ITEM 1. BUSINESS. ------------------
General -------
Green Tree Financial Corporation ("Green Tree" or "the Company") is a diversified financial services company that originates conditional sales contracts for manufactured homes, home improvements, consumer products and equipment financing, and provides commercial financing to manufacturers and dealers. The Company's insurance agencies also market physical damage and term mortgage life insurance relating to the customers' contracts it services. Green Tree is the largest servicer of manufactured housing government insured or guaranteed contracts, and conventional manufactured housing contracts in the United States. Through its principal offices in Saint Paul, Minnesota and service centers throughout the United States, Green Tree serves all 50 states.
The Company finances both new and previously owned manufactured homes, and originates conventional contracts as well as contracts insured by the Department of Housing and Urban Development's Federal Housing Administration ("FHA") and contracts partially guaranteed by the Department of Veterans' Affairs ("VA"). The Company's home improvement loans are financed either on a conventional basis or insured through the FHA Title I program. Consumer and equipment finance products are financed using installment sales contracts. The Company provides financing for the purchase of motorcycles, marine products, pianos and organs, horse trailers, sport vehicles, small aircraft, tractor/trailers and recreational vehicles.
Green Tree also provides inventory financing to dealers, manufacturers and distributors of various consumer and commercial products, and in 1996 began providing home equity and revolving credit financing.
Green Tree pools and securitizes substantially all of the contracts it originates, retaining the servicing on the contracts. Conventional manufactured housing contracts are pooled and such pools are structured into asset-backed securities which are sold in the public securities markets. Substantially all FHA and VA manufactured housing contracts are converted into pass-through certificates ("GNMA certificates") guaranteed by the Government National Mortgage Association ("GNMA"), a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The GNMA certificates, which are secured by the FHA and VA contracts, are then sold in the secondary market. The Company also pools FHA-insured and conventional home improvement contracts, and consumer and equipment finance installment sales contracts, for sale in the secondary market. In servicing the contracts, the Company collects payments from the
borrower and remits principal and interest payments to the holder of the contract or investor certificate secured by the contracts.
The Company was originally incorporated as Green Tree Acceptance, Inc. under the laws of the State of Minnesota in 1975. In 1992, the Company changed its name to Green Tree Financial Corporation and in 1995 reincorporated as Green Tree Financial Corporation under the laws of the State of Delaware. The Company's principal executive offices are located at 1100 Landmark Towers, 345 St. Peter Street, Saint Paul, Minnesota 55102- 1639, and its telephone number is (612) 293-3400. Unless the context otherwise requires, "Green Tree" or the "Company" means Green Tree Financial Corporation and its subsidiaries.
Purchase and Origination of Contracts
Conditional sales contracts are the typical means of financing the purchase of manufactured homes ("MH"), consumer products ("CP")and equipment finance products("EF") and can also be used to finance home improvements ("HI") to existing owner-occupied one- to- four family homes. A "contract" or "conditional sales contract" refers to an agreement evidencing a monetary obligation and providing security for the obligation. MH contracts grant the owner of the contract a security interest in the related manufactured home (and any other personal property described therein), and CP and EF contracts grant a security interest in the related consumer or equipment finance product. For secured HI contracts, a mortgage or deed of trust on the home to which the improvements relate serves as security for the payment obligation under the contract. Green Tree also offers unsecured HI contracts on certain loans of $15,000 or less.
All contracts that the Company originates directly or indirectly are written on forms provided or approved by the Company and are originated on an individually approved basis in accordance with Company underwriting guidelines.
Manufactured Housing
"Manufactured housing" or a "manufactured home" is a structure, transportable in one or more sections, which is designed to be a dwelling with or without a permanent foundation. Since most manufactured homes are never moved once the home has reached the homesite, the wheels and axles are removable and have not been designed for continuous use. Manufactured housing does not include either modular housing (which typically involves more sections, greater assembly and a separate means of transporting the sections) or recreational vehicles ("RV's") (which are either self- propelled vehicles or units towed by passenger vehicles).
Conditional sales contracts for manufactured home purchases may be financed on a conventional basis, insured by the FHA or partially guaranteed by the VA. With respect to manufactured housing, the
relative volume of conventional, FHA and VA contracts originated by the Company depends on customer and dealer preferences as well as prevailing market conditions. Over the last five years, the percentage of FHA and VA contracts in the Company's manufactured home contract portfolio has ranged from 15% to 39%, and at December 31, 1995, such contracts constituted 15% of the Company's portfolio (of which approximately 95% were FHA contracts). The Company has developed more cost effective conventional manufactured housing lending programs and as a result, FHA and VA contracts represented less than 1% of the Company's manufactured housing originations during 1995. MH contracts are generally subject to minimum down payments of approximately 5% of the amount financed. The Company offers manufactured housing contract terms up to 30 years.
Through its regional service centers, the Company arranges to purchase MH contracts from MH dealers located throughout the United States. The Company's regional service center personnel contact dealers located in their region and explain the Company's available financing plans, terms, prevailing rates, and credit and financing policies. If the dealer wishes to utilize the Company's available customer financing, the dealer must make an application for dealer approval. Upon satisfactory results of the Company's investigation of the dealer's creditworthiness and general business reputation, the Company and the dealer execute a dealer agreement. The Company also originates manufactured housing installment loan agreements directly with customers. For the year ended December 31, 1995, the Company's manufactured housing contract originations consisted of 83% purchased from dealers, and 17% directly originated by the Company.
The dealer or the customer submits the customer's credit application and purchase order to a central or regional service center where Company personnel make an analysis of the creditworthiness of the proposed buyer. If the application meets the Company's guidelines and credit is approved, the Company generally purchases the contract after the manufactured home is delivered and set up and the customer has moved in.
For manufactured housing contracts, the Company uses a proprietary automated credit scoring system. It is a statistically based scoring system which quantifies information using variables obtained from customers' credit applications and credit reports. As of December 31, 1995, this credit scoring system has been used in making credit determinations on over two million applications. The Company believes the use of this proprietary credit scoring system has contributed to the reduction in the number of repossessions incurred as a percentage of the Company's servicing portfolio.
In 1995, new manufactured housing shipments rose to approximately 340,000 units, a 12% increase over 1994. The Company continues to benefit from this increase and believes that it is maintaining its
market share of contracts for financing new manufactured homes. Competition to finance manufactured home purchases continues to be strong, and there can be no assurance that such competition will not intensify in the future. Significant decreases in consumer demand for manufactured housing, or significant increases in competition, could have an adverse effect on the Company's financial position and results of operations.
Home Improvement
The types of home improvements financed by the Company include exterior renovations, including windows, siding and roofing; pools and spas; kitchen and bath remodeling; and room additions and garages. The Company may also, under certain limited conditions, extend additional credit beyond the purchase price of the home improvement for the purpose of debt consolidation.
Through its centralized loan processing operations in Saint Paul, Minnesota, the Company arranges to purchase certain contracts from HI contractors located throughout the United States. The Company's business development managers contact HI contractors and explain the Company's available financing plans, terms, prevailing rates and credit and financing policies. If the contractor wishes to utilize the Company's available customer financing, the contractor must make an application for contractor approval. The Company has a contractor approval process pursuant to which the financial condition, business experience and qualifications of the contractor are reviewed prior to his or her approval to sell contracts to the Company. The Company occasionally will originate directly a home improvement promissory note involving a home improvement transaction.
The level of growth in the Company's HI contract originations during the year ended December 31, 1995 results from significantly expanding the number of relationships with contractors, remodelers and dealers throughout the United States. This has provided the Company with an established and growing network through which to market its financing.
The Company finances both conventional HI contracts and HI contracts insured through the FHA Title I program. Such contracts are generally secured by first, second or, to a lesser extent, third mortgages on the improved real estate. The Company has also implemented an unsecured conventional HI lending program for certain customers which generally allows for loan amounts ranging from $2,500 to $15,000. Unsecured loans account for less than 20% of the home improvement portfolio.
The contractor submits the customer's credit application and construction contract to the Company's office where an analysis of the creditworthiness of the customer is made using a proprietary credit scoring system that was implemented by the Company in June
1993. If it is determined that the application meets the Company's underwriting guidelines and applicable FHA regulations (for FHA-insured contracts) and the credit is approved, the Company generally purchases the contract from the contractor when the customer verifies satisfactory completion of the work.
Consumer and Equipment Finance
Green Tree's consumer finance and equipment finance divisions finance the purchase of motorcycles; marine products (including boats, boat trailers and outboard motors); pianos and organs; horse trailers; sport vehicles (including snowmobiles, personal watercraft and all-terrain vehicles); tractor/trailers; personal aircraft; and recreational vehicles.
The Company arranges to purchase certain contracts originated by dealers throughout the United States. The Company's personnel contact dealers and explain Green Tree's available financing plans, terms, prevailing rates and credit and financing policies. If the dealer wishes to utilize the Company's available customer financing, the dealer must make an application for approval.
The dealer submits the customer's credit application and purchase order to the Company's central service center where an analysis of the creditworthiness of the proposed buyer is made. If the application meets the Company's guidelines and credit is approved, the Company purchases the contract when the customer accepts delivery of the product.
The volume of contracts originated by the Company during the past five years and certain other information for each of those years, are indicated below:
- ---------------- (a) Does not include $552,936,000 of conventional contracts purchased from the Resolution Trust Corporation ("RTC").
(b) Does not include $66,980,000 of conventional contracts purchased from other originators.
The Company believes that, in addition to an individual analysis of each contract, it is important to achieve a geographic dispersion of contracts in order to reduce the impact of regional economic conditions on the overall performance of the Company's portfolio. Accordingly, the Company seeks to maintain a portfolio of contracts dispersed throughout the United States. At December 31, 1995, no state accounted for more than 10% of all contracts serviced by the Company.
The Company originates contracts through over 3,000 approved manufactured housing dealers, approximately 5,700 home improvement contractors and over 3,000 consumer product dealers. In 1995, no single MH dealer accounted for more than one percent of the total number of MH contracts originated by the Company. Likewise, no single contractor or dealer accounted for more than two percent of the total number of HI or CP contracts originated by the Company.
Commercial Finance Division
Green Tree's Commercial Finance Division extends credit through its three regional lending centers under revolving credit agreements with dealers, manufacturers and distributors of various consumer and commercial products. "Floorplan Receivables" represent the financing of product inventory for retail dealers of a variety of consumer products. The products securing the Floorplan Receivables currently include manufactured housing, recreational vehicles and marine products. "Asset-Based Receivables" represent the financing of production and inventory by manufacturers, such revolving credit arrangements being secured by finished goods inventory, accounts receivable rising from the sale of such inventory, certain work- in-process, raw materials and component parts, as well as other assets of the borrower.
The Company will provide financing for products for a particular dealer, manufacturer or distributor ("Dealer"), in most instances, only if the Company has also entered into a floorplanning agreement with the manufacturer, distributor or other vendor of such product. A Dealer requesting the establishment of a credit line with Green Tree is required to submit an application and financial information.
Advances made for the purchase of inventory are most commonly arranged in the following manner: the Dealer will contact the manufacturer and place a purchase order for a shipment of inventory. If the manufacturer has been advised that Green Tree is the Dealer's inventory financing source, the manufacturer will contact Green Tree to obtain an approval number with respect to such purchase order. Upon such request, the Company will determine whether (i) the manufacturer is in compliance with its floorplan agreement, (ii) the Dealer is in compliance with its program with Green Tree and (iii) such purchase order is within the Dealer's credit limit. If all of such requirements are met, the Company will issue an approval number to the manufacturer. The manufacturer will then ship the inventory and directly submit its invoice for such purchase order to Green Tree for payment. Interest or finance charges normally begin to accrue on the Dealer's accounts as of the invoice date. The proceeds of the loan being made by the Company to the Dealer are paid directly to the manufacturer in satisfaction of the invoice price and are often funded a number of days subsequent to the invoice date depending upon the Company's arrangements with the manufacturer. Inventory inspections are performed to physically verify the collateral used to secure a Dealer's loan, check the condition of the inventory, account for any missing inventory and collect any funds due. Approximately two-thirds of Green Tree's MH dealers are participants in this program.
Asset-Based Receivables arise from asset-based revolving credit facilities provided to certain manufacturers and distributors.
These facilities typically involve a revolving line of credit, for a contractually committed period of time, pursuant to which the borrower may draw the lesser of the maximum amount of such line of credit or a specifically negotiated loan availability amount, subject to the availability of adequate collateral. The loan availability amount is determined by multiplying an agreed upon advance rate against the value of certain types of assets. In these facilities, Green Tree will most typically lend against finished inventory and eligible accounts receivable arising from the sale of such inventory which are free and clear of other liens and otherwise in compliance with specified standards.
Pooling, Disposition and Related Sales Structures of Contracts, Net Interest Margin Certificates and Floorplan Receivables
The Company pools contracts for sale to investors, generally on a monthly basis. It is the Company's policy to sell substantially all of the contracts it originates or purchases. Conventional manufactured housing contracts are generally sold through asset-backed securities. FHA-insured and VA-guaranteed manufactured housing contracts are converted into GNMA certificates. The GNMA certificates, which are secured by the FHA and VA contracts, are then sold in the secondary market. The GNMA certificates provide for payment by the Company to registered holders of the certificates of monthly principal and interest, as well as the "pass-through" of any principal prepayments on the contracts. The Company also pools FHA-insured and conventional home improvement contracts for sale in the secondary market. Consumer product and equipment finance contracts have also been pooled for sale to investors through both public and private transactions. During 1994 and 1995, the Company also securitized a significant portion of its excess servicing rights receivable in the form of securitized Net Interest Margin Certificates ("NIM Certificates"), and in 1995 securitized a significant portion of its then outstanding floorplan receivables through a Master Trust structure.
Principal and interest payments made by borrowers on the manufactured housing contracts securing each GNMA certificate are the source of funds for payments due on the GNMA certificates. The Company is required to advance its own funds in order to make timely payment of all amounts due on the GNMA certificates if, due to defaults or delinquencies on contracts, the payments received by the Company on the contracts securing such certificates are less than the amounts due on the certificates. If the Company was unable to make payments on the GNMA certificates as they became due, it would promptly notify GNMA and request GNMA to make such payments and, upon such notification and request, GNMA would make such payments directly to the registered holders of the certificates and would seek reimbursement from the Company, FHA or the VA as appropriate. The GNMA certificates are secured by manufactured housing contracts which are either FHA- insured or VA-guaranteed. For FHA manufactured housing contracts, the maximum
amount of insurance benefits paid by FHA is equal to approximately 90% of the net unpaid principal and uncollected interest earned to the date of default on the contract, subject to certain adjustments, less the greater of the actual net sales price or FHA appraisal of the home. The amounts reimbursable by FHA are further limited to an aggregate amount representing reserves FHA has established. These reserves, which approximated $106 million at December 31, 1995, are based on the Company's origination and loss experience. The Company is required to make scheduled premium payments to maintain the benefit of the reserve. If losses on FHA-insured contracts exceed the established reserve, the Company would not be reimbursed by FHA but would still be required to make payments on the GNMA certificates. For VA manufactured housing contracts, the maximum guarantee that may be issued is the lesser of: (1) the lesser of $20,000 or 40% of the principal amount of the contract, or (2) the maximum amount of guarantee entitlement available to the veteran (which may range from $20,000 to zero).
Conventional manufactured housing, home improvement, consumer and equipment finance contracts are pooled and sold by the Company through securitized asset sales which have been either single class or senior/subordinated pass-through structures. Under certain securitized sales structures, corporate guarantees, bank letters of credit, surety bonds, cash deposits or other equivalent collateral have been provided by the Company as credit enhancements. Certain senior/subordinated structures, such as those used during 1990, 1991 and 1992, retain a portion of the Company's excess servicing spread as additional credit enhancement or for accelerated principal repayments to subordinated certificateholders. The Company analyzes the cash flows unique to each transaction, as well as the marketability and earnings potential of such transactions when choosing the appropriate structure for each securitized loan sale. The structure of each securitized sale depends, to a great extent, on conditions of the fixed income markets at the time of sale as well as cost considerations and availability and effectiveness of the various enhancement methods. Customer principal and interest payments are deposited in separate bank accounts as received by the Company and are held for monthly distribution to the certificateholders.
During 1994 and 1995 Green Tree sold a substantial portion of its excess servicing rights receivable, representing net cash flows retained from the securitization of its manufactured housing contracts, in the form of securitized NIM Certificates through public offerings. A subordinated interest in those certificates was retained by the Company. As a result of these transactions, certain net cash flows that formerly were retained by Green Tree are now passed through to investors with the exception of a 50 basis point servicing fee which Green Tree retains out of available monthly net cash flows. Payments on the subordinated interests retained do not commence until the senior certificateholders have been paid all principal and interest due them under the terms of
the transaction. Interest will continue to accrue to the balance of such subordinated certificates until payments commence.
In initially valuing its excess servicing rights receivable, the Company establishes an allowance for expected losses under the recourse provisions with investors/owners and calculates that allowance on the basis of historical experience and management's best estimate of future credit losses likely to be incurred. If there is a default under a contract and liquidation of the underlying collateral on loans not sold as part of the NIM Certificate sales, any net losses are charged against the reserves that have been established. Losses in excess of those projected in the valuation of the NIM Certificates have the effect of reducing the value of the subordinate interest retained by Green Tree. The dollar amount of potential contractual recourse to the Company exceeds both the amount of projected losses factored into the subordinated certificate valuation and the amount established by the Company as an "allowance for losses on contracts sold with recourse."
During 1995 the Company formed a revolving Master Trust vehicle for purposes of selling its commercial finance receivables, and in December 1995 issued its first series of certificates through this trust totaling approximately $428 million. This first series of certificates has a two year life with an option to extend the term to three years at the Company's discretion, and was structured as a LIBOR-based floater backed by eligible commercial finance receivables, such receivables having been removed from the Company's balance sheet upon sale.
Estimated losses relating to the Company's commercial finance receivables are recorded at the time the loans are made. Commercial finance receivables are shown net of the related allowance for losses and net of amounts securitized and sold on the balance sheet.
Information on the Company's securitized asset sales is as follows:
(a) "Contracts sold" represents the face amount of the contracts sold but not necessarily settled during the same year.
(b) Includes $533 million of contracts purchased from the RTC.
(c) Includes $52 million of contracts purchased from other originators, but does not include $88 million of contracts sold pursuant to a joint venture agreement with Merrill Lynch Mortgage Capital, Inc.
(d) Approximately $431 million of consumer products contracts were securitized and sold in January 1996.
Servicing
The Company services all of the contracts and commercial finance receivables that it originates or purchases from other originators, collecting loan payments, taxes and insurance payments, where applicable, and other payments from borrowers and remitting principal and interest payments to the holders of the asset-backed securities or of the GNMA certificates.
The following table shows the composition of the Company's servicing portfolio at December 31 for the years indicated on contracts it originated, excluding commercial finance receivables.
During 1990 and 1991, the Company acquired servicing on manufactured housing contracts originated by other lenders. The Company has not since acquired servicing on manufactured housing contracts originated by other lenders, and does not expect to acquire such servicing in the near future. The Company has no loss risk on these contracts and charges a service fee based on principal outstanding. The following table shows the composition of this servicing portfolio at December 31 for the years indicated.
As of December 31, 1995 and 1994 the Company serviced $574,100,000 and $167,723,000, respectively, of commercial finance receivables. The Company currently has financing arrangements with approximately 2,000 dealers.
Delinquency and Loss Experience
A contract is considered delinquent by the Company if any payment of $25 or more is past due 30 days or more. Contracts for which the obligor is in bankruptcy are considered delinquent regardless of whether or not the borrower is current under a plan of bankruptcy. Delinquent contracts are subject to acceleration, and repossession
or foreclosure of the underlying collateral. Losses associated with such actions are charged against applicable reserves upon disposition of the collateral.
The following table provides certain information with respect to the delinquency and loss experience of contracts the Company originated, excluding commercial finance receivables.
(a) As a percentage of the total number of contracts serviced at period end (other than contracts already in repossession).
(b) As a percentage of the average number of contracts serviced during the period.
(c) As a percentage of the average principal amount of contracts serviced during the period. Annual net repossession losses represent the loss amount at the time the repossession is sold, and has not been reduced for amounts subsequently recovered from either customers or investors.
(d) As a percentage of the total number of contracts serviced at period end.
Commercial finance receivables due and unpaid aged over 60 days as of December 31, 1995 totaled .18%.
Insurance
Through certain subsidiaries, the Company markets physical damage insurance on manufactured homes, certain consumer products and dealer lots which collateralize contracts and receivables serviced by the Company, and markets term mortgage life insurance to its MH and HI customers. In addition, the Company owns Green Tree Life Insurance Company, a life and disability reinsurance company which functions as a reinsurer for policies written by selected other insurers covering individuals whose contracts are serviced by the Company.
The following table provides certain information with respect to net written premiums (gross premiums on new or renewal policies issued less cancellations of previous policies) on policies written by the Company. The Company acts as an agent with respect to the
sale of such policies and, in some cases, the Company also acts as reinsurer of such policies.
Regulation
The Company's operations are subject to supervision by various state authorities (typically state mortgage lending, financial institutions, consumer credit and insurance authorities) that generally require that the Company be licensed to conduct its business. In many states, issuance of licenses is dependent upon a finding of public convenience, and of financial responsibility, character and fitness of the applicant. The Company is generally subject to state regulations, examinations and reporting requirements, and licenses are revocable for cause.
Contracts insured under the FHA Title I manufactured home and home improvement lending programs are subject to compliance with detailed federal regulations governing originations, servicing, and loss claim payments by the FHA to cover a portion of losses due to default and repossessions or foreclosures. Other governmental programs such as VA also contain similar detailed regulations governing loan origination and servicing responsibilities.
The Federal Consumer Credit Protection Act ("FCCPA") requires, among other things, a written disclosure showing the cost of credit to debtors when consumer credit contracts are executed. The Federal Equal Credit Opportunity Act requires certain disclosures to applicants for credit concerning information that is used as a basis for denial of credit and prohibits discrimination against applicants with respect to any aspect of a credit transaction on the basis of sex, race, color, religion, national origin, age, marital status, derivation of income from a public assistance program, or the good faith exercise of a right under the FCCPA, of which it is a part. By virtue of a Federal Trade Commission rule, consumer credit contracts must contain a provision that the holder of the contract is subject to all claims and defenses which the debtor could assert against the seller, but the debtor's recovery under such provisions cannot exceed the amount paid under the contract.
The Company is also required to comply with other federal disclosure laws for certain of its lending programs. The home equity lending program, the combination land-and-home program, the land-in-lieu program and the home improvement lending program are
subject to the Federal Real Estate Settlement and Procedures Act. In addition, the Company is subject to the reporting requirements of the Home Mortgage Disclosure Act for its manufactured home, purchase money mortgage and home improvement lending products.
The construction of manufactured housing is subject to compliance with governmental regulation. Changes in such regulations may occur from time to time and such changes may affect the cost of manufactured housing. The Company cannot predict whether any regulatory changes will occur or what impact such future changes would have on the manufactured housing industry.
The Company is subject to state usury laws. Generally, state law has been preempted by federal law with respect to certain manufactured home, mortgage lending and home improvement products, although certain states have enacted legislation superseding federal law. To be eligible for the federal preemption, the Company's contract form must comply with certain consumer protection provisions. The Company offers its products within the limitations set by the state usury laws and federal preemption of these laws.
The regulatory procedures discussed above are subject to changes by the regulatory authorities. There are no assurances that future regulatory changes will not occur. These regulatory changes could place additional burdens on the Company's programs.
Competition and Other Factors
The Company is affected by consumer demand for manufactured housing, home improvements, consumer products and its insurance products, as well as commercial demand for floorplan and asset-backed lending. Consumer and commercial demand, in turn, are partially influenced by regional trends, economic conditions and personal preferences. The Company competes primarily with banks, finance companies, savings and loan associations, and credit unions. Prevailing interest rates are typically affected by economic conditions. Changes in rates, however, generally do not inhibit the Company's ability to compete, although from time to time in particular geographic areas, local competition may choose to offer more favorable rates. The Company competes by offering superior service, prompt credit review, and a variety of financing programs.
The Company's business is generally subject to seasonal trends, reflecting the general pattern of sales of manufactured housing and site-built homes. Sales typically peak during the spring and summer seasons and decline to lower levels from mid-November through January.
Employees
As of December 31, 1995, the Company had 2,503 full-time and 308 part-time employees, and considers its employee relations to be satisfactory. None of the employees are represented by a union.
ITEM 2.

ITEM 2. PROPERTIES.
At December 31, 1995, the Company operated 50 manufactured housing regional service centers and three commercial finance business centers located in 35 states. Such offices are leased, typically for a term of three to five years, and range in size from 1,700 to 22,000 square feet. The Company also operates a central servicing center in Rapid City, South Dakota. The lease on this facility is for a term of five years with an option to purchase and consists of 100,000 square feet. The Company's home improvement and consumer products divisions lease their main office in Saint Paul, Minnesota. The lease is for a term of five years and consists of 122,000 square feet. (See Note I of Notes to Consolidated Financial Statements for annual rental obligations.) The Company owns the building which houses its equipment finance and insurance divisions and its corporate offices.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The nature of the Company's business is such that it is routinely a party or subject to items of pending or threatened litigation. Although the ultimate outcome of certain of these matters cannot be predicted, management believes, based upon information currently available and the advice of counsel, that the resolution of these routine legal matters will not result in any material adverse effect on its consolidated financial condition.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II -------
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York and Pacific Stock Exchanges under the symbol "GNT." The following table sets forth, for the periods indicated, the range of the high and low sale prices.
1994 High Low ---- --------- ----------
First quarter $14-1/2 $10-27/32 Second quarter 15-1/4 10-3/4 Third quarter 17-7/16 12-3/8 Fourth quarter 15-5/16 12-1/8
1995 High Low ---- --------- ----------
First quarter 20-1/2 14-3/8 Second quarter 23-5/16 18-3/4 Third quarter 31-7/16 21-11/16 Fourth quarter 32-3/8 25
The above stock prices, as well as all other share and per share amounts referenced in this Annual Report on Form 10-K, have been restated to reflect the two-for-one stock splits effected in the form of stock dividends in June 1994 and October 1995.
On February 29, 1996, the Company had approximately 755 stockholders of record of its Common Stock including the nominee of The Depository Trust Company which held approximately 130,478,302 shares of Common Stock.
The Company has paid cash dividends since December 1986. The 1995 quarterly dividend rate for the first three quarters was $0.047 per share. In September 1995, the Board of Directors approved an increase in the quarterly dividend rate to $0.0625 per share effective December 1995. The payment of future dividends will depend on the Company's financial condition, prospects and such other factors as the Board of Directors may deem relevant. Under a letter of credit agreement, the Company is subject to restrictions limiting the payment of dividends and Common Stock repurchases. At December 31, 1995, such payments were limited to $25,046,000, which represents 50% of consolidated net earnings for the most recently concluded four fiscal quarter periods less dividends paid, repurchases of Common Stock and the retirement of Subordinated Indebtedness.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
(a) Before extraordinary loss relating to the debt exchange in 1992.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Introduction
Green Tree Financial Corporation is a diversified financial services company that originates conditional sales contracts for manufactured homes ("MH"), home improvements ("HI"), consumer products ("CP")and equipment financing ("EF"), and provides commercial financing to manufacturers and dealers. The Company's insurance agencies market physical damage and term mortgage life insurance relating to the customers' contracts it services. Green Tree also acts as servicer for manufactured housing contracts originated by other lenders.
The Company records "net gains on contract sales" at the time of sale of its contracts and defers service income, recognizing it as servicing is performed. Income from commercial financing is recognized as realized. Net gains on contract sales are an amount equal to the present value of the expected excess servicing rights receivable to be collected during the term of the contracts, plus or minus any premiums or discounts realized on the sale of the contracts and less any selling expenses. "Excess servicing rights receivable" represents cash expected to be received by the Company over the life of the contracts. The subordinated certificates retained by the Company from the securitized Net Interest Margin Certificate ("NIM Certificate") sales are shown net of projected losses and are included in excess servicing rights receivable. Excess servicing rights receivable, excluding the subordinated certificates, is calculated by aggregating the contractual payments to be received pursuant to the contracts and subtracting: (i) the estimated amount to be remitted to the investors/owners of the contracts, (ii) the estimated amount that will not be collected as a result of prepayments, (iii) the estimated amount to be remitted for FHA insurance and other credit enhancement fees and (iv) the estimated amount that represents deferred service income. Deferred service income represents the amount that will be earned by the Company for servicing the contracts. Concurrently with recognizing such gains, the Company also records the present value of excess servicing rights as an asset on the Company's balance sheet. Excess servicing rights receivable is calculated using prepayment, default, and interest rate assumptions which the Company believes market participants would use for similar instruments,such assumptions being consistent, given portfolio composition, with those used in the public sales of the NIM Certificates. Excess servicing rights receivable has not been reduced for potential losses under recourse provisions of the sales. Such rights are subordinated to the rights of investors/owners of the contracts. The Company believes that the excess servicing rights receivable recognized at the time of sale does not exceed the amount that would be received if it were sold in the marketplace.
In initially valuing its excess servicing rights receivable, the Company establishes an allowance for expected losses under the recourse provisions with investors/owners of contracts or investor certificates and calculates that allowance on the basis of historical experience and management's best estimate of future credit losses likely to be incurred. The amount of this provision is reviewed quarterly and adjustments are made if actual experience or other factors indicate management's estimate of losses should be revised. While the Company retains a substantial amount of risk of default on the loan portfolios that it sells, such risk has been substantially reduced through the sales of the NIM Certificates. The Company believes that its allowance for losses on contracts sold with recourse is adequate and consistent with current economic conditions as well as historical default and loss experiences of the Company's entire loan portfolio. The allowance for losses on
contracts sold with recourse is shown separately as a liability. The allowance has been discounted using an interest rate equivalent to the risk-free market rate for securities with a duration consistent with the estimated timing of losses. The outstanding security balances of contracts at December 31, 1995 were $1,290,750,000 of GNMA certificates and $10,941,384,000 related to securitized transactions, including whole loan sales.
The Company records the amount to be remitted to the investors/owners of the contracts or investor certificates for the activity related to the current month, payable the next month, as "investor payable" and it is shown separately as a liability on the Company's balance sheet.
The Company has provided the investors/owners of pools of contracts with a variety of additional forms of credit enhancements on its securitized sales. These credit enhancements have included corporate guarantees, letters of credit and surety bonds that provide limited recourse to the Company, and letters of credit that, if drawn, are entitled to reimbursement only from the future excess cash flows of the underlying transactions. Furthermore, certain securitized sales structures use cash reserve funds and certain cash flows from the underlying pool of contracts as additional credit enhancement.
The carrying value of the subordinated interest in the NIM Certificates retained by the Company is determined using prepayment and default assumptions consistent with those used in determining the value of excess servicing rights receivable, giving consideration to differences in the composition of the contracts underlying those anticipated cash flows. The subordinated certificates are shown net of the effect of projected losses.
Payments on the subordinated certificates will not be made until such time as the senior certificateholders have been paid all principal and interest due them under the terms of the transactions. As such, interest on the subordinated certificates will continue to accrue to the outstanding balance until payments commence. Green Tree collects a monthly servicing fee equal to 50 basis points on an annualized basis on the underlying contract balance to the extent that adequate funds are available based on cash flows provided by each underlying securitized sale.
The Company's expectations used in calculating its excess servicing rights receivable and allowance for losses on contracts sold with recourse, as well as the value of the subordinated interest in the NIM Certificates, are subject to volatility that could materially affect operating results. Prepayments resulting from obligor mobility, general and regional economic conditions, and prevailing interest rates, as well as actual losses incurred, may vary from the performance the Company projects. The Company recognizes the impact of adverse prepayment and loss experience by recording a
charge to current earnings. The Company reflects favorable portfolio experience prospectively as realized.
Results of operations
The following table shows, for the periods indicated, the percentage relationships to income of certain income and expense items and the percentage changes in such items from period to period.
Net gains on contract sales increased 47.7% and 63.0% for the years ended December 31, 1995 and 1994, respectively, as a result of increased dollar volume of contracts sold, longer average terms and in 1995, higher interest rate spreads on contracts sold. During 1995 and 1994, total contract sales increased $829,317,000 or 22.0% and $1,423,930,000, or 60.7%, respectively. In 1994, the increase in net gains on contract sales was partially offset by decreased interest rate spreads on contracts sold. The Company's net gains on contract sales in 1993 reflect higher interest rate spreads on contracts sold but were reduced by an increase in prepayment reserves as a result of higher than previously projected prepayment activity.
Prevailing interest rates are typically affected by economic conditions. Changes in interest rates generally do not inhibit the Company's ability to compete, although from time to time, in particular geographic areas, local competition may be able to offer more favorable rates. Because of the size of the excess servicing spread (which enables the Company to absorb changes in interest
rates) and the relatively short period of time between origination and sale of contracts, the Company's ability to sell contracts is generally not affected by gradual changes in interest rates, although the amount of earnings may be affected. Average excess servicing spreads were 3.8%, 3.1% and 3.8% for 1995, 1994 and 1993, respectively. Excess servicing spreads decreased during 1994 as the rates on the Company's sales of securitized loans increased faster than the rates on the contracts originated by the Company.
The increase in the provision for losses on contract sales of 65.9% in 1995 reflects the growth in total contract sales and the Company's increased provision for losses on contract sales as a percentage of contracts sold. This increased percentage is a result of increasing average contract terms and the changing mix of originations to a higher percentage of conventional contracts and to loans which have a lower down payment. The 74.3% increase in the provision for losses on contract sales during 1994 also reflects the Company's higher dollar volume of contracts sold during the year as well as the changing mix of originations to a significantly lower percentage of FHA and VA contracts. The Company feels that its credit underwriting standards and servicing procedures have served to stabilize its loss experience. A very important factor in the reduction of the Company's credit risk is the geographic dispersion of the portfolio. At December 31, 1995, no state accounted for more than 10% of all contracts serviced by the Company. The Company continually monitors its dispersion of contracts as economic downturns are often more severely felt in certain geographic areas than others.
During 1994 and 1995 the Company sold a substantial portion of its excess servicing rights receivable, representing net cash flows retained from the securitization of its manufactured housing contracts, in the form of securitized NIM Certificates through public offerings. Green Tree Securitized Net Interest Margin Trusts 1994-A, 1994-B and 1995-A, sold certificates representing approximately 72% to 78% of the estimated present value of future excess servicing cash flows derived from the Company's sales of certain manufactured housing contracts between 1978 and 1995. The estimated present value of these future excess servicing cash flows was previously recorded on the Company's balance sheet as part of "Excess servicing rights receivable", "Contracts, GNMA certificates and collateral" and "Allowance for losses on contracts sold with recourse". The remaining interests retained by the Company, representing subordinated certificates, continue to be recorded as part of excess servicing rights receivable and are shown net of projected losses.
The manufactured housing market experienced a 12% increase in new home shipments during 1995 compared to 1994. The Company continues to benefit from this increase as its dollar volume of MH contract originations rose 29.9% during 1995 over 1994 to $4,159,836,000, and believes that it is maintaining its market share of contracts
for financing new manufactured homes. The Company's dollar volume of new manufactured housing contract originations rose 31.4% during 1995 over 1994. The dollar volume of previously owned MH contract originations also rose 43.7% year over year. Although small compared to total volume, the dollar volume of refinanced contracts decreased in 1995 compared to 1994. In addition to the increase in the number of new MH contracts originated by the Company, the average contract size has also increased due to a shift in the Company's manufactured home financing to more land-and-home contracts, price increases by the MH manufacturers, and new federal wind and thermal standards enacted in mid- to-late 1994.
The dollar volume of home improvement, consumer and equipment finance contract originations rose 95.5% during 1995 over 1994 to $1,098,139,000. The level of growth in these divisions results from significantly expanding the number of relationships with contractors, remodelers and dealers throughout the United States. This has provided the Company with an established and growing network through which to market its financing.
Interest income is realized from contract inventory, commercial finance receivables, cash deposits, short-term investments, as well as amortization of the present value discount relating to excess servicing rights receivable. Interest income grew 58.0% during 1995 over 1994 primarily from increased earnings on the Company's commercial finance receivables. Amortization of the present value discount during 1995 increased in comparison to 1994 due to the growth of the Company's average excess servicing rights receivable. Contracts held for sale during the year was higher on average than during 1994 due to higher production levels, resulting in an increase in interest income. Interest income decreased 1.0% for the year ended December 31, 1994 compared to 1993. Interest income relating to the amortization of the present value discount during 1994 decreased compared to 1993 as a result of the NIM Certificate sales, offset partially by interest accrued on the subordinated certificates. Earnings on short-term investment activity relating to the cash generated by the NIM Certificate sales and an increase in average contracts held for sale due to substantially higher production levels during 1994 also partially offset that decrease. Contributing to the growth in interest income during 1993 was interest earned on the increased dollar amount of contracts held for sale and increased amortization of the present value discount on the Company's excess servicing rights receivable.
The increase in service income of 33.7% during 1995 and 28.3% during 1994 resulted from the 38.2% and 35.2% growth in the Company's average originated servicing portfolio during 1995 and 1994, respectively, but was offset by the decline in servicing income on contracts originated by others. The average unpaid principal balance of contracts being serviced for others during 1995 and 1994 decreased 21.0% and 22.1%, respectively. The Company expects this decline in outside servicing to continue in the future while overall servicing income should increase as its portfolio grows.
Commissions and other income, which includes commissions earned on new insurance policies written and renewals on existing policies, as well as other income from late fees, grew during 1995, 1994 and 1993 primarily as a result of the increase in net written insurance premiums as the Company's contract originations and servicing portfolio continue to grow.
Interest expense increased 37.7% during 1995 as a result of the Company maintaining a significantly higher level of borrowings to fund its loan originations and commercial finance portfolio during 1995 compared to 1994. Interest expense decreased 18.6% during 1994 compared to 1993. The Company maintained a lower level of borrowings to fund its loan originations during 1994, as compared with 1993, as a result of converting a substantial portion of its excess servicing rights receivable to cash through the NIM Certificate sales, as well as completing more frequent contract sales in 1994. This decreased level of borrowings is offset slightly by higher average interest rates throughout much of 1994. The Company's interest expense increased in 1993 as a result of the higher amount of average outstanding borrowings supporting the Company's increased contract inventory levels. The increase was, however, partially offset by lower average interest rates.
Green Tree's dollar amount of cost of servicing has increased over the past three years as its total average servicing portfolio during the years ended December 31, 1995, 1994 and 1993 grew 36.5%, 32.4% and 17.1%, respectively. The Company's cost of servicing as a percentage of contracts serviced has decreased over each of the past three years.
General and administrative expenses rose 67.1% and 38.1% during 1995 and 1994, respectively. The primary reason for these increases in both 1995 and 1994 relates to the compensation of the chief executive officer pursuant to the terms of an employment agreement, the majority of such expense being paid in stock. As a percentage of contract originations, however, general and administrative expenses have remained relatively constant over the past three years.
During the third quarter of 1993, the Company took a one-time charge to earnings of $4,685,000 as a result of the August 1993 enactment of the new federal corporate income tax rate. The charge reflects the increase in the federal corporate income tax rate on the Company's deferred tax liability and increased the Company's effective tax rate during that year to 41.9%. The Company's effective tax rate during 1995 and 1994 was 38% and 40%, respectively.
The Company is affected by consumer demand for manufactured housing, home improvements, consumer products and its insurance products, as well as commercial demand for floorplan and asset-backed lending. Consumer and commercial demand, in turn, are partially influenced by regional trends, economic conditions and personal preferences. The Company can make no prediction about any particular geographic area in which it does business. These
regional effects, however, are mitigated by the national geographic dispersion of its servicing portfolio.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (FAS 123) was issued in October 1995 and requires that the impact of the fair value of employee stock-based compensation plans on net income and earnings per share be disclosed on a pro forma basis in a footnote to the consolidated financial statements for awards granted after December 15, 1994, if the accounting for such awards continues to be in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Alternatively, FAS 123 permits a company to record the fair value of employee stock-based compensation plans as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans. Adoption of FAS 123 is required for fiscal years beginning after December 15, 1995. In adopting FAS 123, the Company plans to disclose the impact on net income and earnings per share on a pro forma basis in a footnote to the consolidated financial statements.
Inflation has not had a material effect on the Company's income or earnings over the past three fiscal years.
Capital resources and liquidity
The Company's business requires continued access to the capital markets for the purchase, warehousing and sale of contracts. To satisfy these needs, the Company employs a variety of capital resources.
Historically, the most important liquidity source for the Company has been its ability to sell contracts in the secondary markets through loan securitizations and sales of GNMA certificates. Under certain securitized sales structures, corporate guarantees, bank letters of credit, surety bonds, cash deposits or other equivalent collateral have been provided by the Company as credit enhancements. Certain senior/subordinated structures, such as those used during 1990, 1991 and 1992, retain a portion of the Company's excess servicing spread as additional credit enhancement or for accelerated principal repayments to subordinated certificateholders. The Company analyzes the cash flows unique to each transaction, as well as the marketability and earnings potential of such transactions when choosing the appropriate structure for each securitized loan sale. The structure of each securitized sale depends, to a great extent, on conditions of the fixed income markets at the time of sale as well as cost considerations and availability and effectiveness of the various enhancement methods. During 1995, the Company used a senior/subordinated structure for each of its ten conventional manufactured home loan sales and enhanced a portion of the subordinated certificates sold with a corporate guarantee. The
Company's expertise and increased loan origination volume have allowed it to have multiple conventional manufactured home loan sales in a quarter which serves to reduce interest rate risk by shortening the holding period of the contracts. The Company's public home improvement sales in the first and third quarters of 1995 were each comprised of two trusts. The first trust, which included secured home improvement contracts, employed a senior/subordinated structure with a limited corporate guarantee and the second trust, which included unsecured home improvement contracts, was a single class pass-through with a limited corporate guarantee. The Company's public home improvement sales in the second and fourth quarters of 1995 each employed a senior/subordinated structure with a limited corporate guarantee.
Another liquidity source for the Company is its ability to sell portions of its excess servicing rights receivable in the form of securitized NIM Certificates. During 1994 the Company sold $600,400,000 of NIM Certificates and in August 1995 the Company completed another sale of $308,000,000 of NIM Certificates. These certificates represent approximately 72% to 78% of the estimated present value of future excess servicing cash flows derived from the Company's sales of certain manufactured housing contracts between 1978 and 1995. Net proceeds to the Company from these sales were used to reduce short-term borrowings supporting ongoing loan originations. The combined interest rate on the NIM Certificates sold and the market rate (based on market comparisons at the time of sale of the NIM Certificates) on the subordinated certificates retained by the Company was less than the discount rates the Company used to initially record the excess servicing rights receivable. Based on these market rates, the present value of the future excess servicing cash flows which exceeded the carrying value has been included in the Company's reserves related to its excess servicing rights receivables.
Servicing fees and net interest payments collected, which has been the Company's principal source of cash, increased during the year ended December 31, 1995 and decreased during 1994 as a result of the timing and size of the NIM Certificate sales, the proceeds of which are shown separately on the Company's statements of cash flows. Net interest payments collected on the transactions underlying the NIM Certificates, after certain deductions, are remitted directly to the senior certificateholders. Payments on the subordinated certificates will not commence until the senior certificateholders have been paid in full. For the year ended December 31, 1995 and 1994, servicing fees and net interest payments collected consist only of servicing fees collected on the NIM Certificates, plus servicing fees and net interest payments on all existing HI and CP securitizations, and all MH securitizations and GNMA pools in which the Company has not yet sold a portion of the related excess servicing rights. The increase in servicing fees and net interest payments collected during 1993 is a result of the increased amount of servicing spread collected due to the growth of the Company's servicing portfolio.
Net principal payments collected have been positive in each of the last three years as a result of an increase in the contract principal payments collected by the Company as of the end of each year but not yet remitted to the investors/owners of the contracts. These increases are a result of customer payoffs and the growth of the Company's servicing portfolio.
Interest on contracts and GNMA certificates during 1994 includes interest the Company received on the NIM Certificates for the period they were held by the Company.
Interest on cash, commercial finance receivables and investments grew significantly during 1995 primarily as a result of the increase in commercial finance receivables outstanding. During the first quarter of 1994, the Company began floorplan lending to provide financing to manufactured housing dealers for purposes of financing new manufactured home inventory. The Company merged this floorplan lending into its new commercial finance division in 1995 and sold a substantial portion of its portfolio in December 1995. This division provides inventory and asset-based financing for manufacturers and dealers in a variety of industries, including primarily manufactured housing and other products for which the Company is already providing retail financing. Average net commercial finance receivables outstanding for 1995 were $357 million compared to $35 million in 1994.
Defeasance structures were used on the Company's securitized sales in the fourth quarter of 1990 and continued through the second quarter of 1992. The cash flows used to make these defeasance payments were sold as part of the NIM Certificate sale.
Repossession losses net of recoveries decreased significantly in both 1995 and 1994 compared to 1993 as a result of the sale of the NIM Certificates. Repossession losses on contracts whose net cash flows were sold as part of these transactions (with the exception of the first five securitized sales completed by Green Tree in 1987 through the first quarter of 1988 as such losses were excluded from the 1994-A NIM Certificate sale) are not borne by the Company but, instead, reduce the amount of cash available to pay the senior certificateholders. To the extent that such losses should exceed projected levels, the impact would first be borne by Green Tree through charges to the valuation of its subordinated certificates, and thereafter by the holders of the certificates, not through charges to the allowance for losses on contracts sold. In the future, repossession losses net of recoveries will continue to include activity relating to all future securitizations and GNMA pools in which the Company does not sell or has not yet sold a portion of the related excess servicing rights, as well as losses on the first five MH securitizations.
FHA insurance premiums paid also decreased significantly in 1995 and 1994 compared to 1993, as such payments which relate to
contracts in the NIM Certificate sales are made through cash flows on those transactions.
During 1995, the Company repurchased 2,051,000 shares of its common stock for $53,913,000. These shares are currently held as treasury shares. Dividends paid by the Company increased 75.4% in 1995 compared to 1994 as the Company's 1995 quarterly average dividend rate increased 73.3% over the 1994 rate.
Net cash from operating activities decreased in 1995 compared to 1994 as a result of the increased volume of contract purchases in 1995 as the Company prepared for its consumer product loan securitization in the first quarter of 1996. Net cash provided by operating activities during 1994 increased significantly over 1993, primarily as a result of the sale of NIM Certificates. Proceeds from the sale of contracts was greater than the purchase of contracts held for sale in 1994 as the Company, in that year, began public securitization of its HI loans primarily originated in the third and fourth quarters of 1993 in 1994. Net cash from operating activities was negative in 1993 due largely to the increase in dollar volume of contracts held for sale. This increase in contract inventory was a result of the Company's decision not to securitize any CP loans, or any HI loans after the second quarter, as well as increases in MH production. To a lesser extent, 1995, 1994 and 1993 cash flows from operating activities were also reduced by income taxes paid. The Company expects it will use its remaining net operating loss carryforward during 1996, and accordingly will be paying additional taxes on its taxable income thereafter.
Net cash used for investing activities included, in 1995, leasehold improvements on its Rapid City servicing center and the purchase and upgrade of computer equipment as a result of the Company's growth; in 1994, the renovation of certain floors in its corporate office building and the buyout and upgrade of the Company's mainframe computer; and in 1993, the purchase of certain floors of the building where the Company's corporate offices are located.
The Company used cash from financing activities in 1995 as a result of the common stock repurchases, a 73.3% increase in the common stock dividend rate and the retirement of its senior subordinated debentures in June 1995. The Company also used cash from financing activities during 1994 as it repaid all of its borrowings on credit facilities and increased its common stock dividend rate 33.3% in May 1994. Net cash provided by financing activities was positive in 1993 as borrowings on credit facilities and proceeds from the issuance of common stock and debt exceeded debt repayments and dividends.
The Company has a $15,000,000 unsecured bank credit agreement for general operating purposes. In addition, the Company currently has $1.3 billion in master repurchase agreements with various
investment banking firms for the purpose of financing its contract and commercial finance loan production. At December 31, 1995, the Company had $3,350,000 of borrowings outstanding under these agreements and had $1,221,150,000 available, subject to the availability of eligible collateral. The master repurchase agreements all provide for annual terms that are extended each quarter by mutual agreement of the parties for an additional annual term based upon receipt of updated quarterly financial information from the Company. The Company believes that these agreements will continue to be renewed.
During April 1995, the Company began borrowing under its commercial paper program through which it is authorized to issue up to $500,000,000 in notes of varying terms (not to exceed 270 days) to meet its liquidity needs. This program is backed by the bank and master repurchase agreements referred to above. As of December 31, 1995, the Company had issued and outstanding $90,500,000 in notes under this program. Commercial paper is expected to be an ongoing source of liquidity for purposes of meeting the Company's funding needs between sales of its contract and commercial loan production.
In September 1993, the Company completed a 10,000,000 share common stock offering, and sold an additional 1,500,000 shares to cover over-allotments. The net proceeds of approximately $138,000,000 were used to finance the Company's continued growth in its manufactured home, home improvement and consumer products contract inventory, to temporarily reduce notes payable under the Company's borrowing agreements, and for other general corporate purposes.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K
AND
INDEPENDENT AUDITORS' REPORT -------------------------------------
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 --------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Green Tree Financial Corporation Saint Paul, Minnesota:
We have audited the accompanying consolidated balance sheets of Green Tree Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995 and the financial statement schedule listed in the Index at Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Green Tree Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Minneapolis, Minnesota January 30, 1996
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES -------------------------------------------------
CONSOLIDATED BALANCE SHEETS ---------------------------
See notes to consolidated financial statements.
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES -------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
See notes to consolidated financial statements.
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES -------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -----------------------------------------------
See notes to consolidated financial statements.
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES -------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(continued)
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (continued)
See notes to consolidated financial statements.
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES -------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 --------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated.
Securitized asset sales
The Company originates directly, or indirectly through dealers, conditional sales contracts which are typically sold at or near par to investors. The Company retains the servicing rights and participation in certain cash flows from the loans. The present value of expected cash flows from this participation which exceeds normal servicing fees is recorded at the time of sale as "excess servicing rights receivable." The excess servicing rights receivable is calculated using prepayment, default and interest rate assumptions which the Company believes market participants would use for similar instruments, such assumptions being consistent, given portfolio composition, with those used in the public sales of the NIM Certificates. The excess servicing rights receivable has not been reduced for potential losses under recourse provisions of the sales. The allowance for losses on contracts sold with recourse is shown separately as a liability on the Company's balance sheet. For contracts sold prior to October 1, 1992, the allowance is shown on a nondiscounted basis. For contracts sold after September 30, 1992, the allowance has been discounted using an interest rate equivalent to the risk-free market rate for securities with a duration consistent with the estimated timing of losses based on guidance issued by the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") in "EITF Issue 92-2."
In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates are revised as necessary for any reductions in expected future cash flows arising from adverse prepayment and loss experience by recording a charge to current earnings. Favorable experience is recognized prospectively as realized.
During 1995 and 1994, the Company sold portions of its excess servicing rights receivable to investors in the form of securitized NIM Certificates. The subordinated certificates retained by the
Company are included in excess servicing rights receivable at a value which is net of expected losses. No gain or loss was recorded as a result of these transactions, such certificates being valued in the market place using prepayment, default and interest rate assumptions generally consistent with those recorded by the Company.
Interest payments received on the contracts, less interest payments paid to investors (including payments on the NIM Certificates), are reported on the consolidated statements of cash flows as "servicing fees and net interest payments collected." Principal payments received on the contracts, less non- defeasance principal payments paid to investors, are reported as "net principal payments collected" on the consolidated statements of cash flows. Interest income and service income are recognized by systematically amortizing the present value discount and deferred service income, respectively.
The Company defers service income at an annual rate of 0.44% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. The cash flows were discounted to present value using discount rates which averaged approximately 9.4% in 1995, 9.5% in 1994 and 9.3% in 1993. The Company has developed its assumptions based on experience with its own portfolio, available market data (including market estimates utilized in the sales of the NIM Certificates) and ongoing consultation with its investment bankers. The Company believes that the assumptions used in estimating cash flows are similar to those which would be used by an outside investor.
The Company's commercial finance receivables represent revolving credit arrangements with dealers for which a loss reserve is established at the time of origination. During 1995 a portion of these receivables was sold in the form of a revolving Master Trust. The portion of the loss reserve relating to the balances sold was reclassified as a liability, and no gain or loss was recorded at the time of sale. The Company's policy is to record income on these receivables only as realized.
Depreciation
Property, furniture and fixtures are carried at cost and are depreciated over their estimated useful lives on a straight-line basis.
Deferred debt expenses
Expenses associated with the issuance of long-term debt are amortized on a straight-line basis over the term of the debt. Amortization was $362,000 in 1995, $390,000 in 1994 and $389,000 in 1993.
Earnings per common and common equivalent share
Earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during each year. Common Stock equivalents consist of the dilutive effect of Common Stock which may be issued upon exercise of stock options. All share and per-share amounts have been restated to reflect the two-for-one stock splits the Company effected in June 1994 and October 1995. Earnings per share and fully diluted earnings per share are substantially the same.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid temporary investments purchased with a maturity of three months or less to be cash equivalents. These temporary investments include United States Treasury Funds, A1/P1 commercial paper or bank money market accounts. At December 31, 1995 and 1994, cash of approximately $239,617,000 and $164,901,000, respectively, was held in trust for subsequent payment to investors. In addition, cash of approximately $2,809,000 and $3,377,000 was restricted and held by the Company's subsidiaries pursuant to master repurchase agreements and government requirements at December 31, 1995 and 1994, respectively.
Other investments
Other investments consist of highly liquid investments with original maturities of more than three months. Other investments are held in United States Treasury Bills, United States Government and Agency Bonds, corporate bonds and certificates of deposit, and are stated at cost plus accrued interest, which approximates market value. At December 31, 1995 and 1994, investments of approximately $18,880,000 and $19,916,000, respectively, were held in trust for policy and claim reserves for the Company's insurance subsidiaries. In addition, investments of approximately $1,000,000 and $1,004,000 were restricted and held by the Company's subsidiaries pursuant to a master repurchase agreement at December 31, 1995 and 1994, respectively.
Allowance for losses
Recourse of investors against the Company is governed by the agreements between the investor and the Company (Note F). The allowance for losses on contracts sold with recourse represents the Company's best estimate of future credit losses likely to be incurred over the entire life of the contracts, pursuant to recourse provided to investors. Amounts representing losses on the contracts underlying the NIM Certificates are reflected in the carrying value of the subordinated certificates.
B. RECEIVABLES
Excess Servicing Rights Receivable
Excess servicing rights receivable consists of net excess cash expected to be collected over the life of the contracts sold. During 1995 and 1994, portions of these net cash flows were sold to investors through securitized NIM Certificate sales in which the Company retained a subordinated interest. As of December 31 excess servicing rights receivable consisted of:
During 1995 and 1994 the Company completed three sales of a substantial portion of its excess servicing rights receivable in the form of securitized NIM Certificates. Green Tree Securitized Net Interest Margin Trusts 1994-A, 1994-B and 1995-A, sold certificates representing approximately 72% to 78% of the estimated present value of future excess servicing cash flows derived from the Company's sales of certain manufactured housing contracts between 1978 and 1995. The remaining interests in the Net Interest
Margin Trusts were retained by the Company as subordinated interests.
This subordinated interest will continue to accrue interest as no payments of principal or interest will be made until the senior certificateholders have been paid in full. The carrying value is analyzed quarterly to determine the impact, if any, of adverse prepayment or loss experience. However, the carrying value will continue to reflect the discount rates utilized at the time of sale.
The carrying value of excess servicing rights receivable is analyzed quarterly to determine the impact of prepayments, if any.
During the years ended December 31, 1995, 1994 and 1993, the Company sold $12,236,000, $45,668,000 and $213,368,000, respectively, of GNMA guaranteed certificates secured by FHA-insured and VA-guaranteed contracts. At December 31, 1995 and 1994, the outstanding principal balance on GNMA certificates issued by the Company was $1,290,750,000 and $1,520,307,000, respectively.
During the years ended December 31, 1995, 1994 and 1993, the Company sold $4,586,851,000, $3,724,102,000 and $2,132,472,000, respectively, of contracts in various securitized transactions, and during 1995 and 1994, the Company sold $308,000,000 and $600,400,000 of NIM Certificates, respectively. At December 31, 1995 and 1994, the outstanding principal balance on all conventional securitized and private investor sales was $10,941,384,000 and $7,534,340,000, respectively.
Commercial Finance Receivables
The Company's commercial finance receivables represent revolving credit arrangements with dealers for which a loss reserve is established at the time of origination. As of December 31, 1995 and 1994 the outstanding principal balance on commercial finance receivables serviced by the Company was $574,100,000 and $167,723,000, respectively. During 1995 the Company sold $427,800,000 of these receivables in the form of a revolving Master Trust.
C. CONTRACTS, GNMA CERTIFICATES AND COLLATERAL
Contracts, GNMA certificates and collateral consist of:
Collateral in process of liquidation includes collateral related only to contracts which have not been included in the MH securitizations and GNMA pools underlying the NIM Certificate sales. Gross collateral in process of liquidation was $89,007,000 and $53,193,000 as of December 31, 1995 and 1994, respectively.
The aggregate method is used in determining the lower of cost or market value of contracts held for sale and contracts held as collateral. See fair value disclosure of financial instruments in Note H.
Potential losses on the liquidation of the collateral are included in determining the allowance for losses on contracts sold with recourse (Notes F and H).
Included in other accounts receivable as of December 31, 1994 was approximately $1,284,000 of GNMA certificates which were sold during 1994 for settlement in January 1995. These GNMA certificates along with contracts held for sale are used in full or in part as collateral on the Company's master repurchase agreements (Note E).
D. PROPERTY, FURNITURE AND FIXTURES
Property, furniture and fixtures consist of:
Depreciation expense for 1995, 1994 and 1993 was $10,956,000, $5,656,000 and $2,482,000, respectively.
E. DEBT
The Company has a $15,000,000 unsecured bank credit agreement for general operating purposes. The agreement provides for interest at variable rates and certain fee provisions, the costs of which are included in interest expense. The credit agreement contains certain restrictive covenants which include maintaining minimum net worth (as defined in the agreement) and a debt to net worth ratio not to exceed 5 to 1. In addition, the Company currently has $1.3 billion in master repurchase agreements with various investment banking firms for the purpose of financing its contract and commercial finance loan production. At December 31, 1995, the
Company had $3,350,000 of borrowings outstanding under these agreements and had $1,221,150,000 available, subject to the availability of eligible collateral. The master repurchase agreements all provide for annual terms that are extended each quarter by mutual agreement of the parties for an additional annual term based upon receipt of updated quarterly financial information from the Company. The Company believes that, if it so desires, these agreements will continue to be renewed.
During April 1995, the Company began borrowing under its commercial paper program through which it is authorized to issue up to $500,000,000 in notes of varying terms (not to exceed 270 days) to meet its liquidity needs. This program is backed by the bank and master repurchase agreements referred to above. As of December 31, 1995, the Company had issued and outstanding $90,500,000 in notes under this program.
The notes payable outstanding at December 31, 1995 bear interest at a weighted average rate of 6.15%.
Debt is as follows:
The Company has on file a shelf registration to issue up to $250 million of senior notes with maturities in excess of nine months. The notes may bear interest at fixed or floating rates. The senior notes outstanding at December 31, 1995 and 1994 bear interest at a weighted average rate of 7.27% and have maturities ranging from 1998 to 2003. Interest on these notes is payable semi- annually.
The 10-1/4% Senior Subordinated Notes due June 1, 2002 (the "Notes") were issued in connection with a debt exchange in April 1992. The effective interest rate on the Notes is 10.8%. The Company must maintain a net worth of $80,000,000 or will be required, through the operation of a sinking fund, to redeem $25,000,000 on such contingent sinking fund payment date. Interest is payable semi-annually.
At December 31, 1995, aggregate maturities of debt for the following five years are $23,000,000, payable as follows: $8,000,000 in 1998, $12,000,000 in 1999 and $3,000,000 in 2000.
F. ALLOWANCE FOR LOSSES ON CONTRACTS SOLD WITH RECOURSE
The Company sells GNMA guaranteed certificates which are secured by FHA-insured and VA-guaranteed contracts. The majority of credit losses incurred on these contracts are covered by FHA insurance or VA guarantees with the remainder borne by the Company.
In initially valuing its excess servicing rights receivable, the Company establishes an allowance for expected losses under the recourse provisions with investors/owners of contracts or investor certificates and calculates that allowance on the basis of historical experience and management's best estimate of future credit losses likely to be incurred. The amount of this provision is reviewed quarterly and adjustments are made if actual experience or other factors indicate management's estimate of losses should be revised. While the Company retains a substantial amount of risk of default on the loan portfolios that it sells, such risk has been substantially reduced through the sales of the NIM Certificates.
The Company has provided the investors/owners of pools of contracts with a variety of additional forms of credit enhancements on its securitized sales. These credit enhancements have included corporate guarantees, letters of credit and surety bonds that provide limited recourse to the Company, and letters of credit that, if drawn, are entitled to reimbursement only from the future excess cash flows of the underlying transactions. Furthermore, certain securitized sales structures use cash reserve funds and certain cash flows from the underlying pool of contracts as the credit enhancement. At December 31, 1995 and 1994, the Company had bank letters of credit and surety bonds outstanding of $156,617,000 and $174,910,000, respectively. Cash deposits held in interest bearing accounts totaled $159,311,000 and $146,057,000, and contracts pledged aggregated $10,217,000 and $10,307,000 at December 31, 1995 and 1994, respectively, and are maintained as part of credit enhancement features under certain sales structures.
Allowances are provided for the Company's best estimate of future credit losses likely to be incurred over the entire life of the contracts. Estimated losses are based on an analysis of the underlying loans and do not reflect the maximum recourse provided to investors. The following table presents an analysis of the allowance for losses on contracts sold with recourse for 1995, 1994 and 1993.
G. STOCKHOLDERS' EQUITY
Common Stock
In May 1994 and September 1995, the Board of Directors declared two-for-one stock splits, in the form of stock dividends, payable on June 30, 1994 and October 15, 1995 to stockholders of record as of June 15, 1994 and September 30, 1995, respectively. All references in the consolidated financial statements and notes with regard to number of shares, stock options and related prices, and per-share amounts have been restated to give retroactive effect to the stock splits.
In February 1995, the Company's Board of Directors approved and authorized the repurchase of up to 7,000,000 shares of the Company's Common Stock from time to time in the open market or in private transactions.
In September 1993, the Company completed a 10,000,000 share Common Stock offering, and sold an additional 1,500,000 shares to cover over-allotments. The net proceeds of approximately $138,000,000 were used to finance the Company's continued growth in its manufactured home, home improvement and consumer products contract inventory, to temporarily reduce certain borrowings under the Company's bank warehousing agreement and master repurchase agreements and for other general corporate purposes.
Preferred Stock
The Company's authorized shares of capital stock include 15,000,000 shares of stock designated as Preferred Stock. The Company had previously designated a series of Junior Preferred Stock in connection with its Stockholders Rights Plan (the "Plan"). As of October 31, 1995 the term of the Plan expired and the Company determined not to extend the term of the Plan. At December 31, 1995 there were no shares of Preferred Stock outstanding.
Rights
In October 1985, the Company issued one Preferred Stock purchase right for each share of Common Stock and amended the rights in August 1990 in connection with the Plan. As of October 31, 1995 the rights expired as the term of the Plan expired.
Stock option and stock bonus plans
In 1988, the Company's stockholders approved two stock option plans: an employee stock option plan and an outside director plan. In 1992, the Board of Directors approved a supplemental stock option plan for its outside directors and in 1995, the Company's stockholders approved an Employee Stock Incentive Plan.
A summary of the stock option plans is as follows:
Of the 6,256,532 options outstanding at December 31, 1995, 6,096,532 options related to the employee stock option plans, and 160,000 options related to the outside director plans. The director options and 2,575,532 shares of certain employee options were exercisable as of December 31, 1995. Options for 4,271,040 shares were available for future grant under these plans. The option price per share represents the market value of the Company's stock on the date of grant except for certain options granted in 1993 and 1995. The option price per share on 340,000 options granted in 1993 represents 50% of the market value of the Company's stock on the date of grant. The option price per share on 370,000 options granted in 1995 represents approximately 79% of the market value of the Company's stock on the date of grant.
In 1988, the Company's stockholders approved a key executive stock bonus plan. Shares issued under this plan are pursuant to an employment agreement and the stock is valued at $2.96875 per share which represents the closing market price of the stock on the date of the employment agreement. Total shares issued under this plan during 1995, 1994 and 1993 were 1,349,216, 886,428 and 481,240, respectively. As of December 31, 1995 there were 19,470,164 shares available for future issuance under this plan. This plan terminates December 31, 1998.
The Company's Board of Directors has reserved 12,406,252 shares for future issuance under all plans as of December 31, 1995.
Dividends
During 1995, 1994 and 1993 the Company declared and paid dividends of $.20, $.12 and $.08 per share, respectively, on its Common Stock.
Under a letter of credit agreement, the Company is subject to restrictions limiting the payment of dividends and common stock repurchases. At December 31, 1995, such payments were limited to $25,046,000, which represents 50% of consolidated net earnings for the most recently concluded four fiscal quarter period less dividends paid, repurchases of Common Stock and the retirement of Subordinated Indebtedness.
H. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose the estimated fair values of its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments.
Cash and cash equivalents, cash deposits and other investments
The carrying amount of cash and cash equivalents, cash deposits and other investments approximates fair value because they generally mature in 90 days or less and do not present unanticipated credit concerns.
Excess servicing rights receivable
Excess servicing rights receivable is calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar instruments at the time of sale. Projected performance is monitored on an ongoing basis. The initially established discount rate is fixed for the life of the transaction. As such, the fair value of excess servicing rights receivable primarily includes consideration of a current discount rate to be applied to the financial instrument as a whole.
The Company has consulted with investment bankers and obtained an estimate of a market discount rate. Utilizing this market discount rate, and such other assumptions as the Company believes market participants would use for similar instruments, the Company has estimated the fair value of its excess servicing rights receivable, excluding its subordinated interest in the NIM Certificates, to approximate its carrying value, shown net of the related allowance for losses which is disclosed separately as a liability on the balance sheet.
The carrying value of excess servicing relating to the subordinated interest retained in the NIM Certificates sold during 1994 and 1995 is calculated using prepayment and default assumptions which the Company believes market participants would use currently, but using the interest rate determined at the time of sale. For purposes of computing fair value, the Company consulted with its investment bankers and obtained an estimate of a market interest rate as of December 31, 1995. Using that rate, fair value exceeds carrying value
for this component of excess servicing rights receivable by $56,600,000.
Contracts held for sale and as collateral
Contracts held for sale and as collateral are generally recent originations which will be sold during the following quarter. The Company does not charge origination fees or points and, as such, its contracts have origination rates generally in excess of rates on the securities into which they will be pooled. Since these contracts have not been converted into securitized pools, the Company estimates the fair value to be the carrying amount plus the cost of origination.
Commercial finance receivable
Commercial finance receivable consists entirely of loans which reprice monthly, typically in accordance with the prime lending rate offered by banks. Given this repricing structure, the Company estimates the fair value of these receivables to approximate their carrying value.
Collateral in process of liquidation
Collateral in the process of liquidation is valued on an individual unit basis after inspection of such collateral. Shown net of the related allowance for losses on contracts sold with recourse, fair value approximates carrying value.
Other contracts held
Pursuant to investor sale agreements, certain contracts are repurchased by the Company as a result of delinquency before they are repossessed, and are included in other contracts held. The loss has been estimated on an aggregate basis, and is included on the balance sheet in allowance for losses on contracts sold with recourse.
Notes payable
Notes payable consists of amounts payable under the Company's commercial paper program, bank line or repurchase agreements and, given its short-term nature, is at a rate which approximates market. As such, fair value approximates the carrying amount.
Senior notes
The fair value of the Company's senior notes is estimated based on their quoted market price or on the current rates offered to the Company for debt of a similar maturity.
Senior subordinated notes and debentures
The Company's senior subordinated notes and debentures are valued at quoted market prices.
The carrying amounts and estimated fair values of the Company's financial assets and liabilities are as follows:
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future loss and prepayment experience, current economic conditions, specific risk characteristics and other factors. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a regional branch network with significant dealer relationships and proprietary credit scoring systems, which contribute to the Company's ongoing profitability and neither of which is considered a financial instrument.
I. COMMITMENTS AND CONTINGENCIES
Lease commitments
At December 31, 1995, aggregate minimum rental commitments under noncancelable leases having terms of more than one year were $18,087,000, payable $5,853,000 (1996), $5,498,000 (1997), $4,021,000 (1998), $1,765,000 (1999) and $950,000 (2000). Total rental expense for the years ended December 31, 1995, 1994 and 1993 was $6,101,000, $5,065,000 and $4,449,000, respectively. These leases are for office facilities and equipment, and many contain either clauses for cost of living increases and/or options to renew or terminate the lease.
Litigation
The nature of the Company's business is such that it is routinely a party or subject to items of pending or threatened litigation. Although the ultimate outcome of certain of these matters cannot be predicted, management believes, based upon information currently available and the advice of counsel, that the resolution of these routine legal matters will not result in any material adverse effect on its consolidated financial condition.
J. BENEFIT PLANS
The Company has a qualified noncontributory defined benefit pension plan covering substantially all of its employees over 21 years of age. The plan's benefits are based on years of service and the employee's compensation. The plan is funded annually based on the maximum amount that can be deducted for federal income tax purposes. The assets of the plan are primarily invested in common stock, corporate bonds and cash equivalents. As of December 31, 1995 and 1994, net assets available for plan benefits were $7,790,000 and $5,873,000, and the accumulated benefit obligation was $6,393,000 and $3,934,000, respectively. As of December 31, 1995 and 1994, the projected benefit obligation of the plan was $12,466,000 and $7,460,000, respectively. In addition, the Company maintains a nonqualified pension plan for certain key employees as designated by the Board of Directors. This plan is not currently funded and the projected benefit obligation at December 31, 1995 and 1994 was $13,023,000 and $9,711,000, respectively. Total pension expense for the plans in 1995, 1994 and 1993 was $3,091,000, $3,585,000 and $2,340,000, respectively.
The Company also has a 401(k) Retirement Savings Plan available to all eligible employees. To be eligible for the plan, the employee must be at least 21 years of age and have completed one year of employment at Green Tree during which the employee worked at least 1,000 hours. Eligible employees may contribute to the plan up to 10% of their earnings with a maximum of $9,240 for 1995 based on the Internal Revenue Service annual contribution limit. The
Company will match 50% of the employee contributions for an amount up to 6% of each employee's earnings. Contributions are invested at the direction of the employee in one or more funds. Company contributions vest after three years. Company contributions to the plan were $859,000, $713,000 and $575,000 in 1995, 1994 and 1993, respectively.
K. INCOME TAXES
Income taxes consist of the following:
Deferred income taxes are provided for temporary differences between pretax income for financial reporting purposes and taxable income. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented below.
At December 31, 1995, the Company has net operating loss carryforwards for federal income tax purposes of approximately $37,000,000 which are available to offset future federal taxable income and expire no earlier than 2003. No valuation allowance was required as of December 31, 1995 or 1994 since it is likely that
the deferred tax asset will be realized against future taxable income.
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
QUARTERLY RESULTS OF OPERATIONS (unaudited) -------------------------------------------
ITEM 9.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------------------------------------------------------------
Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1996 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before May 1, 1996.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION. - ---------------------------------
Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1996 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before May 1, 1996.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------
Pursuant to General Instruction G(3), reference is made to the information contained in the Company's definitive proxy statement for its 1996 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before May 1, 1996.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ---------------------------------------------------------
Reference is made to Note I of Notes to Consolidated Financial Statements contained in Item 8 hereof.
PART IV -------
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(l) Financial statements
The following consolidated financial statements of Green Tree Financial Corporation and subsidiaries are included in Part II, Item 8 of this report:
Page(s) -------
Independent Auditors' Report 31 Consolidated Balance Sheets - December 31, 1995 and 1994 32 Consolidated Statements of Operations - years ended December 31, 1995, 1994 and 1993 33 Consolidated Statements of Stockholders' Equity - years ended December 31, 1995, 1994 and 1993 34 Consolidated Statements of Cash Flows - years ended December 31, 1995, 1994 and 1993 35-36 Notes to Consolidated Financial Statements 37-53
(2) Financial statement schedules
The following consolidated financial statement schedule of Green Tree Financial Corporation and subsidiaries are included in Part IV of this report:
Schedule II - Valuation and qualifying accounts 61
Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information required is included in the consolidated financial statements or notes thereto.
(3) Exhibits
Exhibit No. -------
3(a) Certificate of Incorporation of Green Tree Financial Corporation (incorporated by reference to the Company's Registration Statement on Form S-1; File No. 33-60869).
3(b) Certificate of Merger of Incorporation of Green Tree Financial Corporation, as filed with the Delaware Secretary of State on June 30, 1995 (incorporated by reference to the Company's
Registration Statement on Form S-1; File No. 33-60869.)
3(c) Bylaws of Green Tree Financial Corporation (incorporated by reference to Company's Registration Statement on Form S-1; File No. 33-60869).
4(a) Indenture dated as of March 15, 1992 relating to $287,500,000 of 10 1/4% Senior Subordinated Notes due June 1, 2002 (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249).
4(b) Indenture dated as of September 1, 1992 relating to $250,000,000 of Medium-Term Notes, Series A, Due Nine Months or More From Date of Issue (incorporated by reference to the Company's Registration Statement on Form S-3; File No. 33- 51804).
10(a) Company's Key Executive Bonus Program (incorporated by reference to the Company's Registration Statement on Form S-l; File No. 2-82880).
10(b) Employment Agreement, dated April 20, 1991 between the Company and Lawrence M. Coss (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249).
10(c) Green Tree Financial Corporation 1987 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249).
10(d) Green Tree Financial Corporation Key Executive Stock Bonus Plan (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33-42249).
10(e) Master Repurchase Agreement dated as of August 1, 1990 between Green Tree Finance Corp.-Three and Merrill Lynch Mortgage Capital Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990; File No. 0-11652); as amended by Amendment to the Master Repurchase Agreement dated May 10, 1993 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994; File No. 0-11652); as amended by Amendment to the Master Repurchase
Agreement dated August 8, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995; File No. 0-11652).
10(f) Credit Agreement dated as of May 22, 1995 between Green Tree Financial Corporation and First Bank National Association (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995; File No. 0-11652).
10(g) Master Repurchase Agreement dated as of May 17, 1991 between Green Tree Finance Corp.-Four and First Boston Mortgage Capital Corp. (incorporated by reference to the Company's Registration Statement on Form S-4; File No. 33- 42249); as amended by Amendment to the Master Repurchase Agreement dated March 31, 1994 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994; File No. 0-11652).
10(h) Insurance and Indemnity Agreement dated as of February 13, 1992 among Green Tree Financial Corporation, MaHCS Guaranty Corporation and Financial Security Assurance Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991; File No. 0-11652); as amended by Amended and Restated Insurance and Indemnity Agreement dated March 11, 1994 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994; File No. 0- 11652).
10(i) Master Repurchase Agreement dated as of October 15, 1992 between Green Tree Finance Corp.-Five and Lehman Commercial Paper, Inc. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 0-11652); as amended by Amendment to the Master Repurchase Agreement dated June 30, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995; File No. 0-11652).
10(j) 401(k) Plan Trust Agreement effective as of October 1, 1992 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 0-11652).
10(k) Green Tree Financial Corporation 1992 Supplemental Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993; File No. 0-11652).
10(l) Master Repurchase Agreement dated as of September 1, 1995 between Merrill Lynch Mortgage Capital, Inc. and Green Tree Financial Corporation (filed herewith).
10(m) Master Repurchase Agreement dated as of November 9, 1995 between Salomon Brothers Holding Company and Green Tree Financial Corporation (filed herewith).
10(n) Green Tree Financial Corporation 1995 Employee Stock Incentive Plan (filed herewith).
11(a) Computation of Primary Earnings Per Share (filed herewith).
11(b) Computation of Fully Diluted Earnings Per Share (filed herewith).
12 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of KPMG Peat Marwick LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).
PURSUANT TO ITEM 601(b)(4) OF REGULATION S-K, THERE HAS BEEN EXCLUDED FROM THE EXHIBITS FILED PURSUANT TO THIS REPORT, INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF LONG-TERM DEBT OF THE COMPANY WHERE THE TOTAL AMOUNT OF THE SECURITIES AUTHORIZED UNDER SUCH INSTRUMENTS DOES NOT EXCEED TEN PERCENT OF THE TOTAL ASSETS OF THE COMPANY. THE COMPANY HEREBY AGREES TO FURNISH A COPY OF ANY SUCH INSTRUMENTS TO THE COMMISSION UPON REQUEST.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Green Tree Financial Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GREEN TREE FINANCIAL CORPORATION
By: /s/Lawrence M. Coss By: /s/Robley D. Evans -------------------------- ---------------------------- Lawrence M. Coss Robley D. Evans Chairman and Chief Vice President and Executive Officer Controller (principal (principal executive financial and principal officer) accounting officer)
Dated: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/Lawrence M. Coss - --------------------------------- Lawrence M. Coss, Director March 25, 1996
/s/Richard G. Evans - --------------------------------- Richard G. Evans, Director March 25, 1996
/s/Robert D. Potts - --------------------------------- Robert D. Potts, Director March 25, 1996
By: /s/Joel H. Gottesman ------------------------- Joel H. Gottesman Attorney-in-Fact W. Max McGee, Director ) Dated: March 25, 1996 ) Tania A. Modic, Director ) ) Robert S. Nickoloff, Director )
GREEN TREE FINANCIAL CORPORATION AND SUBSIDIARIES -------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS -----------------------------------------------
Notes:
(a) Reduced as a result of the NIM Certificate sales. (b) Amortization and discount. (c) Amounts charged off.
GREEN TREE FINANCIAL CORPORATION
Securities and Exchange Commission
Form 10-K (For the Fiscal Year Ended December 31, 1995)
EXHIBIT INDEX
Exhibit No. Exhibit Page No. - ----------- ------- --------
10(l) Master Repurchase Agreement dated as of September 1, 1995 between Merrill Lynch Mortgage Capital, Inc. and Green Tree Financial Corporation 63
10(m) Master Repurchase Agreement dated as of November 9, 1995 between Salomon Brothers Holding Company and Green Tree Financial Corporation 103
10(n) Green Tree Financial Corporation 1995 Employee Stock Incentive Plan 169
11(a) Computation of Primary Earnings Per Share 181
11(b) Computation of Fully Diluted Earnings Per Share 182
12 Computation of Ratio of Earnings to Fixed Charges 183
21 Subsidiaries of Registrant 184
23 Consent of KPMG Peat Marwick LLP 186
24 Powers of Attorney 187
27 Financial Data Schedule 188