in our other
assumptions used for such valuation (such as interest rates and our loss
mitigation policies), we could be required to recognize additional impairment
charges (including potential payments related to $1.5 billion of guarantees)
which could have a material adverse effect on our financial condition or results
of operations. We consider any estimated payments related to these guarantees in
the projected cash flows used to determine the value of our interest-only
securities.
Finance Receivables
At December 31, 2001, the balance of our finance receivables was $18.0
billion. This value is significantly affected by our assessment of the
collectibility of the receivables, servicing actions and the provision for
credit losses that we establish.
The provision for credit losses charged to expense is based upon an
assessment of current and historical loss experience, loan portfolio trends, the
value of collateral, prevailing economic and business conditions, and other
relevant factors. We reduce the carrying value of finance receivables to net
realizable value at the earlier of: (i) six months of contractual delinquency;
or (ii) when we take possession of the property securing the finance receivable.
Estimates of the provision are revised each period, and changes are recorded in
the period they become known. A significant change in the level of collectible
finance receivables would have a significant adverse effect on our results of
operations and financial position in future periods.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the financial reporting and tax bases of assets
and liabilities. These amounts are reflected in the balance of our income tax
assets which totaled $267.2 million at December 31, 2001. In assessing the
realization of our deferred income tax assets, we consider whether it is more
likely than not that the deferred income tax assets will be realized. The
ultimate realization of our
7
deferred income tax assets depends upon generating future taxable income during
the periods in which our temporary differences become deductible. We evaluate
the recoverability of our deferred income tax assets by assessing the need for a
valuation allowance on a quarterly basis. If we determine that it is more likely
than not that our deferred income tax assets will not be recovered, a valuation
allowance will be established against some or all of our deferred income tax
assets. This could have a significant effect on our future results of operations
and financial position.
No valuation allowance has been provided on our deferred income tax
assets at December 31, 2001, as we believe it is more likely than not that all
such assets will be realized. We reached this conclusion after considering the
availability of taxable income in prior carryback years, tax planning
strategies, and the likelihood of future taxable income exclusive of reversing
temporary differences. Differences between forecasted and actual future
operating results could adversely impact our ability to realize our deferred
income tax assets.
At December 31, 2001, we did not have any net operating loss
carryforwards. However, if our deferred income tax assets started to reverse
into net operating losses, we would have 20 years to generate future taxable
income and utilize these potential net operating losses before they would begin
to expire under current tax law. In recent years, we have had losses before
income taxes for financial reporting purposes. However, we believe that existing
levels of income from our continuing operations coupled with changes in our
operations that either have taken place or will take place are sufficient to
generate the levels of taxable income needed to utilize our net deferred income
tax assets. Such changes include: (i) various cost saving initiatives; (ii) the
transfer of certain customer service and backroom operations to our India
affiliate; and (iii) restructuring our business to increase profitability such
as streamlining our loan origination operations in the manufactured housing and
home equity divisions.
The following chart reconciles our income (loss) before taxes for
financial statement purposes to our taxable income (loss) for income tax
purposes:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Income (loss) before income taxes,
extraordinary gain (loss), and
cumulative effect of accounting change........... $(165.2) $(742.6) $ 34.0
Adjustments to determine taxable income:
Net investment income ........................... (37.2) 81.0 257.5
Impairment charges .............................. 386.9 515.7 554.3
Gain on sale of finance receivables.............. - - (550.6)
Provision for losses............................. 114.6 99.8 45.4
Special charges.................................. - 211.2 -
Extraordinary gain (loss) on extinguishment
of debt...................................... 9.4 - (3.8)
Cumulative effect of accounting change........... - 70.0 -
Issuance of common shares for stock option
and for employee benefit plans................ - - (9.4)
Other............................................ (129.2) 8.1 142.6
------- ------- -------
Taxable income for income tax purposes........ $ 179.3 $ 243.2 $ 470.0
======= ======= =======
Based on our projections of future financial reporting income and
assuming that our deferred income tax assets and liabilities reverse to the
extent of future projected financial reporting income, we expect to utilize all
of our net deferred income tax assets of $245.3 million over the next three to
four years.
Liabilities for Contingencies
We are involved on an ongoing basis in lawsuits relating to our
operations, including with respect to sales contractspractices, and we and current and
former officers and directors are defendants in pending class action lawsuits
asserting claims under the securities laws and in derivative lawsuits. The
ultimate outcome of these lawsuits cannot be predicted with certainty. We
recognize an estimated loss from these loss contingencies when we believe it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. However, it is difficult to measure the actual loss that
might be incurred related to litigation. The ultimate outcome of these lawsuits
could have a significant impact on our results of operations and financial
position.
8
Results of operations for the three years ended December 31, 2001:
The following tables and narratives summarize the results of our
operations.
2001 2000 1999
---- ---- ----
(Dollars in millions)
Contract originations:
Manufactured housing......................................................... $ 2,499.5 $ 4,395.8 $ 6,607.3
Mortgage services............................................................ 3,043.7 4,448.3 6,745.8
Retail credit................................................................ 3,585.8 2,582.1 2,036.0
Consumer finance - closed-end................................................ - 544.6 790.7
Floorplan.................................................................... 2,101.5 3,950.4 5,559.1
Discontinued................................................................. 86.8 969.1 3,370.1
--------- --------- ---------
Total...................................................................... $11,317.3 $16,890.3 $25,109.0
========= ========= =========
Sales of finance receivables:
Manufactured housing......................................................... $ 3.6 $ 600.7 $ 5,598.2
Mortgage services............................................................ 833.8 913.1 3,748.4
Floorplan.................................................................... - - 117.7
Retained bonds............................................................... - - (379.7)
Discontinued lines........................................................... 802.3 1,174.9 574.5
--------- --------- ---------
Total...................................................................... $ 1,639.7 $ 2,688.7 $ 9,659.1
========= ========= =========
Managed receivables (average):
Manufactured housing......................................................... $25,979.1 $25,700.4 $22,899.2
Mortgage services............................................................ 12,555.5 13,254.6 10,237.5
Retail credit................................................................ 2,248.0 1,523.0 937.9
Consumer finance - closed-end................................................ 1,735.2 2,173.1 2,121.6
Floorplan................................................................... 1,181.7 2,070.4 2,098.4
Discontinued lines........................................................... 674.7 2,700.3 3,469.2
--------- --------- ---------
Total...................................................................... $44,374.2 $47,421.8 $41,763.8
========= ========= =========
Revenues:
Net investment income:
Finance receivables and other.............................................. $ 2,260.2 $ 1,945.0 $ 647.1
Interest-only securities................................................... 51.5 106.6 185.1
Gain on sale of finance receivables.......................................... 26.9 7.5 550.6
Fee revenue and other income................................................. 345.0 385.7 372.7
---------- ---------- ---------
Total revenues............................................................. 2,683.6 2,444.8 1,755.5
---------- ---------- ---------
Expenses:
Provision for losses......................................................... 563.6 354.2 128.7
Interest expense............................................................. 1,234.4 1,152.4 341.3
Other operating costs and expenses........................................... 642.4 770.8 697.2
---------- ---------- ---------
Total expenses............................................................. 2,440.4 2,277.4 1,167.2
---------- ---------- ---------
Operating income before impairment charges, special charges, income
taxes and extraordinary charge........................................... 243.2 167.4 588.3
Impairment charges.............................................................. 386.9 515.7 554.3
Special charges................................................................. 21.5 394.3 -
---------- ---------- ---------
Income (loss) before income taxes and extraordinary charge................. $ (165.2) $ (742.6) $ 34.0
========== ========== =========
9
General: We provide financing for manufactured homes
("MH"),housing, home equity, home
improvements, ("HI")consumer products and specialequipment, and provide consumer and
commercial revolving credit. Finance products ("SP") (primarily
motorcycles to date). In early 1993, the Company began to expand the types of
special products it finances to include snowmobiles, personal watercraft, all-
terrain vehicles,both fixed-term and
trailers for recreational activities,
such as horse, boatrevolving loans and snowmobile trailers.leases. The Company also markets physical damage and term life insuranceother
credit protection relating to the customers' contractsloans it services,services.
After September 8, 1999, we no longer structure our securitizations in a
manner that results in recording a sale of the loans. Instead, new
securitization transactions are being structured to include provisions that
entitle the Company to repurchase assets transferred to the special purpose
entity when the aggregate unpaid principal balance reaches a specified level.
Until these assets are repurchased, however, the assets are the property of the
special purpose entity and actsare not available to satisfy the claims of creditors
of the Company. In addition, our securitization transactions are structured so
that the Company, as servicer for the loans, is able to exercise significant
discretion in making decisions about the serviced portfolio. Pursuant to
Financial Accounting Standards Board Statement No. 140, "Accounting for the
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140"), such securitization transactions are accounted for as secured
borrowings whereby the loans and securitization debt remain on the balance
sheet, rather than as sales.
The change to the structure of our new securitizations has no effect on
the total profit we recognize over the life of each new loan, but it changes the
timing of profit recognition. Under the portfolio method (the accounting method
required for our securitizations which are structured as secured borrowings), we
recognize: (i) earnings over the life of new loans as interest revenues are
generated; (ii) interest expense on the securities which are sold to investors
in the loan securitization trusts; and (iii) provisions for losses. As a result,
our reported earnings from new loans securitized in transactions accounted for
under the portfolio method are lower in the period in which the loans are
securitized (compared to our historical method) and higher in later periods, as
interest spread is earned on the loans.
During the last two years, Conseco has taken a number of actions with
respect to the Company, including: (i) the sale, closing or runoff of several
business units (including asset-based lending, vendor leasing, bankcards,
transportation and park construction); (ii) monetization of certain on-balance
sheet financial assets through sales or as collateral for additional borrowings;
and (iii) cost savings and restructuring of ongoing businesses such as the
streamlining of loan origination operations in the manufactured housing contracts originatedand home
equity lending divisions. These courses of action and the change to the
portfolio method of accounting have caused significant fluctuations in account
balances as further described below. In early 2002, we announced our decision to
reduce the size of our floorplan lending business.
The risks associated with our business become more acute in any economic
slowdown or recession. Periods of economic slowdown or recession may be
accompanied by decreased demand for consumer credit and declining asset values.
In the home equity mortgage and manufactured housing businesses, any material
decline in real estate values reduces the ability of borrowers to use home
equity to support borrowing and increases the loan-to-value ratios of loans
previously made, thereby weakening collateral coverage and increasing the size
of losses in the event of a default. Delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Proposed changes to
the federal bankruptcy laws applicable to individuals would make it more
difficult for borrowers to seek bankruptcy protection, and the prospect of these
changes may encourage certain borrowers to seek bankruptcy protection before the
law changes become effective, thereby increasing delinquencies. For our finance
customers, loss of employment, increases in cost-of-living or other lenders.adverse
economic conditions would impair their ability to meet their payment
obligations. Higher industry inventory levels of repossessed manufactured homes
may affect recovery rates and result in future impairment charges and provision
for losses. In addition, in an economic slowdown or recession, our servicing and
litigation costs increase. Any sustained period of increased delinquencies,
foreclosures, losses or increased costs would adversely affect our financial
condition and results of operations.
Loan originations in 2001 were $11.3 billion, down 33 percent from 2000.
Loan originations in 2000 were $16.9 billion, down 33 percent from 1999. The
primary reason for the decrease was our decision to no longer originate certain
lines of business and to manage our growth consistent with our revised business
plan. This strategy allowed us to enhance net interest margins, to reduce the
amount of cash required for new loan originations, and to transfer cash to the
parent company.
Sales of finance receivables have decreased since 1999 as a result of the
change in the structure of our securitizations. The sales of finance receivables
in 2001 and 2000 are further explained below under "Gain on sale of finance
receivables".
Managed receivables include finance receivables recorded on our
consolidated balance sheet and those managed by us but applicable to holders of
asset-backed securities sold in securitizations structured in a manner that
resulted in gain-on- sale revenue. Average managed receivables decreased to
$44.4 billion in 2001, down 6.4 percent from 2000, and increased to $47.4
billion in 2000, up 14 percent over 1999.
10
Net investment income on finance receivables and other consists of: (i)
interest earned on finance receivables; and (ii) interest income on short-term
and other investments. Such income increased by 16 percent, to $2,260.2 million,
in 2001 and by 201 percent, to $1,945.0 million, in 2000, consistent with the
increases in average on-balance sheet finance receivables following the
September 8, 1999 change in the manner in which we structure our securitizations
as described above. The weighted average yields earned on finance receivables
and other investments were 12.8 percent, 13.0 percent and 11.1 percent during
2001, 2000 and 1999, respectively. As a result of the change in the structure of
our securitizations, future interest earned on finance receivables should
increase as our average on-balance sheet finance receivables increase.
Net investment income on interest-only securities is the income
recognized on the interest-only securities we retain after we sell finance
receivables. Such income decreased by 52 percent, to $51.5 million, in 2001 and
by 42 percent, to $106.6 million, in 2000. These fluctuations are consistent
with the change in the average balance of interest-only securities. The weighted
average yields earned on interest-only securities were 13.2 percent, 13.4
percent and 14.6 percent during 2001, 2000 and 1999, respectively. As a result
of the change in the structure of our securitizations, our securitizations are
accounted for as secured borrowings and we do not recognize gain-on-sale revenue
or additions to interest-only securities from such transactions. Accordingly,
future investment income accreted on the interest-only security will decrease,
as cash remittances from the prior gain-on-sale securitizations reduce the
interest-only security balances. In addition, the balance of the interest-only
securities was reduced by $533.8 million in 1999, $504.3 million in 2000
(including $70.2 million due to the accounting change described in note 1 to the
accompanying consolidated financial statements) and $264.8 million in 2001 due
to impairment charges. Impairment charges are further explained below.
Gain on sales of finance receivables resulted from various loan sale
transactions in 2001 and 2000. During 2001, we sold $1.6 billion of finance
receivables which included: (i) our $802.3 million vendor services loan
portfolio (which was marked-to-market in the fourth quarter of 2000 and no
additional gain or loss was recognized in 2001); (ii) $568.4 million of
high-loan-to-value mortgage loans; and (iii) $269.0 million of other loans.
These sales resulted in net gains of $26.9 million. The Company records "net gainsentered into a
servicing agreement on contract sales" at the timehigh-loan-to-value mortgage loans sold. Pursuant to
the servicing agreement, the servicing fees payable to the Company are senior to
all other payments of salethe trust which purchased the loans. The Company also
holds a residual interest in certain other cash flows of its
contracts and defers service income, recognizing it as servicing is
-16-
performed.the trust. The Company'sCompany
did not provide any guarantees with respect to the performance of the loans
sold. In 2000, we sold approximately $147.1 million of finance receivables in
whole-loan sales resulting in net gains of $7.5 million. Gain on contract sales are an amount equal toof
finance receivables in 2000 excludes 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
discountsgain realized on the sale of our
bankcard portfolio which is included in special charges.
During 1999, the contractsCompany sold $9.7 billion of finance receivables in
securitizations structured as sales and less any selling expenses.
"Excessrecognized gains of $550.6 million.
During 2001 and 2000, we recognized no gain on sale related to securitized
transactions.
Fee revenue and other income includes servicing income, commissions
earned on insurance policies written in conjunction with financing transactions
and other income from late fees. Such income decreased by 11 percent, to $345.0
million, in 2001 and increased by 3.5 percent, to $385.7 million, in 2000. The
decrease in 2001 is primarily due to: (i) decreases in commission income as a
result of reduced origination activities; (ii) the termination of sales of
single premium credit life insurance; and (iii) a decrease of $16.7 million
related to fee revenue earned on net assets which were returned to Conseco in
the second quarter of 2000. In addition, as a result of the change in the
structure of our securitizations, we no longer record an asset for servicing
rights receivable" representsat the time of our securitizations, nor do we record servicing fee
revenue; instead, the entire amount of interest income is recorded as investment
income. The amount of servicing income, (which is net of the amortization of
servicing assets and liabilities) was $115.3 million in 2001, $108.2 million in
2000 and $165.3 million in 1999. However, we expect servicing income to decline
in future periods as the managed receivables in these securitizations are paid
down. In 2000, the decrease in servicing income was partially offset by higher
commissions and late fee income.
Provision for losses increased by 59 percent, to $563.6 million, in 2001
and by 175 percent, to $354.2 million, in 2000. These amounts relate to our
on-balance sheet receivables. The increase is principally due to the increase in
loans held on our balance sheet and an increase in delinquencies. In 2001,
on-balance sheet finance receivables increased 9.2 percent to $18.0 billion as
compared to 2000. At December 31, 2001 and 2000, the 60-days-and-over
delinquencies as a percentage of on-balance sheet finance receivables were 2.19
percent and 1.48 percent, respectively. Under the portfolio method, we estimate
an allowance for credit losses based upon our assessment of current and
historical loss experience, loan portfolio trends, the value of collateral,
prevailing economic and business conditions, and other relevant factors.
Increases in our allowance for credit losses are recognized as expense based on
our current assessments of such factors. For loans previously recorded as sales,
the anticipated discounted credit losses over the expected life of the loans
were reflected through a reduction in the gain-on-sale revenue recorded at the
time of securitization.
11
Our credit losses as a percentage of related loan balances for our
on-balance sheet portfolio have been increasing over the last several quarters
(1.69 percent, 1.96 percent, 2.25 percent, 2.39 percent and 2.50 percent for the
quarters ended December 31, 2000, March 31, 2001, June 30, 2001, September 30,
2001 and December 31, 2001, respectively). We believe such increases reflect:
(i) the natural increase in delinquencies in some of our products as they age
into periods at which we have historically experienced higher delinquencies;
(ii) the increase in retail credit receivables which typically experience higher
credit losses; (iii) economic factors which have resulted in an increase in
defaults; and (iv) a decrease in the recovery rates when repossessed properties
are sold given current industry levels of repossessed assets.
At December 31, 2001, the Company had a total of 24,131 unsold properties
(15,531 of which relate to our off- balance sheet securitizations) in
repossession or foreclosure, compared to 20,110 properties at December 31, 2000.
We reduce the value of repossessed property to our estimate of net realizable
value upon foreclosure. With respect to our managed manufactured housing
portfolio, we liquidated 25,750 units at an average loss severity rate (the
ratio of the loss realized, to the principal balance of the foreclosed loan) of
57 percent in 2001 compared to 23,861 units at an average loss severity rate of
54 percent in 2000. The loss severity rate related to our on-balance sheet
manufactured housing portfolio was 49 percent in 2001, compared to 48 percent in
2000. We believe the higher average severity rate in 2001 related to our
on-balance sheet manufactured housing portfolio is consistent with the aging of
such portfolio. The higher industry levels of repossessed manufactured homes
which we believe exist in the marketplace at December 31, 2001, may adversely
affect recovery rates, specifically wholesale severity, as other lenders
(including lenders who have exited the manufactured home lending business) have
acted to more quickly dispose of repossessed manufactured housing inventory.
Additionally, the higher levels of repossessed inventory that currently exists
in the marketplace may make it more difficult for us to liquidate our inventory
at or near historical recovery rates. In order to maintain recovery levels, we
may decide to hold inventory longer potentially causing our repossessed
inventory level to temporarily grow. We believe that our severity rates are
positively impacted by our use of retail channels to dispose of repossessed
inventory (where the repossessed units are sold through: (i) Company-owned sales
lots; or (ii) our dealer network). We currently liquidate approximately 70
percent of our repossessed units through the retail channel; thus, we rely less
on the wholesale channel (through which recovery rates are typically lower). We
intend to continue to focus on the retail channel in an effort to maximize our
recovery rates.
The Company believes that its historical loss experience has been
favorably affected by various loss mitigation policies. Under one such policy,
the Company works with the defaulting obligor and its dealer network to find a
new buyer who meets our underwriting standards and is willing to assume the
defaulting obligor's loan. Under other loss mitigation policies, the Company may
permit qualifying obligors (obligors who are currently unable to meet the
obligations under their loans, but are expected to be able to meet them in the
future under modified terms) to defer scheduled payments or the Company may
reduce the interest rate on the loan, in an effort to avoid loan defaults.
Due to the prevailing economic conditions in 2001, the Company increased
the use of the aforementioned mitigation policies. Based on past experience, we
believe these policies will reduce the ultimate losses we recognize. If we apply
loss mitigation policies, we generally reflect the customer's delinquency status
as not being past due. Accordingly, the loss mitigation policies favorably
impact our delinquency ratios. We attempt to appropriately reserve for the
effects of these loss mitigation policies when establishing loan loss reserves.
These policies are also considered when we determine the value of our retained
interests in securitization trusts (including interest-only securities). Loss
mitigation policies were applied to 8.8 percent of average managed accounts in
2001 compared to 7.0 percent in 2000. Such loss mitigation policies were applied
to 1.3 percent, 1.5 percent, 2.9 percent and 3.1 percent of average managed
accounts during the first, second, third and fourth quarters of 2001,
respectively.
Interest expense increased by 7.1 percent, to $1,234.4 million, in 2001
and by 238 percent, to $1,152.4 million, in 2000. Such fluctuations were the net
result of: (i) increased borrowings to fund the increased finance receivables;
and (ii) different average borrowing rates. Our average borrowing rate was 7.0
percent, 7.7 percent and 5.8 percent during 2001, 2000 and 1999, respectively.
The decrease in average borrowing rates in 2001 as compared to 2000 is primarily
due to the decrease in the general interest rate environment between periods.
Under the portfolio method, we recognize interest expense on the
securities issued to investors in the securitization trusts. These securities
typically have higher interest rates than our other debt. However, the decrease
in the average borrowing rate in 2001 was favorably impacted by the decrease in
the general interest rate environment. The average borrowing rate during 1999
was favorably impacted by the use of relatively lower rate borrowings from the
parent company to fund finance receivables. (Given the liquidity needs of our
parent, its inability to access lower interest rate borrowings, and bank loan
restrictions, our parent was unable to loan additional amounts to us during most
of 2000 and 2001).
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 decreased by 17 percent, to $642.4 million,
in 2001 and
12
increased by 11.0 percent, to $770.8 million, in 2000. In 2001, we began to
realize the cost savings from the previously announced restructuring of the
Company. In 2000, such costs increased consistent with the prior business plans
for the Company, partially offset by cost savings from our restructuring
activities. Other operating costs and expenses decreased $62.5 million to $345.5
million in the second half of 2000, as compared to the first half of 2000.
Impairment charges represent reductions in the value of our retained
interests in securitization trusts (including interest-only securities and
servicing rights) recognized as a loss in the statement of operations. We carry
interest-only securities at estimated fair value, which is determined by
discounting the projected cash flows over the expected life of the receivables
sold using current prepayment, default, loss and interest rate assumptions. We
consider any potential payments related to the guarantees of certain lower rated
securities issued by the securitization trusts in the projected cash flows used
to determine the value of our interest-only securities. When declines in value
considered to be other than temporary occur, we reduce the amortized cost to
estimated fair value and recognize a loss in the statement of operations. The
assumptions used to determine new values are based on our internal evaluations
and consultation with external advisors having significant experience in valuing
these securities. Under current accounting rules (pursuant to EITF 99-20) which
we adopted effective July 1, 2000, declines in the value of our interest-only
securities are recognized when: (i) the fair value of the security is less than
its carrying value; and (ii) the timing and/or amount of cash expected to be
received byfrom the Company oversecurity has changed adversely from the lifeprevious valuation
which determined the carrying value of the contracts. Excess servicing rights
receivablesecurity. When both occur, the
security is calculated by aggregating the contractual paymentswritten down to be
received pursuant to the contracts and subtracting: (i) the estimated amount
to be remitted to the investors/ownersfair value.
We recognized an impairment charge of the contracts, (ii) the estimated
amount that will$264.8 million in 2001. During
2001, our interest-only securities did not be collectedperform 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 rightswell as an asset on the Company's balance sheet. The excess servicing rights
receivable is calculated using prepayment,anticipated. In
addition, our expectations regarding future economic conditions changed.
Accordingly, we increased our default and interest rateseverity assumptions that the Company believes market participants would use for
similar instruments. The excess servicing rights receivable has not been
reduced for expected losses under recourse provisions of the sales, but such
rights are subordinated to the rights of investors/owners of the contracts.
The Company believes that the excess servicing rights receivable recognized at
the time of sale does not exceed the amount that would be received if it were
sold in the marketplace. The Company records the amount to be remitted to the
investors/owners of the contracts for the activity related to the
current
month, payable the next month, as "investor payable" and it is shown
separately as a liability on the Company's balance sheet.
The Company establishes an allowance for expected losses under the recourse
provisions with investors/owners of contracts or investor certificates and
calculates that allowance on the basis of historical experience and
management's best estimate of future credit losses likely to be incurred. The
amount of this provision is reviewed quarterly and adjustments are made if
actual experience or other factors indicate management's estimate of losses
should be revised. The Company retains a substantial amount of risk of
default on the loan portfolios that it sells. The Company has provided the
investors/owners of pools of contracts with a variety of additional forms of
credit enhancements. These credit enhancements have included letters of
credit, corporate guarantees and surety bonds that provide limited recourse to
the Company, and letters of credit that if drawn, are entitled to
reimbursement only from the future excess cash flowsperformance of the underlying transactions. Furthermore, certain securitized sales structures use cash
reserve funds and certain cash flows from the underlying pool of contracts as
the credit enhancement. The Company believes that its allowance for losses on
contracts sold with recourse is adequate andloans to be consistent with current economic
conditions as well as historical default and loss experiences of the
Company's entire loan portfolio. The outstanding security balances of
contracts at December 31, 1993 were $1,793,908,000 of GNMA certificates and
$4,713,012,000 related to securitized transactions,
-17-
including whole loan sales. The allowance for losses on contracts sold with
recourse is shown separately asour expectations. We
also recognized a liability. For contracts sold prior to
October 1, 1992, the allowance has been recorded on a nondiscounted basis.
For contracts sold subsequent to September 30, 1992, the allowance has been
discounted using an interest rate equivalent to the risk-free market rate for
securities with a duration similar to that estimated for the underlying
contracts based on guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in "EITF Issue 92-2".
The Company's expectations used in calculating its excess servicing rights
receivable and allowance for losses on contracts sold with recourse are
subject to volatility that could materially affect operating results.
Prepayments resulting from obligor mobility, general and regional economic
conditions, and prevailing interest rates, as well as actual losses incurred,
may vary from the performance the Company projects. The Company recognizes the
impact of adverse prepayment and loss experience by recording a charge to
earnings immediately. The Company reflects favorable portfolio experience
prospectively as realized.
During March 1994, the Company concluded its first public sale of a
significant portion of its excess servicing rights receivable. The sale was
in the form of senior/subordinated net interest margin certificates whereby
the senior certificates were issued by a trust, supported by the cash flows
from previous manufactured housing securitizations and GNMA sales, whose only
assets are the cash flows derived from certain excess servicing rights and the
proceeds therefrom. The subordinated certificates were retained by the
Company. The effect of this transaction was to monetize a significant portion
of the Company's excess servicing rights receivable and to begin to establish
a public market for such net interest margin certificates.
-18-
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.
Period-to-period
As a percentage of increase (decrease)
income for the year -------------------
ended December 31 1992 1991
---------------------------- to to
1993 1992 1991 1993 1992
-------- -------- -------- -------- --------
Income:
Net gains on contract
sales 76.1% 91.9% 85.5% 23.1% 23.4%
Provision for losses
on contract sales (21.0) (42.7) (34.8) (26.8) 40.8
Interest 30.7 31.4 29.5 45.2 22.1
Service 8.5 11.9 13.0 6.8 4.9
Commissions and other 5.7 7.5 6.8 13.5 26.9
-------- -------- --------
Total income 100.0% 100.0% 100.0%
======== ======== ========
Expenses:
Interest 14.0 18.2 22.8 14.0 (8.4)
Cost of servicing 7.1 9.5 9.2 10.7 20.0
General and
administrative 24.2 24.1 25.1 49.7 10.0
Earnings before
income taxes and
extraordinary loss 54.7 48.2 42.9 68.8 28.9
Earnings before
extraordinary loss 31.8 29.4 26.4 60.6 27.8
Net earnings 31.8 22.3 26.4 111.6 (3.0)
Net gains on contract sales, when netted with the Company's provision for
losses on contract sales, increased 66.3% in 1993 as the dollar volume of
contracts originated and sold rose over 1992. During the year ended
December 31, 1993, total contract sales increased $474,274,000, or 25.3%.
Also contributing to the increase in net gains on contract sales for both
1993 and 1992 was an$122.1 million increase in the average contract size and term duevaluation allowance related to
a shift in manufactured home sales to more expensive multi-section homes
versus single-wide homes. These increases for 1993 were partially offset
by decreased interest rate spreads on contracts sold and an increase in
prepayment reserves as a result of falling interest rates and the ongoing
evaluation of the Company's prepayment projections based on year-to-date
activity. The increase in net gains on contract sales in 1992 is a
reflection of the higher percentage of conventional versus GNMA contracts
sold. In addition, during the first quarter of 1992, the Company purchased
portfolios from the Resolution Trust Corporation ("RTC") which resulted in
gains at the time of sale primarily due to purchase discounts. The gain on
RTC contract sales was substantially offset by recourse liabilities assumed
at the same time which were included in the provision for losses on
contracts sales (see below). For 1991, net gains on contract sales
reflects
-19-
increased interest rate spreads on contracts sold and the impact of
securitization of portfolios purchased from other originators at discounts.
Prevailing interest rates are typically affected by economic conditions.
Changes in interest rates generally do not inhibit the Company's ability to
compete, although from time to time, in particular geographic areas, local
competition may be able to offer more favorable rates. Because of the size
of the excessour servicing spread (which enables the Company to absorb changes
in interest rates) and the relatively short period of time between
origination of contracts and sale by the Company of such contracts, the
Company's ability to sell contracts is generally not affected by gradual
changes in interest rates, although the amount of earnings may be affected.
Average excess servicing spreads were 3.8%, 4.8% and 4.5% for 1993, 1992
and 1991, respectively. Excess servicing spreads decreased during 1993 as
the rates on the contracts originated by the Company declined faster than
the rates on the Company's sales of securitized loans. Excess servicing
spreads increased during 1992 as the rates on contracts purchased,
primarily from the RTC, were higher than the rates on the contracts
originated by the Company during 1992. Excluding the contracts purchased
from the RTC, the servicing spread was 4.1% for 1992, which is reflective
of interest rate movements during the year and interest rates at the time
of sale. Excess servicing spreads increased during 1991 as the rates on
contracts originated by the Company declined more slowly than the rates on
the Company's sales of securitized loans. In addition, the inclusion of
seasoned portfolios in the Company's securitized program reduced the
expected lives of contracts sold, further contributing to the increased
spreads. Traditionally, changes in interest rates have less of an impact
on the Company's prepayment level as compared to conventional housing
prepayment levels. The changes in the interest rate environment, however,
did cause an increase in prepayments on the portfolio underlying the
Company's excess servicing rights receivable during 1993 and 1992. The
weighted average customer interest rate on the underlying portfolio of the
Company decreased during 1993 and 1992 due to lower rates on originations
for those years. A lower interest rate portfolio should add even greater
prepayment stability to the Company's portfolio.
The 26.8% decrease in the provision for losses on contract sales for 1993
is a result of the increased provision for losses incurred in 1992 for the
recourse liabilities assumed as a result of the RTC repurchasechanges in assumptions. Such assumptions
reflect that the service fees are subordinate to other cash flows in certain of
our securitization transactions. We carry our servicing rights at the lower of
carrying value or estimated fair value.
During 2000, actual default and asloss trends were worse than our previous
estimates. In light of these trends, management analyzed the assumptions used to
determine the estimated fair value of the interest-only securities and made
changes to the credit loss assumptions and the discount rate used to determine
the value of our securities. These changes also reflected other economic factors
and further methodology enhancements made by the Company. As a result, the
expected future cash flows from interest-only securities changed adversely from
previous estimates. Pursuant to the requirements of discounting the provision for losses on contracts sold during all
of 1993 compared to just one quarter in 1992. The decrease in the
provision also reflects the shift in manufactured home sales to more
expensive multi-section homes and land-and-home sales from single-wide
homes, as well as the continued use of the Company's proprietary credit
scoring system and the resulting improvement in loan performance. The
40.8% increase in the provision for losses on contract sales for 1992
reflectsEITF 99-20, the effect of
these changes was reflected immediately in earnings as an impairment charge. The
effect of the RTC repurchase as well asimpairment charge and adjustments to the higher dollar
volumevalue of -20-
contracts soldour
interest-only securities and servicing rights totaled $515.7 million ($324.9
million after the income tax benefit) for 2000 (in addition to the cumulative
effect of adopting EITF 99-20 of $70.2 million, or $45.5 million after the
income tax benefit).
In addition, during 1999 and early 2000, the Company reevaluated its
interest-only securities and servicing rights, including a higher percentagethe underlying
assumptions, in light of conventional versus GNMA
contracts sold.loss experience exceeding previous expectations. The
Company's provision for losses on contract sales
increased by 134.6%principal change in the revised assumptions resulting from 1990 to 1991 as a result ofthis process was an
increase in contract sales of $105,829,000, additionalexpected future credit losses, incurred in 1991relating primarily to reduced
assumptions as a
resultto future housing price inflation, recent loss experience and
refinements to the methodology of the unexpected length and severity of the recession, additional
provisions for the expected impact of a continuing recession, as well as
additions for anticipated losses on portfolios purchased at a discount from
other originators which the Company estimates will perform less favorably
than the Company's originated product. The Company feels that its credit
underwriting standards and servicing procedures will stabilize its loss
experience. A very important factor in the reduction of the Company's
credit risk is the geographic dispersion of the portfolio. At December 31,
1993, no state accounted for more than 10% of all contracts serviced by
the Company. The Company continually monitors its dispersion of contracts
as economic downturns are more severely felt in certain geographic areas
than others.
Interest income is realized from contracts held for sale, cash deposits and
amortization of the present value discount established for the excess
servicing rights receivable. Interest income grew 45.2% during 1993 due to
interest earned on the increased dollar amount of contracts held for sale
during 1993 compared to 1992, and due to an increase in the amortization of
present value discount on the Company's increasing excess servicing rights
receivable. Interest income grew during 1992 and 1991 primarily due to
increases in the amortization of present value discount on the excess
servicing rights receivable.
The increase in service income of 6.8% during 1993 and 4.9% during 1992
resulted from the increase in the Company's growing servicing portfolio.
The Company's average servicing portfolio grew 20.3% during 1993 and 12.2%
during 1992. Offsetting this increase in revenue was a decline in
servicing revenue on contracts originated by others. The average unpaid
principal balance of contracts being serviced for others during 1993 and
1992 decreased 23.0% and 19.8%, respectively. The Company expects this
decline in outside servicing to continue in the future. Servicing income
in 1991 included additional amortization of deferred service income as a
result of increasing the rate at which such income is deferred to reflect
44 basis points over the entire portfolio, higher fees collected under
outside servicing agreements and growth in the Company's servicing
portfolio.
Commissions and other income, which represents commissions earned on new
insurance policies written and renewals on existing policies, as well as
other income from late fees, grew during 1993, 1992 and 1991 as a result of
the increase in the Company's contract originations and servicing
portfolio. Excluding a nonrecurring loss in the third quarter of 1991,
commissions and other income increased 12.7% in 1992.
-21-
The Company's interest expense increased 14.0% in 1993 as a result of the
higher amount of average outstanding borrowings supporting the Company's
increased contract inventory levels. The increase was, however, partially
offset by lower credit facility borrowing rates and the lower effective
interest rate on the Company's senior subordinated debt as a result of the
Company's debt exchange in April 1992. Interest expense decreased 8.4%
during 1992 primarily as a result of the April 1992 debt exchange which
reduced the blended effective cost of the Company's publicly held
subordinated debt from 13.1% to 10.8%. In addition, average interest rates
on the Company's line of credit borrowings decreased substantially from
1991, although the average amount outstanding rose. Interest expense
declined in 1991 due to the cancellation of long-term debt related to the
office building the Company previously owned, and a decline in short-term
borrowing rates.
While the dollar amount of cost of servicing has increased over the past
three years, the cost of servicing as a percentage of contracts serviced
remained relatively constant during 1991 and 1992 , and decreased modestly
in 1993.
General and administrative expenses rose 49.7% during 1993, however, as a
percentage of revenue, these expenses have remained consistent with the
previous two years. The dollar growth is due primarily to an increase in
personnel and other origination costs related to the significant growth in
the number of contracts the Company has originated during the year. The
number of contracts originated during 1993 increased 81.6% over 1992. The
increase in general and administrative costs during 1992 and 1991 are
related to the centralization and growth in the Company's home improvement
division and the growth in manufactured home loan originations. The
Company continues to actively manage and control these expenses, although
increases are expected as the volume of business grows.
During the third quarter of 1993, the Company took a one-time charge to
earnings of $4,685,000 as a result of the August enactment of the new
federal corporate income tax rate. The charge reflects the increase in the
federal corporate income tax rate on the Company's deferred tax liability
and increased the Company's effective tax rate during the year to 41.9%.
Going forward, the Company's effective tax rate is expected to be 40%,
compared to 39% in 1992 and 38.5% in 1991.
The Company is affected by consumer demand for manufactured housing, home
improvements, special products and its insurance products. Consumer
demand, in turn, is partially influenced by regional trends, economic
conditions and personal preferences. The Company can make no prediction
about any particular geographic area in which it does business. These
regional effects, however, are mitigated by the national geographic
dispersion of the Company's servicing portfolio.
-22-
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," does not affect the
Company as the Company does not provide postretirement benefits other than
its pension plans.
Inflation has not had a material effect on the Company's income or earnings
over the past three fiscal years.
Capital resources and liquidity
-------------------------------
Green Tree's business requires continued access to the capital markets for
the purchase, warehousing and sale of contracts. To satisfy these needs,
the Company employs a variety of capital resources.
Historically, the most important liquidity source for the Company has been
its ability to sell contracts in the secondary markets through loan
securitizations and sales of GNMA certificates. Under certain securitized
sales structures, bank letters of credit, surety bonds, cash deposits or
other equivalent collateral are provided by the Company as credit
enhancements. Certain senior/subordinated structures retain a portion of
the Company's excess servicing spread as additional credit enhancement or
for accelerated principal repayments to subordinated certificateholders.
The Company analyzes the cash flows unique to each transaction, as well as
the marketability and earnings potential of such transactions when choosing
the appropriate structure for each securitized loan sale. In addition, the
structure of each securitized sale depends, to a great extent, on
conditions of the fixed income markets at the time of sale, as well as cost
considerations, availability and effectiveness of the various enhancement
methods. During 1993, the Company utilized a combination of
senior/subordinated structures and corporate guarantees in its manufactured
home asset securitizations, and did not utilize any outside sources of
credit enhancement to effect its sales. The home improvement loan sales in
1993 were enhanced with a cash deposit.
During March 1994, the Company added another liquidity source as it
completed its first public sale of a significant portion of its excess
servicing rights receivable. Net proceeds to the Company from the sale are
expected to be approximately $493,000,000 and will be used to pay down
short-term debt and fund the Company's future growth.
In February 1992, the Company replaced letters of credit and cash deposits
held as credit enhancements for certain existing securitized transactions
with financial guaranty insurance policies issued by a credit bond insurer
for an annual fee approximately equal to the Company's cost of maintaining
the letters of credit and cash deposits. The financial guaranty insurance
polices are noncancelable for the lives of the securitized transactions.valuation process. The effect of this
transactionchange was to make availableoffset somewhat by a revision to the estimation methodology to
incorporate the value associated with the cleanup call rights held by the
Company -23-
previously restricted cash deposits approximating $20 million. In
addition,in securitizations. We recognized a $554.3 million impairment charge
($349.2 million after tax) in 1999 to reduce the Company's outstanding letters of credit were reduced by
approximately $62 million.
Servicing fees and net interest payments collected, which is the Company's
principal source of cash, increased in eachbook value of the last three years. These
increases are a result ofinterest-only
securities and servicing rights.
Special charges for 2001 include: (i) the increased amount of servicing spread
collected as the Company's servicing portfolio continuesloss related to grow. With the
completion of the sale of
net interest margin certificatescertain finance receivables of $11.2 million; (ii) severance benefits,
litigation reserves and other restructuring charges of $12.8 million; (iii) a
$7.5 million charge related to the decision to discontinue the sale of certain
types of life insurance in March 1994,conjunction with lending transactions; and (iv) a
$10.0 million benefit due to the reduction in the value of the warrant held by
Lehman Brothers, Inc. and its affiliates (collectively "Lehman") to purchase
five percent of the Company, will show an increasewhich was caused by a decrease in servicing fees and net interest
payments collectedthe value of the
Company. Special charges recorded in 2000 include: (i) the $103.3 million
reduction in the value of finance receivables identified for sale; (ii) the
first quarter of 1994. Thereafter, servicing
fees and net interest payments collected will consist of servicing fees
collected only from the net interest margin certificates, plus servicing
fees and net interest payments on all existing HI and SP securitizations,
and all future securitizations in which the Company does not sell the
related excess servicing rights. After the first quarter of 1994,
repossession losses net of recoveries will likewise only consist of losses
on existing HI and SP securitizations, plus losses on future
securitizations, and losses$53.0 million loss on the first five MH securitizations (1987
through the first quartersale of 1988), as such losses have been excluded from
the net interest margin certificate sale.
Net principal payments collected have been positive in eachasset-based loans; (iii) $29.5 million 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 remittedcosts related to closing offices and streamlining businesses; (iv) $35.8 million
related to the investors/ownersabandonment of the contracts. These increases arecomputer processing systems; (v) $30.3 million of
fees paid to Lehman including a result of
customer payoffs and the growth of the Company's servicing portfolio. The
significant increase in net principal payments collected in 1992 compared
to 1991 occurred$25.0 million fee paid in conjunction with the
purchase and resalesale of $1.3 billion of finance receivables to Lehman; (vi) the issuance of a
warrant valued at $48.1 million related to the modification of the contracts fromLehman master
repurchase financing facilities; (vii) the RTC in which the Company recouped approximately
$18,000,000$51.0 million loss on sale of
previously advanced principal. The Company expects net
principal payments collected to decrease in 1994 as payoffs are expected to
stabilize.
Accelerated principal repayments to subordinated certificateholders
("defeasance payments") increased during 1993transportation loans and 1992. Defeasance
structures were used on the Company's securitized salesvendor services financing business; (viii) a $48.0
million increase in the fourth
quarterallowance for loan losses at our bank subsidiary; and
(ix)
13
$4.7 million of 1990 through the second quarter of 1992. Generally, defeasance
payments will decline as the securitization balances on these securitized
loan sales decrease.
Net cash used for operating activities increased in 1993 due largelynet gains related to the
increase in dollar volume of contracts held for sale. This increase in
contract inventory was a result of the Company's decision not to securitize
any SP loans, any HI loans after the second quarter, and through increases
in MH production. Although the Company purchased more contracts than it
sold, resulting in a usage of cash, this usage was offset by positive cash
flows from other operating items, including an increase in servicing and
net payments collected, an increase in interest on contracts and GNMA
certificates held for sale, and a reduction in repossession losses.
-24-
During 1992, the additional servicing fees and net interest and principal
payments collected, as well as the reduction in net cash deposits provided,
contributed to the Company's positive cash flows from operating activities.
These increased operating cash flows in 1992 were offset by repossession
losses net of recoveries which increased 57% in 1992 over 1991 as a result
of management's action to reduce the Company's aged repossession inventory
levels and poor economic conditions in California. Negative cash flows
from operating activities in 1991 were primarily due to cash deposits that
the Company was required to provide as credit enhancements for newly issued
and existing securitized sales. To a lesser extent, 1993, 1992 and 1991
cash flows from operating activities were also reduced by income taxes
paid. The Company expects it will use its remaining net operating loss
carryforward during 1994 and 1995, and accordingly will be paying
additional taxes on its taxable income thereafter.
Net cash used for investing activities for the year ended December 31, 1993
included the purchase of certain floors of the building where its corporate
offices are located. The positive cash flows from investing activities in
1991 are a result of the sale of GNMA certificates previously held for
investment and the salecertain lines of business, net
of other assets.
Net cash provided by financing activities was positiveitems. These charges are described in 1993 and 1991 as
borrowings on credit facilities and proceeds fromgreater detail in the issuance of common
stock and debt exceeded debt repayments and dividends, while in 1992, debt
repayments, dividends and other financing activities exceeded borrowings.
The Company has a $60 million bank warehousing credit agreement for the
purpose of financing its manufactured home, home improvement and
motorcycle contract production under which $58,725,000 was available,
subjectnote to the
availability of appropriate collateral, at December 31,
1993. This agreement expires November 30, 1994. In addition, the Company
currently has $950 million in master repurchase agreements with various
investment banking firms for the purpose of financing its contract
production. At December 31, 1993, the Company had $765,535,000 available
under these master repurchase agreements, subject to the availability of
appropriate collateral. These agreements expire during 1994, however, the
Company believes, based on discussions with the lenders, that these
agreements will be renewed. At December 31, 1993, the Company also had
$21,171,000 of notes payable outstanding through a GNMA reverse repurchase
agreement. These notes were collateralized by GNMA certificates.
In September 1993, the Company completed a 2,500,000 share common stock
offering, and sold an additional 375,000 shares to cover over-allotments.
The net proceeds of approximately $138,000,000 were used to finance the
Company's continued growth in its manufactured home, home improvement and
special products contract inventory, to temporarily reduce notes payable
under the Company's borrowing agreements, and for other general corporate
purposes. During the
-25-
first quarter of 1992, the Company completed a 6,000,000 share common stock
offering, and in April 1992, the Company sold an additional 614,800 shares
to cover over-allotments. The net proceeds of approximately $115,000,000
were used to purchase and retire all of the Company's outstanding preferred
stock (which had a liquidation value of $143,495,000) for $102,000,000 as
part of the settlement of litigation between the Company and the RTC, and
for general corporate purposes. The preferred stock had a $9,300,000
annual cash dividend requirement which terminated upon its repurchase.
In September 1992, the Securities and Exchange Commission declared
effective the Company's $250 million shelf registration which enables the
Company to offer, from time to time, medium-term notes with maturities in
excess of nine months. The notes may bear interest at fixed or floating
rates. In October 1992, the Company sold $12 million of 7.55% notes due
1999. In April 1993, the Company sold $14,650,000 of medium-term notes.
The notes were issued at varying rates (6.69% to 7.62%) with terms ranging
from 5 to 10 years. The proceeds from the issuance of these notes were
used to pay down the Company's notes payable. The issuance of these notes
lengthened the Company's debt maturity schedule at an interest rate which
the Company believes to be favorable.
In April 1992, the Company completed an exchange offer related to its
8 1/4% Senior Subordinated Debentures due 1995 (the "Debentures")accompanying financial statements entitled "Special Charges".
Of the
$287,500,000 of Debentures, $267,254,000 were tendered and accepted for
exchange by the Company for its new 10 1/4% Senior Subordinated Notes due
2002. The result of the exchange was to reduce the blended effective cost
of the Company's outstanding subordinated debt from 13.1% to 10.8%. An
extraordinary charge of $17,457,000 was recognized in the second quarter as
a result of the exchange. The extraordinary charge resulted from the
accelerated write-down of the original issue discount and deferred debt
expense, net of income taxes of $11,161,000, relating to the Debentures
exchanged.
-26-14
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS FURNISHED PURSUANT
TO THE REQUIREMENTSIndex to Consolidated Financial Statements
Page
Report of Independent Accountants......................................................................................16
Consolidated Balance Sheet at December 31, 2001 and 2000...............................................................17
Consolidated Statement of Operations for the years ended
December 31, 2001, 2000 and 1999...................................................................................18
Consolidated Statement of Shareholder's Equity
for the years ended December 31, 2001, 2000 and 1999...............................................................19
Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000 and 1999...................................................................................21
Notes to Consolidated Financial Statements.............................................................................22
15
REPORT OF FORM 10-K
AND
INDEPENDENT AUDITORS' REPORT
-------------------------------------
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
--------------------------------------------
-27-
INDEPENDENT AUDITORS' REPORT
TheACCOUNTANTS
To the Board of Directors
and Shareholders
Green Tree Financial Corporation
Saint Paul, Minnesota:
We have auditedShareholder of
Conseco Finance Corp.
In our opinion, the accompanying consolidated balance sheets of Green Tree
Financial Corporation and subsidiaries as of December 31, 1993 and 1992,sheet and the
related consolidated statements of operations, stockholders'shareholder's equity and cash
flows present fairly, in all material respects, the financial position of
Conseco Finance Corp. (formerly Green Tree Financial Corporation prior to its
name change in November 1999) and subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the three-year period ended December 31, 1993 and the financial statement schedules listed2001, in conformity with accounting
principles generally accepted in the Index
at Item 14(a)(2).United States of America. These consolidated financial
statements and financial
statement schedules are the responsibility of the Company's management.
Ourmanagement; our
responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted auditing
standards. Those standardsin the United States of America, which
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 includesstatements, assessing the accounting principles
used and significant estimates made by management, as well asand evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion,As discussed in note 1 to the consolidated financial statements, referred to above
present fairly,the
Company adopted EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in all material respects, the financial position of Green
TreeSecuritized
Financial Corporation and subsidiaries as ofAssets" in 2000.
/s/ PricewaterhouseCoopers LLP
----------------------------------
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 29, 2002
16
CONSECO FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 19932001 and 1992, and the results of their operations and their cash flows for each2000
(Dollars in millions)
ASSETS
2001 2000
---- ----
Retained interests in securitization trusts:
Actively managed fixed maturities at fair value (amortized cost: 2001 - $704.9;
2000 - $716.8)................................................................... $ 528.5 $ 494.6
Interest-only securities at fair value (amortized cost: 2001 - $131.3; 2000 - $431.2) 141.7 432.9
--------- ---------
Total retained interests in securitization trusts................................ 670.2 927.5
--------- ---------
Cash and cash equivalents............................................................... 394.5 665.5
Cash held in segregated accounts for investors in securitizations....................... 550.2 551.3
Cash held in segregated accounts related to servicing agreements and
securitization transactions......................................................... 994.6 866.7
Finance receivables..................................................................... 3,810.7 3,865.0
Finance receivables - securitized....................................................... 14,198.5 12,622.8
Receivables due from Conseco, Inc....................................................... 358.0 349.9
Income tax assets....................................................................... 267.2 208.6
Goodwill................................................................................ - 28.8
Other assets............................................................................ 984.1 751.9
--------- ---------
Total assets.................................................................. $22,228.0 $20,838.0
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Investor payables.................................................................... $ 550.2 $ 551.3
Liabilities related to certificates of deposit....................................... 1,790.3 1,873.3
Other liabilities.................................................................... 566.3 583.7
Preferred stock dividends payable to Conseco, Inc.................................... 86.1 18.6
Notes payable:
Related to securitized finance receivables structured as collateralized borrowings. 14,484.5 12,100.6
Master repurchase agreements....................................................... 1,691.8 1,802.4
Credit facility collateralized by retained interests in securitizations............ 507.3 590.0
Due to Conseco, Inc................................................................ 249.5 786.7
Other borrowings................................................................... 352.5 442.2
--------- ---------
Total liabilities............................................................. 20,278.5 18,748.8
--------- ---------
Shareholder's equity:
Preferred stock...................................................................... 750.0 750.0
Common stock and additional paid-in capital.......................................... 1,209.4 1,209.4
Accumulated other comprehensive loss (net of applicable deferred income tax
benefit: 2001 - $63.8; 2000 - $81.6)............................................... (108.6) (139.1)
Retained earnings.................................................................... 98.7 268.9
--------- ---------
Total shareholder's equity.................................................... 1,949.5 2,089.2
--------- ---------
Total liabilities and shareholder's equity.................................... $22,228.0 $20,838.0
========= =========
The accompanying notes are an integral part
of the years inconsolidated financial statements.
17
CONSECO FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the three-year periodyears ended December 31, 19932001, 2000 and 1999
(Dollars in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly,
in all material respects, information set forth therein.
KPMG Peat Marwick
Minneapolis, Minnesota
March 22, 1994
-28-
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------millions)
December 31
------------------------------
1993 1992
-------------- --------------
ASSETS:
Cash and cash equivalents (Note A) $ 170,674,000 $ 133,435,000
Cash deposits, restricted (Note F) 124,817,000 117,067,000
Other investments (Note A) 19,016,000 13,504,000
Receivables:
Excess servicing rights
(Notes A and B) 843,489,000 640,647,000
Other accounts receivable 58,604,000 51,773,000
Contracts, GNMA certificates and
collateral(Notes C, E and F) 495,225,000 193,969,000
Property, furniture and fixtures
(Note D) 23,275,000 12,770,000
Other assets (including deferred
debt expense of $2,816,000 and
$3,206,000, respectively) 4,402,000 3,890,000
-------------- --------------
Total assets $1,739,502,000 $1,167,055,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable (Note E) $ 206,911,000 $ 79,438,000
Senior notes (Note E) 26,650,000 12,000,000
Senior subordinated notes due 2002
(Note E) 262,435,000 262,093,000
Senior subordinated debentures due
1995 (Note E) 19,008,000 18,262,000
Subordinated note (Note E) -- 4,250,000
Allowance for losses on contracts
sold with recourse (Notes A and F) 222,135,000 189,669,000
Accounts payable and accrued
liabilities 103,598,000 49,228,000
Investor payable 139,655,000 108,207,000
Income taxes, principally deferred
(Note K) 209,681,000 145,074,000
-------------- --------------
Total liabilities 1,190,073,000 868,221,000
Commitments and contingencies (Notes F and I)
Stockholders' equity (Notes E and G):
Common stock, $.01 par; authorized
50,000,000 shares, issued and
outstanding 33,517,392 shares
(1993) and 30,401,374 shares (1992) 335,000 304,000
Additional paid-in capital 286,731,000 142,000,000
Retained earnings 262,363,000 156,530,000
-------------- --------------
Total stockholders' equity 549,429,000 298,834,000
-------------- --------------
$1,739,502,000 $1,167,055,000
============== ==============
See notes to consolidated financial statements.
-29-
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year ended December 31
-------------------------------------------
1993 1992 1991
------------- ------------ --------------2001 2000 1999
---- ---- ----
INCOME:Revenues:
Net gainsinvestment income:
Finance receivables and other..................................... $ 2,260.2 $1,945.0 $ 647.1
Interest-only securities.......................................... 51.5 106.6 185.1
Gain on contract
sales $279,061,000 $226,754,000 $183,689,000sale:
Securitization transactions....................................... - - 550.6
Whole-loan sales.................................................. 26.9 7.5 -
Servicing income.................................................... 115.3 108.2 165.3
Fee revenue and other income........................................ 229.7 277.5 207.4
--------- -------- ---------
Total revenues.................................................. 2,683.6 2,444.8 1,755.5
--------- -------- ---------
Expenses:
Provision for losseslosses................................................ 563.6 354.2 128.7
Interest expense.................................................... 1,234.4 1,152.4 341.3
Other operating costs and expenses.................................. 642.4 770.8 697.2
Impairment charges.................................................. 386.9 515.7 554.3
Special charges..................................................... 21.5 394.3 -
--------- -------- ---------
Total expenses.................................................... 2,848.8 3,187.4 1,721.5
--------- -------- ---------
Income (loss) before income taxes, cumulative effect of
accounting change and extraordinary gain (loss) on
contract sales (77,135,000) (105,357,000) (74,845,000)
Interest 112,495,000 77,461,000 63,441,000
Service 31,249,000 29,252,000 27,895,000
Commissionsextinguishment of debt.......................................... (165.2) (742.6) 34.0
Income tax benefit..................................................... (56.4) (262.8) (16.4)
--------- -------- ---------
Income (loss) before cumulative effect of accounting change
and other 21,010,000 18,505,000 14,585,000
------------- ------------ --------------
366,680,000 246,615,000 214,765,000
EXPENSES:
Interest 51,155,000 44,868,000 48,957,000
Costextraordinary gain (loss) on extinguishment of servicing 26,078,000 23,557,000 19,637,000
General and administrative 88,910,000 59,384,000 53,995,000
------------- ------------ --------------
166,143,000 127,809,000 122,589,000
------------- ------------ --------------
EARNINGS BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS 200,537,000 118,806,000 92,176,000
INCOME TAXES (Note K) 84,114,000 46,334,000 35,488,000
------------- ------------ --------------
EARNINGS BEFORE EXTRAORDINARY LOSS 116,423,000 72,472,000 56,688,000
EXTRAORDINARY LOSS ON DEBT EXCHANGE
(Netdebt ........ (108.8) (479.8) 50.4
Extraordinary gain (loss) on extinguishment of debt, net of income
taxestaxes........................................................... 6.1 - (2.5)
Cumulative effect of $11,161,000) (Note E) -- (17,457,000) --
------------- ------------ --------------
NET EARNINGS $116,423,000accounting change, net of income taxes............ - (45.5) -
--------- -------- ---------
Net income (loss)................................................. (102.7) (525.3) 47.9
Preferred stock dividends.............................................. 67.5 18.6 -
-------- -------- ---------
Net income (loss) applicable to common stock...................... $ 55,015,000(170.2) $ 56,688,000
============= ============ ==============
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Earnings before extraordinary
loss $3.62 $2.41 $2.00
Extraordinary loss -- (.59) --
------------- ------------ --------------
Net earnings $3.62 $1.82 $2.00
============= ============ ==============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 32,187,409 29,199,970 23,641,446(543.9) $ 47.9
========= ======== =========
SeeThe accompanying notes toare an integral part
of the consolidated financial statements.
-30-18
GREEN TREE FINANCIAL CORPORATIONCONSECO FINANCE CORP. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS'SHAREHOLDER'S EQUITY, -----------------------------------------------continued
for the years ended December 31, 2001, 2000 and 1999
(Dollars in millions)
AdditionalCommon stock Accumulated other
Preferred and additional comprehensive Retained
Total Preferred Commonstock paid-in Retained stockholders'
stock stock capital income (loss) earnings
equity
--------------- ----- --------------- ------------- -------- ------------- ------------- -------------
BALANCES, December 31, 1990Balance, January 1, 1999......................... $2,292.2 $ 14,000 $232,000- $1,338.3 $ 120,259,000 $ 71,973,000 $ 192,478,000
Common(11.0) $964.9
Comprehensive income (loss), net of tax:
Net income.................................... 47.9 - - - 47.9
Change in minimum pension liability
adjustment (net of applicable income
tax expense of $2.6 million)................ 4.2 - - 4.2 -
Change in unrealized depreciation of
actively managed fixed maturity
investments and interest-only securities
(net of applicable income tax benefit
of $7.6).................................... (12.0) - - (12.0) -
--------
Total comprehensive income.............. 40.1 -
Issuance of common stock...................... 299.4 - 299.4 - -
Tax benefit related to issuance of shares
under stock issuance -- 4,000 4,724,000 -- 4,728,000
Dividends on:
Preferred stock -- -- -- (9,310,000) (9,310,000)
Common stock -- -- -- (7,040 000) (7,040,000)
Net earnings -- -- -- 56,688,000 56,688,000
--------- -------- ------------- ------------ -------------
BALANCES, December 31, 1991 14,000 236,000 124,983,000 112,311,000 237,544,000
Common stock issuance -- 68,000 119,003,000 -- 119,071,000
Preferred stock repurchased (14,000) -- (101,986,000) -- (102,000,000)
Dividends on:
Preferred stock -- -- -- (1,995,000) (1,995,000)
Common stock -- -- -- (8,801,000) (8,801,000)
Net earnings -- -- -- 55,015,000 55,015,000
--------- -------- ------------- ------------ -------------
BALANCES, December 31, 1992 -- 304,000 142,000,000 156,530,000 298,834,000
Common stock issuance -- 31,000 144,731,000 -- 144,762,000option plans.................... 3.3 - 3.3 -
Dividends on common stock -- -- -- (10,590,000) (10,590,000)
Net earnings -- -- -- 116,423,000 116,423,000
---------stock..................... (200.0) - - - (200.0)
-------- ------------- ------------ -------------
BALANCES,------ -------- ------- ------
Balance, December 31, 1993 $ -- $335,000 $ 286,731,000 $262,363,000 $ 549,429,000
========= ======== ============= ============ =============1999....................... 2,435.0 - 1,641.0 (18.8) 812.8
Comprehensive loss, net of tax:
Net loss.................................... (525.3) - - - (525.3)
Change in unrealized depreciation of
actively managed fixed maturity
investments and interest-only securities
(net of applicable income tax expense of
$70.6 million)............................ (120.3) - - (120.3) -
--------
Total comprehensive loss................ (645.6) -
Issuance of preferred stock................... 750.0 750.0 - - -
Repurchase of shares of common stock.......... (126.0) - (126.0) - -
Return of capital............................. (306.3) - (306.3) - -
Dividends on preferred stock.................. (18.6) - - - (18.6)
Other......................................... .7 - .7 - -
-------- ------ -------- ------- ------
Balance, December 31, 2000....................... $2,089.2 $750.0 $1,209.4 $(139.1) $268.9
See(continued on following page)
The accompanying notes toare an integral part
of the consolidated financial statements.
-31-19
GREEN TREE FINANCIAL CORPORATIONCONSECO FINANCE CORP. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
-------------------------------------SHAREHOLDER'S EQUITY
for the years ended December 31, 2001, 2000 and 1999
(Dollars in millions)
Year ended December 31
-------------------------------------------------
1993 1992 1991Common stock Accumulated other
Preferred and additional comprehensive Retained
Total Stock paid-in capital income (loss) earnings
----- ----- --------------- --------------- ---------------------------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Servicing fees and net
interest payments
collected $ 249,884,000 $ 205,900,000 $ 143,246,000
Net principal payments
collected 28,316,000 45,256,000 9,906,000
Interest on contracts and
GNMA certificates 52,016,000 27,184,000 28,307,000
Interest on cash and
investments 5,517,000 5,731,000 7,105,000
Commissions 13,665,000 16,254,000 11,272,000
Other 2,092,000 3,096,000 2,402,000
--------------- --------------- ---------------
351,490,000 303,421,000 202,238,000
--------------- --------------- ---------------
Cash paid to employees
and suppliers (87,864,000) (75,905,000) (68,001,000)
Defeasance payments (32,177,000) (29,725,000) (5,166,000)
Interest paid on debt (48,472,000) (40,099,000) (40,195,000)
Repossession losses
Balance, December 31, 2000 (carried forward
from prior page).............................. $2,089.2 $750.0 $1,209.4 $(139.1) $268.9
Comprehensive income (loss), net of recoveries (46,325,000) (50,369,000) (32,109,000)
FHA insurance premiums (19,681,000) (17,888,000) (16,316,000)
Income taxes paid (17,800,000) (9,622,000) (11,585,000)
--------------- --------------- ---------------
(252,319,000) (223,608,000) (173,372,000)
--------------- --------------- ---------------
NET CASH PROVIDED BY
OPERATIONS 99,171,000 79,813,000 28,866,000
Purchasetax:
Net loss...................................... (102.7) - - - (102.7)
Change in minimum pension liability
adjustment (net of contracts
held for sale (2,665,594,000) (1,879,934,000) (1,155,067,000)
Proceeds from saleapplicable income
tax benefit of contracts held for sale 2,319,268,000 1,866,896,000 1,145,681,000
Principal collections$2.3 million)................ (3.9) - - (3.9) -
Change in unrealized depreciation
of actively managed fixed maturity
investments and interest-only
securities (net of applicable income tax
expense of $21.7)........................... 34.4 - - 34.4 -
--------
Total comprehensive loss................ (72.2) -
Dividends on contracts held for sale 40,789,000 19,214,000 16,494,000
Cash deposits provided as
credit enhancements (12,133,000) (44,304,000) (46,832,000)
Cash deposits returned 4,384,000 22,131,000 5,758,000
--------------- --------------- ---------------
NET CASH (USED FOR)
PROVIDED BY OPERATING
ACTIVITIES (214,115,000) 63,816,000 (5,100,000)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property,
furniture and fixtures (11,658,000) (1,694,000) (886,000)
Purchase of investment
securities (5,512,000) (2,020,000) (3,127,000)
Proceeds from sale of
other assets -- -- 10,172,000
Proceeds from sale of GNMA
certificates held for
investment -- -- 1,268,000
Principal collections on
GNMA certificates held
for investment -- -- 94,000
--------------- --------------- ---------------
NET CASH (USED FOR)
PROVIDED BY INVESTING
ACTIVITIES (17,170,000) (3,714,000) 7,521,000
--------------- --------------- ---------------preferred stock.................. (67.5) - - - (67.5)
-------- ------ -------- ------- ------
Balance, December 31, 2001....................... $1,949.5 $750.0 $1,209.4 $(108.6) $ 98.7
======== ====== ======== ======= ======
-32-The accompanying notes are an integral part
of the consolidated financial statements.
20
GREEN TREE FINANCIAL CORPORATIONCONSECO FINANCE CORP. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
-------------------------------------for the years ended December 31, 2001, 2000 and 1999
(Dollars in millions)
Year ended December 31
-------------------------------------------------
1993 1992 1991
--------------- --------------- ---------------2001 2000 1999
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
BorrowingsCash flows from operating activities:
Net investment income............................................................... $ 2,141.2 $ 1,994.6 $ 1,009.0
Points and origination fees......................................................... - - 390.0
Fee revenue and other income........................................................ 301.4 401.3 383.1
Interest expense.................................................................... (1,212.3) (1,038.7) (293.5)
Special charges..................................................................... (3.1) (44.8) (20.9)
Other operating costs............................................................... (686.6) (757.0) (655.7)
Taxes............................................................................... (23.9) (72.8) (188.0)
--------- --------- ---------
Net cash provided by operating activities......................................... 516.7 482.6 624.0
--------- --------- ---------
Cash flows from investing activities:
Cash received from the sale of finance receivables, net of expenses................. 867.2 2,501.2 9,516.6
Principal payments received on credit
facilities 2,379,552,000 1,188,115,000 1,061,179,000
Repaymentsfinance receivables.................................. 8,611.3 8,490.1 7,487.2
Finance receivables originated...................................................... (12,320.3) (18,515.9) (24,650.5)
Sale of vendor services financing business.......................................... 407.2 - -
Other............................................................................... (111.3) (262.3) (120.0)
--------- --------- ---------
Net cash used by investing activities ............................................ (2,545.9) (7,786.9) (7,766.7)
--------- --------- ---------
Cash flows from financing activities:
Cash contributed by parent resulting from asset transfer............................ - - 18.2
Issuance of liabilities related to deposit products................................. 1,872.4 2,168.8 1,128.8
Payments on credit
facilities (2,252,079,000) (1,208,864,000) (1,017,927,000)liabilities related to deposit products................................. (1,961.1) (1,166.0) (288.3)
Issuance of notes payable and commercial paper...................................... 11,755.6 20,452.1 22,220.3
Payments on notes payable and commercial paper...................................... (9,666.9) (13,202.8) (15,321.3)
Change in cash held in restricted accounts for settlement of collateralized
borrowings........................................................................ (241.8) (689.7) (76.8)
Repurchase of shares of common stock................................................ - (126.0) -
Common stock issued 141,028,000 116,286,000 3,259,000
Repurchase of preferred
stock -- (102,000,000) --
Dividendsdividends paid (10,590,000) (13,123,000) (16,350,000)
Proceeds from debt issuance 14,650,000 12,000,000 --
Payments of debt (4,037,000) (6,983,000) (8,926,000)
Fees paid for debt
exchange and issuance -- (2,968,000) --
--------------- --------------- ---------------
NET CASH PROVIDED BY
(USED FOR) FINANCING
ACTIVITIES 268,524,000 (17,537,000) 21,235,000
--------------- --------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 37,239,000 42,565,000 23,656,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 133,435,000 90,870,000 67,214,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 170,674,000 $ 133,435,000 $ 90,870,000
=============== =============== ===============
RECONCILIATION OF NET EARNINGS TO
NET CASH (USED FOR) PROVIDED BY
OPERATING ACTIVITIES:........................................................ - - (200.0)
--------- --------- ---------
Net earnings $ 116,423,000 $ 55,015,000 $ 56,688,000
Deferred taxes 63,743,000 26,554,000 25,795,000
Extraordinary loss on debt
exchange -- 28,618,000 --
Depreciation and
amortization 5,291,000 6,711,000 12,987,000
Net contract payments
collected, less excess
servicing rights recorded (58,844,000) 34,557,000 (18,356,000)
Amortization of deferred
service income (26,318,000) (21,240,000) (17,508,000)
Net amortization of present
value discount (54,793,000) (44,625,000) (28,503,000)cash provided by financing activities......................................... 1,758.2 7,436.4 7,480.9
--------- --------- ---------
Net increase (decrease) in cash deposits (7,749,000) (22,173,000) (41,074,000)
Purchaseand cash equivalents.............................. (271.0) 132.1 338.2
Cash and cash equivalents, beginning of contracts held
for sale, netyear........................................... 665.5 533.4 195.2
--------- --------- ---------
Cash and cash equivalents, end of sales
and principal collections (305,537,000) 6,176,000 7,108,000
Net discount (gain) on sale
of loans 16,496,000 (9,720,000) 1,222,000
Other 37,173,000 3,943,000 (3,459,000)
--------------- --------------- ---------------
NET CASH (USED FOR) PROVIDED
BY OPERATING ACTIVITIESyear................................................. $ (214,115,000)394.5 $ 63,816,000665.5 $ (5,100,000)
=============== =============== ===============533.4
========= ========= =========
SeeThe accompanying notes toare an integral part
of the consolidated financial statements.
-33-21
GREEN TREE FINANCIAL CORPORATIONCONSECO FINANCE CORP. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1993, 1992Notes to Consolidated Financial Statements
--------------------------
1. DESCRIPTION OF BUSINESS AND 1991
--------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PrinciplesPOLICIES:
Description of consolidation
---------------------------
The consolidatedBusiness
Conseco Finance Corp. ("we", "Conseco Finance", or the "Company",
formerly Green Tree Financial Corporation prior to its name change in November
1999) is a financial statements include the accounts ofservices holding company that originates, securitizes and
services manufactured housing, home equity, home improvement, retail credit and
floorplan loans (references to loans made by the Company include both cash
advances and itspurchases of obligations). Conseco Finance is a wholly owned
subsidiaries. All material intercompany profits,
transactions and balances have been eliminated.
Contract sales
--------------
The Company originates directly, or indirectly through dealers, conditional
sales contracts. It typically sellssubsidiary of Conseco, Inc. ("Conseco"), a financial services holding company.
During the contracts at or near parlast two years, Conseco has taken a number of actions with
respect to
investors with servicing retained (the Company retains a participation in
cash flows from the loans). The present value of expected cash flows from
this participation which exceeds normal servicing fees is recorded at the
time of sale as "excess servicing rights receivable." The excess servicing
rights receivable is calculated using prepayment, default and interest
rate assumptions that the Company, believes market participants would useincluding: (i) the sale, closing or runoff of several
business units (including asset-based lending, vendor leasing, bankcards,
transportation and park construction); (ii) monetization of certain on-balance
sheet financial assets through sales or as collateral for similar instruments but is not reduced for expected losses under
recourse provisionsadditional borrowings;
and (iii) cost savings and restructuring of ongoing businesses such as the
sales. The Company believes that the excess
servicing rights receivable recognized at the timestreamlining of sale does not exceed
the amount that would be received if it were soldloan origination operations in the marketplace. The
allowance for losses on contracts sold with recourse is shown separately asmanufactured housing and home
equity lending divisions. These actions had a liabilitysignificant effect on the
Company's balance sheet. For contracts sold prioroperating results during 2001 and 2000. In early 2002, we announced
our decision to October 1, 1992,reduce the allowance is shown on a nondiscounted basis. For
contracts sold after September 30, 1992,size of our floorplan lending business.
Basis of Presentation
The following summary explains the allowance has been discounted
using an interest rate equivalentsignificant accounting policies we use
to prepare our financial statements. We prepare our financial statements in
accordance with generally accepted accounting principles ("GAAP"). We follow the
risk-free market rate for
securities with a duration similar to that estimated for the underlying
contracts based on guidance issuedaccounting standards established by the Financial Accounting Standards Board's Emerging Issues Task ForceBoard
("EITF"FASB") in "EITF Issue 92-2."
In determining expected cash flows, management considers economic
conditions at, the dateAmerican Institute of sale. In subsequent periods, these estimates are
revised as necessary using the original discount rate and any losses
arising from adverse prepayment and loss experience are recognized by
recording a charge to earnings immediately. Favorable experience is
recognized prospectively as realized.
Interest payments received on the contracts, less interest payments paid to
investors, is reported on the consolidated statements of cash flows as
"servicing fees and net interest payments collected."
-34-
Principal payments received on the contracts, less non-defeasance principal
payments paid to investors is reported as "net principal payments
collected" on the consolidated statements of cash flows. Interest income
and service income are recognized by systematically amortizing the present
value discount and deferred service income, respectively.
The Company defers service income at an annual rate of 0.44%. The Company
discounts cash flows on sales at the rate it believes a purchaser would
require as a rate of return. The cash flows are discounted to present
value using discount rates which averaged approximately 9.3% in 1993, 9.6%
in 1992 and 9.5% in 1991. The Company has developed its assumptions based
on experience with its own portfolio, available market data and
consultation with its investment bankers. The Company believes that the
assumptions used in estimating cash flows are similar to that which would
be used by an outside investor.
Depreciation
------------
Property, furniture and fixtures are carried at cost and are depreciated
over their estimated useful lives on a straight-line basis.
Deferred debt expenses
----------------------
Expenses associated with the issuance of long-term debt are amortized on a
straight-line basis over the term of the debt. Amortization was $389,000
in 1993, $494,000 in 1992 and $838,000 in 1991.
Earnings per common and common equivalent share
-----------------------------------------------
Earnings per common and common equivalent share are computed by dividing
net earnings less preferred dividends ($1,995,000 in 1992 and $9,310,000 in
1991) by the weighted average number of shares of Common Stock and Common
Stock equivalents outstanding during each year. Common Stock equivalents
consist of the dilutive effect of Common Stock which may be issued upon
exercise of stock options. All share and per-share amounts have been
restated to reflect the two-for-one stock split the Company effected in
January 1993. Earnings per share and fully diluted earnings per share are
substantially the same.
Cash and cash equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid temporary investments purchased with a maturity of three
months or less to be cash equivalents. These temporary investments are
held in United States Treasury Funds or bank money market accounts. At
December 31, 1993 and 1992, cash of approximately $140,528,000 and
$107,117,000, respectively, was held
-35-
in trust for subsequent payment to investors. In addition, cash of
approximately $2,404,000 and $2,525,000 was restricted and held by the
Company's subsidiaries pursuant to master repurchase agreements and
government requirements at December 31, 1993 and 1992, respectively.
Other investments
-----------------
Other investments consist of highly liquid investments with original
maturities of more than three months. Other investments are held in
United States Treasury Bills, United States Government Bonds, corporate
bonds and certificates of deposit, and are stated at cost plus accrued
interest, which approximates market value. At December 31, 1993 and 1992,
investments of approximately $17,865,000 and $12,275,000, respectively,
were held in trust for policy and claim reserves for the Company's
insurance subsidiaries. In addition, investments of approximately
$1,151,000 and $1,229,000 were restricted and held by the Company's
subsidiaries pursuant to a master repurchase agreement and government
requirements at December 31, 1993 and 1992, respectively.
Allowance for losses
--------------------
Recourse of investors against the Company is governed by the agreements
between the investorCertified Public Accountants and the
Company (Note F). The allowance for losses on
contracts sold with recourse represents the Company's best estimate of
future credit losses likely to be incurred over the entire life of the
contracts, pursuant to recourse provided to investors.
Reclassifications
-----------------
Certain reclassifications have been made to the December 31, 1992Securities and 1991Exchange Commission.
Our consolidated financial statements to conform toexclude the classifications usedresults of material
transactions between us and our consolidated affiliates, or among our
consolidated affiliates. We reclassified certain amounts in the December
31, 1993 financial statements. These reclassifications had no effect on
net earnings or stockholders' equity as previously reported.
B. EXCESS SERVICING RIGHTS RECEIVABLE
Excess servicing rights receivable consists of:
December 31
--------------------------------
1993 1992
--------------- ---------------
Gross cash flows receivable on
contracts sold $2,307,735,000 $1,788,594,000
Less:
Prepayment reserve (761,732,000) (567,007,000)
FHA insurance and other fees (83,706,000) (95,944,000)
Deferred service income (161,407,000) (119,487,000)
Discount to present value (457,401,000) (365,509,000)
-------------- --------------
$ 843,489,000 $ 640,647,000
============== ==============
-36-
The carrying value of excess servicing rights receivable is analyzed
quarterly to determine the impact of prepayments, if any. The adjustments
required as a result of adverse prepayment activity, net of refinancings,
were approximately $22,000,000our 2000 and $14,000,000 in 1993 and 1992,
respectively.
During the years ended December 31, 1993, 1992 and 1991, the Company sold
$213,368,000, $268,916,000 and $499,780,000, respectively, of GNMA
guaranteed certificates secured by FHA-insured and VA-guaranteed contracts.
At December 31, 1993 and 1992, the outstanding principal balance on GNMA
certificates issued by the Company was $1,793,908,000 and $1,893,363,000,
respectively.
During the years ended December 31, 1993, 1992 and 1991, the Company sold
$2,132,472,000, $1,602,650,000 and $638,886,000, respectively, of
contracts in various securitized transactions and in sales to private
investors. At December 31, 1993 and 1992, the outstanding principal
balance on all conventional securitized and private investor sales was
$4,713,012,000 and $3,272,988,000, respectively.
C. CONTRACTS, GNMA CERTIFICATES AND COLLATERAL
Contracts, GNMA certificates and collateral consist of:
December 31
--------------------------
1993 1992
------------ ------------
Contracts held for sale $428,092,000 $126,411,000
Other contracts held 9,570,000 11,652,000
Collateral in process
of liquidation 47,847,000 46,252,000
Contracts held as collateral 9,716,000 9,654,000
------------ ------------
$495,225,000 $193,969,000
============ ============
The aggregate method is used in determining the lower of cost or market
value of contracts held for sale and contracts held as collateral. See fair
value disclosure of financial instruments in Note H.
Potential losses on the liquidation of the collateral are included in
determining the allowance for losses on contracts sold with recourse (Notes
F and H).
Included in other accounts receivable as of December 31, 1993 and 1992 was
approximately $34,055,000 and $24,687,000, respectively, of GNMA
certificates which were sold during 1993 and 1992 for settlement in
January 1994 and 1993, respectively. These GNMA certificates along with
contracts held for sale are used in full or in part as collateral on the
Company's warehousing credit agreement and master repurchase agreements
(Note E).
-37-
D. PROPERTY, FURNITURE AND FIXTURES
Property, furniture and fixtures consist of:
December 31
Estimated --------------------------
useful life 1993 1992
----------- ------------ ------------
Cost:
Building 35 years $ 17,268,000 $ 8,472,000
Furniture and equipment 3-7 years 14,213,000 7,983,000
Leasehold improvements 3-5 years 485,000 2,550,000
Land and improvements 1,795,000 1,798,000
------------ -----------
33,761,000 20,803,000
Less accumulated depreciation (10,486,000) (8,033,000)
------------ -----------
$ 23,275,000 $12,770,000
============ ===========
In January 1993, the Company purchased the remaining commercial floors of
the building where its corporate offices are located. The total purchase
price was $5,800,000.
Depreciation expense for 1993, 1992 and 1991 was $2,482,000, $1,668,000
and $1,579,000, respectively.
E. DEBT
The Company has a $60 million bank warehousing credit agreement under which
$58,725,000 was available, subject to the availability of appropriate
collateral, at December 31, 1993, and borrowings under this agreement were
$1,275,000. This committed facility is to be used for financing the
Company's manufactured home, home improvement and motorcycle contract
production and expires November 30, 1994. The agreement provides for
interest at variable rates (4.31% at December 31, 1993) and certain fee
provisions, the costs of which are included in interest expense. The
borrowings are collateralized by manufactured housing, home improvement and
motorcycle contracts totaling $1,417,000 as of December 31, 1993. The
credit agreement contains certain restrictive covenants which include
maintaining minimum net worth (as defined in the agreement) and a debt to
net worth ratio not to exceed 5 to 1. In addition, the Company currently
has $950 million in master repurchase agreements with various investment
banking firms for the purpose of financing its contract production. At
December 31, 1993, the amount available, subject to the availability of
appropriate collateral, was $765,535,000. The borrowings of $184,465,000
under these agreements were collateralized by $207,810,000 of manufactured
housing, home improvement and special products contracts at December 31,
1993. The rates under these agreements ranged from 3.44% to 4.66% at
December 31, 1993. These agreements expire during 1994, however, the
Company believes, based on discussions with the lenders, that these
agreements will be renewed. At December 31, 1993, the Company also had
$21,171,000 of notes payable outstanding through a GNMA reverse repurchase
agreement. The rate under this agreement was 3.63% at December 31, 1993
and was collateralized by $22,286,000 of GNMA certificates.
-38-
Debt is as follows:
December 31
--------------------------
1993 1992
------------ ------------
Notes payable $206,911,000 $ 79,438,000
Senior notes 26,650,000 12,000,000
Senior subordinated notes, 10 1/4%,
due 2002 (see below), less
unamortized original issue
discount of $4,819,000 and
$5,161,000, respectively 262,435,000 262,093,000
Senior subordinated debentures,
8 1/4%, due 1995 (see below), less
unamortized original issue
discount of $1,238,000 and
$1,984,000, respectively 19,008,000 18,262,000
Subordinated note, 8% -- 4,250,000
------------ ------------
$515,004,000 $376,043,000
============ ============
The Company has on file a shelf registration to issue up to $250 million of
senior notes with maturities in excess of nine months. The notes may bear
interest at fixed or floating rates. The senior notes outstanding at
December 31, 1993 bear interest at a weighted average rate of 7.27% and
have maturities ranging from 1998 to 2003. Interest on these notes is
payable semi-annually.
The 8 1/4% senior subordinated debentures due 1995 (the "Debentures") were
issued in connection with a public offering in June 1985. The effective
interest rate on the Debentures is 13.1% and interest is payable semi-
annually. In April 1992, the Company completed an offer to exchange a new
issue of 10 1/4% Senior Subordinated Notes due June 1, 2002 (the "Notes")
for its outstanding Debentures. Of the Company's $287,500,000 of
Debentures, $267,254,000 were tendered and accepted for exchange by the
Company for its new Notes. The effective interest rate on the Notes is
10.8%. The Company must maintain a net worth of $80,000,000 or will be
required, through the operation of a sinking fund, to redeem $25,000,000 on
such contingent sinking fund payment date. Interest is payable semi-
annually. An extraordinary charge of $17,457,000 was recognized in the
second quarter of 1992 as a result of the exchange. The extraordinary
charge resulted from the accelerated write-down of the original issue
discount and deferred debt expense, net of income taxes of $11,161,000,
relating to the Debentures exchanged.
In May 1993, the Company retired the subordinate note at a 5% discount.
At December 31, 1993, aggregate maturities of debt other than notes payable
for the following five years were $28,246,000, payable as follows:
$20,246,000 in 1995 and $8,000,000 in 1998.
-39-
F. ALLOWANCE FOR LOSSES ON CONTRACTS SOLD WITH RECOURSE
The Company sells GNMA guaranteed certificates which are secured by FHA-
insured and VA-guaranteed contracts. The majority of credit losses
incurred on these contracts are covered by FHA insurance or VA guarantees
with the remainder borne by the Company.
The Company establishes an allowance for expected losses under the recourse
provisions with investors/owners and calculates that allowance on the basis
of historical experience and management's best estimate of future credit
losses likely to be incurred. For contracts sold prior to October 1, 1992,
the allowance is shown on a nondiscounted basis. For contracts sold after
September 30, 1992, the allowance has been discounted using an interest
rate equivalent to the risk-free market rate for securities with a duration
similar to that estimated for the underlying contracts. The amount of this
provision is reviewed quarterly and adjustments are made if actual
experience or other factors indicate management's estimate of losses should
be revised. The Company retains substantial amounts of risk of default on
the loan portfolios that it sells. The Company has provided the
investors/owners of pools of contracts with a variety of additional forms
of credit enhancements. These credit enhancements have included letters of
credit and surety bonds that provided limited recourse to the Company, and
letters of credit that, if drawn, are entitled to reimbursement only from
the future excess cash flows of the underlying transactions. Furthermore,
certain securitized sales structures use cash reserve funds and certain
cash flows from the underlying pool of contracts as the credit enhancement.
At December 31, 1993 and 1992, the Company had bank letters of credit and
surety bonds outstanding of $141,052,000 and $161,344,000, respectively.
Cash deposits held in interest bearing accounts totaled $124,817,000 and
$117,067,000, and contracts pledged aggregated $9,716,000 and $9,654,000 at
December 31, 1993 and 1992, respectively, and are maintained as part of
credit enhancement features under certain sales structures.
Allowances are provided for the Company's best estimate of future credit
losses likely to be incurred over the entire life of the contracts.
Estimated losses are based on an analysis of the underlying loans and do
not reflect the maximum recourse provided to investors. The following
table presents an analysis of the allowance for losses on contracts sold
with recourse for 1993, 1992 and 1991.
1993 1992 1991
------------ ------------ ------------
Allowance at
beginning of year $189,669,000 $134,681,000 $ 91,945,000
Provision for losses 77,135,000 105,357,000 74,845,000
Losses net of
recoveries (46,325,000) (50,369,000) (32,109,000)
Amortization of
present value
discount on loss
reserve 1,656,000 -- --
------------ ------------ ------------
Allowance at end
of year $222,135,000 $189,669,000 $134,681,000
============ ============ ============
-40-
G. STOCKHOLDERS' EQUITY
Common Stock
------------
In September 1993, the Company completed a 2,500,000 share Common Stock
offering, and sold an additional 375,000 shares to cover over-allotments.
The net proceeds of approximately $138,000,000 were used to finance the
Company's continued growth in its manufactured home, home improvement and
special products contract inventory, to temporarily reduce certain
borrowings under the Company's bank warehousing agreement and master
repurchase agreements and for other general corporate purposes.
During the first quarter of 1992, the Company completed a 6,000,000 share
Common Stock offering and in April 1992, the Company sold an additional
614,800 shares to cover over-allotments. The net proceeds of approximately
$115,000,000 were used to purchase and retire all of the Company's
outstanding Preferred Stock discussed below, and for general corporate
purposes.
In December 1992, the Board of Directors declared a two-for-one stock
split, in the form of a stock dividend, payable on January 31, 1993 to
shareholders of record as of January 15, 1993. All references in the1999
consolidated financial statements and notes to conform with regardthe 2001
presentation. These reclassifications have no effect on net income (loss) or
shareholder's equity.
Retained Interests in Securitization Trusts
Retained interests in securitization trusts represent the right to
numberreceive certain future cash flows from securitization transactions structured
prior to our September 8, 1999 announcement (see "Revenue Recognition for Sales
of shares, stock optionsFinance Receivables and related prices, and per-share amounts have been
restated to give retroactive effectAmortization of Servicing Rights" below). Such cash
flows generally are equal to the stock split.
Preferred Stock
---------------
During 1992, the Company repurchased 50,012 shares of its Preferred Series
B Stock, 712,562 shares of its Preferred Series C Stock and 672,376 shares
of its Preferred Series D Stock which represented allvalue of the Company's
outstanding Preferred Stock. These shares, which had a liquidation valueprincipal and interest to be
collected on the underlying financial contracts of $100 per share, or $143,495,000, were repurchased and retired for
$102,000,000 as parteach securitization in excess
of the settlement of litigation between the Company
and the Resolution Trust Corporation (the "RTC"). The Preferred Stock had
a $9,300,000 annual cash dividend requirement which terminated upon its
repurchase.
In connection with the issuancesum of the rights discussed below, the Company
authorized shares of Junior Preferred Stock. If issued, the stock willprincipal and interest to be nonredeemable. Each share of Junior Preferred Stock will have a minimum
cumulative, preferential quarterly dividend rate of $25 per share, but will
be entitled to an aggregate dividend of 100 times the dividend declaredpaid on the Common Stock. Insecurities sold and
contractual servicing fees. These interests include interests represented by:
(i) actively managed fixed maturities of $528.5 million; and (ii) interest-only
securities of $141.7 million. We carry these retained interests at estimated
fair value. We determine fair value by discounting the event of liquidation,projected cash flows over
the holdersexpected life of the Junior
Preferred Stock will receive a minimum preferred liquidation paymentreceivables sold using current prepayment, default,
loss and interest rate assumptions. We determine the appropriate discount rate
to value these securities based on our estimates of $100 per share, but will be entitled to receive an aggregate liquidation
payment equal to 100 times the payment made per sharecurrent market rates of
Common Stock.
Each share of Junior Preferred Stock will have 100 votes, voting together
-41-
interest for securities with the Common Stock. In the event of any merger, consolidation or other
transaction in which Common Stock is exchanged, each share of Junior
Preferred Stock will be entitled to receive 100 times the amount received
per share of Common Stock. At December 31, 1993, there were no shares of
Junior Preferred Stock outstanding.
Rights
------
In October 1985, the Company issued one Preferred Stock purchase right for
each share of Common Stocksimilar yield, credit quality and amended the rights in August 1990.maturity
characteristics. The rights become exercisable if a person or group either acquires or makes an
offer to acquire 20% or more of Green Tree's Common Stock (10% in the case
of an "adverse person" designated by the Board of Directors).
If the rights become exercisable, a holder will be entitled to purchase for
the exercise price ($125) the number of shares of Common Stock that could
be purchased at a price per share equal to one-half of the then-current
market price per share of Common Stock. If the Company is involved in a
merger or other business combination, the rights will be modified so as to
entitle a holder to buy a number of shares of Common Stock of the acquiring
company having a market value of twice the exercise price of each right.
The rights may be redeemed upon approval of a majority of the independent
directors of the Company for $.10 per right at any time prior to the tenth
day after a public announcement that a person or group has acquired
beneficially 20% or more of Green Tree's Common Stock.
Stock option plans
------------------
Under the terms of two previous stock option plans, a total of 6,065,880
shares of Green Tree's Common Stock were initially reserved for grant to
eligible employees and directors.
A summary of stock activity related to these stock option plans is as
follows:
Number of Option price
shares per share
---------- ------------
Outstanding at December 31, 1990 153,504 $4.13- 6.44
Exercised (116,504) 4.13- 6.44
--------
Outstanding at December 31, 1991 37,000 6.44
Exercised (5,000) 6.44
--------
Outstanding at December 31, 1992 32,000 6.44
Exercised (12,000) 6.44
--------
Outstanding at December 31, 1993 20,000 $6.44
========
-42-
As of December 31, 1993, all of the outstanding options were exercisable.
No additional options will be granted under these plans.
In 1988, the Company's shareholders approved three new stock option plans:
an employee stock option plan, a key executive plan and an outside director
plan. In 1992, the Board of Directors approved a new supplemental stock
option plan for its outside directors. The number of shares reserved under
those plans is 8,200,000.
A summary of the three stock option plans is as follows:
Number of Option price
shares per share
--------- ------------
Outstanding at December 31, 1990 458,000 $ 3.25- 8.25
Granted 1,658,804 6.44-19.50
Exercised (353,804) 5.00- 6.88
---------
Outstanding at December 31, 1991 1,763,000 3.25-19.50
Granted 185,384 6.44-24.00
Exercised (240,384) 3.25-20.69
Expired (100,000) 18.31
---------
Outstanding at December 31, 1992 1,608,000 3.25-24.00
Granted 217,310 11.88-54.00
Exercised (274,428) 6.44-18.31
Expired (89,998) 18.31
---------
Outstanding at December 31, 1993 1,460,884 $ 3.25-54.00
=========
Of the 1,460,884 options outstandingdiscount rate was 16 percent at December 31, 1993, 1,408,884
options related2001. We
record any unrealized gain or loss determined to be temporary, net of tax, as a
component of shareholder's equity. With the employee stock option plan,adoption of EITF Issue No. 99- 20,
"Recognition of Interest Income and 52,000 options
relatedImpairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("EITF 99-20") on July 1,
2000, declines in value are considered to be other than temporary when: (i) the
outside director plan.fair value of the security is less than its carrying value; and (ii) the timing
and/or amount of cash expected to be received from the security has changed
adversely from the previous valuation which determined the carrying value of the
security. When declines in value considered to be other than temporary occur, we
reduce the amortized cost to estimated fair value and recognize a loss in the
statement of operations. The director optionsassumptions used to determine new values are based
on our internal evaluations and 832,227
sharesconsultation with external advisors having
significant experience in valuing these securities. See note 3 for additional
discussion of certain employee options were exercisablegain on sale of receivables and interest-only securities.
22
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Cash and cash equivalents
Cash and cash equivalents include commercial paper, invested cash and
other investments purchased with original maturities of less than three months.
We carry them at amortized cost, which approximates their estimated fair value.
Finance Receivables
Finance receivables include manufactured housing, home equity, home
improvement, retail credit and floorplan loans. We carry finance receivables at
amortized cost, net of an allowance for credit losses.
We defer fees received and costs incurred when we originate finance
receivables. We amortize deferred fees, costs, discounts and premiums over the
estimated lives of the receivables. We include such deferred fees or costs in
the amortized cost of finance receivables.
We generally stop accruing investment income on finance receivables after
three consecutive months of contractual delinquency.
Finance receivables transferred to securitization trusts in transactions
structured as securitized borrowings are classified as finance receivables -
securitized. These receivables are held as collateral for the notes issued to
investors in the securitization trusts. Finance receivables held by us that have
not been securitized are classified as finance receivables.
Provision for Losses
The provision for credit losses charged to expense is based upon an
assessment of current and historical loss experience, loan portfolio trends,
prevailing economic and business conditions, and other relevant factors. In
management's opinion, the provision is sufficient to maintain the allowance for
credit losses at a level that adequately provides for losses inherent in the
portfolio.
We reduce the carrying value of finance receivables to net realizable
value at the earlier of: (i) six months of contractual delinquency; or (ii) when
we take possession of the property securing the finance receivable.
Goodwill
Goodwill is the excess of the amount we paid to acquire a company over
the fair value of its net assets. We amortized goodwill on the straight-line
basis generally over a 20-year period. The total accumulated amortization of
goodwill was $12.0 million at December 31, 2000. The goodwill balance at
December 31, 2000, of $28.8 million was a portion of the net assets of our
vendor services financing business which was sold in the first quarter of 2001.
The Company has no remaining goodwill as of December 31, 1993. Options2001. See "Recently
Issued Accounting Standards" below for 5,525,450 shares were availablea discussion of new accounting standards
applicable to goodwill which are effective beginning on January 1, 2002.
Liabilities Related to Certificates of Deposit
These liabilities relate to the certificates of deposits issued by our
bank subsidiaries. The liability and interest expense account are also increased
for the interest which accrues on the deposits. At December 31, 2001 and 2000,
the weighted average interest crediting rate on these deposits was 4.7 percent
and 6.9 percent, respectively.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of assets
and liabilities and net operating loss carryforwards. In assessing the
realization of deferred income tax assets, we consider whether it is more likely
than not that the deferred income tax assets will be realized. The ultimate
realization of deferred income tax assets depends upon generating future grant. The
option price per share representstaxable
income during the marketperiods in which temporary differences become deductible. If
future income is not generated as expected, a valuation allowance will be
established.
23
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Use of Estimates
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 values for actively managed fixed maturities
interest-only securities, servicing rights, goodwill, liabilities for deposit
products, liabilities related to litigation, liabilities related to guarantees
of securitized debt issued in conjunction with certain sales of finance
receivables, gain on sale of finance receivables, allowance for credit losses on
finance receivables and the reliance on generating adequate future taxable
income to support deferred income tax assets. If our future experience differs
materially from these estimates and assumptions, our financial statements would
be affected.
Revenue Recognition for Sales of Finance Receivables and Amortization of
Servicing Rights
Subsequent to September 8, 1999, we are using the portfolio method (the
accounting method required for securitizations which are now structured as
secured borrowings) to account for securitization transactions. Our
securitizations are now structured in a manner that requires them to be
accounted for under the portfolio method, whereby the loans and securitization
debt remain on our balance sheet pursuant to Financial Accounting Standards
Board Statement No. 140, "Accounting for the Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS 140").
For securitizations structured prior to September 8, 1999, we accounted
for the transfer of finance receivables as sales. In applying generally accepted
accounting principles to our securitized sales, we recognized a gain,
representing the difference between the proceeds from the sale (net of related
sale costs) and the carrying value of the Company's stock
oncomponent of the date of grant except for those options issued pursuant to an
employment agreement and certain options granted in 1993. The option price
per share onfinance receivable
sold. We determined such carrying value by allocating the options related to the employment agreement represents the
marketcarrying value of the
stockfinance receivables between the portion we sold and the interests we retained
(generally interest-only securities, servicing rights and, in some instances,
other securities), based on each portion's relative fair values on the date of
the employment agreement.sale.
During 1999, the Company sold $9.7 billion of finance receivables in
securitizations structured as sales and recognized gains of $550.6 million. The
option price per sharegains recognized were dependent in part on 85,000 options granted in 1993 represents 50% of
the marketprevious carrying value of the
Company's stockfinance receivables included in the securitization transactions, allocated
between the assets sold and our retained interests based on their relative fair
value at the date of grant.
Dividends
---------
During 1993, 1992transfer. To obtain fair values, quoted market prices were
used if available. However, quotes were generally not available for retained
interests, so we estimated the fair values based on the present value of future
expected cash flows using our estimates of the key assumptions - credit losses,
prepayment speeds, forward yield curves, and 1991discount rates commensurate with
the Company declaredrisks involved.
We amortize the servicing rights we retain after the sale of finance
receivables, in proportion to, and paid dividendsover the estimated period of, $.34, $.31net servicing
income.
We evaluate servicing rights for impairment on an ongoing basis,
stratified by product type and $.30 per share, respectively, on its Common Stock. Under
certain debt agreements,securitization period. To the Company is subjectextent that the
recorded amount exceeds the fair value for any strata, we establish a valuation
allowance through a charge to restrictions limitingearnings. If we determine, upon subsequent
measurement of the paymentfair value of dividendsthese servicing rights, that the fair value
equals or exceeds the amortized cost, any previously recorded valuation
allowance would be deemed unnecessary and common stock repurchases. At December 31,
1993, under the most restrictive agreement, such payments were limitedrestored to $43,585,000, which
-43-
represents 50% of consolidated net earnings for the most recently concluded
four fiscal quarter period less dividends paid and prepayment of
subordinated debt during such period.
H. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statementearnings.
Fair Values of Financial Accounting Standards No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial Instruments" requires that
We use the Company disclosefollowing methods and assumptions to determine the estimated
fair values of its financial instruments.
Fair value estimates, methodsinstruments:
Retained interests in securitization trusts. Such retained interests
include actively managed fixed maturities and assumptionsinterest-only securities.
The actively managed fixed maturities are set forth belowvalued by discounting the
expected future cash flows using a current market rate appropriate for
the Company's financial instruments.yield, credit quality, and the maturity of the investment being
priced. The interest-only securities are valued by discounting the
future expected cash flows over the expected life of the receivables sold
using current estimates of future prepayment, default, loss severity and
interest rates. We consider any potential payments related to the
guarantees of certain lower rated securities issued by the securitization
trusts in the projected cash flows used to determine the value of our
interest-only securities.
Cash and cash equivalents, cash deposits and other investments
---------------------------------------------------------------equivalents. The carrying amount of cash and cash equivalents, cash deposits and other
investmentsfor these instruments
approximates their estimated fair value.
24
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Finance receivables. The estimated 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 receivableof finance receivables,
including those that have been securitized, is calculated using prepayment, default
and interest rate assumptions that the Company believesdetermined based on
general market participants
would usetransactions which establish values for similar instruments at the timeloans.
Liabilities related to certificates of sale. Projected
performance is monitored on an ongoing basis. However, the Company does
not change the underlying rate at which future estimated cash flows are
discounted once the initial sale has been recorded. As such,deposit. We estimate the fair
value of excess servicing rights receivable primarily includes
consideration of an appropriate discount rate to be applied to the
financial instrument as a whole.
The Company has consulted with investment bankers and obtained an estimate
of athese liabilities using discounted cash flow analyses based on
current crediting rates. Since crediting rates are generally not
guaranteed beyond one year, market discount rate. Utilizing thisvalue approximates carrying value.
Notes payable. For publicly traded debt, we use current market discount rate, and suchvalues.
For other assumptions as the Company believes market participants wouldnotes, we use discounted cash flow analyses based on our
current incremental borrowing rates for similar instruments,types of borrowing
arrangements.
Here are the Company has estimated the fair value of its excess
servicing rights receivable to approximate its carrying value.
Contracts held for sale and as collateral
-----------------------------------------
Contracts held for sale and as collateral are generally recent originations
which will be sold during the following quarter. The Company does not
charge origination fees or points and, as such, its contracts have
origination rates generally in excess of rates on the securities into which
they will be pooled. Since these contracts have not been converted into
securitized pools, the Company estimates the fair value to be the carrying
amount plus the cost of origination.
-44-
Collateral in process of liquidation
------------------------------------
Collateral in the process of liquidation is valued on an individual unit
basis after inspection of such collateral. The difference between carrying
amount and fair value is carried as a liability by the Company in the
allowance for losses on contracts sold with recourse.
Other contracts held
--------------------
Pursuant to investor sale agreements, certain contracts are repurchased by
the Company as a result of delinquency before they are repossessed, and are
included in other contracts held. The loss has been estimated on an
aggregate basis, and is included on the balance sheet in allowance for
losses on contracts sold with recourse.
Notes payable
-------------
Notes payable consists of amounts payable under the Company's warehouse
line or repurchase agreements and, given its short-term nature, is at a
rate which approximates market. As such, fair value approximates the
carrying amount.
Senior notes
------------
The fair value of the Company's senior notes is estimated based on the
quoted market price of similar issues or on the current rates offered to
the Company for debt of a similar maturity.
Senior subordinated notes and debentures
----------------------------------------
The Company's senior subordinated notes and debentures are valued at quoted
market prices.
-45-
The carrying amounts and estimated fair values of the Company'sour financial assets and liabilities are as follows:instruments:
December 31, 1993 December 31, 1992
------------------- -------------------
Estimated Estimated2001 2000
------------------------ ------------------------
Carrying fairFair Carrying fair
amount value amount value
-------- --------- -------- ---------
(in thousands) (in thousands)Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
Financial assets:
Retained assets in securitization trusts:
Actively managed fixed maturities.......................... $ 528.5 $ 528.5 $ 494.6 $ 494.6
Interest-only securities................................... 141.7 141.7 432.9 432.9
--------- --------- --------- ----------
Total retained interests in securitization trusts........ $ 670.2 $ 670.2 $ 927.5 $ 927.5
========= ========= ========= ==========
Cash and cash equivalents,
cash deposits and other
investments $314,507 $314,507 $264,006 $264,006
Excess servicing rights
receivable 843,489 843,489 640,647 640,647
Contracts held for sale
and as collateral 437,808 448,753 136,065 140,827
Collateral in process
of liquidation 47,847 32,202 46,252 31,339
Other contracts held 9,570 6,441 11,652 7,895equivalents.................................... $ 394.5 $ 394.5 $ 665.5 $ 665.5
Finance receivables (including finance
receivables - securitized)................................. 18,009.2 18,376.7 16,487.8 17,108.7
Financial liabilities:
Liabilities related to certificates of deposit............... 1,790.3 1,790.3 1,873.3 1,873.3
Notes payable:
Notes payable.............................................. 2,551.6 2,475.2 2,834.6 2,755.6
Notes payable 206,911 206,911 79,438 79,438
Senior notes 26,650 28,136 12,000 12,000
Senior subordinated notes
due 2002 262,434 318,032 262,093 277,944
Senior subordinated
debentures due 1995 19,008 21,132 18,262 20,246to Conseco............................... 249.5 249.5 786.7 786.7
Related to securitized finance receivables structured
as collateralized borrowings............................. 14,484.5 14,774.3 12,100.6 12,323.8
Fair value estimates are made atCumulative Effect of Accounting Change
During the third quarter of 2000, the Emerging Issues Task Force of the
Financial Accounting Standards Board issued EITF 99-20, a specific point in time, basednew accounting
requirement for the recognition of impairment 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 characteristicsinterest-only securities and
other factors. Changesretained beneficial interests in assumptions could significantly affectsecuritized financial assets.
Under the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimateprior accounting rule, declines in the value of anticipatedour
interest-only securities and other retained beneficial interests in securitized
financial assets were recognized in the statement of operations when the present
value of estimated cash flows discounted at a risk-free rate using current
assumptions was less than the carrying value of the interest-only security.
Under the new accounting rule, declines in value are recognized when: (i)
the fair value of the retained beneficial interests are less than their carrying
value; and (ii) the timing and/or amount of cash expected to be received from
the retained beneficial interests have changed adversely from the previous
valuation which determined the carrying value of the retained beneficial
interests. When both occur, the retained beneficial interests are written down
to fair value.
We adopted the new accounting rule on July 1, 2000. The cumulative effect
of the accounting change for periods prior to July 1, 2000 was a charge to the
statement of operations of $45.5 million (net of an income tax benefit of $24.7
million) related to interest-only securities.
25
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Impairment Charge
During 2001 and 2000, our interest-only securities did not perform as
well as anticipated. In addition, our expectations regarding future businesseconomic
conditions changed. Accordingly, we changed various underlying assumptions
(including default, severity, credit loss and discount rate assumptions) related
to the future performance of the underlying loans to be consistent with our
expectations. As a result, the expected future cash flows (including any
potential payments related to the guarantees of certain lower rated securities
issued by the securitization trusts) from interest-only securities changed
adversely from previous estimates. Pursuant to the requirements of EITF 99-20
(described above under "Cumulative Effect of Accounting Change"), the effect of
these changes was reflected immediately in earnings as an impairment charge. In
2001, we recognized an impairment charge of $264.8 million ($171.3 million after
the income tax benefit) related to our interest-only securities. We also
recognized a $122.1 million ($79.1 million after the income tax benefit)
increase in the valuation allowance related to our servicing rights as a result
of the changes in assumptions in 2001. In 2000, the effect of the impairment
charge and adjustments to the value of assetsour interest-only securities and
liabilities that
are not considered financial instruments. For example,servicing rights totaled $515.7 million ($324.9 million after the income tax
benefit) in addition to the cumulative effect of adopting EITF 99-20 of $70.2
million ($45.5 million after the income tax benefit).
In addition, during 1999 and early 2000, the Company hasreevaluated its
interest-only securities and servicing rights, including the underlying
assumptions, in light of loss experience exceeding previous expectations. The
principal change in the revised assumptions resulting from this process was an
increase in expected future credit losses, relating primarily to reduced
assumptions as to future housing price inflation, recent loss experience and
refinements to the methodology of the valuation process. The effect of this
change was offset somewhat by a regional branch networkrevision to the estimation methodology to
incorporate the value associated with significant dealer relationshipsthe cleanup call rights held by the
Company in securitizations. We recognized a $554.3 million impairment charge
($349.2 million after tax) in 1999 to reduce the book value of the interest-only
securities and servicing rights.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Long-Lived Assets" ("SFAS 144") in August 2001. This standard addresses the
measurement and reporting for impairment of all long-lived assets. It also
broadens the definition of what may be presented as a discontinued operation in
the consolidated statement of operations to include components of a company's
business segments. SFAS 144 requires that long-lived assets currently in use be
written down to fair value when considered impaired. Long-lived assets to be
disposed of are written down to the lower of cost or fair value less the
estimated cost to sell. The Company is required to implement this standard
beginning January 1, 2002. We do not expect that the adoption of this standard
will have a material effect on our financial position or results of operations.
The FASB issued Statement of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets" in
June 2001. Under the new rules, intangible assets with an indefinite life will
no longer be amortized in periods subsequent to December 31, 2001, but will be
subject to annual impairment tests (or more frequent under certain
circumstances), effective January 1, 2002. As we currently have no goodwill, the
new rules should not have a material impact on the earnings and financial
position of the Company.
SFAS 141 requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method, and prospectively prohibits the
use of the pooling-of-interests method. Conseco accounted for its 1998
acquisition of Green Tree Financial Corporation (subsequently renamed "Conseco
Finance") using the pooling-of-interests method. The new rules do not permit us
to change the method of accounting for previous acquisitions accounted for using
the pooling-of-interests method.
The FASB issued SFAS 140, which is a replacement for Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities"; and a proprietary credit scoring system, both ofrelated
implementation guide in September 2000. SFAS 140 and the implementation guide
have changed the criteria that must be met for securitization transactions to be
recorded under the portfolio method. We did not need to make any significant
changes to our securitization structures to meet the new criteria which contribute heavily toare
effective for securitization transactions completed after March 31, 2001. We
first adopted the Company's ongoing profitability and neither of which is considered a
financial instrument.
-46-
I. COMMITMENTS AND CONTINGENCIES
Lease commitments
-----------------
AtSFAS 140 requirement for additional disclosures on
securitization in our December 31, 1993, aggregate minimum rental commitments under
noncancelable leases having terms2000, consolidated financial statements.
26
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Statement of more than one year were $11,453,000,
payable $3,558,000 (1994)Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), $2,771,000 (1995), $2,055,000 (1996), $1,850,000
(1997)as amended by
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FASB Statement No. 133" and $1,219,000 (1998). Total rental expenseStatement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("SFAS 138") requires all derivative instruments to be recorded on
the years ended
December 31, 1993, 1992 and 1991 was $4,449,000, $4,955,000 and $4,402,000,
respectively. These leases are for office facilities and equipment, and
many contain either clauses for cost of living increases and/or options to
renew or terminate the lease.
Litigation
----------
Shareholder Class Action
In December 1988, a Green Tree shareholder commenced an actionbalance sheet at estimated fair value. Changes in the U.S.
District Courtfair value of
derivative instruments are to be recorded each period either in Minnesota againstcurrent earnings
or other comprehensive income (loss), depending on whether a derivative is
designated as part of a hedge transaction and, if it is, on the Company and certaintype of its present
and former officers and directors alleging violations of Sections 10(b) and
20hedge
transaction. We adopted SFAS 133 on January 1, 2001. The initial adoption of the
Securities Exchange Act of 1934, as amended. Several additional
shareholders were joined as party plaintiffs in the case, which was
certified as a class action in July 1990. The class consists of
shareholders of the Company who purchased Common Stock from May 20, 1985
through March 28, 1989.
In March 1994, the Company reached an agreement to settle the action. The
settlement, which is subject to court approval, willnew standard did not have a material impact on the Company's financial conditionposition
or results of operation.
-47-
General
The natureoperations and there was no cumulative effect of an accounting
change related to its adoption.
Warrant for Five Percent of the Company's business is such that it is routinelyCommon Stock of Conseco Finance
As partial consideration for a party
or subjectfinancing transaction, we issued a warrant
which permits the holder to other items of pending or threatened litigation. Although
the ultimate outcome of certain of these matters cannot be predicted,
managementpurchase 5 percent of the Company believes,at a nominal
price. The holder of the warrant or the Company may cause the warrant and any
stock issued upon its exercise to be purchased for cash at an appraised value in
May 2003. Additionally, until May 2003, the holder has the right (subject to
certain terms and conditions) to convert the warrant into preferred stock of
Conseco (see note 10). Since the warrant permits cash settlement at fair value
at the option of the holder of the warrant, it has been included in other
liabilities and is measured at fair value, with changes in its value reported in
earnings. The estimated fair value of the warrant at December 31, 2001 was $38.1
million. The estimated value was determined based upon information currently
availableon discounted cash flow and
market multiple valuation techniques. During 2001, we recognized a $10.0 million
benefit as a result of the decreased value of the warrant (which was classified
as a reduction to special charges - see note 7).
2. BUSINESS CONDITIONS AND LIQUIDITY CONSIDERATIONS:
At December 31, 2001, we had $161.9 million par value of senior
subordinated notes due in June 2002 and $186.0 million par value of medium term
notes due in September 2002. We have a recent history of losses. We had net
losses applicable to common stock of $170.2 million and $543.9 million for the
years ended December 31, 2001 and 2000. Our parent, Conseco, also has
significant debt service and other cash requirements and depends on cash flows
from us to meet its liquidity needs.
Our finance operations require cash to originate finance receivables. Our
primary sources of cash are: (i) the collection of receivable balances; (ii)
proceeds from the issuance of debt, certificates of deposit and securitization
and sales of loans; and (iii) cash provided by operations. During 2001 and the
advicelast half of counsel, that2000, the resolutionfinance segment significantly slowed the origination of
these routine
matters will notfinance receivables. This strategy allowed the finance segment to enhance net
interest margins, to reduce the amount of cash required for new loan
originations, and to transfer cash to the parent company.
The liquidity needs of our finance operations could increase in the event
of an extended economic slowdown or recession. Loss of employment, increases in
cost-of-living or other adverse economic conditions could impair the ability of
our customers to meet their payment obligations. Higher industry levels of
repossessed manufactured homes may affect recovery rates and result in anydecreased
cash flows. In addition, in an economic slowdown or recession, our servicing and
litigation costs would probably increase. Any sustained period of increased
delinquencies, foreclosures, losses or increased costs would have an adverse
effect on our liquidity.
The most significant source of liquidity for our finance operations has
been our ability to finance the receivables we originate in the secondary
markets through loan securitizations. Adverse changes in the securitization
market could impair our ability to originate, purchase and sell loans or other
assets on a favorable or timely basis. Any such impairment could have a material
adverse effect upon our business and results of operations. The securitization
market is sensitive to the credit ratings of Conseco Finance in connection with
our securitization program. A negative change in the credit ratings of Conseco
Finance could have a material adverse effect on our ability to access capital
through the securitization market. Factors considered by the rating agencies in
assigning such ratings include corporate guarantees, payment priority, current
and anticipated credit enhancement levels, quality of the current and expected
servicing, as well as additional factors associated with each distinct asset
type. Market participants' concerns with Conseco Finance's limited financial
flexibility, as reflected by the current senior unsecured ratings, may have an
effect on liquidity in future securitization transactions. In addition, certain
manufactured housing transactions have had ratings actions that have either
lowered the original ratings or placed on credit watch certain debt classes.
27
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
These rating actions could have an effect on Conseco Finance's access to
liquidity in the securitization market in the future. In addition, the
securitization market for many types of assets is relatively undeveloped and may
be more susceptible to market fluctuations or other adverse changes than more
developed capital markets. Although we have alternative sources of funding,
principally warehouse and bank credit facilities as well as loan sales, these
alternatives may not be sufficient for us to continue to originate loans at our
current origination levels.
We have taken a number of actions designed to improve our liquidity and
increase the efficiency of our business operations. These actions include: (i)
the sale, closing or runoff of several business units (including asset-based
lending, vendor leasing, bankcards, transportation and park construction); (ii)
monetization of certain on-balance sheet financial assets through sales or as
collateral for additional borrowings; and (iii) cost savings and restructuring
of ongoing businesses such as the streamlining of credit origination operations
in the manufactured housing and home equity lending divisions. In addition, we
moved a significant number of jobs to India, where a highly-educated, low-cost,
English-speaking labor force is available. These actions had a significant
effect on the Company's operating results during 2000 and 2001. In early 2002,
we announced our decision to reduce the size of our floorplan lending business.
We have identified a number of cash flow generating initiatives, which we expect
to complete during 2002.
In March 2002, we completed a tender offer pursuant to which we purchased
$75.8 million par value of our senior subordinated notes due June 2002. The
purchase price was equal to 100 percent of the principal amount of the notes
plus accrued interest. The remaining principal amount outstanding of the senior
subordinated notes after giving effect to the tender offer and other debt
repurchases completed prior to the tender offer is $58.4 million (of which $23.7
million is held by Conseco). Also, during the first quarter of 2002, we
announced the tendering for all our remaining public debt - $167 million due in
September 2002 and $4 million due in April 2003. (Such amounts reflect all 2002
debt repurchases completed prior to announcing the tender offer). Such offer
expires on April 12, 2002. The tender offer price is equal to 100 percent of the
principal amount of the notes plus accrued interest.
In the first quarter of 2002, we entered into various transactions with
Lehman which are described in note 10.
We believe that the cash flows to be generated from operations and other
transactions will be sufficient to allow us to meet our debt obligations in
2002. We have taken a number of actions over the past two years to increase the
efficiency of our operations. However, our results for future periods beyond
2002 are subject to numerous uncertainties. We may not be able to improve or
sustain positive cash flows from operations. Our liquidity could be
significantly affected if improvements do not occur. Failure to generate
sufficient cash flows from operations, asset sales or financing transactions
would have a material adverse effect on our liquidity.
3. FINANCE RECEIVABLES AND RETAINED INTERESTS IN SECURITIZATION TRUSTS:
Subsequent to September 8, 1999, we are using the portfolio method to
account for securitization transactions. Our securitizations are now structured
in a manner that requires them to be accounted for under the portfolio method,
whereby the loans and securitization debt remain on our balance sheet, rather
than as sales, pursuant to SFAS 140.
We classify the finance receivables transferred to the securitization
trusts and held as collateral for the notes issued to investors as "finance
receivables-securitized". The average interest rate on these receivables was
12.5 percent and 12.2 percent at December 31, 2001 and 2000, respectively. We
classify the notes issued to investors in the securitization trusts as "notes
payable related to securitized finance receivables structured as collateralized
borrowings".
28
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
The following table summarizes our finance receivables - securitized by
business line and categorized as either: (i) a part of our continuing lines; or
(ii) a part of the business units we have decided to sell, close or runoff (the
"discontinued lines"):
December 31,
---------------------
2001 2000
---- ----
(Dollars in millions)
Continuing lines:
Manufactured housing............................................................... $ 6,940.4 $ 5,602.1
Mortgage services.................................................................. 5,658.2 5,126.0
Retail credit...................................................................... 878.9 653.8
Consumer finance - closed-end...................................................... 580.8 247.3
Floorplan (a)...................................................................... 436.9 637.0
--------- ---------
14,495.2 12,266.2
Less allowance for credit losses................................................... 296.7 167.9
--------- ---------
Net finance receivables - securitized for continuing lines....................... 14,198.5 12,098.3
--------- ---------
Discontinued lines.................................................................... - 531.0
Less allowance for credit losses................................................... - 6.5
--------- ---------
Net finance receivables - securitized for discontinued lines..................... - 524.5
--------- ---------
Total finance receivables - securitized.......................................... $14,198.5 $12,622.8
========= =========
- ------------------
(a) We have recently decided to reduce the size of our floorplan lending business.
The following table summarizes our other finance receivables by business
line and categorized as either: (i) a part of our continuing lines; or (ii) a
part of our discontinued lines:
December 31,
---------------------
2001 2000
---- ----
(Dollars in millions)
Continuing lines:
Manufactured housing............................................................... $ 609.3 $ 263.0
Mortgage services.................................................................. 1,128.9 1,373.1
Retail credit...................................................................... 1,811.1 1,110.1
Consumer finance closed-end........................................................ 6.3 575.1
-------- --------
3,555.6 3,321.3
Less allowance for credit losses................................................... 111.6 98.3
-------- --------
Net other finance receivables for continuing lines............................... 3,444.0 3,223.0
-------- --------
Discontinued lines.................................................................... 379.7 676.1
Less allowance for credit losses................................................... 13.0 34.1
-------- --------
Net other finance receivables for discontinued lines............................. 366.7 642.0
-------- --------
Total other finance receivables.................................................. $3,810.7 $3,865.0
======== ========
29
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
The changes in the allowance for credit losses included in finance
receivables were as follows:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Allowance for credit losses, beginning of year.................................. $306.8 $ 88.4 $ 43.0
Additions to the allowance:
Provision for losses......................................................... 563.6 354.2 128.7
Provision for losses related to discontinued lines (included in
special charges - see note 7).............................................. - 45.9 -
Provision for losses related to regulatory changes related to our bank
subsidiary (included in special charges - see note 7)...................... - 48.0 -
Change in allowance due to purchases and sales of certain
finance receivables........................................................ (.1) 24.7 -
Credit losses................................................................... (449.0) (254.4) (83.3)
------ ------ ------
Allowance for credit losses, end of year........................................ $421.3 $306.8 $ 88.4
====== ====== ======
The securitizations structured prior to September 8, 1999, met the
applicable criteria to be accounted for as sales. At the time the loans were
securitized and sold, we recognized a gain and recorded our retained interest
represented by the interest-only security. The interest-only security 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) contractual servicing fees. In
some of those securitizations, we also retained certain lower-rated securities
that are senior in payment priority to the interest-only securities. Together,
the interest-only securities and the lower-rated securities (classified as
actively managed fixed maturity securities) represent our retained interests in
these securitization trusts. The total value of our retained interests was
$670.2 million and $927.5 million at December 31, 2001 and 2000, respectively.
Retained interests in securitization trusts totaled $670.2 million,
$927.5 million and $1,599.3 million at December 31, 2001, 2000 and 1999,
respectively. At December 31, 2001, 2000 and 1999, such interests were comprised
of: (i) actively managed fixed maturity securities totaling $528.5 million,
$494.6 million and $694.3 million, respectively; and (ii) interest-only
securities totaling $141.7 million, $432.9 million and $905.0 million,
respectively. We consider any estimated payments related to guarantees in
determining the value of our interest-only securities.
We completed various loan sale transactions in 2001 and 2000. During
2001, we sold $1.6 billion of finance receivables which included: (i) our $802.3
million vendor services loan portfolio (which was marked-to-market in the fourth
quarter of 2000 and no additional gain or loss was recognized in 2001); (ii)
$568.4 million of high-loan-to-value mortgage loans; and (iii) $269.0 million of
other loans. These sales resulted in net gains of $26.9 million. The Company
entered into a servicing agreement on the high-loan-to-value mortgage loans
sold. Pursuant to the servicing agreement, the servicing fees payable to the
Company are senior to all other payments of the trust which purchased the loans.
The Company also holds a residual interest in certain other cash flows of the
trust. In the future, the Company will sell this interest, if it can be sold at
a reasonable price. The Company did not provide any guarantees with respect to
the performance of the loans sold. In 2000, we sold approximately $147.1 million
of finance receivables in whole-loan sales resulting in net gains of $7.5
million.
During 1999, the Company sold $9.7 billion of finance receivables in
securitizations structured as sales and recognized gains of $550.6 million.
During 2001 and 2000, we recognized no gain on sale related to securitized
transactions.
The interest-only securities on our balance sheet represent an allocated
portion of the cost basis of the finance receivables in the securitization
transactions accounted for as sales related to transactions structured prior to
September 8, 1999. Our interest-only securities and other retained interests in
those securitization transactions are subordinate to the interests of other
investors. Their values are subject to credit, prepayment, and interest rate
risk on the securitized finance receivables. We determine the appropriate
discount rate to value these securities based on our estimates of current market
rates of interest for securities with similar yield, credit quality and maturity
characteristics. We include the difference between estimated fair value and the
amortized cost of the interest-only securities (after adjustments for
impairments required to be recognized in earnings) in "accumulated other
comprehensive loss, net of taxes."
30
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
As described in note 1 under the caption entitled "Impairment Charge",
the Company adopted the requirements of EITF 99-20 effective July 1, 2000.
During 2001 and 2000, our interest-only securities did not perform as well as
anticipated. As a result, we changed various underlying assumptions (including
default, severity, credit loss and discount rate assumptions) which are used to
determine the value of the interest-only securities. These changes were made as
a result of: (i) the adverse default and loss trends that were experienced; and
(ii) our expectations regarding future economic conditions. As a result of these
changes, the cash flows from interest-only securities changed adversely from
previous estimates. Pursuant to the requirements of EITF 99-20, the effect of
these changes were reflected immediately in earnings as an impairment charge.
The effect of the impairment charge and adjustments to the value of our
interest-only securities and servicing rights totaled $386.9 million ($250.4
million after the income tax benefit) for 2001 and $515.7 million ($324.9
million after the income tax benefit) for 2000 (in addition to the cumulative
effect of adopting EITF 99-20 of $70.2 million ($45.5 million after the income
tax benefit)).
Increases in the estimated fair value of our interest-only securities
which result from favorable changes in the expected timing and/or amount of cash
flows from our previous valuation estimates are recognized as adjustments to
shareholder's equity, which are recognized as a yield adjustment in income over
the life of the interest-only security. Such favorable changes resulted in
increases in unrealized appreciation of $8.7 million and $12.9 million during
2001 and 2000, respectively.
The following table summarizes certain cash flows received from and paid
to the securitization trusts during 2001 and 2000 (dollars in millions):
2001 2000
------------- --------------
Servicing fees received......................................................... $ 71.7 $ 123.8
Cash flows from interest-only securities, net................................... 14.3 187.6
Cash flows from retained bonds.................................................. 82.8 69.9
Servicing advances paid......................................................... (677.0) (1,056.1)
Repayment of servicing advances................................................. 665.2 1,063.5
We have projected that the adverse loss experience in 2001 will continue
into 2002 and then improve over time. As a result of these assumptions, we
project that payments related to all guarantees issued in conjunction with the
sales of certain finance receivables will exceed the gross cash flows from the
interest-only securities by approximately $90 million in 2002 and $60 million in
2003. We project the gross cash flows from the interest-only securities to
exceed the payments related to guarantees issued in conjunction with the sales
of certain finance receivables by approximately $5 million in 2004 and $15
million in 2005 and by approximately $580 million in all years thereafter. These
projected payments are considered in the projected cash flows we use to value
our interest-only securities. See note 6 for additional information about the
guarantees.
Effective September 30, 2001, we transferred substantially all of our
interest-only securities into a trust. No gain or loss was recognized upon such
transfer. In return, we received a trust security representing an interest in
the trust equal to 85 percent of the estimated future cash flows of the
interest-only securities held in the trust. Lehman Brothers, Inc. and affiliates
(collectively "Lehman") purchased the remaining 15 percent interest. The value
of the interest purchased by Lehman was $55.2 million at December 31, 2001. The
Company continues to be the servicer of the finance receivables underlying the
interest-only securities sold to the trust. Lehman has the ability to sell their
interest back to the trust after a stated period. Until such time, Lehman is
required to maintain a 15 percent interest in the estimated future cash flows of
the trust. By aggregating the interest-only securities into one structure, the
impairment test for these securities will be conducted on a single set of cash
flows representing the Company's 85 percent interest in the trust. Accordingly,
adverse changes in cash flows from one interest-only security may be offset by
positive changes in another. The new structure will not avoid an impairment
charge if sufficient positive cash flows in the aggregate are not available.
Further, increases in cash flows above the adverse cash flows cannot be
recognized in earnings.
31
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
At December 31, 2001, key economic assumptions used to determine the
estimated fair value of our retained interests in securitizations and the
sensitivity of the current fair value of residual cash flows to immediate 10
percent and 20 percent changes in those assumptions are as follows:
Home equity/ Interest
Manufactured home Consumer/ held by
housing improvement equipment others Total
------- ------------ --------- ------ -----
(Dollars in millions)
Carrying amount/fair value of retained interests:
Interest-only securities............................... $ 32.3 $155.8 $ 8.8 ($55.2) $141.7
Servicing assets (liabilities)......................... (22.2) 6.4 (1.9) - (17.7)
Bonds.................................................. 274.8 233.7 20.0 - 528.5
----- ------ ----- -------- ------
Total retained interests........................... $284.9 $395.9 $26.9 ($55.2) $652.5
====== ====== ===== ====== ======
Cumulative principal balance of sold finance
receivables............................................ $17,732.2 $4,947.4 $1,210.1 $23,889.7
Weighted average life in years.............................. 7.0 3.9 2.6 6.2
Weighted average stated customer interest rate
on sold finance receivables............................ 9.8% 12.0% 10.6% 10.3%
Assumptions to determine estimated fair value
and impact of favorable and adverse changes:
Expected prepayment speed as a percentage
of principal balance of sold finance receivables (a)... 7.1% 17.4% 18.8% 9.8%
Impact on fair value of 10 percent favorable change.... $10.9 $15.6 $.8 $27.3
Impact on fair value of 20 percent favorable change.... 20.5 34.8 1.7 57.0
Impact on fair value of 10 percent adverse change...... (5.7) (15.0) (.6) (21.3)
Impact on fair value of 20 percent adverse change...... (12.7) (23.6) (1.2) (37.5)
Expected future nondiscounted credit losses as a
percentage of principal of related finance
receivables (a)........................................ 11.7% 7.4% 6.1% 10.6%
Impact on fair value of 10 percent favorable change.... $131.2 $30.3 $5.5 $167.0
Impact on fair value of 20 percent favorable change.... 230.4 73.2 11.1 314.7
Impact on fair value of 10 percent adverse change...... (122.5) (14.9) (4.1) (141.5)
Impact on fair value of 20 percent adverse change...... (239.5) (29.2) (8.3) (277.0)
Residual cash flow discount rate (annual)................... 16.0% 16.0% 16.0% 16.0%
Impact on fair value of 10 percent favorable change.... $37.6 $28.1 $1.7 $67.4
Impact on fair value of 20 percent favorable change.... 81.7 59.7 3.4 144.8
Impact on fair value of 10 percent adverse change...... (29.6) (24.5) (1.5) (55.6)
Impact on fair value of 20 percent adverse change...... (55.4) (46.2) (3.5) (105.1)
32
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
- --------------------
(a) 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.
Additionally, such valuation is determined by discounting cash flows over
the entire expected life of the receivables sold.
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
The following table summarizes quantitative information about
delinquencies, net credit losses, and components of managed finance receivables:
Principal balance
60 days or more Net credit
Principal balance past due losses
----------------------- --------------------- ------
for the year ended
at December 31, December 31,
---------------------------------------------- -----------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(Dollars in millions)
Type of finance receivables
Manufactured housing...................... $25,575.1 $26,314.4 $610.5 $569.3 $ 555.5 $413.9
Home equity/home improvement.............. 11,851.4 13,307.0 139.9 120.5 244.4 154.6
Consumer.................................. 4,198.8 3,887.4 112.6 76.4 225.5 181.0
Commercial................................ 1,377.0 3,077.1 16.2 35.2 38.3 95.5
--------- --------- ------ ------ -------- ------
Total managed receivables................. 43,002.3 46,585.9 879.2 801.4 1,063.7 845.0
Less finance receivables securitized...... 24,297.3 29,636.0 464.9 536.6 614.7 590.6
--------- --------- ------ ------ -------- ------
Finance receivables held on balance sheet
before allowance for credit losses and
deferred points and other, net......... 18,705.0 16,949.9 $414.3 $264.8 $ 449.0 $254.4
====== ====== ======== ======
Less allowance for credit losses.......... 421.3 306.8
Less deferred points and other, net....... 274.5 155.3
--------- ---------
Finance receivables held on
balance sheet.......................... $18,009.2 $16,487.8
========= =========
33
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Activity in the interest-only securities account during 2001, 2000 and
1999 is as follows:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Balance, beginning of year........................................................... $ 432.9 $ 905.0 $1,305.4
Additions resulting from securitizations during the year.......................... - - 393.9
Additions resulting from clean-up calls (a)....................................... 45.3 100.3 -
Investment income................................................................. 51.5 106.6 185.1
Cash paid (received):
Gross cash received............................................................. (89.2) (210.8) (442.6)
Guarantee payments related to bonds held by others.............................. 32.7 22.3 -
Guarantee payments related to retained bonds (included in actively managed
fixed maturities)............................................................. 42.2 .9 -
Impairment charge to reduce carrying value........................................ (264.8) (434.1) (533.8)
Sale of securities related to a discontinued line................................. (12.4) - -
Interest purchased by Lehman in conjunction with securitization transaction....... (55.2) - -
Transfer to servicing rights in conjunction with securitization transaction....... (50.0) - -
Cumulative effect of change in accounting principle............................... - (70.2) -
Change in unrealized appreciation (depreciation) charged to shareholder's equity.. 8.7 12.9 (3.0)
------- ------- --------
Balance, end of year................................................................. $ 141.7 $ 432.9 $ 905.0
======= ======= ========
- -------------------
(a) During 2001 and 2000, clean-up calls were exercised for certain
securitizations that were previously recognized as sales. The
interest-only securities related to these securitizations had previously
been separately securitized with other interest-only securities in
transactions recognized as sales. The repurchase of the collateral
underlying these securitizations triggered a requirement for the Company
to repurchase a portion of the interest-only securities and to deposit
into the securitization trust additional cash in excess of the collateral
amount.
4. INCOME TAXES:
Our income tax expense includes deferred income taxes arising from
temporary differences between the financial reporting and tax bases of assets
and liabilities. These amounts are reflected in the balance of our income tax
assets which totaled $267.2 million at December 31, 2001. In assessing the
realization of our deferred income tax assets, we consider whether it is more
likely than not that the deferred income tax assets will be realized. The
ultimate realization of our deferred income tax assets depends upon generating
future taxable income during the periods in which our temporary differences
become deductible. We evaluate the realizability of our deferred income tax
assets by assessing the need for a valuation allowance on a quarterly basis. If
we determine that it is more likely than not that our deferred income tax assets
will not be recovered, a valuation allowance will be established against some or
all of our deferred income tax assets. This could have a significant effect on
our future results of operations and financial position. The components of the
Company's income tax assets and liabilities were as follows:
34
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
2001 2000
---- ----
(Dollars in millions)
Deferred tax assets (liabilities):
Net operating loss carryforwards............................................................. $ - $ 6.3
Deductible timing differences:
Interest-only securities.................................................................. (75.2) 32.2
Unrealized depreciation................................................................... 61.5 81.6
Allowance for loan losses................................................................. 148.2 116.6
Other..................................................................................... 110.8 (33.1)
------ ------
Total deferred tax assets.............................................................. 245.3 203.6
Current income taxes prepaid..................................................................... 21.9 5.0
------ ------
Net income tax assets.................................................................. $267.2 $208.6
====== ======
Income tax expense (benefit) was as follows:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Current tax provision..................................................................... $ 59.5 $ 60.6 $ 169.2
Deferred tax provision (benefit).......................................................... (115.9) (323.4) (185.6)
------- ------- ------
Income tax benefit......................................................... $ (56.4) $(262.8) $(16.4)
======= ======= ======
The income tax benefit differed from that computed at the applicable
federal statutory rate (35 percent) for the following reasons:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Tax expense (benefit) on income (loss) before income taxes at statutory rate................. $(57.8) $(259.9) $ 12.0
Other ...................................................................................... .2 1.6 1.2
Settlement of tax issues related to revenue recognized as gain on sale of
finance receivables....................................................................... - - (30.2)
State taxes, net............................................................................. 1.2 (4.5) .6
------ ------- ------
Income tax benefit.................................................................... $(56.4) $(262.8) $(16.4)
====== ======= ======
No valuation allowance has been provided on our deferred income tax
assets at December 31, 2001, as we believe it is more likely than not that all
such assets will be realized. We reached this conclusion after considering the
availability of taxable income in prior carryback years, tax planning
strategies, and the likelihood of future taxable income exclusive of reversing
temporary differences. Differences between forecasted and actual future
operating results could adversely impact our ability to realize our deferred
income tax assets.
At December 31, 2001, we did not have any net operating loss
carryforwards. However, if our deferred income tax assets started to reverse
into net operating losses, we would have 20 years to generate future taxable
income and utilize these potential net operating losses before they would begin
to expire under current tax law. In recent years, we have had losses before
income taxes for financial reporting purposes. However, we believe that existing
levels of income from our continuing operations coupled with changes in our
operations that either have taken place or will take place are sufficient to
generate the levels of taxable income needed to utilize our net deferred income
tax assets. Such changes include: (i) various cost saving initiatives; (ii) the
transfer of certain customer service and backroom operations to our India
subsidiary; and (iii) restructuring our business to increase profitability such
as stream lining our loan origination operations in the manufactured housing and
home equity divisions.
35
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
The following chart reconciles our income (loss) before taxes for
financial statement purposes to our taxable income (loss) for income tax
purposes:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Income (loss) before income taxes,
extraordinary gain (loss), and
cumulative effect of accounting change............. $(165.2) $(742.6) $ 34.0
Adjustments to determine taxable income:
Net investment income............................. (37.2) 81.0 257.5
Impairment charges ................................ 386.9 515.7 554.3
Gain on sale of finance receivables................ - - (550.6)
Provision for losses............................... 114.6 99.8 45.4
Special charges.................................... - 211.2 -
Extraordinary gain (loss) on extinguishment
of debt........................................ 9.4 - (3.8)
Cumulative effect of accounting change............. - 70.0 -
Issuance of common shares for stock option and
for employee benefit plans...................... - - (9.4)
Other.............................................. (129.2) 8.1 142.6
------- ------- -------
Taxable income for income tax purposes.......... $ 179.3 $ 243.2 $ 470.0
======= ======= =======
Based on our projections of future financial reporting income and
assuming that our deferred income tax assets and liabilities reverse to the
extent of future projected financial reporting income, we expect to utilize all
of our net deferred income tax assets of $245.3 million over the next three to
four years.
36
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
5. NOTES PAYABLE:
Notes Payable (excluding notes payable related to securitized finance
receivables structured as collateralized borrowings)
Notes payable (excluding notes payable related to securitized finance
receivables structured as collateralized borrowings) at December 31, 2001 and
2000, were as follows (interest rates as of December 31, 2001):
2001 2000
---- ----
(Dollars in millions)
Master repurchase agreements due on various dates in 2002 and 2003 (2.7%)......... $1,679.0 $1,806.9
Credit facility collateralized by retained interests in securitizations
due 2003 (3.9%)................................................................ 507.3 590.0
10.25% senior subordinated notes due June 2002.................................... 161.9 217.3
Medium term notes due September 2002 and April 2003 (6.54%)....................... 189.7 223.7
Note payable to Conseco (3.4%).................................................... 249.5 786.7
Other............................................................................. 22.5 3.2
-------- --------
Total principal amount....................................................... 2,809.9 3,627.8
Unamortized net discount and deferred fees........................................ (8.8) (6.5)
-------- --------
Total notes payable.......................................................... $2,801.1 $3,621.3
======== ========
Amounts borrowed under master repurchase agreements have decreased due to
repayments using the proceeds received from various asset sales. At March 19,
2002, we had $4.0 billion (of which $2.1 billion is committed) in master
repurchase agreements, commercial paper conduit facilities and other facilities
with various banking and investment banking firms for the purpose of financing
our consumer and commercial finance loan production. These facilities typically
provide financing of a certain percentage of the underlying collateral and are
subject to the availability of eligible collateral and, in some cases, the
willingness of the banking firms to continue to provide financing. Some of these
agreements provide for annual terms which are extended either quarterly or
semi-annually by mutual agreement of the parties for an additional annual term
based upon receipt of updated quarterly financial information. At December 31,
2001, we had borrowed $2.2 billion under these agreements, leaving $1.8 billion
available to borrow (of which approximately $.4 billion is committed). One of
our master repurchase agreements (with a committed capacity of $400.0 million)
expires on May 3, 2002. As of December 31, 2001, we had $66.1 million
outstanding under this facility. We are in the process of negotiating a renewal
of this facility.
During 2001, we repurchased $55.4 million par value of our 10.25% senior
subordinated notes due June 2002 for $51.9 million (resulting in an
extraordinary gain of $2.1 million, net of income taxes of $1.3 million). Also
during 2001, we repurchased $34.0 million par value of our 6.5% medium term
notes due September 2002 for $27.5 million (resulting in an extraordinary gain
of $4.0 million, net of income taxes of $2.5 million).
During 2000, the Company amended an agreement with Lehman related to
certain master repurchase agreements and the collateralized credit facility.
Such amendment significantly reduced the restrictions on intercompany payments
from Conseco Finance to Conseco as required by the previous agreement. In
conjunction with the amendment, Conseco agreed to convert $750 million principal
balance of its consolidatedintercompany note due from Conseco Finance to $750 million stated
value of Conseco Finance 9% redeemable cumulative preferred stock (the
"intercompany preferred stock"). During 2001, Conseco Finance made payments to
Conseco totaling $537.2 million reducing the intercompany note balance to $249.5
million at December 31, 2001.
Pursuant to the amended agreement, Conseco Finance may make the following
payments to Conseco: (i) interest on the intercompany note; (ii) payments for
products and services provided by Conseco; and (iii) intercompany tax sharing
payments. Conseco Finance may also make the following payments to Conseco
provided the minimum liquidity requirements defined in the amended agreement are
met and the cash payments are applied in the order summarized: (i) unpaid
interest on the intercompany note; (ii) prepayments of principal on the
intercompany note or repayments of any increase to the intercompany
37
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
receivable balance; (iii) dividends on the intercompany preferred stock; (iv)
redemption of the intercompany preferred stock; and (v) common stock dividends.
The liquidity test of the amended agreement requires Conseco Finance to have
minimum levels of liquidity both before and after giving effect to such payments
to Conseco. Liquidity, as defined, includes unrestricted cash and may include up
to $150 million of liquidity available at Conseco Finance's bank subsidiaries
and the aggregate amount available to be drawn under Conseco Finance's credit
facilities (where applicable, based on eligible excess collateral pledged to the
lender multiplied by the appropriate advance rate). The minimum liquidity must
equal or exceed $250 million, plus: (i) 50 percent of cash up to $100 million
generated by Conseco Finance subsequent to September 21, 2000; and (ii) 25
percent of cash generated by Conseco Finance in excess of $100 million, provided
the total minimum cash liquidity shall not exceed $350 million and the cash
generated by Conseco Finance (used in the calculation to increase the minimum)
will exclude operating cash flows and the net proceeds received from certain
asset sales and other events listed in the amended agreement (which are
consistent with the courses of actions we have previously announced).
The amended agreement requires Conseco Finance to maintain various
financial condition.
J. BENEFIT PLANSratios, as defined in the agreement. These ratios include: (i) an
adjusted tangible net worth of at least $1.95 billion (such amount was $2.04
billion at December 31, 2001); (ii) a fixed charge coverage ratio of not less
than 1.0:1.0 for the year ending December 31, 2001, and defined periods
thereafter (such ratio was 1.20:1.0 for the year ended December 31, 2001); (iii)
a ratio of net worth to total managed receivables of not less than 4:100 (such
ratio was 4.49:100 at December 31, 2001); and (iv) a ratio of total
non-warehouse debt less finance receivables and certain other assets, as defined
in the agreement, to net worth of less than 1.0:2.0 (such ratio was .28:2.0 at
December 31, 2001).
In early 2002, Conseco Finance entered into various new financing
arrangements with Lehman which either amend or replace the prior arrangements.
Also, in early 2002, Conseco Finance tendered for all its remaining public debt
(i.e., its medium term notes due September 2002 and April 2003 and its 10.25%
Senior Subordinated Notes due June 2002). Refer to note 10 for further
discussion of such items.
The note payable to Conseco is further described in note 6 under the
caption "Related Party Transactions."
During 1999, we repurchased $50.0 million par value of our 10.25% senior
subordinated notes due 2002 for $53.5 million. We recognized an extraordinary
charge of $2.5 million (net of a $1.5 million tax benefit) as a result of such
repurchases. At both December 31, 2001 and 2000, $23.7 million of the 10.25%
senior subordinated notes were held by Conseco.
The maturities of notes payable (excluding notes payable related to
securitized finance receivables structured as collateralized borrowings) at
December 31, 2001, were as follows (dollars in millions):
Maturity date
2002.......................................................... $1,464.7
2003.......................................................... 1,345.0
2005.......................................................... .2
--------
Total par value at December 31, 2001.................. $2,809.9
========
Notes Payable Related to Securitized Finance Receivables Structured as
Collateralized Borrowings
Notes payable related to securitized finance receivables structured as
collateralized borrowings were $14,484.5 million and $12,100.6 million at
December 31, 2001 and 2000, respectively. The principal and interest on these
notes are paid using the cash flows from the underlying finance receivables
which serve as collateral for the notes. Accordingly, the timing of the
principal payments on these notes is dependent on the payments received on the
underlying finance receivables which back the notes. In some instances, the
Company is required to advance principal and interest payments even though the
payments on the underlying finance receivables which back the notes have not yet
been received. The average interest rate on these notes was 6.4 percent and 7.7
percent at December 31, 2001 and 2000, respectively.
38
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
6. OTHER DISCLOSURES:
Leases
The Company rents office space, equipment and computer software under
noncancellable operating leases. Rental expense was $20.8 million in 2001, $28.2
million in 2000 and $21.8 million in 1999. Future required minimum rental
payments as of December 31, 2001, were as follows (dollars in millions):
2002............................................................ $ 25.1
2003............................................................ 21.1
2004............................................................ 15.0
2005............................................................ 10.1
2006............................................................ 9.2
Thereafter...................................................... 23.4
------
Total....................................................... $103.9
======
Other operating costs and expenses were as follows:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Salaries and wages.................... $347.2 $428.9 $393.6
Cost of servicing..................... 189.2 159.6 98.7
Other................................. 106.0 182.3 204.9
------ ------ ------
Total........................ $642.4 $770.8 $697.2
====== ====== ======
39
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Pension Plans
The Company has a qualified noncontributory defined benefit pension plan
covering substantially all of its employees over 21 years of age. The plan's
benefits are based on years of service and the employee's compensation. The plan
is funded annually based on the maximum amount that can be deducted for federal
income tax purposes. The assets of the plan are primarily invested in common
stock, corporate bonds and cash equivalents. As of December 31, 1993 and 1992, net assets available for plan benefits
were $5,242,000 and $4,056,000, and the accumulated benefit obligation was
$4,305,000 and $3,484,000, respectively. As of December 31, 1993 and 1992,
the projected benefit obligation of the plan was $8,169,000 and $6,973,000,
respectively. In addition, the Company maintains
a nonqualified pension plan for certain key employees as designated by the Board
of Directors. ThisThe following table sets forth the plan's funded status and
amounts recognized in the Company's statement of financial position at December
31. Amounts related to such benefit plans were as follows:
2001 2000
---- ----
(Dollars in millions)
Benefit obligation, beginning of year.................................. $17.9 $20.6
Interest cost....................................................... 1.1 1.4
Actuarial loss...................................................... .6 1.8
Benefits paid....................................................... (4.8) (5.9)
----- -----
Benefit obligation, end of year........................................ $14.8 $17.9
===== =====
Fair value of plan assets, beginning of year........................... $19.9 $18.8
Actual return on plan assets........................................ (1.4) (.4)
Employer contributions.............................................. .5 6.9
Benefits paid....................................................... (4.8) (5.4)
----- -----
Fair value of plan assets, end of year................................. $14.2 $19.9
===== =====
Funded status.......................................................... (.6) $ 2.0
Unrecognized net actuarial loss........................................ 6.5 4.6
----- -----
Prepaid benefit cost.............................................. $ 5.9 $ 6.6
===== =====
We used the following assumptions to calculate benefit obligations for
our 2001 and 2000 valuations: postretirement discount rate of approximately 6.5
percent; preretirement discount rate of approximately 7.0 percent; and an
expected return on plan is not currently fundedassets of approximately 8.5 percent. Beginning in 2000,
as a result of plan amendments, no assumption for compensation increases was
required.
40
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Components of the cost we recognized related to pension plans are as
follows:
2001 2000 1999
---- ---- ----
(Dollars in millions)
Service cost............................................................. $ - $ - $ 7.3
Interest cost............................................................ 1.1 1.4 3.0
Expected return on plan assets........................................... (1.5) (1.7) (1.4)
Settlement (gain) loss................................................... 1.3 (.3) -
Recognized net actuarial loss............................................ .3 - 1.0
----- ----- -----
Net periodic cost (benefit)......................................... $ 1.2 $ (.6) $ 9.9
===== ====== =====
The Company has qualified defined contribution plans for which
substantially all employees are eligible. Company contributions, which match
certain voluntary employee contributions to the plan, totaled $1.9 million in
2001, $4.3 million in 2000 and $4.7 million in 1999. Matching contributions are
required to be made either in cash or in Conseco common stock.
Related Party Transactions
In 1998, we entered into a $2 billion promissory note with Conseco. The
note bore interest at LIBOR plus a margin of .35 percent and both the projected benefit obligationprincipal
and interest were due on demand. On January 1, 2000, the promissory note was
amended and restated to provide for borrowings up to $5 billion and quarterly
interest payments at a rate of LIBOR plus a margin of 1.5 percent. In connection
with the transaction with Lehman (as described in note 7 entitled "Special
Charges"), the Company repaid $450.0 million of this note. In conjunction with
amendments to its warehouse credit facilities, the Company converted $750.0
million principal balance of the promissory note due to Conseco to $750.0
million stated value of 9 percent redeemable cumulative preferred stock and
repaid $544.6 million of this note. Pursuant to the amended agreement with
Lehman, the Company made additional repayments on the promissory note to Conseco
of $129.5 million in 2000 and $537.2 million in 2001. At December 31, 2001, the
outstanding balance under the note was $249.5 million. Interest expense incurred
under the note totaled $26.1 million, $153.9 million and $79.5 million in 2001,
2000 and 1999, respectively.
As discussed in the previous paragraph, the Company converted $750.0
million principal balance of the note payable to Conseco to $750.0 million
stated value of 9% redeemable cumulative preferred stock during 2000. Dividend
payments are made pursuant to the amended agreement with Lehman. Cumulative
unpaid dividends totaled $86.1 million and $18.6 million at December 31, 19932001
and 19922000, respectively.
On December 31, 1999, Conseco transferred the following assets to the
Company at Conseco's carrying value: (i) fixed maturity investments due from
affiliates of Conseco with a carrying value of $104.6 million; (ii) other
invested assets with a carrying value of $100.5 million; and (iii) two insurance
marketing companies with net assets having a carrying value of $94.3 million.
The carrying value of these assets approximated fair value. Such amounts were
added to the common stock and paid- in capital of the Company. These assets were
returned to Conseco in 2000 concurrently with the Lehman transaction. Such
distribution is reflected as a return of capital in the consolidated statement
of shareholder's equity at the book value of the assets transferred.
In the first quarter of 2000, the Company repurchased shares of its
common stock from Conseco for $126.0 million.
The Company has entered into management and service agreements with
subsidiaries of Conseco. Fees for such services (including data processing,
executive management and investment management services) are based on Conseco's
direct and allocable costs. Total fees incurred by the Company under such
agreements were $21.8 million, $39.7 million and $43.0 million in 2001, 2000 and
1999, respectively.
Litigation
Conseco Finance was $9,158,000 and $5,741,000, respectively.
Total pension expenseserved with various related lawsuits filed in the
United States District Court for the plans in 1993, 1992 and 1991 was $2,340,000,
$1,619,000 and $1,347,000, respectively.
InDistrict of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities who
purchased common stock or options to purchase common stock of Conseco Finance
during alleged class periods that generally run from July 1992, the Company's1995 to January 1998.
One action (Florida State Board of Directors approvedAdmin. v. Green Tree Financial Corp., et. al,
Case No. 98-1162)
41
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
was brought not on behalf of a 401(k) Retirement
Savings Plan available to all eligible employees. The plan commenced on
October 1, 1992. To be eligibleclass, but by the Florida State Board of
Administration, which invests and reinvests retirement funds for the plan, the employee must be at
least 21 yearsbenefit of
agestate employees. In addition to Conseco Finance, certain current and have completed one yearformer
officers and directors of employment at Green
Tree during which the employee worked at least 1,000 hours. Eligible
employees may contribute to the plan up to 10% of their earnings with a
maximum of $8,994 for 1993 based on the Internal Revenue Service annual
contribution limit. The
-48-
Company will match 50% of the employee contributions for an amount up to 6%
of each employee's earnings. ContributionsConseco Finance are invested at the direction
of the employeenamed as defendants in one or more
funds. Company contributions generally
vest after three years, although contributionsof the lawsuits. Conseco Finance and other defendants obtained an order
consolidating the lawsuits seeking class action status into two actions, one of
which pertains to a purported class of common stockholders (In re Green Tree
Financial Corp. Stock Litig., Case No. 97-2666) and the other of which pertains
to a purported class of stock option traders (In re Green Tree Financial Corp.
Options Litig., Case No. 97-2679). Plaintiffs in the lawsuits assert claims
under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the
Securities Exchange Act of 1934. In each case, plaintiffs allege that Conseco
Finance 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 Conseco Finance (particularly with respect to prepayment
assumptions and performance of certain loan portfolios of Conseco Finance) which
allegedly rendered Conseco Finance's financial statements false and misleading.
On August 24, 1999, the United States District Court for those employees already
having three yearsthe District of
service vest immediately. Company contributionsMinnesota issued an order dismissing with prejudice all claims alleged in the
lawsuits. The plaintiffs subsequently appealed the decision to the planU.S. Court of
Appeals for the 8th Circuit. A three judge panel issued an opinion on October
25, 2001, reversing the United States District Court's dismissal order and
remanding the actions to the United States District Court. Pretrial discovery is
expected to commence in all three lawsuits approximately in April 2002. The
Company believes that the lawsuits are without merit and intends to continue to
defend them vigorously. The ultimate outcome of these lawsuits cannot be
predicted with certainty.
Conseco Finance is a defendant in two arbitration proceedings in South
Carolina (Lackey v. Green Tree Financial Corporation, n/k/a Conseco Finance
Corp. and Bazzle v. Green Tree Financial Corporation, n/k/a Conseco Finance
Corp.) where the arbitrator, over Conseco Finance's objection, allowed the
plaintiffs to pursue purported class action claims in arbitration. The two
purported arbitration classes consist of South Carolina residents who obtained
real estate secured credit from Conseco Finance's Manufactured Housing Division
(Lackey) and Home Improvement Division (Bazzle) in the early and mid 1990s, and
did not receive a South Carolina specific disclosure form relating to selection
of attorneys and insurance agents in connection with the credit transactions.
The arbitrator, in separate awards issued on July 24, 2000, awarded a total of
$26.8 million in penalties and attorneys' fees. The awards were $575,000confirmed as
judgments in both Lackey and $208,000Bazzle. These cases have been consolidated into one
case which is currently on appeal before the South Carolina Supreme Court. Oral
argument was heard on March 21, 2002. Conseco Finance has posted appellate
bonds, including $20 million of cash, for these cases. Conseco Finance intends
to vigorously challenge the awards and believes that the arbitrator erred by,
among other things, conducting class action arbitrations without the authority
to do so and misapplying South Carolina law when awarding the penalties. The
ultimate outcome of this proceeding cannot be predicted with certainty.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in 1993other lawsuits (including purported class actions) related to their
operations. The ultimate outcome of all of these other legal matters pending
against the Company or its subsidiaries cannot be predicted, and, 1992,although such
lawsuits are not expected to individually have a material adverse effect on the
Company, such lawsuits could have, in the aggregate, a material adverse effect
on the Company's consolidated financial condition, cash flows or results of
operations.
Guarantees
In conjunction with certain sales of finance receivables, we have
provided guarantees aggregating approximately $1.5 billion at December 31, 2001.
We consider any potential payments related to these guarantees in the projected
net cash flows used to determine the value of our interest-only securities.
During 2001 and 2000, advances of interest and principal payments related to
such guarantees on bonds held by others totaled $32.7 million and $22.3 million,
respectively.
42
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
7. SPECIAL CHARGES:
2001
The following table summarizes the special charges incurred by the
Company during 2001, which are further described in the paragraphs which follow
(dollars in millions):
Severance benefits, litigation reserves and other restructuring charges................... $ 20.3
Loss related to sale of certain finance receivables....................................... 11.2
Change in value of warrant................................................................ (10.0)
------
Special charges before income tax benefit............................................ $ 21.5
======
Severance benefits, litigation reserves and other restructuring charges
During 2001, Conseco developed plans to change the way it operates. Such
changes are being undertaken in an effort to improve the Company's operations
and profitability. The planned changes included moving a significant number of
jobs to India, where a highly-educated, low-cost, English-speaking labor force
is available. Pursuant to GAAP, the Company is required to recognize the costs
associated with most restructuring activities as the costs are incurred.
However, costs associated with severance benefits are required to be recognized
when the costs are: (i) attributable to employees' services that have already
been rendered; (ii) relate to obligations that accumulate; and (iii) are
probable and can be reasonably estimated. Since the severance costs associated
with our planned activities meet these requirements, we recognized a charge of
$6.2 million in 2001 related to severance benefits and other restructuring
charges. We also recognized charges of: (i) $7.5 million related to our decision
to discontinue the sale of certain types of life insurance in conjunction with
lending transactions; and (ii) $6.6 million related to certain litigation
matters.
Loss related to the sale of certain finance receivables
During 2001, we recognized a loss of $2.2 million on the sale of $11.2
million of finance receivables. Also, during 2001, the purchaser of certain
credit card receivables returned certain receivables pursuant to a return of
accounts provision included in the sales agreement. Such returns and the
associated losses exceeded the amounts we initially anticipated when the
receivables were sold. We recognized a loss of $9.0 million related to the
returned receivables.
Change in value of warrant
As partial consideration for a financing transaction, Conseco has a
warrant which permits the holder to purchase 5 percent of Conseco Finance at a
nominal price. The holder of the warrant or Conseco Finance may cause the
warrant and any stock issued upon its exercise to be purchased for cash at an
appraised value in May 2003. Additionally, until May 2003, the holder has the
right (subject to certain terms and conditions) to convert the warrant into
preferred stock of Conseco (see note 10). Since the warrant permits cash
settlement at fair value at the option of the holder of the warrant, it has been
included in other liabilities and is measured at fair value, with changes in its
value reported in earnings. The estimated fair value of the warrant at December
31, 2001 was $38.1 million. The estimated value was determined based on
discounted cash flow and market multiple valuation techniques. During 2001, we
recognized a $10.0 million benefit as a result of the decreased value of the
warrant (which was classified as a reduction to special charges - see note 1).
43
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
2000
The Company incurred significant special charges during 2000, primarily
related to the restructuring of our debt, restructuring of our finance business
and payments made pursuant to employment contracts. The following table
summarizes the special charges, which are further described in the paragraphs
which follow (dollars in millions):
Lower of cost or market adjustment for finance receivables
identified for sale.................................................... $103.3
Loss on sale of transportation loans and vendor services
financing business..................................................... 51.0
Loss on sale of asset-based loans........................................... 53.0
Costs related to closing offices and streamlining businesses................ 29.5
Abandonment of computer processing systems.................................. 35.8
Transaction fees paid and warrant issued.................................... 78.4
Reserve methodology change at bank subsidiary............................... 48.0
Net gain on sale of certain loans and other items........................... (4.7)
------
Special charges before income tax benefit.......................... $394.3
======
Lower of cost or market adjustment for finance receivables identified for
sale
On July 27, 2000, we announced several courses of action to restructure
our business, including the sale or runoff of the finance receivables of several
business lines. The carrying value of the loans held for sale has been reduced
to the lower of cost or market, consistent with our accounting policy for such
loans. The reduction in value of these loans of $103.3 million (including a
$45.9 million increase to the allowance for credit losses) primarily relates to
transportation finance receivables (primarily loans for the purchase of trucks
and buses). These loans had experienced a significant decrease in value as a
result of the adverse economic effect that increases in oil prices and
competition had on borrowers in the transportation business during 2000.
Loss on sale of transportation loans and vendor service financing
business
During the fourth quarter of 2000, we sold transportation loans with a
carrying value of $566.0 million (after the market adjustment described above)
in whole loan sale transactions. We recognized an additional loss of $30.7
million on the sale. During 2000, we recognized a special charge and reduced
goodwill by $20.3 million, representing the difference between: (i) the carrying
value of the net assets of the vendor services financing business; and (ii) the
anticipated proceeds from the sale of such business, which was completed in the
first quarter of 2001.
Loss on sale of asset-based loans
During the third quarter of 2000, we sold asset-based loans with a
carrying value of $152.2 million in whole loan sale transactions. We recognized
a loss of $53.0 million on these sales.
Costs related to closing offices and streamlining businesses
Our restructuring activities included the closing of several branch
offices and streamlining our businesses. These activities included a reduction
in the work force of approximately 1,700 employees. The Company incurred a
charge of $6.9 million related to severance costs paid to terminated employees
in 2000. The Company also incurred lease termination and direct closing costs of
$12.3 million associated with the branch offices closed in conjunction with the
restructuring activities. In addition, fixed assets and leasehold improvements
of $10.3 million were abandoned when the branch offices were closed.
Abandonment of computer processing systems
We recorded a $35.8 million charge in 2000 to write off the carrying
value of capitalized computer software costs for projects that have been
abandoned in conjunction with our restructuring. These costs are primarily
associated with: (i)
44
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
computer processing systems under development that would
require significant additional expenditures to complete and that are
inconsistent with our current business plan; and (ii) computer systems related
to the lines of business discontinued by the Company and therefore are no longer
required.
Advisory fees and warrant paid and/or issued to Lehman and other
investment banks
In May 2000, we sold approximately $1.3 billion of finance receivables to
Lehman and its affiliates for cash and a right to share in future profits from a
subsequent sale or securitization of the assets sold. We paid a $25.0 million
transaction fee to Lehman in conjunction with the sale, which was included in
special charges. Such loans were sold to Lehman at a value which approximated
net book value, less the fee paid to Lehman.
During the second and third quarters of 2000, we repurchased a
significant portion of the finance receivables sold to Lehman. These finance
receivables were subsequently included in securitization transactions structured
as financings. The cost of the finance receivables purchased from Lehman did not
differ materially from the book value of the loans prior to their sale to
Lehman.
Lehman has also amended its master repurchase financing facilities with
our finance operations to expand the types of assets financed. As partial
consideration for the financing transaction, Lehman received a warrant, with a
nominal exercise price, for five percent of the common stock of Conseco Finance.
The initial $48.1 million estimated value of the warrant was recognized as an
expense during the second quarter of 2000. The estimated fair value of the
warrant did not change materially during 2000.
We also paid Lehman $5.3 million in advisory fees related to the business
and debt restructuring.
Reserve Methodology Change at Bank Subsidiary
During the fourth quarter of 2000, we increased the allowance for credit
losses related to credit card receivables held by our bank subsidiary. We
implemented a more conservative approach pursuant to a recent regulatory
examination, which resulted in this special charge.
Gain on sale of certain loans and other items
During 2000, we sold substantially all of the finance receivables related
to our bankcard (Visa and Mastercard) portfolio. We recognized a gain of $9.7
million on the sale.
During 2000, we recognized $5.0 million of other costs related to the
restructuring of the Company.
45
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
8. CONSOLIDATED STATEMENT OF CASH FLOWS:
The following disclosures supplement our consolidated statement of cash
flows:
Income taxes consist of the following:
Year ended December 31
-------------------------------------
1993 1992 1991
----------- ----------- -----------2001 2000 1999
---- ---- ----
(Dollars in millions)
Current:
Federal $17,253,000 $16,843,000Additional non-cash items not reflected in the consolidated statement of cash
flows:
Tax benefit related to the issuance of common stock under employee benefit plans... $ 7,938,000
State 3,118,000 2,937,000 1,755,000
----------- ----------- -----------
20,371,000 19,780,000 9,693,000
Deferred:
Federal 53,826,000 21,769,000 21,511,000
State 9,917,000 4,785,000 4,284,000
----------- ----------- -----------
63,743,000 26,554,000 25,795,000
----------- ----------- -----------
$84,114,000 $46,334,000 $35,488,000
=========== =========== ===========- $ - $ 3.3
The following reconciles net income to net cash provided by operating
activities:
Cash flows from operating activities:
Net income (loss)................................................................... $(102.7) $(525.3) $ 47.9
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on sale of finance receivables............................................. (26.9) (7.5) (550.6)
Points and origination fees received............................................ - - 390.0
Interest-only securities investment income...................................... (51.5) (106.6) (185.1)
Cash received from interest-only securities, net................................ 14.3 187.6 442.6
Servicing income................................................................ (115.3) (108.2) (165.3)
Cash received from servicing activities......................................... 71.7 123.8 175.7
Provision for losses............................................................ 563.6 354.2 128.7
Amortization and depreciation................................................... 6.1 24.9 52.3
Income taxes.................................................................... (76.3) (361.0) (205.9)
Accrual and amortization of investment income................................... (58.0) (97.2) (80.7)
Impairment charges.............................................................. 386.9 515.7 554.3
Special charges................................................................. 18.4 349.5 (20.5)
Extraordinary (gain) loss on extinguishment of debt............................. (9.9) - 4.0
Change in accounting principle.................................................. - 70.2 -
Other........................................................................... (103.7) 62.5 36.6
------- ------- -------
Net cash provided by operating activities.................................... $ 516.7 $ 482.6 $ 624.0
======= ======= =======
For the year ended December 31, 1992, a current tax benefit of $11,161,000
is included in the extraordinary loss from the Company's debt exchange so
that net tax expense was $35,173,000.
Deferred income taxes are provided for temporary differences between pretax
income for financial reporting purposes and taxable income. The tax
effects of temporary differences that give rise46
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1993
and 1992 are presented below.Consolidated Financial Statements
--------------------------
9. QUARTERLY FINANCIAL DATA (UNAUDITED):
December 31
------------------------------
1993 19921st Qtr.(a)(b) 2nd Qtr.(a)(b) 3rd Qtr.(a)(b) 4th Qtr.(b)
-------------- --------------
Deferred tax liabilities:
Excess servicing rights $ 234,721,000 $ 164,323,000
Other 3,272,000 5,088,000
------------- -------------
Gross deferred tax liabilities 237,993,000 169,411,000
------------- -------------
Deferred tax assets:
Net operating loss carryforward 23,571,000 23,030,000
Other 8,918,000 1,964,000
------------- -------------
Gross deferred tax assets 32,489,000 24,994,000
Valuation allowance -- --
------------- -------------
Gross deferred tax assets,
net of valuation 32,489,000 24,994,000
------------- -------------
Net deferred tax liability $ 205,504,000 $ 144,417,000
============= =============
At December 31, 1993, the Company has net operating loss carryforwards for
federal income tax purposes of approximately
-49-
$60,000,000 which are available to offset future federal taxable income and
expire no earlier than 2001.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
Year ended December 31
------------------------------
1993 1992 1991
------ ------ ------
Statutory rate 35.0% 34.0% 34.0%
State tax, net of federal benefit 4.2 4.3 4.3
Adjustments to deferred tax assets
and liabilities for enacted
changes in tax laws and rates 1.9 -- --
Other .8 .7 .2
------ ------ ------
41.9% 39.0% 38.5%
====== ====== ======
L. SUBSEQUENT EVENT
In March 1994, the Company sold, through a public transaction,
approximately $508,000,000 of securitized Net Interest Margin Certificates
("the Certificates"). The Certificates represent 78% of the estimated
present value of future cash flows from certain pools of manufactured
housing contracts sold by the Company between 1978 and 1993. The estimated
present value of these future cash flows are recorded on the Company's
December 31, 1993 balance sheet as part of "Excess servicing rights
receivable," "Contracts, GNMA certificates and collateral" and "Allowance
for losses on contracts sold with recourse." The remaining 22% equity
interest will be held by the Company and recorded as part of excess
servicing rights receivable. The following unaudited pro forma balance
sheet assumes the transaction closed on December 31, 1993 and the proceeds
were used to provide a 4% cash deposit, pay off outstanding notes payable,
and invest the remainder in cash and cash equivalents.
Pro Forma Condensed Balance Sheet
December 31, 1993
-------------------------------------------------
Pro forma Pro forma
As reported adjustments (unaudited)
--------------- --------------- ---------------
(in thousands)
ASSETS:
Cash and cash equivalents $ 170,674 $ 265,529 $ 436,203
Cash deposits 124,817 20,320 145,137
Excess servicing rights
receivable 843,489 (657,760) 185,729
Contracts and collateral 495,225 (43,000) 452,225
All other assets 105,297 105,297
--------------- --------------- ---------------
Total assets $1,739,502 $(414,911) $1,324,591
=============== =============== ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Notes payable $ 206,911 $(206,911) $ --
Allowance for losses 222,135 (208,000) 14,135
All other liabilities 761,027 761,027
Stockholders' equity 549,429 549,429
--------------- --------------- ---------------
Total liabilities and
stockholders' equity $1,739,502 $(414,911) $1,324,591
=============== =============== ===============
-50-
QUARTERLY RESULTS OF OPERATIONS (unaudited)
-------------------------------------------------
-------------- -----------
(Dollars in thousands
except per-share amounts) First Second Third Fourth
quarter quarter quarter quarter
---------- --------- ---------- ----------millions)
1993:2001
Revenues...................................... $669.9 $662.4 $681.6 $669.7
Income $66,645 $82,613 $98,925 $118,497(loss) before income taxes and
extraordinary gain (loss) .................. 41.8 44.0 (273.2) 22.2
Net earnings 22,061 29,187 32,320 32,855income (loss)............................. 25.9 27.4 (178.6) 22.6
2000
Revenues...................................... $530.6 $583.3 $645.8 $685.1
Income (loss) before income taxes and
cumulative effect of accounting change...... 42.9 (43.9) (391.7) (349.9)
Net earnings per share .71 .93 1.02 .95
1992:
Income $51,907 $60,700 $66,302 $ 67,706
Earnings before
extraordinary loss 12,695 19,730 23,097 16,950
Net earnings 12,695 2,273 23,097 16,950
Per share:
Earnings before
extraordinary loss .43 .65 .76 .55
Net earnings .43 .07 .76 .55
1991:
Income $40,423 $56,368 $58,018 $ 59,956
Net earnings 8,317 16,557 17,591 14,223
Net earnings per share .26 .60 .64 .50income (loss)............................. 26.8 (28.5) (296.6) (227.0)
- --------------------
(a) Included in the first, second and third quarters of 2001 are impairment
charges of $7.9 million ($5.0 million after tax), $33.8 million ($21.0
million after tax) and $345.2 million ($224.4 million after tax),
respectively. Also included in the first, second, third and fourth
quarters of 2001 are special charges of $13.8 million ($8.7 million after
tax), $2.4 million ($1.5 million after tax), $.5 million ($.3 million
after tax) and $4.8 million ($3.1 million after tax), respectively.
(b) Included in the first, second, third and fourth quarters of 2000 are
impairment charges of $2.5 million ($1.6 million after tax), $9.6 million
($6.0 million after tax), $205.0 million ($129.2 million after tax) and
$298.6 million ($188.1 million after tax), respectively. Also included in
the second, third and fourth quarters of 2000 are special charges of
$63.4 million ($41.2 million after tax), $226.6 million ($147.6 million
after tax) and $104.3 million ($67.7 million after tax), respectively.
10. SUBSEQUENT EVENTS:
Modifications to Borrowing Agreements
In the first quarter of 2002, we entered into various transactions with
Lehman and its affiliates pursuant to which Lehman extended the terms of our:
(a) warehouse line from September 2002 to September 2003, (b) borrowings with
respect to approximately $90 million of miscellaneous assets ("Miscellaneous
Borrowings") from January 31, 2002 to June 2003, and (c) residual line from
February 2003 to February 2004 under which financing is being provided on our
interest-only securities, servicing rights and retained interests in other
subordinated securities issued by the securitization trusts. We agreed to an
amortization schedule by which the outstanding balance under the Miscellaneous
Borrowings is required to be repaid by June 2003. We also entered into a revised
agreement governing the movement of cash from Conseco Finance to the parent
company. Conseco Finance and Lehman have agreed to amend the agreement such that
Conseco Finance must maintain liquidity (i.e., cash and available borrowings, as
defined) of at least: (i) $50 million until March 31, 2003; and (ii) $100
million from and after April 1, 2003. However, we no longer must meet a minimum
liquidity requirement of $250 million before making interest, principal,
dividend or redemption payments to the parent company.
47
CONSECO FINANCE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------
Pursuant to the new arrangements, Lehman may exchange their existing
Warrant to purchase 5% of the common stock of Conseco Finance until May 2003 and
receive in its place 500,000 shares of Series G Convertible Redeemable Preferred
Stock of Conseco (the "Series G Preferred") at a $100 stated value per share,
having the following general terms:
(a) No dividend;
(b) Convertible to Conseco common stock at $10 per share;
(c) Voting rights on an as converted basis;
(d) Mandatorily redeemable by Conseco in January 2012 at the stated value;
(e) Pari passu with Conseco's Series F Common-Linked Convertible Preferred
Stock (the "Series F Preferred") if, and only if, a majority of the
holders of Conseco's Series E Preferred Stock ("Series E Preferred") and
Series F Preferred consent, and otherwise pari passu with the Series E
Preferred and junior to the Series F Preferred; and
(f) The right to cause Conseco to register the Series G Preferred within one
year after electing to surrender the Warrant in exchange for the Series G
Preferred.
Tender Offers to Purchase Outstanding Debt
In March 2002, we completed a tender offer pursuant to which we purchased
$75.8 million par value of our senior subordinated notes due June 2002. The
purchase price was equal to 100 percent of the principal amount of the notes
plus accrued interest. The remaining principal amount outstanding of the senior
subordinated notes after giving effect to the tender offer and other debt
repurchases completed prior to the tender offer is $58.4 million (of which $23.7
million is held by Conseco). Also, during the first quarter of 2002, we
announced the tendering for all our remaining public debt - $167 million due in
September 2002 and $4 million due in April 2003. (Such amounts reflect all 2002
debt repurchases completed prior to announcing the tender offer). Such offer
expires on April 12, 2002. The tender offer price is equal to 100 percent of the
principal amount of the notes plus accrued interest.
Market for Repossessed Manufactured Homes
On January 2, 2002, GreenPoint Financial Corp. ("GreenPoint"), a
competitor, announced its intention to cease the origination of loans secured by
manufactured homes. In conjunction with this announcement, GreenPoint indicated
its objective to quickly liquidate its repossessed inventory at below market
prices in the wholesale market. This announcement may have a significant impact
on the wholesale market for manufactured homes through which the Company
generally sells 30 percent of its manufactured housing repossessed inventory. We
believe that our net recovery is maximized through a retail (resale either
through Company owned sales lots or our dealer network) exit strategy. We
generally liquidate approximately 70 percent of our repossessed units through
the retail channel; thus, we are much less reliant on the wholesale channel.
48
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
- ---------------------------------------------------------------DISCLOSURE.
None.
-51-
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------------------------------
Pursuant toThe Registrant meets the conditions set forth in the General Instruction G(3), referenceInstructions
(I)(1)(a) and (b) of Form 10-K and is made totherefore omitting the information
containedotherwise required in the Company's definitive proxy statement for its 1994 Annual
Meeting of Shareholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1994.
ITEM 11. EXECUTIVE COMPENSATION.
---------------------------------
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive proxy statement for its 1994 Annual
Meeting of Shareholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
------------------------------------------------------------
MANAGEMENT.
-----------
Pursuant to General Instruction G(3), reference is made to the information
contained in the Company's definitive proxy statement for its 1994 Annual
Meeting of Shareholders which will be filed with the Securities and
Exchange Commission on or before May 1, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------
Reference is made to Note I of Notes to Consolidated Financial Statements
contained in Item 8 hereof.
-52-
Part III.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON ----------------------------------------------------------------
FORM 8-K.
---------
(a)(l) 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 28
Consolidated Balance Sheets - December 31,
1993 and 1992 29
Consolidated Statements of Operations - years
ended December 31, 1993, 1992 and 1991 30
Consolidated Statements of Stockholders' Equity -
years ended December 31, 1993, 1992 and 1991 31
Consolidated Statements of Cash Flows - years
ended December 31, 1993, 1992 and 1991 32-33
NotesStatements. See Index to Consolidated Financial
Statements 34-50
(2) Financial statement schedules
The following consolidatedon page 15 for a list of financial statement
schedules of Green Tree Financial Corporation and
subsidiaries arestatements included
in Part IV of this report:
Schedule II - Amounts receivable from related
parties 58
Schedule VIII - Valuation and qualifying accounts 59
Schedule IX - Short-term borrowings 60
Schedules other than those listed aboveReport.
2. Financial Statement Schedules. All schedules are omitted, either
because of the
absence of the conditions under which they are not applicable, not required, or because the
information requiredthey contain is included elsewhere in the
consolidated financial statements or noted thereto.
(3)notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits
Exhibit
No.
-------
3(a) Articles of Incorporation (incorporated by reference to
Company's Registration Statement on Form S-4; File No.
33-42249).
-53-
3(b) Bylaws (incorporated by reference to Company's
Registration Statement on Form S-4; File No.
33-42249).
4(a) Amended and Restated Rights Agreement dated as of
August 16, 1990 relating to amendments to the Company's
Shareholders Rights Plan originally adopted on October 9,
1985 (incorporated by reference to the Company's quarterly
report on Form 10-Q for the quarter ended September 30,
1990; File No. 0-11652).
4(b) Indenture dated as of June 1, 1985 relating to $287,500,000
of 8 1/4% Senior Subordinated Debentures due June 1, 1995
(incorporated by reference to the Company's Registration
Statement on Form S-4; File No. 33-42249).
4(c) Indenture dated as of March 15, 1992 relating to
$287,500,000 of 10 1/4% Senior Subordinated Notes due
June 1, 2002 (incorporated by reference to the Company's
Registration Statement on Form S-4; File No. 33-42249).
4(d) Indenture dated as of September 1, 1992 relating to
$250,000,000 of Medium-Term Notes, Series A, Due Nine
Months or More From Date of Issue (incorporated by
reference to the Company's Registration Statement on Form
S-3; File No. 33-51804).
10(a) Company's Key Executive Bonus Program (incorporated
by reference to the Company's Registration
Statement on Form S-1; File No. 2-82880).
10(b) Nonqualified Option Plan dated May 19, 1984 (incorporated
by reference to the Company's Registration Statement on
Form S-2; File No. 2-85303).
10(c) Employment Agreement, dated April 20, 1991 between
the Company and Lawrence M. Coss (incorporated by
reference to the Company's Registration Statement
on Form S-4; File No. 33-42249).
10(d) Green Tree Financial Corporation 1987 Stock Option
Plan (incorporated by reference to the Company's
Registration Statement on Form S-4; File No.
33-42249).
-54-
10(e) Green Tree Financial Corporation Key Executive Stock Bonus
Plan (incorporated by reference to the Company's
Registration Statement on Form S-4; File No. 33-42249).
10(f) 1987 Supplemental Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form
S-4; File No. 33-42249).
10(g) Master Repurchase Agreement dated as of August 1, 1990
between Green Tree Finance Corp.-Three and Merrill Lynch
Mortgage Capital Inc. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990; File No. 0-11652).
10(h) Warehousing Credit Agreement dated as of November 30,
1990 among Green Tree Financial Corporation and certain
banks and First Bank National Association, Administrative
Agent (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990;
File No. 0-11652); as amended by a Consent and Third
Amendment to Warehousing Credit Agreement dated November
27, 1991 (incorporated by reference to the Company's
Registration Statement on Form S-4; File No. 33-42249); as
amended by a Consent to Warehousing Credit Agreement dated
February 13, 1992 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991; File No. 0-11652); as amended by Fourth
Amendment to Warehousing Credit Agreement dated November
30,1992 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992;
File No. 0-11652).
10(i) Master Repurchase Agreement dated as of May 17, 1991
between Green Tree Finance Corp.-Four and First Boston
Mortgage Capital Corp. (incorporated by reference to the
Company's Registration Statement on Form S-4; File No. 33-
42249).
10(j) Insurance and Indemnity Agreement dated as of February 13,
1992 among Green Tree Financial Corporation, MaHCS Guaranty
Corporation and Financial Security Assurance Inc.
(incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991; File No.
0-11652).
-55-
10(k) Master Repurchase Agreement dated as of October 15, 1992
between Green Tree Finance Corp.-Five and Lehman Commercial
Paper, Inc. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992; File No. 0-11652).
10(l) 401(k) Plan Trust Agreement effective as of October 1,
1992 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992;
File No. 0-11652).
10(m) Green Tree Financial Corporation 1992 Supplemental Stock
Option Plan (filed herewith).
11(a) Computation of Primary Earnings Per Share (filed
herewith).
11(b) Computation of Fully Diluted Earnings per Share (filed
herewith).
12 Computation of Ratio of Earnings to Fixed Charges (filed
herewith).
22 Subsidiaries of the Registrant (filed herewith).
24 Consent of KPMG Peat Marwick (filed herewith).
25 Powers of Attorney (filed herewith).
PURSUANT TO ITEM 601(b)(4) OF REGULATION S-K, THERE HAS BEEN EXCLUDED FROM
THE EXHIBITS FILED PURSUANT TO THIS REPORT, INSTRUMENTS DEFINING THE RIGHTS
OF HOLDERS OF LONG-TERM DEBT OF THE COMPANY WHERE THE TOTAL AMOUNT OF THE
SECURITIES AUTHORIZED UNDER SUCH INSTRUMENTS DOES NOT EXCEED TEN PERCENT OF
THE TOTAL ASSETS OF THE COMPANY. THE COMPANY HEREBY AGREES TO FURNISH A
COPY OF ANY SUCH INSTRUMENTS TO THE COMMISSION UPON REQUEST.filed with this report.
(b) Reports on Form 8-K - None.
-56-49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Green Tree Financial Corporationthe Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GREEN TREE FINANCIAL CORPORATIONauthorized, this 29th day of March, 2002.
CONSECO FINANCE CORP.
By: /s/Lawrence M. Coss CHARLES H. CREMENS
----------------------------
Charles H. Cremens
President and Chief Executive
Officer (authorized officer and
principal executive officer)
By: /s/John W. Brink
----------------------- ---------------------------
Lawrence M. Coss John W. Brink
Chairman, President and NEAL S. COHEN
----------------------------
Neal S. Cohen
Executive Vice President
Chief Executive Officer Treasurer and Chief (principal executive Financial Officer
officer) (principal(authorized officer and
principal financial officer)
By: /s/Robley D. Evans
---------------------------
Robley D. Evans
Vice President and
Controller (principal
accounting officer)
Dated: March 28, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
reportReport has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/Lawrence M. Coss
-------------------------------
Lawrence M. Coss, Director March 28, 1994
/s/Richard G. Evans
-------------------------------
Richard G. Evans, Director March 28, 1994
/s/Robert D. Potts
-------------------------------
Robert D. Potts, Director March 28, 1994
By: /s/Richard G. Evans
---------------------------
Richard G. Evans,
Attorney-in-Fact
C. Thomas May, Jr., Director ) Dated: March 28, 1994
)
W. Max McGee, Director )
)
Robert S. Nickoloff, Director )
)
Kenneth S. Roberts, Director )
-57-
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
-----------------------------------------------------
Balance at Balance at Balance at
December 31, Amount December 31, Amount December 31,
1990 Additions collected 1991 collected 1992
------------Signature Title (Capacity) Date
- --------- ---------- ------------ ---------- ---------------------------- ----
Boyle, Greg $310,825 $10,000 $ (20,825) $300,000 $(300,000) 0
Evans, Richard 215,877 (15,877) 200,000 (200,000) 0
Evans, Robley 119,205 (119,205) 0 0
Hegstrom, Robert 385,125 (25,125) 360,000 (360,000) 0
Imsdahl,/s/ CHARLES H. CREMENS President, Chief Executive March 29, 2002
- ------------------------------ Officer and Director
Charles H. Cremens (Principal Executive Officer)
/s/ NEAL S. COHEN Executive Vice President and March 29, 2002
- ------------------------------ Chief Financial Officer
Neal S. Cohen (Principal Financial Officer)
/s/ JAMES S. ADAMS Senior Vice President and March 29, 2002
- ------------------------------ Chief Accounting Officer
James 200,371 (125,671) 74,700 (74,700) 0
Jordan, Hugh 108,381 (108,381) 0 0
Roberts, Kenneth 500,000 (500,000) 0 0S. Adams
/s/ GARY C. WENDT Director March 29, 2002
- ------------------------------
Gary C. Wendt
/s/ WILLIAM J. SHEA Director March 29, 2002
- ------------------------------
William J. Shea
/s/ WILLIAM WESP Director March 29, 2002
- ------------------------------
William Wesp
The above notes were executed by certain officers and directors50
CONSECO FINANCE CORP.
EXHIBIT INDEX
EXHIBIT
NO.
- ------
3(a) Restated Certificate of the Company
to purchase Company stock or as personal loans. The stock certificates were
held as collateral as long as the loans were outstanding. The notes were due on
demand and carried an interest rateIncorporation of prime plus 1/2% on personal loans, and
onConseco Finance Corp. was
filed with the stock loans, the greater of 6% or the Internal Revenue Service applicable
federal rate for officer borrowings. No notes were executed during 1993.
-58-
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
Additions-
Balance at reductions Balance at
beginning to income end
Description of period recognized Deductions of period
- ------------------------------------------------- ---------- ---------- ------------- ----------
(thousands of dollars)
Valuation and qualifying
accounts which are deducted
from the assets
to which they apply:
- -------------------------------------------------
Deferred service income:
Year ended December 31, 1993 $119,487 $ 68,238 $26,318(a) $161,407
Year ended December 31, 1992 107,592 33,135 21,240(a) 119,487
Year ended December 31, 1991 65,564 59,536 17,508(a) 107,592
Reserves which support balance
sheet caption reserves:
- -------------------------------------------------
Allowance for losses on contracts
sold with recourse:
Year ended December 31, 1993 189,669 78,791 46,325(b) 222,135
Year ended December 31, 1992 134,681 105,357 50,369(b) 189,669
Year ended December 31, 1991 91,945 74,845 32,109(b) 134,681
Notes:
(a) Amortization and discount.
(b) Amounts charged off.
-59-
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
SCHEDULE IX - SHORT-TERM BORROWINGS
-----------------------------------
Weighted Maximum Average Weighted
average amount amount average
Balance interest outstanding outstanding interest
Category of aggregate at end rate at during during rate during
short-term borrowings of period end of period the period the period(2) the period(3)
- ----------------------------------------- --------- ------------- ----------- ------------- -------------
(dollars in thousands)
YEAR ENDED DECEMBER 31, 1993:
Notes payable to banks (1) $ 1,275 4.31% $ 53,650 $ 11,101 4.29%
GNMA reverse repurchase agreements 21,171 3.63 52,779 20,834 3.38
Merrill Lynch Mortgage Capital
reverse repurchase agreement 73,995 4.66 400,595 118,583 3.80
First Boston Mortgage Capital
reverse repurchase agreement 22,250 4.13 205,750 63,392 3.79
Lehman Commercial Paper
reverse repurchase agreement 88,220 3.44 350,022 139,044 3.51
YEAR ENDED DECEMBER 31, 1992:
Notes payable to banks (1) 8,300 4.50 43,975 9,831 4.82
GNMA reverse repurchase agreements -- -- 35,452 6,368 3.70
Merrill Lynch Mortgage Capital
reverse repurchase agreement 35,799 3.83 167,145 77,080 4.95
First Boston Mortgage Capital
reverse repurchase agreement -- -- 100,000 55,651 4.40
Lehman Commercial Paper
reverse repurchase agreement 35,339 3.56 155,057 15,236 3.56
YEAR ENDED DECEMBER 31, 1991:
Notes payable to banks (1) 24,490 6.79 57,250 16,765 8.73
GNMA reverse repurchase agreements -- -- 44,199 5,533 6.70
Merrill Lynch Mortgage Capital
reverse repurchase agreement 75,697 7.50 188,065 92,798 7.37
First Boston Mortgage Capital
reverse repurchase agreement -- -- 94,600 24,187 7.04
Notes:
(1) These notes represent borrowings under committed lines of credit for
contract financing. The calculations of the weighted average interest rates
include commitment and usage fees on borrowings.
(2) Average amount outstanding during the period was computed by totaling the
daily outstanding balances and dividing the sum by the number of days in
the period.
(3) Weighted average interest rate during the period was computed by dividing
the interest expense for the year by the average daily amount of
outstanding borrowings.
-60-
GREEN TREE FINANCIAL CORPORATION Securities and Exchange Commission as Exhibit 3(a) to
the Company's Report on Form 10-Q for the quarter ended September
30, 2000 and is incorporated herein by reference.
3(b) Merger 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) Restated Bylaws of Conseco Finance Corp. were filed with the
Securities and Exchange Commission as Exhibit 3.4 to the Company's
Registration Statement on Form S-3/A (No. 333-85037) and are
incorporated herein by reference.
3(d) Certificate of Designation of 9% Redeemable Cumulative Preferred
Stock of Conseco Finance Corp. was filed with the Securities and
Exchange Commission as Exhibit 3(d) to the Company's Report on Form
10-Q for the quarter ended September 30, 2000 and is incorporated
herein by reference.
4(a) There have not been filed as exhibits to this Form 10-K (Forcertain
long-term debt instruments, none of which relates to authorized
indebtedness that exceeds 10% of the Fiscal Year Endedconsolidated assets of the
Registrant. The Registrant agrees to furnish the Commission upon its
request a copy of any instrument defining the rights of holders of
long- term debt of the Company and its consolidated subsidiaries.
10(a) 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, 1993)
EXHIBIT INDEX1995; File No.
1-08916); as amended by Amendment to the Master Repurchase Agreement
dated June 1, 1997 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997; File No. 0-11652); as amended by Amendment to the Master
Repurchase Agreement dated February 10, 1998 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998, File No. 1-08916).
10(b) Amended and Restated Master Repurchase Agreement dated May 9, 2000
between Lehman Commercial Paper Inc. and Green Tree Finance
Corp.-Five (filed herewith); and Amendment to the Warehouse Debt
Facility, dated as of September 22, 2000, by and among Lehman
Commercial Paper Inc. and Green Tree Finance Corp. - Five (filed
herewith).
10(c) Asset Assignment Agreement dated as of February 13, 1998 between
Green Tree Residual Finance Corp. I and Lehman Commercial Paper,
Inc. (incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998; File No.
1-08916); Amendment to the First Residual Facility, dated as of
September 22, 2000, by and among Lehman ALI Inc. and Green Tree
Residual Finance Corp. I (filed herewith).
10(d) Promissory Note dated September 22, 2000 issued by the Company to
CIHC, Incorporated was filed with the Securities and Exchange
Commission as Exhibit No.4(c) to the Company's Report on Form 10-Q for
the quarter ended September 30, 2000 and is incorporated herein by
reference.
10(e) Warrant to Purchase Common Stock of Conseco Finance Corp. dated May
11, 2000, by and between Conseco Finance Corp. and Lehman Brothers
Holdings Inc. is incorporated herein by reference to Exhibit Page No.
----------- ------- --------
10(m) 1992 Supplemental Stock Option Plan 62-66
11(a) Computation10.45
to the Form 10-Q of Primary Earnings
Per Share 67
11(b) ComputationConseco, Inc. for the period ended June 30,
2000.
10(f) Amended and Restated Agreement dated September 22, 2000, by and
among Conseco, Inc., CIHC, Incorporated and Lehman Brothers Holdings
Inc. is incorporated herein by reference to the Exhibit 10.46 to the
Form 10-Q of Fully Diluted
Earnings Per Share 68Conseco, Inc. for the period ended September 30, 2000.
12 Computation of Ratio of Earnings to Fixed Charges 69
22 Subsidiaries of Registrant 70-71
24(filed herewith).
23 Consent of KPMG Peat Marwick 72
25 Powers of Attorney 73
-61-
Exhibit 10(m)PricewaterhouseCoopers LLP (filed herewith).
--------------
GREEN TREE ACCEPTANCE, INC.
1992 SUPPLEMENTAL STOCK OPTION PLAN
1. Purpose of Plan.
---------------
This Plan shall be known as the "Green Tree Acceptance, Inc. 1992
Supplemental Stock Option Plan" and is hereinafter referred to as the
"Plan." The purpose of the Plan is to attract and retain the services of
experienced and knowledgeable non-employee directors of Green Tree
Acceptance, Inc. (the "Company") and to provide additional incentive for
such directors to increase their interest in the Company's long term
success and progress. Options granted under this Plan shall be non-
qualified stock options which do not qualify as Incentive Stock Options
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code").
2. Stock Subject to Plan.
---------------------
Subject to the provisions of Section 11 hereof, the stock to be subject
to options under the Plan (the "Shares") shall be the Company's authorized
Common Stock, par value $0.01 per share (the "Common Stock"). Such shares
will be authorized but unissued shares. Subject to adjustment as provided
in Section 11 hereof, the maximum number of shares on which options may be
exercised under this Plan shall be 50,000 shares. If an option under the
Plan expires, or for any reason is terminated or unexercised with respect
to any Shares, such Shares shall again be available for options thereafter
granted during the term of the Plan.
3. Administration of Plan.
----------------------
The Plan shall be administered by the Board of Directors of the Company.
The Board of Directors shall have plenary authority in its discretion, but
subject to the express provisions of this Plan, to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to the Plan,
and to make all other determinations necessary or advisable for the
administration of the Plan. The Board of Directors' determinations on the
foregoing matters shall be final and conclusive.
4. Eligibility.
-----------
An "Eligible Director" shall be a director of the Company who is not
otherwise an employee of the Company or any subsidiary of the Company;
provided, however, that so long as any director of the Company is serving
as a representative of another organization and any options issued to such
director under the Plan are required to be remitted to such organization,
such
-62-
director shall not be deemed to be an Eligible Director for purposes of the
Plan.
5. Grant of Options.
----------------
Upon approval of the Plan by the Board of Directors, but subject to
approval of the Plan by the stockholders of the Company pursuant to Section
14 hereof, each Eligible Director who completes a full fiscal quarter of
service as a director of the Company after December 31, 1992 shall
automatically be granted on the last business day of each such quarter an
option to acquire 500 Shares under the Plan.
6. Price.
-----
The option price for all options granted under the Plan shall be the fair
market value of the Shares covered by the option at the time the option is
granted. For the purpose of the preceding sentence and for all other
valuation purposes under the Plan, the "fair market value" of the Common
Stock as of any date shall be (i) the closing price of the Common Stock on
such date, as reported on the consolidated reporting system for the New
York Stock Exchange or such other national securities exchange as is then
the primary exchange for trading in the Common Stock, or (ii) if the Common
Stock is not then listed on a national securities exchange, the last sale
price or highest closing bid price (whichever is applicable) as reported on
the National Association of Securities Dealers Automated Quotation System.
If, on the date of determination of fair market value, the Common Stock is
not publicly traded, the Board of Directors shall make a good faith attempt
to determine the fair market value of the Common Stock as required by this
Section 6 and in connection therewith shall take such action as it deems
necessary or advisable.
7. Term.
----
Each option and all rights and obligations thereunder shall, subject to
the provisions of Section 9 herein, expire ten (10) years from the date of
granting of the option.
8. Exercise of Option.
------------------
(a) Options granted under the Plan shall not be exercisable for a period
of six months after the date of grant, or until stockholder approval of the
Plan has been obtained, whichever occurs later, but thereafter will be
exercisable in full at any time or from time to time during the term of the
option, subject to the provisions of Section 9 hereof.
-63-
(b) The exercise of any option granted hereunder shall only be effective
at such time as counsel to the Company shall have determined that the
issuance and delivery of Common Stock pursuant to such exercise will not
violate any state or federal securities or other laws. An optionee
desiring to exercise an option may be required by the Company, as a
condition of the effectiveness of any exercise of an option granted
hereunder, to agree in writing that all Common Stock to be acquired
pursuant to such exercise shall be held for his or her own account without
a view to any further distribution thereof, that the certificates for such
shares shall bear an appropriate legend to that effect and that such shares
will not be transferred or disposed of except in compliance with applicable
federal and state securities laws.
(c) An optionee electing to exercise an option shall give written notice
to the Company of such election and of the number of Shares subject to such
exercise. The full purchase price of such Shares shall be tendered with
such notice of exercise. Payment shall be made to the Company either (i)
in cash (including check, bank draft or money order), or (ii) by delivering
shares of Common Stock already owned by the optionee having a fair market
value equal to the full purchase price of the Shares, or (iii) by any
combination of cash and such shares; provided, however, that an optionee
shall not be entitled to tender shares of Common Stock pursuant to
successive, substantially simultaneous exercises of options granted under
this or any other stock option plan of the Company. For purposes of the
preceding sentence, the "fair market value" of such tendered shares shall
be determined as provided in Section 6 herein as of the date of exercise.
Until such person has been issued the Shares subject to such exercise, he
or she shall possess no rights as a stockholder with respect to such
Shares.
9. Effect of Termination of Directorship or Death or Disability.
------------------------------------------------------------
(a) In the event that an optionee shall cease to be a director of the
Company for any reason other than removal for cause due to his or her
serious misconduct or his or her death or disability, such optionee shall
have the right to exercise the option at any time within seven months after
such termination of directorship to the extent of the full number of Shares
he or she was entitled to purchase under the option on the date of
termination, subject to the condition that no option shall be exercisable
after the expiration of the term of the option.
(b) In the event that an optionee shall be removed for cause as a
director of the Company by reason of his or her serious misconduct during
the course of his or her service as a director of the Company, the option
shall be terminated as of the date of the misconduct.
-64-
(c) If the optionee shall die while serving as a director of the Company
or within three months after termination of his or her directorship for any
reason other than removal for cause due to his or her serious misconduct,
or become disabled (as determined by the Board of Directors in its sole
discretion) while serving as a director of the Company and such optionee
shall not have fully exercised the option, such option may be exercised at
any time within twelve months after his or her death or disability by the
personal representatives, administrators, or, if applicable, guardian, of
the optionee or by any person or persons to whom the option is transferred
by will or the applicable laws of descent and distribution, to the extent
of the full number of shares he or she was entitled to purchase under the
option on the date of death, disability, or termination of directorship, if
earlier, and subject to the condition that no option shall be exercisable
after the expiration of the term of the option.
10. Non-Transferability.
-------------------
No option granted under the Plan shall be transferable by the optionee,
otherwise than by will or the laws of descent and distribution as provided
in Section 9(c) herein. Except as provided in Section 9(c) herein with
respect to disability of the optionee, during the lifetime of an optionee
the option shall be exercisable only by such optionee.
11. Dilution or Other Adjustments.
-----------------------------
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend (of
whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options shall be made
by the Board of Directors. In the event of any such changes, adjustments
shall include, where appropriate, changes in the aggregate number of shares
subject to the Plan, the number of shares and the price per share subject
to outstanding options in order to prevent dilution or enlargement of
option rights.
12. Amendment or Discontinuance of Plan.
-----------------------------------
The Board of Directors may amend or discontinue the Plan at any time.
However, subject to the provisions of Section 11 no amendment of the Plan
shall, without stockholder approval: (i) increase the maximum number of
Shares with respect to which options may be granted under the Plan as
provided in Section 2 hereof, (ii) modify the eligibility requirements for
participation in the Plan as provided in Section 4 hereof, or (iii) change
the date of grant or exercise price of, or the number of Shares subject to,
options granted or to be granted to
-65-
Eligible Directors, as provided in Sections 5 and 6 hereof. The Board of
Directors shall not alter or impair any option theretofore granted under
the Plan without the consent of the holder of the option. Notwithstanding
any other provision of the Plan or any option, without the approval of
stockholders of the Company, no such amendment shall be made that, absent
such approval, would cause the exemptions of Rule 16b-3 to become
unavailable with respect to the options hereunder or with respect to the
ability of the Eligible Directors to satisfy the disinterested person
requirements of Rule 16b-3 in administering any other stock-based
compensation plan of the Company (this limitation on amendments to the Plan
shall include, without limitation, a prohibition on any contemplated
amendment within six months of any prior amendment, other than to comport
with changes in the Code, the Employee Retirement Income Security Act, or
the rules thereunder).
13. Time of Granting.
----------------
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the stockholders of the Company,
and no action taken by the Board of Directors (other than the execution and
delivery of an option), shall constitute the granting of an option
hereunder.
14. Effective Date and Termination of Plan.
--------------------------------------
(a) The Plan was approved by the Board of Directors on March 10, 1992
and shall be approved by the stockholders of the Company within twelve (12)
months thereafter. The effective date of the Plan shall be the date of
stockholder approval.
(b) Unless the Plan shall have been discontinued as provided in Section
12 hereof, the Plan shall terminate on December 31, 1997. No option may
be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee, alter or impair any rights or
obligations under any option theretofore granted.
-66-
Exhibit 11.(a)
--------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF PRIMARY EARNINGS PER SHARE
-----------------------------------------
Year ended December 31
---------------------------------------
1993 1992 1991
------------ ------------ -----------
Earnings before
extraordinary loss $116,423,000 $ 72,472,000 $56,688,000
Extraordinary loss on
debt exchange -- (17,457,000) --
------------ ------------ -----------
Net earnings 116,423,000 55,015,000 56,688,000
Less cumulative dividends
on preferred stock -- 1,995,000 9,310,000
------------ ------------ -----------
$116,423,000 $ 53,020,000 $47,378,000
============ ============ ===========
Weighted average number of
common and common equivalent
shares outstanding:
Weighted average common
shares outstanding 31,297,576 28,852,762 23,418,712
Dilutive effect of stock
options after application
of treasury-stock method 889,833 347,208 222,734
------------ ------------ -----------
32,187,409 29,199,970 23,641,446
------------ ------------ -----------
Earnings per share:
Earnings before extraordinary
loss $ 3.62 $ 2.41 $ 2.00
Extraordinary loss on debt
exchange -- (.59) --
------------ ------------ -----------
Net earnings $ 3.62 $ 1.82 $ 2.00
============ ============ ===========
-67-
Exhibit 11.(b)
--------------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
-----------------------------------------------
Year ended December 31
---------------------------------------
1993 1992 1991
------------ ------------ -----------
Earnings before
extraordinary loss $116,423,000 $ 72,472,000 $56,688,000
Extraordinary loss on
debt exchange -- (17,457,000) --
------------ ------------ -----------
Net earnings 116,423,000 55,015,000 56,688,000
Less cumulative dividends
on preferred stock -- 1,995,000 9,310,000
------------ ------------ -----------
$116,423,000 $ 53,020,000 $47,378,000
============ ============ ===========
Weighted average number of
common and common equivalent
shares outstanding:
Weighted average common
shares outstanding 31,297,576 28,852,762 23,418,712
Dilutive effect of stock
options after application
of treasury-stock method
assuming full dilution 943,756 347,208 260,894
------------ ------------ -----------
32,241,332 29,199,970 23,679,606
------------ ------------ -----------
Earnings per share:
Earnings before extraordinary
loss $ 3.61 $ 2.41 $ 2.00
Extraordinary loss on debt
exchange -- (.59) --
------------ ------------ -----------
Net earnings $ 3.61 $ 1.82 $ 2.00
============ ============ ===========
-68-
Exhibit 12.
-----------
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
Year ended December 31
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------ ------------ ------------ ------------ -----------
Earnings:
Earnings before
income taxes $200,537,000 $118,806,000 $ 92,176,000 $ 59,418,000 $47,733,000
Fixed charges:
Interest 51,155,000 44,868,000 48,957,000 51,193,000 44,147,000
One-third rent 1,483,000 1,652,000 1,467,000 812,000 780,000
------------ ------------ ------------ ------------ -----------
52,638,000 46,520,000 50,424,000 52,005,000 44,927,000
------------ ------------ ------------ ------------ -----------
$253,175,000 $165,326,000 $142,600,000 $111,423,000 $92,660,000
============ ============ ============ ============ ===========
Fixed charges:
Interest $ 51,155,000 $ 44,868,000 $ 48,957,000 $ 51,193,000 $44,147,000
One-third rent 1,483,000 1,652,000 1,467,000 812,000 780,000
------------ ------------ ------------ ------------ -----------
$ 52,638,000 $ 46,520,000 $ 50,424,000 $ 52,005,000 $44,927,000
============ ============ ============ ============ ===========
Ratio of earnings
to fixed charges (1) 4.81 3.55 2.83 2.14 2.06
==== ==== ==== ==== ====
(1) For purposes of computing the ratios, earnings consist of earnings before
income taxes plus fixed charges.
-69-
Exhibit 22.
-----------
GREEN TREE FINANCIAL CORPORATION
SUBSIDIARIES
The following is a list of the Company's subsidiaries which are all owned
100% by Green Tree Financial Corporation who is the ultimate or immediate
parent:
STATE OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Green Tree Financial Corp.- Kentucky Delaware
Green Tree Financial Corp.- Louisiana Delaware
Green Tree Financial Corp. - Mississippi Delaware
Green Tree Financial Corp.- North Carolina Delaware
Green Tree Financial Corp.- Ohio Delaware
Green Tree Financial Corp.- Texas Delaware
Green Tree Credit Corp. New York
Green Tree Consumer Discount Company Pennsylvania
Consolidated Acceptance Corporation Nevada
Rice Park Properties Corporation Minnesota
Woodgate Consolidated Incorporated Texas
Woodgate Utilities Incorporated Texas
Woodgate Place Owners Association Texas
Green Tree Finance Corp.-One Minnesota
Green Tree Finance Corp.-Two Minnesota
Green Tree Finance Corp.-Three Minnesota
Green Tree Finance Corp.-Four Minnesota
Green Tree Finance Corp.-Five Minnesota
Green Tree Agency, Inc. Minnesota
Green Tree Agency of Montana, Inc. Montana
Green Tree Agency of Nevada, Inc. Nevada
GTA Agency, Inc. New York
-70-
STATE OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Crum-Reed General Agency, Inc. Texas
Green Tree Life Insurance Company Arizona
Consolidated Casualty Insurance Company Arizona
Green Tree Guaranty Corporation Minnesota
Green Tree Vehicles Guaranty Corporation Minnesota
MaHCS Guaranty Corporation Delaware
Green Tree Manufactured Housing Net Interest
Margin Finance Corp. I Delaware
Green Tree Manufactured Housing Net Interest
Margin Finance Corp. II Delaware
-71-
Exhibit 24
----------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors
Green Tree Financial Corporation:
We consent to incorporation by reference of our report dated March 22, 1994,
relating to the consolidated balance sheets of Green Tree Financial Corporation
and subsidiaries as of December 31, 1993 and 1992 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1993, which report appears in
the December 31, 1993 Form 10-K of Green Tree Financial Corporation, and in the
following Registration Statements of Green Tree Financial Corporation: No. 33-
26498 on Form S-8/S-3, No. 2-88293 on Form S-8, No. 33-51804 on Form S-3 and
No. 33-50527 on Form S-3/S-11.
KPMG Peat Marwick
Minneapolis, Minnesota
March 22, 1994
Exhibit 25.
-----------
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Lawrence M. Coss and Richard G.
Evans, and each or either one of them, his true and lawful attorney(s)-in-
fact and agent(s), with full power of substitution and resubstitution for
him and in his name, place, and stead, in any and all capacities, to sign
the 1993 Annual Report on Form 10-K of Green Tree Financial Corporation,
and any and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s), and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney(s)-in-fact
and agent(s), or either of them, or his or their substitutes, may lawfully
do or cause to be done by virtue hereof.
SIGNATURE DATE
--------- ----
/s/ C. Thomas May, Jr.
------------------------- February 22, 1994
C. Thomas May, Jr.
/s/ W. Max McGee
------------------------- February 22, 1994
W. Max McGee
/s/ Robert S. Nickoloff
------------------------- February 22, 1994
Robert S. Nickoloff
/s/ Kenneth S. Roberts
------------------------- February 22, 1994
Kenneth S. Roberts
-73-