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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20012002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to
_______------ -------
Commission File Number 1-08916
CONSECO FINANCE CORP.
Delaware No. 41-1807858
---------------------- --------------------------------------------------- -------------------------------
State of Incorporation IRS Employer Identification No.
1100 Landmark Towers
Saint Paul, Minnesota 55102-1639 (651) 293-3400
-------------------------------- --------------
Address of principal executive offices Telephone
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Shares of common stock outstanding as of May 10, 2001:9, 2002: 103
The Registrant meets the conditions set forth in general instruction
H(1)(a) and H(1)(b) to Form 10-Q. Accordingly, the disclosures in this filing
have been reduced as permitted by such instructions.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
March 31, December 31,
2002 2001 2000
---- ----
(unaudited)
Retained interests in securitization trusts:
Actively managed fixed maturities at fair value (amortized cost: 2002 - $698.0;
2001 - $714.8;
2000 - $716.8).............................................................................$704.9)........................................................................... $ 501.1523.6 $ 494.6528.5
Interest-only securities at fair value (amortized cost: 2002 - $136.3; 2001 - $418.3; 2000 - $431.2)......... 456.4 432.9$131.3)...... 161.4 141.7
--------- ---------
Total retained interests in securitization trusts........................................ 685.0 670.2
--------- ---------
Cash and cash equivalents..................................................................... 346.4 665.5479.6 394.5
Cash held in segregated accounts for investors in securitizations............................. 638.3 551.3505.5 550.2
Cash held in segregated accounts related to servicing agreements and
securitization transactions................................................................ 585.1 866.71,111.2 994.6
Finance receivables........................................................................... 3,332.8 3,865.03,495.5 3,810.7
Finance receivables - securitized............................................................. 12,718.9 12,622.814,557.1 14,198.5
Receivables due from Conseco, Inc............................................................. 317.6 331.3
Servicing rights.............................................................................. 27.0 14.8351.9 358.0
Income tax assets............................................................................. 225.3 208.6
Goodwill...................................................................................... - 28.8262.2 267.2
Other assets.................................................................................. 801.4 737.11,040.3 984.1
--------- ---------
Total assets........................................................................... $19,950.3 $20,819.4$22,488.3 $22,228.0
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Investor payables.......................................................................... $ 638.3505.5 $ 551.3550.2
Liabilities related to certificates of deposit............................................. 1,712.3 1,873.31,859.4 1,790.3
Other liabilities.......................................................................... 541.4 583.7557.4 566.3
Preferred stock dividends payable to Conseco, Inc.......................................... 103.0 86.1
Notes payable:
Related to securitized finance receivables structured as collateralized borrowings....... 12,396.1 12,100.615,048.7 14,484.5
Master repurchase agreements............................................................. 1,020.6 1,802.41,467.3 1,691.8
Credit facility collateralized by retained interests in securitizations.................. 562.5 590.0529.1 507.3
Due to Conseco, Inc...................................................................... 512.3 786.7249.5 249.5
Other borrowings......................................................................... 440.9 442.2230.1 352.5
--------- ---------
Total liabilities................................................................... 17,824.4 18,730.220,550.0 20,278.5
--------- ---------
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:
2002 - $57.7; 2001 - $64.9; 2000 - $81.6)$63.8).............................................................. (111.4) (139.1)(98.2) (108.6)
Retained earnings.......................................................................... 277.9 268.977.1 98.7
--------- ---------
Total shareholder's equity.......................................................... 2,125.9 2,089.21,938.3 1,949.5
--------- ---------
Total liabilities and shareholder's equity.......................................... $19,950.3 $20,819.4$22,488.3 $22,228.0
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
2
CONSECO FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
-------------------
2002 2001 2000
---- ----
Revenues:
Net investment income:
Finance receivables and other................................................................. $556.3 $391.3other................................................................... $555.4 $552.6
Interest-only securities......................................................................securities........................................................................ 4.9 15.1 27.5
Gain on sale of finance receivables.............................................................receivables............................................................... 7.2 8.9
Servicing income.................................................................................. 16.9 26.8
Impairment charge related to retained interests in securitization transactions.................... - Servicing income................................................................................ 26.8 28.8(7.9)
Fee revenue and other income.................................................................... 62.8 83.0income...................................................................... 51.2 60.8
------ ------
Total revenues............................................................................ 669.9 530.6revenues.............................................................................. 635.6 656.3
------ ------
Expenses:
Provision for losses............................................................................ 121.4 58.6losses.............................................................................. 158.4 115.7
Interest expense................................................................................expense.................................................................................. 289.5 321.6 204.5
Other operating costs and expenses..............................................................expenses................................................................ 154.6 163.4
222.1
Special charges.................................................................................charges................................................................................... 47.2 13.8 -
Impairment charges.............................................................................. 7.9 2.5
------ ------
Total expenses............................................................................ 628.1 487.7expenses.............................................................................. 649.7 614.5
------ ------
Income (loss) before income taxes................................................................taxes and extraordinary gain on
extinguishment of debt.................................................................... (14.1) 41.8 42.9
Income tax expense.................................................................................expense (benefit)......................................................................... (5.4) 15.9 16.1
------ ------
Net income................................................................................Income (loss) before extraordinary gain on extinguishment of debt........................... (8.7) 25.9
26.8
Preferred stock dividends.......................................................................... 16.9Extraordinary gain on extinguishment of debt,
net of income taxes............................................................................... 4.0 -
------ ------
Net income (loss)........................................................................... (4.7) 25.9
Preferred stock dividends............................................................................ 16.9 16.9
------ ------
Net income (loss) applicable to common stock.....................................................stock................................................ $(21.6) $ 9.0 $ 26.8
====== ======
The accompanying notes are an integral part of the
consolidated financial statements.
3
CONSECO FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
(unaudited)
Common stock Accumulated other
Preferred and additional comprehensive Retained
Total stock paid-in capital loss earnings
----- ----- --------------- ---- --------
Balance, January 1, 2002....................... $1,949.5 $750.0 $1,209.4 $(108.6) $ 98.7
Comprehensive income, net of tax:
Net loss.................................. (4.7) - - - (4.7)
Change in unrealized appreciation
(depreciation) of retained interests in
securitization trusts (net of applicable
income tax expense of $6.1)............. 10.4 - - 10.4 -
--------
Total comprehensive income............ 5.7
Dividends on preferred stock................ (16.9) - - - (16.9)
-------- ------ -------- ------- ------
Balance, March 31, 2002........................ $1,938.3 $750.0 $1,209.4 $ (98.2) $ 77.1
======== ====== ======== ======= ======
Balance, January 1, 2001....................... $2,089.2 $750.0 $1,209.4 $(139.1) $268.9
Comprehensive income, net of tax:
Net income................................ 25.9 - - - 25.9
Change in unrealized appreciation
(depreciation) of actively managed fixed
maturity investments and interest-only
securitiesretained interests
in securitization trusts (net of
applicable income tax expensebenefit of
$16.7).............................................. 27.7 - - 27.7 -
--------
Total comprehensive income............ 53.6
Dividends on preferred stock................ (16.9) - - - (16.9)
-------- ------ -------- ------- ------
Balance, March 31, 2001........................ $2,125.9 $750.0 $1,209.4 $(111.4) $277.9
======== ====== ======== ======= ======
Balance, January 1, 2000....................... $2,435.0 $ - $1,641.0 $ (18.8) $812.8
Comprehensive income (loss), net of tax:
Net income................................ 26.8 - - - 26.8
Change in unrealized appreciation
(depreciation) of actively managed
fixed maturity investments and
interest-only securities (net of
applicable income tax benefit of
$93.1).................................. (158.4) - - (158.4) -
--------
Total comprehensive loss.............. (131.6)
Repurchase of shares of common stock........ (126.0) - (126.0) - -
Other....................................... .6 - .6 - -
-------- ------ -------- ------ ------
Balance, March 31, 2000........................ $2,178.0 $ - $1,515.6 $(177.2) $839.6
======== ====== ======== ======= ======
The accompanying notes are an integral part of the
consolidated financial statements.
4
CONSECO FINANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
----------------------------------------
2002 2001 2000
---- ----
Cash flows from operating activities:
Net investment income.................................................................... $ 577.1542.2 $ 439.1551.8
Fee revenue and other income............................................................. 87.3 112.166.1 85.3
Interest expense......................................................................... (282.4) (320.5) (161.2)
Other operating costs.................................................................... (201.5) (258.8)(150.0) (174.2)
Special charges.......................................................................... (.2) -
Taxes.................................................................................... 1.7 (49.2)
(8.2)
--------- ----------------- --------
Net cash provided by operating activities............................................ 177.4 93.2
123.0
--------- ----------------- --------
Cash flows from investing activities:
Purchase of investments.................................................................. - (88.7)
Cash received from the sale of finance receivables, net of expenses...................... 346.2 626.2 -
Principal payments received on finance receivables....................................... 2,189.7 1,884.2 2,160.0
Finance receivables originated........................................................... (2,289.3) (3,007.5) (5,054.0)
Sale of vendor services financing business............................................... - 389.3
-
Other.................................................................................... (27.2) (69.8)
(51.0)
--------- ----------------- --------
Net cash usedprovided (used) by investing activities ................................................................................... 219.4 (177.6)
(3,033.7)
--------- ----------------- --------
Cash flows from financing activities:
Issuance of liabilities related to deposit products...................................... 577.2 301.1 670.6
Payments on liabilities related to deposit products...................................... (509.5) (463.6) (185.8)
Issuance of notes payable................................................................ 1,839.1 2,183.2 5,655.8
Payments on notes payable................................................................ (2,093.6) (2,488.3) (2,789.0)
Change in cash held in restricted accounts for settlement of collateralized borrowings... (124.9) 232.9
(196.6)
Repurchase of shares of common stock..................................................... - (126.0)
--------- ----------------- --------
Net cash provided (used)used by financing activities.....................................activities................................................ (311.7) (234.7)
3,029.0
--------- ----------------- --------
Net increase (decrease) in cash and cash equivalents................................. 85.1 (319.1) 118.3
Cash and cash equivalents, beginning of period.............................................. 394.5 665.5
533.4
--------- ----------------- --------
Cash and cash equivalents, end of period.................................................... $ 479.6 $ 346.4
$ 651.7
========= ================= ========
The accompanying notes are an integral part of the
consolidated financial statements.
5
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following notes should be read in conjunction with the notes to the
consolidated financial statements included in the 20002001 Form 10-K of Conseco
Finance Corp. ("we", "Conseco Finance" or the "Company").
Conseco Finance is a financial services holding company that originates,
securitizes and services manufactured housing, home equity, home improvement,
retail credit and floorplan loans. Conseco Finance is a wholly owned subsidiary
of Conseco, Inc. ("Conseco"), a financial services holding company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our unaudited consolidated financial statements reflect normal recurring
adjustments that are necessary to present fairly Conseco Finance's financial
position and results of operations on a basis consistent with that of our prior
audited consolidated financial statements. As permitted by rules and regulations
of the Securities and Exchange Commission applicable to quarterly reports on
Form 10-Q, we have condensed or omitted certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles ("GAAP"). We have also reclassified certain
amounts from the prior periods to conform to the 20012002 presentation. These
reclassifications have no effect on net income or shareholder's equity. Results
for interim periods are not necessarily indicative of the results that may be
expected for a full year.
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 our actively managed fixed maturity
investments, 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 taxes.tax assets. If our future experience differs
from these estimates and assumptions, our financial statements could be
materially affected.
Our consolidated financial statements exclude the results of material
transactions between us and our consolidated affiliates, or among our
consolidated affiliates.
FINANCE RECEIVABLES AND INTEREST-ONLY SECURITIESRETAINED INTERESTS IN SECURITIZATION TRUSTS
During the first quarterthree months of 2001,2002, we completed twothree securitization
transactions, securitizing $1.2$1.0 billion of finance receivables. These
securitizations were structured in a manner that requires them to be accounted
for as secured borrowings, whereby the loans and securitization debt remain on
our balance sheet, rather than as sales, pursuant to Financial Accounting
Standards Board Statement No. 125,140, "Accounting for Transfersthe Transfer and Servicing of
Financial Assets and ExtinguishmentExtinguishments of Liabilities" ("SFAS 125"140"). Such
accounting method is referred to as the "portfolio method".
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 earned on these receivables
at March 31, 2001,2002, was approximately 12.412.5 percent. We classify the notes issued
to investors in the securitization trusts as "notes payable related to
securitized finance receivables structured as collateralized borrowings."
We also completed various loan sale transactions. During the first three
months of 2002, we sold $.2 billion of finance receivables which generated net
gains of $7.2 million. We also recognized a loss of $39.3 million related to the
sale of $.2 billion of certain finance receivables sold as part of our cash
raising initiatives in order to meet our debt obligations. See "Special Charges"
elsewhere in the notes to the consolidated financial statements. In the first
quarter of 2001, we sold $1.4 billion of finance receivables which included:including: (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 the first
quarter of 2001); (ii) $568.4 million of high-loan- to-valuehigh-loan-to-value mortgage loans; and
(iii) $46.8 million of other loans. These sales resulted in net gains of $8.9
million.million in the first quarter of 2001. The Company entered into a servicing
agreement on the high-loan-to-value mortgage loans
6
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
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, although no value was recognized for such
interest. In the future, the Company will sell this interest, if it can be sold
at a reasonable price.trust. The Company did not provide any guarantees with respect to the
performance of the loans sold.
6
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
We expect to continue to utilize the Company's infrastructure to originate
certain types of finance receivables for sale to other parties, when such sales
can be completed profitably.
For securitizations structured prior to September 8, 1999, we accounted for
the transfer of finance receivables as sales in accordance with SFAS 125. In
applying SFAS 125 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 component of the finance receivable sold. We
determined such carrying amount by allocating the carrying value of the finance
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
sale.
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(there were no such finance receivables related to sell, close or runoff (the
"discontinued lines")discontinued
lines):
March 31, December 31,
2002 2001 2000
---- ----
(Dollars in millions)
Continuing lines:
Manufactured housing...............................................................housing.............................................................. $ 6,033.36,701.2 $ 5,602.16,940.4
Mortgage services.................................................................. 5,418.7 5,126.0services................................................................. 6,055.2 5,658.2
Retail credit...................................................................... 557.7 653.8
Floorplan.......................................................................... 637.0 637.0credit..................................................................... 851.8 878.9
Consumer finance - closed-end..................................................... 533.2 580.8
Floorplan......................................................................... 737.8 436.9
--------- ---------
12,646.7 12,018.914,879.2 14,495.2
Less allowance for credit losses................................................... 156.1 166.4
--------- ---------
Net finance receivables - securitized for continuing lines ...................... 12,490.6 11,852.5
--------- ---------
Discontinued lines.................................................................... 229.4 778.3
Less allowance for credit losses................................................... 1.1 8.0
--------- ---------
Net finance receivables - securitized for discontinued lines..................... 228.3 770.3losses.................................................. 322.1 296.7
--------- ---------
Total finance receivables - securitized.......................................... $12,718.9 $12,622.8securitized......................................... $14,557.1 $14,198.5
========= =========
7
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
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:
March 31, December 31,
2002 2001 2000
---- ----
(Dollars in millions)
Continuing lines:
Manufactured housing............................................................... $ 202.3974.5 $ 263.0609.3
Mortgage services.................................................................. 884.0 1,373.1624.7 1,128.9
Retail credit...................................................................... 1,262.2 1,110.1
Floorplan.......................................................................... 185.31,728.4 1,811.1
Consumer finance - closed-end...................................................... 4.9 6.3
-------- --------
2,533.8 2,746.23,332.5 3,555.6
Less allowance for credit losses................................................... 128.9 95.5108.4 111.6
-------- --------
Net other finance receivables for continuing lines............................... 2,404.9 2,650.73,224.1 3,444.0
-------- --------
Discontinued lines.................................................................... 953.9 1,251.2280.8 379.7
Less allowance for credit losses................................................... 26.0 36.99.4 13.0
-------- --------
Net other finance receivables for discontinued lines............................. 927.9 1,214.3271.4 366.7
-------- --------
Total other finance receivables.................................................. $3,332.8 $3,865.0$3,495.5 $3,810.7
======== ========
The changes in the allowance for credit losses included in finance
receivables (both securitized and other portfolios) were as follows:
Three months ended
March 31,
-------------------------------------
2002 2001 2000
---- ----
(Dollars in millions)
Allowance for credit losses, beginning of period..................................................period................................................... $ 306.8421.3 $ 88.4306.8
Additions to the allowance........................................................................ 113.0 (a) 58.6allowance:
Provision for losses............................................................................ 158.4 115.7
Change in allowance due to purchases and sales of certain
finance receivables........................................................................... 2.3 (8.4)
Credit losses..................................................................................... (107.7) (27.9)losses...................................................................................... (142.1) (102.0)
------- -------------
Allowance for credit losses, end of period........................................................period......................................................... $ 439.9 $ 312.1
$119.1
======= ======
- --------------------
(a) Additions to the allowance for the three months ended March 31, 2001,
includes: (i) an increase to reserves of $121.4 million which is classified
as "provision for losses"; and (ii) a net decrease to reserves totaling
$8.4 million primarily related to the sale of certain finance receivables.
=======
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. Such
retained securities (classified as actively managed fixed maturity securities)
had a par value, fair market value and amortized cost of $766.8$745.4 million, $501.1$523.6 million
and $714.8$698.0 million, respectively, at March 31, 2001.2002.
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, 8
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
1999. Our interest-only securities and other retained interests in
those securitization transactions are subordinate to the interests of other
investors.
8
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Their values are subject to credit, prepayment, and interest rate risk on the
securitized finance receivables. We useddetermine the following assumptionsappropriate discount rate to
adjust the
amortized cost to estimated fair value at March 31, 2001these securities based on our estimates of current market rates of
interest for securities with similar yield, credit quality and December 31, 2000.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".taxes." We used the following assumptions to adjust
the amortized cost to estimated fair value at March 31, 2002 and December 31,
2001. If actual performance differs from these assumptions, we may be required
to recognize additional impairment charges related to the value of our
interest-only securities and servicing rights.
Interests Interests
Manufactured Home equity/ Consumer/ held by held by
March 31, 20012002 housing home improvement (b) equipment Total others the Company
- -------------- ------- ------------------------------------ --------- ----- ------ -----------
(Dollars in millions)
Interest-only securities at fair value.............value............ $ 255.965.7 $ 192.4143.5 $ 8.17.6 $ 456.4216.8 $(55.4) $161.4
Cumulative principal balance of sold finance
receivables at March 31, 2001................... 19,691.9 6,603.9 1,644.0 27,939.82002.................. 17,080.8 4,502.9 1,088.8 22,672.5
Weighted average stated customer interest rate
on sold finance receivables..................... 9.9% 12.0% 10.7%receivables.................... 9.8% 11.9% 10.6%
Assumptions to determine estimated fair value
of interest-only securities at March 31, 2002:
Expected prepayment speed as a percentage
of principal balance of sold finance
receivables (a)............................ 7.1% 16.9% 18.6%
Expected nondiscounted credit losses as a
percentage of principal balance of
related finance receivables (a)............ 11.6% 7.4% 6.0%
Weighted average discount rate .............. 16.0% 16.0% 16.0%
Interests Interests
Manufactured Home equity/ Consumer/ held by held by
December 31, 2001 housing home improvement equipment Total others the Company
- ----------------- ------- ---------------- --------- ----- ------ -----------
(Dollars in millions)
Interest-only securities at fair value............ $ 32.3 $ 155.8 $ 8.8 $ 196.9 $(55.2) $141.7
Cumulative principal balance of sold finance
receivables at December 31, 2001............... 17,732.2 4,947.4 1,210.1 23,889.7
Weighted average stated customer interest rate on
sold finance receivables....................... 9.8% 12.0% 10.6%
Assumptions to determine estimated fair value of
interest-only securities at December 31, 2001:
Expected prepayment speed as a percentage
of principal balance of sold finance
receivables (a)............................. 7.8% 18.3% 19.5%............................ 7.1% 17.4% 18.8%
Expected nondiscounted credit losses as a
percentage of principal balance of related
finance receivables (a)............. 10.2% 7.5% 6.5%.................... 11.7% 7.4% 6.1%
Weighted average discount rate ............... 15.0% 15.0% 15.0%
Manufactured Home equity/ Consumer/
December 31, 2000 housing home improvement equipment Total
- ----------------- ------- ---------------- --------- -----
(Dollars in millions)
Interest-only securities at fair value............. $ 245.4 $ 177.5 $ 10.0 $ 432.9
Cumulative principal balance of sold finance
receivables at December 31, 2000................ 20,256.4 6,489.7 1,936.3 28,682.4
Weighted average stated customer interest rate on
sold finance receivables........................ 9.9% 11.6% 10.8%
Assumptions to determine estimated fair value of
interest-only securities at December 31, 2000:
Expected prepayment speed as a percentage
of principal balance of sold finance
receivables (a)............................. 7.9% 18.5% 19.7%
Expected nondiscounted credit losses as a
percentage of principal balance of related
finance receivables (a)..................... 10.2% 6.5% 6.5%
Weighted average discount rate................ 15.0% 15.0% 15.0%rate............... 16.0% 16.0% 16.0%
- ------------------------------------------------
(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.
(b) Includes the sale of finance receivables in the first quarter of 2001
totaling $568.4 million. The Company did not provide any guarantees with
respect to the loans sold. The Company holds a residual interest in certain
cash flows from the securitization trust which purchased the loans,
although no value was recognized for the interest-only security.
9
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Under current accounting rules (pursuant to EITF Issue No. 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 isretained beneficial
interests are less than itstheir carrying value; and (ii) the timing and/or amount
of cash expected to be received from the security hasretained beneficial interests have
changed adversely from the previous valuation which determined the carrying
value of the security.retained beneficial interests. When both occur, the security isretained
beneficial interests are written down to fair value.
We recognized an impairment charge (net of adjustments to the valuation
allowance associated with our servicing rights) of $7.9 million in the first
quarterthree months of 2001 for the interest-only securities that were not performing
as well as expected based on our previous valuation estimates. IncreasesNo such
impairment charge was recognized in the estimated fair valuefirst three months 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 a
$36.4 million increase in unrealized appreciation during the first quarter of
2001.2002.
The following table summarizes certain cash flows received from and paid to
the securitization trusts during the first quarter ofthree months ended March 31, 2002 and 2001
(dollars in millions):
Three months
ended March 31,
-----------------
2002 2001
---- ----
Servicing fees received.............................received........................................................................ $ 11.8 $ 24.5
Cash flows from interest-only securities............securities, net.................................................. .8 6.1
Cash flows from retained bonds......................bonds................................................................. 24.6 17.5
Servicing advances paid............................. 264.5paid........................................................................ (86.3) (204.5)
Repayment of servicing advances.....................advances................................................................ 83.1 194.9
We have projected lower cash flows from our interest-only securities in
2001, reflecting our assumption that the adverse lossdefault experience in 20002001 will continue
into 2001the second quarter of 2002 and then improve over time. As a result of these
assumptions, we project that payments related to guarantees issued in
conjunction with the sales of certain finance receivables will exceed the amounts paidgross
cash flows from the interest-only securities by approximately $90 million in
previous
periods.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.
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 was $55.4 million at March 31, 2002. The Company
continues to be the servicer of the finance receivables underlying the
interest-only securities transferred to the trust. Lehman has the ability to
accelerate the principal payments related to their interest 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.
10
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following table summarizes quantitative information about
delinquencies, net credit losses, and components of managed finance receivables:
Net credit
losses
Principal balance --------------------------------
60 days or more Three months
Principal balance past due ended
----------------------- --------------------------------------------------- March 31,
March 31, December 31, March 31, December 31, -------------------------------
2002 2001 20002002 2001 20002002 2001 2000
---- ---- ---- ---- ---- ----
(Dollars in millions)
Type of finance receivables
- ---------------------------
Type of finance receivables
- ---------------------------
Manufactured housing.................... $26,124.3 $26,314.4 $501.8 $569.3housing................... $25,082.9 $25,575.1 $567.3 $610.5 $147.6 $135.3 $ 88.2
Home equity/home improvement............ 12,914.8 13,307.0 118.5 120.5improvement........... 11,418.6 11,851.4 128.6 139.9 62.3 59.4
32.7
Consumer................................ 3,786.4 3,887.4Consumer............................... 3,965.1 4,198.8 98.4 76.4 56.8 39.2
Commercial.............................. 1,951.4 3,077.1 31.9 35.2112.6 64.1 51.1
Commercial............................. 1,065.6 1,377.0 7.9 16.2 10.8 9.6 12.1
--------- --------- ------ ------ ------ ------
Total managed receivables............... 44,776.9 46,585.9 750.6 801.4 261.1 172.2receivables.............. 41,532.2 43,002.3 802.2 879.2 284.8 255.4
Less finance receivables securitized.... 28,215.3 29,636.0 455.7 536.6securitized... 22,801.9 24,297.3 398.0 464.9 142.7 153.4 144.3
Less allowance for credit losses........ 312.1 306.8 - - - -
Less deferred points and other, net..... 197.8 155.3 - - - -
--------- --------- ------ ----------- ------ ------
Finance receivables held on balance
sheet........................ $16,051.7 $16,487.8 $294.9 $264.8 $107.7 $ 27.9
========= =========sheet before allowance for credit
losses and deferred points and
other, net........................ 18,730.3 18,705.0 $404.2 $414.3 $142.1 $102.0
====== ====== ====== ======
======Less allowance for credit losses....... 439.9 421.3
Less deferred points and other, net.... 237.8 274.5
--------- ---------
Finance receivables held on
balance sheet....................... $18,052.6 $18,009.2
========= =========
10
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Activity in the interest-only securities account was as follows:
Three months ended
March 31,
-------------------------------------
2002 2001 2000
---- ----
(Dollars in millions)
Balance, beginning of period................................................................... $141.7 $432.9 $905.0
Additions resulting from clean-up calls (a)................................................. 1.1 4.9 60.7
Investment income........................................................................... 4.9 15.1
27.5
Cash received, net.......................................................................... (6.1) (70.6)paid (received):
Gross cash received....................................................................... (31.0) (20.3)
Guarantee payments related to bonds held by others........................................ 13.1 7.4
Guarantee payments related to retained bonds (included in actively managed
fixed maturities)....................................................................... 17.1 6.8
Impairment charge to reduce carrying value.................................................. - (14.4) (4.8)
Sale of securities related to a discontinued line........................................... - (12.4)
Change in interest purchased by Lehman in conjunction with securitization transaction....... (.2) -
Change in unrealized appreciation (depreciation) charged torecorded in shareholder's equity............equity.......................... 14.7 36.4 (28.1)
------ ------
Balance, end of period......................................................................... $161.4 $456.4 $889.7
====== ======
11
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
- ----------------------------------------------
(a) During the first three months of 20012002 and 2000,2001, 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.securities and to deposit into
the securitization trust additional cash in excess of the collateral
amount.
1112
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CHANGES IN 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) were as follows (interest
rates as of March 31, 2001)2002):
March 31, December 31,
2002 2001 2000
---- ----
(Dollars in millions)
Master repurchase agreements due on various dates in
2002 and 2003 (6.35%(2.72%)..................................................... $1,023.9 $1,806.9$1,469.8 $1,679.0
Credit facility collateralized by retained interests in securitizations
due 2003 (7.06%2004 (3.9%).......................................................... 562.5 590.0........................................................... 529.1 507.3
Medium term notes due September 2002 and April 2003 (6.52%(6.50%).................. 223.7 223.7170.4 189.7
10.25% senior subordinated notes due 2002.................................... 217.3 217.3June 2002............................... 58.5 161.9
Note payable to Conseco (6.44%(3.51%).............................................. 512.3 786.7249.5 249.5
Other........................................................................ 1.6 3.21.5 22.5
-------- --------
Total principal amount.................................................. 2,541.3 3,627.82,478.8 2,809.9
Unamortized net discount and deferred fees................................... 5.0 6.5(2.8) (8.8)
-------- --------
Direct finance obligations.............................................. $2,536.3 $3,621.3Total notes payable..................................................... $2,476.0 $2,801.1
======== ========
Amounts borrowed under master repurchase agreements have decreased due to
repayments using the proceeds received from various asset sales. At March 31,
2001,May 7, 2002, we had $3.2$3.8 billion (of which $1.9 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 March 31,
2001,2002, we had borrowed $1.0$2.0 billion of the
$3.2under these agreements, leaving $1.8 billion
available under such agreements.
During 2000,to borrow (of which approximately $.3 billion is committed). Such
amounts reflect the Company amended an agreement with Lehman Brothers Holdings
Inc. (collectively with its direct and indirect subsidiaries "Lehman") related
to certainrenewal of one of our master repurchase agreements on May 3,
2002, for an additional annual term. The renewed agreement has a committed
capacity of $200.0 million (under which we had $40.4 million outstanding at
March 31, 2002).
In the first quarter of 2002, we entered into various transactions with
Lehman and its affiliates pursuant to which Lehman extended the collateralized credit facility.
Such amendment significantly reducedterms of Conseco
Finance's: (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 restrictions on intercompany paymentssecuritization 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 as required by the previous agreement. In
conjunction with the amendment, ConsecoFinance and Lehman have agreed to convert $750 million principal
balance of its intercompany note due fromamend the
agreement such that Conseco Finance must maintain liquidity (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, Conseco Finance no
longer must meet a minimum liquidity requirement of $250 million before making
interest, principal, dividend or redemption payments to $750 million stated
valuethe parent company.
Pursuant to the new arrangements, Lehman may exchange their existing
Warrant to purchase 5 percent of the common stock of Conseco Finance 9 percent redeemable cumulative preferred stockuntil May
2003 and receive in its place 500,000 shares of Series G Convertible Redeemable
Preferred Stock of Conseco (the "intercompany preferred stock""Series G Preferred Stock"). During at a $100 stated
value per share, having the first quarter of 2001, Conseco
Finance made paymentsfollowing general terms:
(a) No dividend;
(b) Convertible to Conseco totaling $274.4 million reducing the
intercompany note balance to $512.3 million at March 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 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,at $10 per share;
(c) Voting rights on an 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
12converted basis;
13
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
$100 million, provided the total minimum cash liquidity shall not exceed $350
million and the cash generated(d) Mandatorily redeemable by Conseco Finance (used in January 2012 at 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 consistentstated value;
(e) Pari passu with the coursesSeries F Preferred Stock if, and only if, a
majority of actions we have previously
announced).the holders of Conseco's Series E Preferred Stock and
Series F Preferred Stock consent, and otherwise pari passu with the
Series E Preferred Stock and junior to the Series F Preferred Stock;
and
(f) The amended agreementright to cause Conseco to register the Series G Preferred Stock
within one year after electing to surrender the Warrant in exchange
for the Series G Preferred Stock.
The credit facility collateralized by retained interests in securitizations
requires Conseco Finance to maintain various financial ratios, as defined in the
agreement. These ratios include: (i) an adjusted tangible net worth of at least
$1.95$1.5 billion (such amount was $2.2greater than $1.6 billion at March 31, 2001)2002); (ii)
a fixed charge coverage ratio of not less than 1.0:1.0 for the six-month periodfour quarters
ending March 31, 2001,2002, and defined periods thereafter (such ratio was 1.17:1.16:1.0
for the six monthsperiod ended March 31, 2001)2002); (iii) a ratio of net worth to total
managed receivables of not less than 4:100 (such ratio was 4.68:4.58:100 at March 31,
2001)2002); 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 .48:2.0 at March 31, 2002).
Certain master repurchase agreements require Conseco Finance to maintain
various financial ratios, as defined in the agreements. These ratios include:
(i) an adjusted tangible net worth of at least $1.95 billion (such amount was
$2.04 billion at March 31, 2002); (ii) a fixed charge coverage ratio of not less
than 1.0:1.0 for the four quarters ending March 31, 2002, and defined periods
thereafter (such ratio was 1.18:1.0 for the four quarters ended March 31, 2002);
(iii) a ratio of net worth to total managed receivables of not less than 4:100
(such ratio was 4.58:100 at March 31, 2002); 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 (.1):.48:2.0 at
March 31, 2001)2002).
During the first quarter of 2002, Conseco Finance repurchased $46.9 million
par value of its senior subordinated notes and medium term notes resulting in an
extraordinary gain of $4.0 million (net of income taxes). In March 2002, Conseco
Finance completed a tender offer pursuant to which it purchased $75.8 million
par value of its 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 $58.5 million (including $23.7 million of notes
held by Conseco), which is due June 2002.
In April 2002, Conseco Finance completed a tender offer pursuant to which
it purchased $158.5 million par value of its medium term notes due September
2002 and $3.7 million par value of its medium term notes due April 2003. 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 medium
term notes after giving effect to the tender offer and other debt repurchases
completed prior to the tender offer is $8.2 million due September 2002.
NOTES PAYABLE RELATED TO SECURITIZED FINANCE RECEIVABLES STRUCTURED AS
COLLATERALIZED BORROWINGS
Notes payable related to securitized finance receivables structured as
collateralized borrowings were $12,396.1$15,048.7 million at March 31, 2001.2002. 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 at March 31, 20012002, was 7.76.2 percent.
RELATED PARTY TRANSACTIONS
At March 31, 2001,2002, the outstanding balance under the note payable to
Conseco was $512.3$249.5 million. Interest is payable monthly at a rate of LIBOR plus
a margin of 1.5 percent. Principal payments are made pursuant to the amended
agreement with Lehman. During the first quarter of 2001, the Company made
principal payments totaling $274.4 million to Conseco. Interest expense incurred under the note totaled $11.6$2.1
million and $46.3$11.6 million during the three months ended March 31, 2002 and 2001,
and 2000, respectively.
14
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
During 2000, the Company converted $750.0 million principal balance of the
note payable to Conseco to $750.0 million stated value of 9 percent9% redeemable
cumulative preferred stock. Dividend payments are made pursuant to the amended
agreement with Lehman. Cumulative unpaid dividends totaled $35.5$103.0 million and
$18.6$86.1 million at March 31, 20012002 and December 31, 2000,2001, respectively.
At March 31, 2001,2002, $23.7 million par value of the 10.25% senior
subordinated notes were held by Conseco.
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 $7.7$4.3 million and $13.9$7.7 million for the three months ended March
31, 20012002 and 2000,2001, respectively.
LITIGATION
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 FebruaryJuly 1995 to January 1998.
One action (Florida State Board of Admin. v. Green Tree Financial Corp., et. al,
Case No. 98-1162) didwas brought not includeon behalf of a class, action claims.but by the Florida 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 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 13
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------of which pertains
to a purported class action 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 the District of
Minnesota issued an order to dismissdismissing 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,Circuit. A three judge panel issued an opinion on October
25, 2001, reversing the United States District Court's dismissal order and
remanding the appealactions to the United States District Court. Conseco Finance has
moved to dismiss the options lawsuit on the grounds that stock option traders
lack standing under federal securities law. Argument on the motion is currently pending.scheduled
for May 24, 2002. Pretrial discovery in the options lawsuit is stayed pending
disposition of the motion to dismiss. In the other two lawsuits, pretrial
discovery commenced 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 confirmed as
judgments in both Lackey and Bazzle. These matters arecases have been consolidated into one
case which is currently on appeal atbefore 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 these
proceedingsthis proceeding cannot be predicted with certainty.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in other lawsuits (including purported class actions) related to their
operations. Although theThe ultimate outcome of certainall of suchthese other legal matters cannot be predicted, such lawsuits currently pending
against the Company or its subsidiaries cannot be predicted, and, although such
lawsuits are not expected to individually orhave a material adverse effect
15
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
on the Company, such lawsuits could have, in the aggregate, to have 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 March 31, 2001.2002. 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 the
first three months of 2002 and 2001, advances of interest and principal payments
related to such guarantees on bonds held by others totaled $14.2 million.$13.1 million and
$7.4 million, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FASB Statement No. 133" and Statement 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 balance sheet at estimated fair value. Changes in the fair value of
derivative instruments are to be recorded each period either in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, on the type of hedge transaction.
We adopted SFAS 133 on January 1, 2000 and it did not have a material impact on
the Company's financial position or results of operations.
The Financial Accounting Standards Board recently("FASB") issued Statement of
Financial Accounting Standards No. 140,144, "Accounting for the TransferImpairment of
Long-Lived Assets" ("SFAS 144") in August 2001. This standard addresses the
measurement and Servicingreporting 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 adopted this standard on January 1, 2002.
The adoption of this standard did not have a material effect on our financial
position or results of operations.
FASB issued Statement of Financial AssetsAccounting Standards No. 141, "Business
Combinations", and ExtinguishmentsNo. 142, "Goodwill and Other Intangible Assets" in June 2001.
Under the new rules, intangible assets with an indefinite life are no longer
amortized in periods subsequent to December 31, 2001, but are subject to annual
impairment tests (or more frequent under certain circumstances), effective
January 1, 2002. As we currently have no goodwill, the new rules did not have
any impact on the earnings and financial position of Liabilities" ("SFAS 140")the Company.
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 $262.2 million at March 31, 2002. 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 replacement for SFAS 125;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 a related implementation guide. SFAS
140financial position.
No valuation allowance has been provided on our deferred income tax assets
at March 31, 2002, 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
implementation guidelikelihood 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.
In recent years, we have changedhad 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 criteria that must be met for
securitization transactionslevels of taxable
income needed to be recorded underutilize our net deferred income tax assets. Such changes
include: (i) various cost saving initiatives; (ii) the portfolio method. We did
not need to make any significant changestransfer of certain
customer service and backroom operations to our securitization structuresIndia subsidiary; and (iii)
restructuring our business to meetincrease profitability such as streamlining our
loan origination operations in the new criteria which are effective for securitization transactions
completed after March 31, 2001. SFAS 140 also requires additional disclosures
regarding securitization
14manufactured housing and home equity
divisions.
16
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
transactions, which are reflected in the notes herein or in the notes to the
consolidated financial statements included in the Company's 2000 Form 10-K.
CONSOLIDATED STATEMENT OF CASH FLOWS
The following disclosures supplement our consolidated statement of cash
flows:
Three months ended
March 31,
--------------------
2002 2001 2000
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income................................................................................income (loss)......................................................................... $ 25.9(4.7) $ 26.825.9
Adjustments to reconcile the net income (loss) to net cash provided by operating activities:
Interest-only securities investment income............................................ (4.9) (15.1) (27.5)
Cash received from interest-only securities...........................................securities, net...................................... .8 6.1 70.6
Servicing income...................................................................... (16.9) (26.8) (28.8)
Cash received from servicing activities............................................... 11.8 24.5 31.4
Provision for losses.................................................................. 121.4 58.6158.4 115.7
Gain on sale of finance receivables................................................... (7.2) (8.9) -
Amortization and depreciation......................................................... 7.2 (4.4) 6.3
Income taxes.......................................................................... (1.2) (33.3) 7.9
Accrual and amortization of investment income......................................... 14.7 (22.8)4.2 18.4
Special charges....................................................................... 47.0 13.8 -
Impairment charge..................................................................... - 7.9
2.5Extraordinary gain on extinguishment of debt ......................................... (6.4) -
Other ............................................................................... (32.6) (2.0)(10.7) (30.6)
------ -------------
Net cash provided by operating activities........................................... $177.4 $ 93.2
$123.0
====== =============
15SPECIAL CHARGES
2002
The following table summarizes the special charges incurred by the Company
during the first quarter of 2002, which are further described in the paragraphs
which follow (dollars in millions):
Loss related to sales of certain finance receivables......................................... $39.3
Costs related to debt modification........................................................... 7.0
Other items.................................................................................. .9
-----
Special charges before income tax benefit........................................... $47.2
=====
Loss related to sales of certain finance receivables
During the first quarter of 2002, we recognized a loss of $39.3 million
related to the sale of $253 million of certain finance receivables. Such assets
were sold as part of our cash raising initiatives in order to meet our debt
obligations. The sales generated free cash flow in excess of $100 million.
Costs related to debt modification
In conjunction with the various modifications to borrowing arrangements
entered into in the first quarter of 2002, we incurred costs of $7.0 million
which are not permitted to be deferred pursuant to GAAP.
17
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
SPECIAL CHARGES2001
The following table summarizes the special charges incurred by the Company
during the first quarter of 2001, which are further described in the paragraphs
which follow (dollars in millions):
Severance benefits............................................................................... $ 4.8
Loss related to sale of certain finance receivables.............................................. 9.0
-----
Special charges before income tax benefit................................................... $13.8
=====
Severance benefits
During the first quarter of 2001, the Company 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 $4.8 million in the first quarter of 2001.
Loss related to the sale of certain finance receivables
During the first quarter of 2001, the purchaser of certain credit card
receivables returned certain receivables we sold to them 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.
1618
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting our results
of operations. This discussion should be read in conjunction with the
consolidated financial statements and notes included herein and in our 20002001 Form
10-K. The Registrant meets the conditions set forth in the General Instructions
(H)(1)(a) and (b) of the Form 10-Q and is therefore omitting certain information
otherwise required by Item 2.
1719
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
RESULTS OF OPERATIONS
Three months ended
March 31,
------------------
2002 2001 2000
---- ----
(Dollars in millions)
Contract originations:
Manufactured housing..........................................................................housing............................................................... $ 333.6 $ 514.1
$ 1,183.7
Mortgage services.............................................................................services.................................................................. 664.7 563.7
1,544.2
Consumer/credit card.......................................................................... 657.9 774.5
Commercial.................................................................................... 506.5 1,506.7Retail credit...................................................................... 730.1 648.4
Consumer finance - closed-end...................................................... .2 -
Floorplan.......................................................................... 386.6 462.8
Discontinued....................................................................... 8.3 53.2
--------- ---------
Total.......................................................................................Total............................................................................ $ 2,242.22,123.5 $ 5,009.12,242.2
========= =========
Sales of finance receivables:
Home equity/home improvement..................................................................Manufactured housing............................................................... $ 615.21.7 $ -
Commercial (sale of vendor services financing business).......................................Mortgage services.................................................................. 176.4 615.2
Floorplan.......................................................................... 126.8 -
Discontinued lines................................................................. 89.8 802.3 -
--------- ---------
Total.......................................................................................Total............................................................................ $ 1,417.5394.7 $ -1,417.5
========= =========
Managed receivables (average):
Manufactured housing..........................................................................housing............................................................... $25,329.3 $26,226.0
$24,936.7
Mortgage services.............................................................................services.................................................................. 11,622.0 13,132.6
12,734.1
Consumer/credit card.......................................................................... 3,829.3 3,885.6
Commercial.................................................................................... 2,270.4 5,144.5Retail credit...................................................................... 2,647.1 1,791.0
Consumer finance - closed-end...................................................... 1,387.4 1,961.9
Floorplan.......................................................................... 858.3 1,413.7
Discontinued lines................................................................. 455.6 933.1
--------- ---------
Total.......................................................................................Total............................................................................ $42,299.7 $45,458.3 $46,700.9
========= =========
Revenues:
Net investment income:
Finance receivables and other...............................................................other.................................................... $ 556.3555.4 $ 391.3552.6
Interest-only securities....................................................................securities......................................................... 4.9 15.1 27.5
Gain on sales of finance receivables..........................................................receivables............................................... 7.2 8.9 -
Fee revenue and other income.................................................................. 89.6 111.8income....................................................... 68.1 87.6
--------- ---------
Total revenues.............................................................................. 669.9 530.6revenues................................................................... 635.6 664.2
--------- ---------
Expenses:
Provision for losses.......................................................................... 121.4 58.6losses............................................................... 158.4 115.7
Interest expense..............................................................................expense................................................................... 289.5 321.6 204.5
Other operating costs and expenses............................................................expenses................................................. 154.6 163.4
222.1
--------------- ---------
Total expenses.............................................................................. 606.4 485.2
-------expenses................................................................... 602.5 600.7
--------- ---------
Operating income before special charges, impairment
charges and income taxes................taxes....................................................... 33.1 63.5
45.4
Special charges..................................................................................charges....................................................................... 47.2 13.8
Impairment charges.................................................................... - Impairment charges............................................................................... 7.9
2.5
--------------- ---------
Income (loss) before income taxes..................................................................taxes................................................ $ (14.1) $ 41.8
$ 42.9
========= =================
20
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
General: We provide financing for manufactured housing, home equity, home
improvements, consumer products and equipment, and provide consumer and
commercial revolving credit. Finance products include both fixed-term and
revolving loans and leases. The CompanyWe also marketsmarket physical damage and term
mortgage life insurance and other credit
protection relating to the loans it services. 18
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
After September 8, 1999, weCertain amounts have been
reclassified for the change in presentation of accrued finance charges and fees
at the time the related principal balance is charged-off. Effective January 1,
2002, to conform to standard industry practices as well as to maintain
consistency with the Company's closed-end products, accrued interest and fees
were charged against the related income at the time of charge-off. This change
only impacts the retail credit business area. This change in presentation has no
longer structure our securitizationsimpact on the consolidated balance sheet and does not impact the consolidated
statements of operations or cash flows in a
manner that results in recording a sale oftotal. Any effects on net interest
margin, other income and provision for losses are not material to the
loans. Instead, newconsolidated financial statements.
Our 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 are 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 SFAS
125,140, 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)During 2001 and higher in later periods, as
interest spread is earned on the loans.
During 2000, Conseco announced2002, we completed several courses of action with respect to
the Company,actions, including: (i) the
sale, closingmonetization of certain on-balance sheet financial assets through sales or runoff of five units (i.e.,
asset-based lending, vendor finance, bankcards, transportationas
collateral for additional borrowings; and park
construction); (ii) efforts to better utilize existing assets so as to increase
cash; and (iii) cost savings and restructuring of
ongoing businesses. 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, such as
streamliningany material
decline in real estate values reduces the ability of borrowers to use home
equity to support borrowing and increases the field forceloan-to-value ratios of loans
previously made, thereby weakening collateral coverage and increasing the size
of losses in the manufactured housingevent of a default. Delinquencies, foreclosures and home equity
divisions.
These courses of actionlosses
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 changeprospect of these
changes may encourage certain borrowers to seek bankruptcy protection before the
portfolio methodlaw changes become effective, thereby increasing delinquencies. For our
customers, loss of accounting have caused significant fluctuationsemployment, increases in account balances as further
described below.cost-of-living or other 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 the first quarter of 20012002 were $2.2$2.1 billion, down 555.3
percent from 2000.2001. The primary reason for the decrease was our decision to no
longer originate certain lines andof business in order to manage our growth
consistent with our current business plan.
The significant decrease in new loan originations allowed theSales of 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 following table summarizes our loan originationsreceivables in the first quarters of 2002 and 2001 and 2000 summarized by product and whether part of our continuing or
discontinued lines:
Three months ended
March 31,
---------------------
2001 2000
---- ---
(Dollars in millions)
Continuing lines:
Manufacturing housing............................................. $ 514.1 $1,183.7
Mortgage services................................................. 563.7 1,544.2
Retail credit..................................................... 648.4 529.6
Floorplan......................................................... 462.8 1,172.2
-------- --------
Total continuing lines........................................ 2,189.0 4,429.7
Discontinued lines................................................... 53.2 579.4
-------- --------
Total......................................................... $2,242.2 $5,009.1
======== ========
Sales of finance receivables in 2001 representinclude
the sale of $.2 billion and $1.4 billion, respectively, of finance receivables,
on which we recognized a gaingains of $7.2 million and $8.9 million.million, respectively.
These sales are further explained below under "Gain on sale of finance
receivables". We also sold $.2 billion of certain other finance receivables in
the first quarter of 2002, as part of our cash raising arrangements which are
explained below under "Special charges".
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- salegain-on-sale revenue. Average managed receivables decreased to
$45.5$42.3 billion in the first quarter of 2001,2002, down 2.76.9 percent from 2000.
19the same
period in 2001.
21
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
The following table summarizes our average managed receivables at March 31,
2001 and 2000, summarized by product and whether part of our continuing or
discontinued lines:
March 31,
--------------------
2001 2000
---- ----
(Dollars in millions)
Continuing lines:
Manufactured housing.............................................. $26,226.0 $24,936.7
Mortgage services................................................. 13,132.6 12,734.1
Retail credit..................................................... 1,791.0 1,331.6
Floorplan......................................................... 1,413.7 2,356.6
--------- ---------
Total continuing lines.......................................... 42,563.3 41,359.0
Discontinued lines................................................... 2,895.0 5,341.9
--------- ---------
Total........................................................... $45,458.3 $46,700.9
========= =========
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 42.5 percent, to $556.3$555.4 million,
in the first quarter of 2001, consistent with2002, as compared to the increasesame period in average2001. At March
31, 2002, on-balance sheet finance receivables.receivables increased 12 percent to $18.1
billion as compared to March 31, 2001. The weighted average yields earned on
finance receivables and other investments were 12.410.9 percent and 12.112.3 percent
during the first quarters of 2002 and 2001, and 2000, respectively. As a resultThe effect of the
increase in average on-balance sheet finance receivables was substantially
offset by the decrease in average yield. The average yield decreased due to the
decrease in prime interest rates and change in product mix of the structure of our securitizations, futureportfolio.
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 accretionincome recognized
on the interest-only securities we retain after we sell finance receivables.
Such income decreased by 4568 percent, to $15.1$4.9 million, in the first quarter of
2002, as compared to the same period in 2001. The decrease is consistent with
the change in the average balance of interest-only securities. The weighted
average yields earned on interest-only securities were 13.912.8 percent and 12.113.9
percent during the first three monthsquarters of 20012002 and 2000,2001, 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 $504.3$264.8 million during 20002001 (of which only $4.8$7.9 million was
incurred in the first three months of 2000) and by $14.4 million during 20012001) due to impairment charges.
Impairment charges are further explained below.
Gain on sales of finance receivables in the first quarter of 2002 resulted
from the sale of $1.4$.2 billion of finance receivables. Thereceivables which generated net gains of
$7.2 million. In the first quarter of 2001, we sold $1.4 billion of receivables
sold included:including: (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 the first quarter of 2001); (ii) $568.4 million of
high-loan- to-valuehigh-loan-to-value mortgage loans; and (iii) $46.8 million of other loans. These
sales resulted in net gains of $8.9 million.million in the first quarter of 2001. 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, although no value was recognized for such
interest. In the future, the Company will sell this interest, if it can be sold
at a reasonable price.trust. The Company did not provide any guarantees with respect to the
performance of the loans sold.
We expect to continue to utilize the Company's infrastructure to originate
certain types of finance receivables for sale to other parties, when such sales
can be completed profitably.
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 2022 percent, to $89.6$68.1
million, in the first quarter of 20012002, as compared to the same period in 2001.
Such decrease is primarily due to: (i) a $9.1 million
decreaseto decreases in commission income due to decreasedas a result of
reduced origination activities;activities and (ii)
a $11.7 million decrease in fee revenue earned on net assets which were returned
to Conseco in the second the quartertermination of 2000.sales of single premium
credit life insurance. In addition, as a result of the change in the structure
of our securitizations, we no longer record an asset for servicing rights at the
time of our securitizations, nor do we record servicing fee revenue; instead,
the 20
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
entire amount of interest income is recorded as investment income. Accordingly,
theThe
amount of servicing income has decreased to(which is net of the amortization of servicing assets
and liabilities) was $16.9 million and $26.8 million in the first quarterquarters of
2002 and 2001, from $28.8 million in the comparable period of 2000, and willrespectively. We expect servicing income to decline further in future
periods.periods as the managed receivables in these securitizations are paid down.
Provision for losses increased by 10737 percent, to $121.4$158.4 million, in 2002,
as compared to the first quarter ofsame period in 2001. These amounts relate to our on-balance
sheet receivables. The increase is principally due to the increase in loans held
on our balance sheet.sheet and an increase in delinquencies. At March 31, 2002,
on-balance sheet finance receivables increased 12 percent to $18.1 billion as
compared to March 31, 2001. At March 31 2002 and 2001, the 60-days-and-over
delinquencies as a percentage of on-balance sheet finance receivables were 2.18
percent and 1.73 percent, respectively (such delinquency ratio was 2.19 percent
at December 31, 2001). Under the portfolio method, (which is usedwe estimate an allowance for
securitizations structured as collateralized borrowings), we recognize the
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.
Our credit losses as a percentage of related loan balances for our
on-balance sheet portfolio have been increasing over the last several quarters
(1.88 percent, 2.14 percent, 2.26 percent, 2.36 percent and 2.53 percent for the
quarters ended March 31, 2001, June 30, 2001, September 30, 2001, December 31,
2001 and March 31, 2002, respectively). We believe
22
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
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 manufactured
housing recovery rates when repossessed properties are sold given current
industry levels of repossessed assets.
At March 31, 2002, the Company had a total of 16,729 unsold manufactured
housing properties (11,453 of which relate to our off-balance sheet
securitizations) in repossession, compared to 13,790 properties (10,868 of which
relate to our off-balance sheet securitizations) at March 31, 2001. We reduce
the value of repossessed property to our estimate of net realizable value upon
repossession. We liquidated 5,904 managed manufactured housing units at an
average loss severity rate (the ratio of the loss realized to the principal
balance of the foreclosed loan) of 58 percent in the first quarter of 2002
compared to 6,629 units at an average loss severity rate of 57 percent in the
first quarter of 2001. The loss severity rate related to our on-balance sheet
manufactured housing portfolio was 50 percent in the first quarter of 2002,
compared to 48 percent in the first quarter of 2001. We believe the higher
average severity rate in 2002 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 existed in
the marketplace at March 31, 2002, 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
level 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); 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 and 2002, 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 balance sheet asdelinquency ratios. We attempt to
appropriately reserve for the losseseffects of these loss mitigation policies when
establishing loan loss reserves. These policies are incurred.also considered when we
determine the value of our retained interests in securitization trusts
(including interest-only securities). Loss mitigation policies were applied to
3.0 percent of average managed accounts in the first quarter of 2002, compared
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 increaseddecreased by 5710 percent, to $321.6$289.5 million, in the first
quarter of 2002, as compared to the same period in 2001. OurSuch decrease was the
net result of: (i) increased borrowings grew in order to fund the increase inincreased finance
receivables. In addition, ourreceivables; and (ii) lower average borrowing rates. Our average borrowing rate
increaseddecreased to 6.1 percent in the first quarter of 2002 from 7.6 percent in the
first quarter of 2001 from 7.1 percent2001. The decrease in the first quarter of 2000. Under
the portfolio method, we recognize interest expense on the securities issued to
investors in the securitization trusts. Since these securities typically have
higher interest rates than our other debt, our average borrowing rate increasedrates in 2002 as
compared to priorthe same period in 2001 is primarily due to the decrease in the
general interest rate environment between periods.
Other operating costs and expenses include the costs associated with
servicing our managed receivables, and non- deferrablenon-deferrable costs related to
originating new loans. Such expenses decreased by 265.3 percent, to $163.4$154.6
million, in the first quarter of 2002, as compared to the same period in 2001.
Such costs have decreased as we beganhave begun to realize the cost savings from the
previously announced restructuring of the Company.Conseco Finance.
Special charges for the first quarter of 2002 include: (i) the loss of
$39.3 million related to the sales of certain finance receivables of $253
million (such assets were sold as part of our cash raising initiatives which
generated free cash flow in excess of $100 million in order to meet our debt
obligations); (ii) a $7.0 million fee paid pursuant to amended financing
23
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
arrangements; and (iii) other restructuring charges of $.9 million. Special
charges recorded in the finance segmentfirst quarter of 2001 include: (i) the loss related to
the sale of certain finance receivables of $9.0 million; and (ii) severance
benefits of $4.8 million. These charges are described in greater detail in the
note to the accompanying financial statements entitled "Special Charges".
Impairment charges represent reductions in the value of our retained
interests in securitization trusts (including interest-only securities and
servicing rightsrights) 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.evaluations.
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 from the security has changed adversely from the previous valuation
which determined the carrying value of the security. When both occur, the
security is written down to fair value.
We recognized an impairment charge (net of adjustments to the valuation
allowance associated with our servicing rights) of $7.9 million in the first
quarter of 2001 for the interest-only securities that were not performing as
well as expected based on our previous valuation estimates.
We recognized an
impairment charge of $2.5 million in the first quarter of 2000.
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 a
$36.4 million increase in unrealized appreciation during the first quarter of
2001.
2124
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
CreditThe credit quality of managed finance receivables was as follows:
March 31, December 31,
2002 2001 2000
---- ----
60-days-and-over delinquencies as a percentage of managed finance
receivables at period end:
Manufactured housing.................................................... 1.96% 2.20%2.33% 2.45%
Mortgage services (a)................................................... .95 .931.18 1.23
Retail credit........................................................... 4.30 3.043.16 3.39
Consumer finance - closed-end........................................... .86 1.08
Floorplan............................................................... .48 .31
Total continuing lines................................................ 1.71 1.78
Total discontinued lines................................................ 1.82 1.47.63 .58
Discontinued lines...................................................... 2.36 3.50
Total................................................................. 1.72% 1.76%1.99% 2.10%
Net credit losses incurred during the last twelve months as a percentage of
average managed finance receivables during the period:
Manufactured housing.................................................... 1.77% 1.61%2.21% 2.14%
Mortgage services....................................................... 1.35 1.172.03 1.95
Retail credit........................................................... 6.27 5.306.69 6.65
Consumer finance - closed-end........................................... 2.77 2.50
Floorplan............................................................... .39 .31
Total continuing lines................................................ 1.76 1.55
Total discontinued lines................................................ 4.26 3.891.14 1.00
Discontinued lines...................................................... 7.78 5.73
Total................................................................. 1.98% 1.79%2.47% 2.35%
Repossessed collateral inventory as a percentage of managed finance receivables
at period end:end (b):
Manufactured housing.................................................... 2.07% 1.73%2.74% 2.45%
Mortgage services (b)(c)................................................... 3.11 2.974.35 4.07
Retail credit........................................................... .06.18 .13
Consumer finance - closed-end........................................... 1.07 1.03
Floorplan............................................................... .57 .44
Total continuing lines................................................ 2.25 2.00
Total discontinued lines................................................ 3.01 2.96.81 .69
Discontinued lines...................................................... 3.14 4.20
Total................................................................. 2.30% 2.08%2.94% 2.68%
- --------------------
(a) 60-day-and-over60-days-and-over delinquencies exclude loans in foreclosure.
(b) Ratio of: (1) outstanding loan principal balance related to the repossessed
inventory (before writedown) to: (2) total receivables. We writedown the
value of our repossessed inventory to estimated realizable value at the
time of repossession.
(c) Repossessed collateral inventory includes loans in the process of
foreclosure.
25
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
The credit quality of on-balance sheet finance receivables was as follows:
March 31, December 31,
2002 2001
---- ----
60-days-and-over delinquencies as a percentage of managed finance
receivables at period end:
Manufactured housing.................................................... 3.11% 3.08%
Mortgage services (a)................................................... .95 .94
Retail credit........................................................... 3.16 3.39
Consumer finance - closed-end........................................... .92 1.33
Floorplan............................................................... .63 .58
Discontinued lines...................................................... 1.94 2.72
Total................................................................. 2.18% 2.19%
Net credit losses incurred during the last twelve months as a percentage of
average on-balance sheet finance receivables during the period:
Manufactured housing.................................................... 1.96% 1.87%
Mortgage services....................................................... 1.71 1.53
Retail credit........................................................... 6.69 6.65
Consumer finance - closed-end........................................... 2.26 2.02
Floorplan............................................................... 1.14 1.00
Discontinued lines...................................................... 5.49 4.66
Total................................................................. 2.53% 2.36%
Repossessed collateral inventory as a percentage of on-balance sheet finance
receivables at period end (b) (c):
Manufactured housing.................................................... 2.88% 2.41%
Mortgage services (d)................................................... 3.86 3.50
Retail credit........................................................... .18 .13
Consumer finance - closed-end........................................... 1.20 1.15
Floorplan............................................................... .81 .69
Discontinued lines...................................................... 2.02 2.92
Total................................................................. 2.72% 2.37%
- --------------------
(a) 60-days-and-over delinquencies exclude loans in foreclosure.
(b) Ratio of: (1) outstanding loan principal balance related to the repossessed
inventory (before writedown) to: (2) total receivables.
(c) Although the ratio is calculated using the outstanding loan principal
balance related to the repossessed inventory, the repossessed inventory is
written down to net realizable value at the time of repossession or
completed foreclosure.
(d) Repossessed collateral inventory includes loans in the process of
foreclosure.
26
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
NEW ACCOUNTING STANDARDS
See "Recently Issued Accounting Standards" in the notes to consolidated
financial statements for a discussion of recently issued accounting standards.
FORWARD-LOOKING STATEMENTS
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," "projected," "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. These forward-lookingForward-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 those contemplatedthe future results,
performance or achievements expressed or implied by the forward-looking
statements. SuchAssumptions and other important factors that could cause our actual
results to differ materially from those anticipated in our forward-looking
statement include, among other things: (i) general economic conditions and other
factors, including prevailing interest rate levels, stock and credit market
performance, which may affect (among other things) the Company's ability to sell
its products, its ability to make loans and access capital resources and the
costs associated therewith, the market value of the Company's investments and
the level of defaults and prepayments of loans made by the Company; (ii) the
Company's ability to achieve anticipated synergies and levels of operational
efficiencies;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 (x)(xi) the
risk factors or uncertainties listed from time to time in the filings of the
Company or its parent, Conseco, with the Securities and Exchange Commission.
22Other 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.
27
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
PART II - OTHER INFORMATION
ITEM 1. 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 FebruaryJuly 1995 to January 1998.
One action (Florida State Board of Admin. v. Green Tree Financial Corp., et. al,
Case No. 98-1162) didwas brought not includeon behalf of a class, action claims.but by the Florida 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 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 action 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 the District of
Minnesota issued an order to dismissdismissing 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,Circuit. A three judge panel issued an opinion on October
25, 2001, reversing the United States District Court's dismissal order and
remanding the appealactions to the United States District Court. Conseco Finance has
moved to dismiss the options lawsuit on the grounds that stock option traders
lack standing under federal securities law. Argument on the motion is currently
pending.scheduled
for May 24, 2002. Pretrial discovery in the options lawsuit is stayed pending
disposition of the motion to dismiss. In the other two lawsuits, pretrial
discovery commenced 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 confirmed as
judgments in both Lackey and Bazzle. These matters arecases have been consolidated into one
case which is currently on appeal atbefore 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 these
proceedingsthis proceeding cannot be predicted with certainty.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in other lawsuits (including purported class actions) related to itstheir
operations. Although theThe ultimate outcome of certainall of suchthese other legal matters cannot be predicted, such lawsuits currently pending
against the Company or its subsidiaries cannot be predicted, and, although such
lawsuits are not expected to individually orhave a material adverse effect on the
Company, such lawsuits could have, in the aggregate, to have a material adverse effect
on the Company's consolidated financial condition, cash flows or results of
operations.
2328
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. (a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K - None
24ITEM 6. (a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
A report on Form 8-K dated January 30, 2002, was filed with the
Commission to report under Item 5, modifications to certain
borrowing agreements.
29
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO FINANCE CORP.
Dated: May 15, 20012002
By: /s/ James S. Adams
-----------------------------------
James S. AdamsKeith A. Anderson
-------------------------------
Keith A. Anderson
Senior Vice President and
Chief AccountingFinancial Officer (authorized
officer and chief
accountingprincipal financial
officer)
2530