<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-11164
Conseco, Inc.
Indiana No. 35-1468632
State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 573-6100
Address of principal executive offices Telephone
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Shares of common stock outstanding as of July 25, 1994: 24,452,386
<PAGE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
June 30, December 31,
1994 1993
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Fixed maturities:
Actively managed at fair value (amortized cost: 1994 - $3,018.3;
1993 - $9,525.4) . . . . . . . . . . . . . . $2,788.5 $ 9,820.6
Held to maturity at amortized cost (fair value: 1994 - $ - ;
1993 - $1.6) . . . . . . . . . . . . . . . . - 1.1
Equity securities at fair value (cost: 1994 - $15.1; 1993- $30.2) 14.7 30.3
Mortgage loans . . . . . . . . . . . . . . . . . 77.2 158.4
Credit-tenant loans. . . . . . . . . . . . . . . 46.0 326.9
Policy loans . . . . . . . . . . . . . . . . . . 116.9 190.0
Investment in Western National Corporation . . . 193.1 -
Investment in CCP Insurance, Inc.. . . . . . . . 218.1 244.3
Other invested assets. . . . . . . . . . . . . . 49.2 64.2
Trading account securities . . . . . . . . . . . 27.8 105.8
Short-term investments . . . . . . . . . . . . . 472.0 666.4
Assets held in separate accounts . . . . . . . . 73.7 81.1
________ _________
Total investments . . . . . . . . . . . . . 4,077.2 11,689.1
Accrued investment income. . . . . . . . . . . . 56.9 168.3
Reinsurance receivables. . . . . . . . . . . . . 39.4 511.1
Deferred income taxes. . . . . . . . . . . . . . 48.0 -
Cost of policies purchased . . . . . . . . . . . 621.6 603.7
Cost of policies produced. . . . . . . . . . . . 216.7 258.6
Goodwill (net of accumulated amortization:
1994 - $18.5; 1993 - $14.3). . . . . . . . . . . 316.0 320.6
Property and equipment at cost (net of accumulated depreciation:
1994 - $22.9; 1993 - $21.1). . . . . . . . . . . 74.3 71.7
Other assets . . . . . . . . . . . . . . . . . . 149.3 126.2
________ _________
Total assets. . . . . . . . . . . . . . . . $5,599.4 $13,749.3
======== =========
(continued on next page)
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1994 1993
---- ----
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities . . . . . . . . . . . . . $3,527.6 $10,798.3
Income tax liabilities . . . . . . . . . . . . - 118.2
Investment borrowings . . . . . . . . . . . . . 189.7 427.7
Other liabilities . . . . . . . . . . . . . . . 258.2 256.4
Liabilities related to separate accounts. . . . 72.9 79.0
Notes payable of Conseco. . . . . . . . . . . . 230.5 413.0
Notes payable of Bankers Life Holding Corporation,
not direct obligations of Conseco. . . . . . 279.7 290.3
________ _________
Total liabilities . . . . . . . . . . . . . 4,558.6 12,382.9
Minority interest. . . . . . . . . . . . . . . . 185.9 223.8
________ _________
Shareholders' equity:
Preferred stock . . . . . . . . . . . . . . . . 287.5 287.5
Common stock and additional paid-in capital, no par value,
500,000,000 shares authorized, shares outstanding:
1994 - 24,645,708; 1993 - 25,311,773 . . . . 172.4 102.8
Unrealized appreciation (depreciation) of securities
(net of applicable deferred income
taxes: 1994 - $(39.0); 1993 - $41.8) . . . . (118.5) 97.5
Retained earnings . . . . . . . . . . . . . . . 513.5 654.8
________ _________
Total shareholders' equity. . . . . . . . . 854.9 1,142.6
________ _________
Total liabilities and shareholders' equity. $5,599.4 $13,749.3
======== =========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 4
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
--------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . $312.9 $322.8 $634.0 $ 642.3
Investment activity:
Net investment income. . . . . . 73.4 228.7 141.9 434.8
Net trading income (loss). . . . (2.4) 15.5 (2.4) 52.6
Net realized gain (loss) . . . . (4.0) 36.4 (11.6) 70.1
Fee revenue . . . . . . . . . . . 15.2 7.8 28.1 14.9
Equity in earnings of Western National Corporation 9.5 - 31.4 -
Equity in earnings of CCP Insurance, Inc. 9.2 9.6 17.2 17.3
Merchant banking income . . . . . - - 65.3 138.1
Other income. . . . . . . . . . . .1 .3 .2 .5
______ ______ ______ ________
Total revenues . . . . . . . . 413.9 621.1 904.1 1,370.6
______ ______ ______ ________
Benefits and expenses:
Insurance policy benefits . . . . 224.0 250.9 456.3 503.6
Change in future policy benefits. 8.7 15.9 19.8 30.1
Interest expense on annuities and financial products 18.2 106.1 32.8 207.8
Interest expense on long-term debt 11.7 13.5 25.2 29.6
Interest expense on short-term investment borrowings 2.7 2.2 4.9 3.5
Amortization related to operations 32.3 34.2 62.5 65.4
Amortization and change in future policy benefits
related to realized gains and losses - 26.6 (.9) 55.5
Other operating costs and expenses 52.9 58.9 105.9 111.2
______ ______ ______ ________
Total benefits and expenses. . 350.5 508.3 706.5 1,006.7
______ ______ ______ ________
Income before income taxes, minority
interest and extraordinary charge 63.4 112.8 197.6 363.9
Income tax expense. . . . . . . . . 18.5 38.1 58.3 132.0
______ ______ _______ _______
Income before minority interest and
extraordinary charge . . . . 44.9 74.7 139.3 231.9
Less minority interest. . . . . . . 10.7 23.3 22.6 38.1
______ ______ ______ _______
Income before extraordinary charge 34.2 51.4 116.7 193.8
Extraordinary charge on extinguishment of debt,
net of taxes and minority interest - - 2.4 10.9
______ ______ ______ _______
(continued on next page)
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 5
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS, continued
(Dollars in millions, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
--------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . 34.2 51.4 114.3 182.9
Less preferred stock dividends. . . 4.6 6.1 9.3 10.8
_____ _____ ______ ______
Earnings applicable to common stock $29.6 $45.3 $105.0 $172.1
===== ===== ====== ======
Earnings per common share and common equivalent share:
Primary:
Weighted average shares. . . . . 26,487,000 29,248,000 27,396,000 29,305,000
Earnings before extraordinary charge $1.11 $1.55 $3.92 $6.24
Extraordinary charge . . . . . . - - (.09) (.37)
_____ _____ _____ _____
Net income . . . . . . . . . . $1.11 $1.55 $3.83 $5.87
===== ===== ===== =====
Fully diluted:
Weighted average shares. . . . . 30,996,000 33,799,000 31,905,000 33,233,000
Earnings before extraordinary charge $1.10 $1.48 $3.66 $5.75
Extraordinary charge . . . . . . - - (.08) (.33)
_____ _____ _____ _____
Net income . . . . . . . . . . $1.10 $1.48 $3.58 $5.42
===== ===== ===== =====
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 6
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Six months ended
June 30,
---------------
1994 1993
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning of period. . . . . . . . . . $ 287.5 $ 50.0
Series D preferred shares issued. . . . . . . - 287.5
_______ ________
Balance, end of period. . . . . . . . . . . . . $ 287.5 $ 337.5
======= ========
Common stock and additional paid-in capital:
Balance, beginning of period. . . . . . . . . . $ 102.8 $ 115.4
Amounts related to stock options and employee benefit plans 18.8 1.7
Tax benefit related to issuance of shares under employee benefit plans 67.5 4.4
Cost of shares acquired charged to common stock and additional
paid-in capital . . . . . . . . . . . . . . (16.7) (11.6)
Cost of issuance of Series D preferred shares - (9.0)
_______ ________
Balance, end of period. . . . . . . . . . . . . $ 172.4 $ 100.9
======= ========
Unrealized appreciation (depreciation) of securities:
Balance, beginning of period. . . . . . . . . . $ 97.5 $ 42.9
Change in unrealized appreciation (depreciation) (216.0) 50.8
_______ ________
Balance, end of period. . . . . . . . . . . . . $(118.5) $ 93.7
======= ========
Retained earnings:
Balance, beginning of period. . . . . . . . . . $ 654.8 $ 386.0
Net income . . . . . . . . . . . . . . . . . 114.3 182.9
Cost of shares acquired charged to retained earnings (240.0) -
Dividends on common stock . . . . . . . . . . (6.3) (1.3)
Dividends on preferred stock. . . . . . . . . (9.3) (10.8)
_______ ________
Balance, end of period. . . . . . . . . . . . . $ 513.5 $ 556.8
======= ========
Total shareholders' equity. . . . . . . . . $ 854.9 $1,088.9
======= ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 7
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Six months ended
June 30,
---------------
1994 1993
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $114.3 $ 182.9
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation . . . . . . . . . . 65.1 111.0
Income taxes. . . . . . . . . . . . . . . . . . . (27.4) 16.1
Insurance liabilities . . . . . . . . . . . . . . 28.8 52.0
Interest credited to insurance liabilities. . . . 32.8 207.8
Fees charged to insurance liabilities . . . . . . (17.5) (19.6)
Accrual and amortization of investment income . . (13.4) (25.4)
Deferral of cost of policies produced . . . . . . (65.2) (79.8)
Merchant banking income . . . . . . . . . . . . . (65.3) (138.1)
Equity in earnings of Western National Corporation (30.4) -
Equity in earnings of CCP Insurance, Inc. . . . . (16.7) (17.3)
Trading account securities. . . . . . . . . . . . 17.2 55.0
Minority interest . . . . . . . . . . . . . . . . 18.1 37.3
Extraordinary charge on extinguishment of debt. . 2.4 10.9
Other . . . . . . . . . . . . . . . . . . . . . . (22.7) 40.7
-------- --------
Net cash provided by operating activities. . . 20.1 433.5
-------- --------
Cash flows from investing activities:
Proceeds from sale of shares of Western National Corporation and
related transactions 537.9 -
Sales of investments . . . . . . . . . . . . . . . . 898.3 3,253.4
Maturities and redemptions . . . . . . . . . . . . . 84.7 766.7
Purchases of investments . . . . . . . . . . . . . . (1,099.0) (5,182.6)
Cash received from reinsurance recapture . . . . . . 158.8 43.2
Cash held by Western National Corporation before deconsolidation
and the settlement of intercompany balances . . . . (352.5) -
Other. . . . . . . . . . . . . . . . . . . . . . . . (39.7) (88.0)
-------- --------
Net cash provided (used) by investing activities 188.5 (1,207.3)
-------- --------
Cash flows from financing activities:
Issuance of capital stock . . . . . . . . . . . . . 16.3 279.6
Issuance of capital stock by subsidiary. . . . . . . - 405.3
Issuance of debt of Conseco, net . . . . . . . . . . 34.6 195.6
Payments on debt of Conseco . . . . . . . . . . . . (220.3) (166.2)
Payments on debt of subsidiary - not direct obligations of Conseco (11.0) (103.3)
Payments to repurchase equity securities . . . . . . (256.7) (11.6)
Payments to repurchase equity securities of subsidiaries (21.1) (52.2)
Deposits to insurance liabilities. . . . . . . . . . 169.9 662.7
Investment borrowings. . . . . . . . . . . . . . . . (17.4) 284.4
Withdrawals from insurance liabilities . . . . . . . (81.6) (263.6)
Dividends paid . . . . . . . . . . . . . . . . . . . (15.7) (8.2)
-------- --------
Net cash provided (used) by financing activities (403.0) 1,222.5
-------- --------
Net increase (decrease) in short-term investments (194.4) 448.7
Short-term investments, beginning of period . . . . . 666.4 666.6
-------- --------
Short-term investments, end of period . . . . . . . . $ 472.0 $1,115.3
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE> 8
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes should be read in conjunction with the notes to
consolidated financial statements included in the 1993 Form 10-K of Conseco,
Inc. ("Conseco" or the "Company").
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of June 30, 1994, and
for the three and six months ended June 30, 1994 and 1993, reflect all
adjustments, consisting only of normal recurring items, which are necessary to
present fairly the Company's financial position and results of operations on
a basis consistent with that of the prior audited consolidated financial
statements. The consolidated financial statements include Conseco, Inc., its
wholly owned subsidiaries and Bankers Life Holding Corporation and its wholly
owned subsidiaries ("BLH"). Conseco's principal wholly owned insurance
subsidiaries are Bankers National Life Insurance Company, National Fidelity
Life Insurance Company and Lincoln American Life Insurance Company
(collectively referred to as "Wholly Owned Insurance Subsidiaries"). In the
first six months of 1993 and as of December 31, 1993, the consolidated
financial statements also included the accounts of Western National Life
Insurance Company ("Western"). As described under "Investment in Western
National Corporation" in these notes, Western National Corporation ("WNC"), a
company formed to be the holding company for Western, completed an initial
public offering ("IPO") of its common stock on February 15, 1994. The shares
issued in the offering represented a 60 percent interest in WNC. The remaining
common shares, which represent a 40 percent interest, are held by the Company.
Accordingly, WNC is included in Conseco's financial statements on the equity
basis as of January 1, 1994. Intercompany amounts and transactions among
consolidated subsidiaries are eliminated. Certain amounts from the prior
period were reclassified to conform to the 1994 presentation.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITIES
The Company classifies fixed maturity investments into two categories:
"actively managed" (which are carried at estimated fair value) and "held to
maturity" (which are carried at amortized cost). There were no fixed maturity
investments in the "held to maturity" category at June 30, 1994. The
adjustment to carry actively managed fixed maturity investments at fair value
(as described in note 1 to the consolidated financial statements included in
the Company's 1993 Form 10-K) resulted in the following cumulative effects on
balance sheet accounts as of June 30, 1994:
<TABLE>
<CAPTION>
Adjustment to Carry
Balance Actively Managed
before Fixed Maturities Reported
Adjustment at Fair Value Amount
---------- ------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities $3,018.3 $(229.8) $2,788.5
Cost of policies purchased. . . . 542.7 78.9 621.6
Cost of policies produced . . . . 204.9 11.8 216.7
Income tax liabilities (assets) . 4.5 (52.5) (48.0)
Minority interest . . . . . . . . 217.6 (31.7) 185.9
Unrealized depreciation of securities (63.6) (54.9) (118.5)
</TABLE>
<PAGE>
<PAGE> 9
INVESTMENT IN WESTERN NATIONAL CORPORATION
On February 15, 1994, WNC completed the IPO of 37.2 million shares of
common stock, of which 2.3 million shares were sold by WNC and 34.9 million
shares were sold by Conseco. In addition, Conseco sold .2 million shares to
the President of WNC at the IPO price less underwriting discounts and
commissions. Prior to the IPO, Western and WNC were wholly owned subsidiaries
of Conseco. WNC was formed in October 1993 to be the holding company for
Western. In connection with the organization of WNC and the transfer of the
stock of Western to WNC by Conseco, WNC issued 60 million shares of its common
stock and a $150.0 million, 6.75 percent senior note due March 31, 1996 (the
"Conseco Note") to Conseco. On February 22, 1994, WNC completed a public
offering of $150.0 million aggregate principal amount of 7.125 percent senior
notes due February 15, 2004. The net proceeds from the offering of $147.5
million (after original issue discount, underwriting discount and offering
expenses) and certain proceeds from WNC's IPO of common stock were used
to repay the Conseco Note.
The shares sold in the IPO and the related sale to the President of WNC
represent a 60 percent interest in WNC. The remaining common shares, which
represent a 40 percent interest, are held by Conseco. Net pretax proceeds to
Conseco from the repayment of the Conseco Note and the sale of WNC shares
totaling $537.9 million were used to repay a $200 million senior unsecured loan
and for other general corporate purposes. Effective January 1, 1994, WNC is
included in Conseco's financial statements on the equity method. In the first
quarter of 1994, Conseco recorded a gain of approximately $42.4 million (net
of taxes of $22.9 million) as a result of these transactions.
PRO FORMA DATA
The following pro forma data are presented as if the IPO of WNC had
occurred on January 1, 1993. Additionally, the pro forma data for the six
months ended June 30, 1993, are presented as if all financing transactions
related to the IPO of BLH and Conseco's subsequent purchases of additional
shares of BLH and CCP Insurance, Inc. ("CCP"), as described in the notes to the
consolidated financial statements included in Conseco's 1993 Form 10-K, had
occurred on January 1, 1993.
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1994(a) 1993(b)
------- -------
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues . . . . . . . . . . . . $832.3 $894.5
Income before extraordinary charge 66.1 73.2
Income before extraordinary charge per
common share:
Primary . . . . . . . . . . . . 2.07 2.12
Fully diluted . . . . . . . . . 2.07 2.12
--------------------
<FN>
(a) Excludes revenues, net income, net income per primary common share and
net income per fully diluted common share related to the gain on the
sale which resulted from WNC's IPO and related transactions of $65.3
million, $42.4 million, $1.55 and $1.33, respectively.
(b) Excludes revenues, net income, net income per primary common share and
net income per fully diluted common share related to the gain on the
sale and incentive earnings allocation which resulted from BLH's IPO
and related transactions of $138.1 million, $84.7 million, $2.89 and
$2.55, respectively.
</TABLE>
<PAGE>
<PAGE> 10
CHANGES IN LONG-TERM DEBT
Notes Payable of Conseco
In February 1994, the Company repaid in full a $200 million senior
unsecured loan executed in connection with the Company's acquisition of
additional BLH common shares in September 1993. The loan was repaid with the
proceeds from the sale of shares of WNC and resulted in an extraordinary charge
of $1.2 million (net of a $.6 million tax benefit).
In March 1994, the Company repaid two unsecured promissory notes with book
values totaling $19.2 million, resulting in an extraordinary charge of $.7
million (net of a $.4 million tax benefit).
In April 1994, the Company entered into a revolving credit agreement which
provides a $140.0 million credit facility through May 1, 1997. The agreement
permits borrowings based on defined rates plus an applicable margin based on
the rating of the Company's unsecured senior notes. The interest rate under
the revolving credit agreement at June 30, 1994, was 5.32 percent. The Company
must prepay the loan if certain ratios are not maintained. The Company expects
to repay the loan in connection with the acquisitions described under "Pending
Acquisitions." The Company borrowed $35.0 million under the agreement on June
27, 1994, and an additional $20.0 million on July 19, 1994. The Company pays
a commitment fee equal to .25 percent per annum on the average daily unused
commitments.
Notes Payable of BLH (not direct obligations of Conseco)
During March 1994, BLH made a scheduled $11.0 million principal payment on
the senior term loan. The interest rate on BLH's senior term loan was 6.38
percent at June 30, 1994.
Notes Payable of CCP
In the first quarter of 1994, CCP repaid an unsecured note, resulting in
an extraordinary charge to CCP of $1.3 million (net of a $.7 million tax
benefit). Conseco's share of this charge ($.5 million) was included as an
extraordinary charge in the consolidated statement of operations.
CHANGES IN CAPITAL STOCK
In February 1994, Conseco implemented an option exercise program under
which its chief executive officer and four executive vice presidents exercised
outstanding options to purchase approximately 3.6 million shares of the
Company's common stock. The options would otherwise have remained exercisable
until the years 1999 and 2000. As a result of the exercise, the Company
realized a tax deduction equal to the aggregate tax gain recognized by the
executives as a result of the exercise. The tax benefit of $67.5 million (net
of payroll taxes incurred of $2.9 million) and the proceeds from the exercise
of these and other employee options of $16.3 million were reflected as
increases in common stock and paid-in capital. The Company withheld sufficient
shares to cover federal and state taxes owed by the executives as a result of
the exercise transactions. Net of withheld shares, the Company issued
approximately 1.8 million common shares to the executives. The Company also
granted to the executive officers new options to purchase a total of 3,016,000
shares of the Company's common stock at $59.25 per share (the market price at
the date of such grant) under the 1994 Stock and Incentive Plan to replace the
shares surrendered for taxes and the exercise price on these and other recent
option exercises and as the 1994 incentive grant to six executives.
<PAGE>
<PAGE> 11
In addition to the 1.8 million shares repurchased as described above, the
Company repurchased approximately 3.2 million common shares during the first
six months of 1994, as part of its previously announced stock repurchase
program. The total cost of shares repurchased during the first two quarters
of 1994 of $256.7 million was allocated to shareholders' equity accounts as
follows: (i) $16.7 million to common stock and paid-in capital (such
allocation was based on the average common stock and paid-in capital balance
per share); and (ii) $240.0 million to retained earnings.
During the first six months of 1994, 2,921 shares of common stock were
contributed to employee benefit plans. Additionally, $2.5 million was added
to common stock and additional paid-in capital related to employee benefit
plans.
REINSURANCE
The cost of reinsurance ceded for policies containing mortality or
morbidity risks totaled $16.6 million and $20.9 million in the first six months
of 1994 and 1993, respectively. This cost was deducted from insurance policy
income. Reinsurance premiums assumed on policies containing mortality risks
totaled $.6 million in the first six months of both 1994 and 1993. Reinsurance
recoveries netted against insurance policy benefits totaled $10.4 million and
$23.2 million in the first six months of 1994 and 1993, respectively.
Effective April 1, 1994, BLH recaptured certain annuity business previously
ceded to an unaffiliated company and
retroceded to an affiliate of ICH Corporation. The Company capitalized the
excess of assumed liabilities of $390.2 million
over acquired assets of $371.0 million as a component of cost of policies
purchased.
CHANGES IN MINORITY INTEREST
The change in minority interest during the first six months of 1994 was
attributable to the minority interests' share of the results of BLH's
operations of $22.6 million, offset by (i) the change in unrealized
appreciation (depreciation) of BLH's investments of $32.2 million consistent
with the requirements of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities; (ii)
dividends to minority interests of $7.2 million and (iii) repurchase by BLH of
shares held by minority interests for $21.1 million. <PAGE>
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting the results
of operations and the significant changes in balance sheet items. The
comparison of 1994 and 1993 balances in the consolidated financial statements
is largely affected by the transactions described in the notes to the
consolidated financial statements included herein and the notes to the
consolidated financial statements included in the 1993 Form 10-K of Conseco.
This discussion should be read in conjunction with the aforementioned
consolidated financial statements and related notes.
RESULTS OF OPERATIONS
Conseco's earnings result from three different activities:
- Operations of life insurance companies;
- Services provided to affiliates and non-affiliates for fees; and
- Merchant banking activities, consisting of acquisition and
restructuring of life insurance companies currently conducted through
Conseco Capital Partners II, L.P. ("CCP II").
<PAGE>
<PAGE> 13
The following table shows the sources of Conseco's net income (after taxes
and minority interest) disaggregated for the above three earnings activities.
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . $19.1 $ 7.0 $ 30.6 $ 13.9
Net trading income (loss) . . . . (.4) 2.0 (.4) 4.7
Net realized gain (loss). . . . . (1.6) 1.1 (1.9) 2.6
Extraordinary charge . . . . . . - (.2) - (2.1)
----- ----- ------ ------
Net income. . . . . . . . . . . 17.1 9.9 28.3 19.1
----- ----- ------ ------
WNC:
Operating earnings . . . . . . . 8.8 21.3 30.5 43.8
Net trading income. . . . . . . . - 4.0 - 13.1
Net realized gain . . . . . . . . - 2.6 - 7.2
----- ----- ------ ------
Net income. . . . . . . . . . . 8.8 27.9 30.5 64.1
----- ----- ------ ------
CCP:
Operating earnings . . . . . . . 8.6 8.9 16.0 16.0
Extraordinary charge. . . . . . . - - (.5) -
----- ----- ------ ------
Net income. . . . . . . . . . . 8.6 8.9 15.5 16.0
----- ----- ------ ------
Wholly Owned Insurance Subsidiaries:
Operating earnings . . . . . . . 4.4 9.4 10.7 13.0
Net trading income. . . . . . . . .1 - .1 6.5
Net realized gain (loss). . . . . (.7) .1 (5.7) (4.3)
----- ----- ------ ------
Net income. . . . . . . . . . . 3.8 9.5 5.1 15.2
----- ----- ------ ------
Total from operations of life insurance companies:
Operating earnings . . . . . . . . 40.9 46.6 87.8 86.7
Net trading income (loss) . . . . . (.3) 6.0 (.3) 24.3
Net realized gain (loss). . . . . . (2.3) 3.8 (7.6) 5.5
Extraordinary charge. . . . . . . . - (.2) (.5) (2.1)
----- ----- ------ ------
Net income. . . . . . . . . . . 38.3 56.2 79.4 114.4
----- ----- ------ ------
Services provided for fees . . . . . 5.7 4.6 11.8 8.9
----- ----- ------ ------
Merchant banking activities:
Incentive earnings allocation . . . - - - 22.3
Sale of stock . . . . . . . . . . . - - 42.4 62.4
----- ----- ------ ------
Net income. . . . . . . . . . . - - 42.4 84.7
----- ----- ------ ------
Corporate and other:
Operating expenses, net of revenues (4.7) (5.4) (8.2) (7.5)
Interest expense on long-term debt. (3.9) (4.6) (9.0) (9.8)
Net trading income (loss) . . . . . (.9) - (.9) .6
Net realized gain (loss). . . . . . (.3) .4 .7 .4
Extraordinary charge. . . . . . . . - .2 (1.9) (8.8)
----- ----- ------ ------
Net loss. . . . . . . . . . . . (9.8) (9.4) (19.3) (25.1)
----- ----- ------ ------
Consolidated earnings:
Operating earnings . . . . . . . . 38.0 41.2 82.4 78.3
Net trading income (loss) . . . . . (1.2) 6.0 (1.2) 24.9
Net realized gain (loss). . . . . . (2.6) 4.2 (6.9) 5.9
Merchant banking income . . . . . . - - 42.4 84.7
Extraordinary charge. . . . . . . . - - (2.4) (10.9)
----- ----- ------ ------
Net income. . . . . . . . . . . $34.2 $51.4 $114.3 $182.9
===== ===== ====== ======
</TABLE>
<PAGE>
<PAGE> 14
The disaggregated earnings summarized in the preceding schedule resulted
in fully diluted earnings per share as follows:
<TABLE>
<CAPTION> Three months Six months
ended June 30, ended June 30,
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . $ .61 $ .21 $.96 $ .42
Net trading income (loss) . . . (.01) .06 (.01) .14
Net realized gain (loss). . . . (.05) .03 (.06) .08
Extraordinary charge . . . . . - - - (.06)
----- ----- ----- -----
Net income. . . . . . . . . . .55 .30 .89 .58
----- ----- ----- -----
WNC:
Operating earnings . . . . . . .29 .60 .96 1.26
Net trading income. . . . . . . - .11 - .38
Net realized gain . . . . . . . - .08 - .21
----- ----- ----- -----
Net income. . . . . . . . . . .29 .79 .96 1.85
----- ----- ----- -----
CCP:
Operating earnings . . . . . . .27 .26 .50 .48
Extraordinary charge. . . . . . - - (.02) -
----- ----- ----- -----
Net income. . . . . . . . . . .27 .26 .48 .48
----- ----- ----- -----
Wholly Owned Insurance Subsidiaries:
Operating earnings . . . . . . .15 .28 .34 .38
Net trading income (loss) . . . - - - .19
Net realized gain (loss). . . . (.03) - (.18) (.13)
----- ----- ----- -----
Net income. . . . . . . . . . .12 .28 .16 .44
----- ----- ----- -----
Total from operations of life insurance
companies:
Operating earnings . . . . . . . 1.32 1.35 2.76 2.54
Net trading income (loss) . . . . (.01) .17 (.01) .71
Net realized gain (loss). . . . . (.08) .11 (.24) .16
Extraordinary charge. . . . . . . - - (.02) (.06)
----- ----- ----- -----
Net income. . . . . . . . . . 1.23 1.63 2.49 3.35
----- ----- ----- -----
Services provided for fees. . . . . .18 .13 .37 .26
----- ----- ----- -----
Merchant banking activities:
Incentive earnings allocation . . - - - .67
Sale of stock . . . . . . . . . . - - 1.33 1.88
----- ----- ----- -----
Net income. . . . . . . . . . - - 1.33 2.55
----- ----- ----- -----
Corporate and other:
Operating expenses, net of revenues (.14) (.16) (.26) (.21)
Interest expense. . . . . . . . . (.13) (.13) (.28) (.29)
Net trading income (loss) . . . . (.03) - (.03) .02
Net realized gain (loss). . . . . (.01) .01 .02 .01
Extraordinary charge. . . . . . . - - (.06) (.27)
----- ----- ----- -----
Net loss. . . . . . . . . . . (.31) (.28) (.61) (.74)
----- ----- ----- -----
Consolidated earnings:
Operating earnings . . . . . . . 1.23 1.19 2.59 2.30
Net trading income (loss) . . . . (.04) .17 (.04) .73
Net realized gain (loss). . . . . (.09) .12 (.22) .17
Merchant banking income . . . . . - - 1.33 2.55
Extraordinary charge. . . . . . . - - (.08) (.33)
----- ----- ----- -----
Net income. . . . . . . . . . $1.10 $1.48 $3.58 $5.42
===== ===== ===== =====
</TABLE>
<PAGE>
<PAGE> 15
Additional Discussion of Consolidated Statement of Operations for the First
Six Months of 1994 Compared to the First Six Months of 1993 and for the Second
Quarter of 1994 Compared to the Second Quarter of 1993:
The following tables and narratives summarize amounts reported in the
consolidated statement of operations for the first six months of 1994 and 1993
and the second quarters of 1994 and 1993, disaggregated as previously described
for Conseco's three earnings activities. Many of the changes which occurred
in the consolidated statement of operations resulted from: (i) restructurings
that changed Conseco's percentage ownership in BLH, WNC and CCP; and (ii)
changes in control of WNC that affected the determination of whether such
affiliate was to be included in Conseco's statement of operations under the
consolidation or the equity method of accounting.
BLH:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . $300.0 $299.4 $603.6 $595.3
Investment activity:
Net investment income . . . . . 55.1 43.6 103.0 77.9
Net trading income (loss) . . . (1.1) 9.1 (1.1) 21.5
Net realized gain (loss). . . . (1.0) 11.6 (2.9) 22.7
Total revenues. . . . . . . . . . . 352.9 363.8 702.5 718.5
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits . . . 216.7 217.1 441.7 433.2
Interest expense on annuities and
financial products 15.3 9.0 25.6 17.4
Interest expense on long-term debt 7.7 8.9 15.5 19.7
Amortization related to operations 31.2 28.1 59.6 54.6
Amortization related to realized gains 1.1 6.6 .2 13.7
Other operating costs and expenses 34.3 40.3 73.1 78.7
Income before taxes, minority interest
and extraordinary charge 44.5 53.1 82.8 99.9
Income tax expense. . . . . . . . . 16.7 19.7 31.9 37.6
Income before minority interest and
extraordinary charge 27.8 33.4 50.9 62.3
Minority interest . . . . . . . . . 10.7 23.3 22.6 38.1
Extraordinary charge . . . . . . . - (.2) - (2.1)
Net income. . . . . . . . . . . . . 17.1 9.9 28.3 22.1
Less preferred stock dividends. . . - - - 3.0
Earnings applicable to common stock 17.1 9.9 28.3 19.1
Summarized by component, all net of
applicable expenses, taxes and
minority interest:
Operating earnings . . . . . . $19.1 $7.0 $30.6 $13.9
Net trading income (loss) . . . (.4) 2.0 (.4) 4.7
Net realized gain (loss). . . . (1.6) 1.1 (1.9) 2.6
Extraordinary charge . . . . . - .2 - 2.1
Net income. . . . . . . . . . . 17.1 9.9 28.3 19.1
</TABLE>
<PAGE>
<PAGE> 16
General. Conseco's first quarter 1993 earnings reflected a 44 percent
wnership interest in BLH. In March 1993, BLH completed an IPO of its common
stock, thus reducing Conseco's ownership to 31 percent for the second quarter
of 1993. On September 30, 1993, Conseco acquired 13.3 million additional
common shares of BLH, increasing its ownership interest to 56 percent. During
the first six months of 1994, BLH acquired 1,042,900 of its common shares at
a cost of $21.1 million which increased Conseco's ownership interest in BLH to
57 percent. While activities of BLH were included in Conseco's financial
statements on a consolidated basis for all periods presented herein, the
minority interest adjustment removes from Conseco's net income the portion
applicable to other owners so that net income reflects only Conseco's
applicable ownership interest (i.e., 44 percent during the first quarter of
1993, 32 percent during the second quarter of 1993 and 57 percent during the
first six months of 1994).
At June 30, 1994, the BLH shares owned by Conseco had a net carrying value
of approximately $454.5 million, a market value of approximately $611.1 million
(based on the June 30, 1994 market value of $20.125 per share) and a cost of
$313.1 million.
Insurance policy income. Insurance policy income increased slightly in the
second quarter and first six months of 1994 compared to the same periods in
1993. Increases in Medicare supplement and long-term care premiums were
largely offset by decreases in other individual health premiums, as anticipated
due to prior steps taken to improve the profitability of these products (see
"Premiums Collected" which follows).
Net investment income. Net investment income increased 26 percent to $55.1
million in the second quarter of 1994 from $43.6 million in the second quarter
of 1993, and increased 32 percent to $103.0 million in the first six months of
1994 from $77.9 million in the first six months of 1993. The increase was due
to the growth of invested assets as a result of; (i) recurring operations; (ii)
the recapture on March 31, 1993, of a reinsurance treaty with related assets
totaling $182.0 million; (iii) the recapture, effective April 1, 1994, of a
reinsurance treaty with assets totaling $371.0 million; and (iv) the capital
transactions in connection with BLH's IPO, as discussed in the notes to the
consolidated financial statements included in Conseco's 1993 Form 10-K,
partially offset by lower yields on the investment portfolio.
Net trading income (loss). BLH had a $.4 million net trading loss (after
applicable expenses, taxes and minority interest) in the second quarter of
1994, compared to $2.0 million net trading income in the second quarter of
1993. The net trading loss was $.4 million in the first six months of 1994,
compared to net trading income of $4.7 million in the same period of 1993. Net
trading income often fluctuates from period to period as market conditions
change for trading activities.
Net realized gain (loss). Net realized gain (loss) (after applicable
expenses, amortization, change in future policy benefits and taxes) often
fluctuates from period to period. BLH sold $283.1 million and $662.9 million
of actively managed securities during the second quarters of 1994 and 1993,
respectively, and $718.3 million and $1,130.2 million in the first six months
of 1994 and 1993, respectively. Such securities were sold in response to
changes in the investment environment which created opportunities to enhance
the risk profile of the investment portfolio by replacing existing securities
with alternative securities without adversely affecting the matching of
expected maturities of assets and liabilities.
The realization of investment gains and losses affects the timing of the
amortization of the cost of policies purchased and the cost of policies
produced. As a result of realized gains and losses from the sales of fixed
maturity investments in the second quarters of 1994 and 1993, amortization of
cost of policies purchased and cost of policies produced was increased by $1.1
million and $6.6 million, respectively. As a result of realized gains and
losses from the sales of fixed maturity investments in the first six months of
1994 and 1993, amortization of cost of policies purchased and cost of policies
produced was increased by $.2 million and $13.7 million, respectively.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) did not change materially between the
corresponding 1993 and 1994 periods, consistent with the immaterial change in
insurance policy income.
<PAGE> 17
Interest expense on long-term debt. Interest expense on long-term debt
decreased 13 percent to $7.7 million in the second quarter of 1994 from $8.9
million in the second quarter of 1993, and decreased 21 percent to $15.5
million in the first six months of 1994 from $19.7 million in first six months
of 1993. The reduction in interest expense was attributable to: (i) scheduled
and unscheduled principal payments totaling $65.0 million on the senior term
loan in March and April, 1993; (ii) the repurchase of $20.0 million senior
subordinated notes of BLH in December 1993; (iii) the repayment of $36.7
million junior subordinated notes in March 1993; and (iv) the scheduled
principal payment on the senior term loan of $11.0 million in March 1994.
Extraordinary charge. In the first six months of 1993, BLH retired all of
its junior subordinated notes and prepaid $55.0 million of its senior term loan
resulting in a net extraordinary charge of $5.6 million, of which Conseco's
share was $2.1 million.
WNC:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1994 1994
-------------------- ------------------
Included in Included in
Total Conseco's Total Conseco's
WNC Accounts 1993 WNC Accounts 1993
--- -------- ---- --- -------- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 6.8 $ - $ 6.2 $ 12.8 $ - $ 13.7
Investment activity:
Net investment income 157.0 - 153.9 310.9 - 287.7
Net trading income (loss) (.2) - 6.2 3.7 - 20.1
Net realized gain (loss) (2.3) - 25.1 3.5 - 46.1
Equity in earnings of WNC - 9.5 - - 31.4 -
Total revenues 161.3 9.5 191.4 330.9 31.4 367.6
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 29.3 - 31.4 56.7 - 64.1
Interest expense on annuities and
financial products 84.8 - 89.1 167.0 - 156.8
Interest expense on long-term debt 2.7 - - 4.4 - -
Amortization related to operations 4.3 - 4.0 8.8 - 7.6
Amortization and change in
future policy benefits related
to realized gains and losses (2.3) - 21.0 3.5 - 35.4
Other operating costs and expenses 2.9 - 2.0 6.3 - 3.3
Income before taxes 36.9 9.5 42.5 80.0 31.4 98.4
Income tax expense 13.2 .7 14.6 28.6 .9 34.3
Net income 23.7 8.8 27.9 51.4 30.5 64.1
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings $23.8 $8.8 $21.3 $49.0 $30.5 $43.8
Net trading income (loss) (.1) - 4.0 2.4 - 13.1
Net realized gain (loss) - - 2.6 - - 7.2
Net income 23.7 8.8 27.9 51.4 30.5 64.1
</TABLE>
<PAGE>
<PAGE> 18
General. Prior to the completion of the IPO of WNC, Western and WNC were
wholly owned subsidiaries of Conseco. After the IPO, Conseco owns 40 percent
of WNC. Accordingly, WNC is included in Conseco's financial statements on the
equity method effective January 1, 1994. Amounts included in Conseco's
accounts for the first six months of 1994 reflected: (i) all of WNC's earnings
for the period through February 15, 1994, the date the IPO was completed; and
(ii) 40 percent of WNC's earnings for the remainder of the period. At June 30,
1994, the shares of WNC owned by Conseco had a net carrying value of $193.1
million, a market value of $296.3 million (based on the June 30, 1994 market
value of $11.875 per share) and an initial cost of $44.7 million.
Insurance policy income. Insurance policy income relates primarily to
premiums from products with mortality and morbidity features. WNC does not
emphasize generating new premiums from such products and the amount of
insurance policy income did not change materially between the corresponding
1994 and 1993 periods.
Net investment income. Total net investment income of WNC increased 2.0
percent to $157.0 million in the second quarter of 1994 from $153.9 million in
the second quarter of 1993, and increased 8.1 percent to $310.9 million in the
first six months of 1994 from $287.7 million in the first six months of 1993.
Net investment income increased during the periods presented because of the
growth of invested assets resulting from: (i) operations; (ii) the recapture
of reinsurance from subsidiaries of Conseco on March 31, 1993, resulting in an
increase of $1.3 billion in insurance liabilities and invested assets; and
(iii) the recapture of reinsurance from a nonaffiliated company on June 30,
1993, resulting in an increase of $156.5 million in insurance liabilities and
invested assets, partially offset by lower yields on the investment portfolio.
In addition, during the second quarters of 1994 and 1993, fixed maturity
investments were redeemed prior to their scheduled maturity dates, resulting
in additional investment income of approximately $1.0 million and $4.7 million,
respectively. During the six months ended June 30, 1994 and 1993, such
additional investment income was approximately $2.7 million and $11.0 million,
respectively.
Net trading income (loss). WNC had a $.1 million net trading loss (after
applicable expenses and taxes) in the second quarter of 1994, compared to $4.0
million of net trading income in the second quarter of 1993. The net trading
income was $2.4 million in the first six months of 1994 compared to net trading
income of $13.1 million in the same period of 1993. Net trading income often
fluctuates from period to period as market conditions change for trading
activities.
Net realized gain (loss). Net realized gain (loss) (after applicable
expenses, amortization, change in future policy benefits and taxes) often
fluctuate from period to period. Western sold fixed maturity investments of
$912.8 million and $832.0 million in the second quarters of 1994 and 1993,
respectively, and $1,699.3 million and $1,623.5 million in the first six months
of 1994 and 1993, respectively. Such securities were sold in response to
changes in the investment environment which created opportunities to enhance
the risk profile of the investment portfolio by replacing existing securities
with alternative securities without adversely affecting the matching of
expected maturities of assets and liabilities.
The realization of investment gains and losses affects: (i) the timing of
the amortization of the cost of policies purchased and the cost of policies
produced; and (ii) the change in future policy benefits. As a result of
realized gains and losses from the sales of fixed maturity investments in the
second quarters of 1994 and 1993, amortization and change in future policy
reserves related to realized gains and losses was $(2.3) million and $21.0
million, respectively. The negative amortization in the second quarter of the
1994 reflects the effect of the realization of investment losses and subsequent
reinvestment of the proceeds at comparably higher rates on the cost of policies
purchased and the cost of policies produced for investment-type contracts
(principally annuities). Amortization and change in future policy reserves
related to realized gains and losses in the first six months of 1994 and 1993
was $3.5 million and $35.4 million, respectively.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) decreased 12 percent to $56.7 million in the
first six months of 1994 from $64.1 million in the first six months of 1993,
as a result of favorable mortality experience.
<PAGE> 19
Interest expense on annuities and financial products. Interest expense on
annuities and financial products decreased 5 percent to $84.8 million in the
second quarter of 1994 from $89.1 million in the second quarter of 1993. Such
decrease reflects the reduced interest rates credited on these products, net
of increased annuity liabilities from both operations and the recapture of
$156.5 million in insurance liabilities on June 30, 1993 described under "Net
investment income" above. This account increased 7 percent to $167.0 million
in the first six months of 1994 from $156.8 in the first six months of 1993.
Such increase reflects the increased annuity liabilities from both (i)
operations and (ii) the reinsurance recaptures described under "Net investment
income" above, partially offset by reduced interest rates credited on these
products. The average rate credited on all insurance liabilities was 6.2
percent and 6.9 percent at June 30, 1994 and 1993, respectively. The decline
in credited rates over these periods resulted from the lower interest rate
environment.
Interest expense on long-term debt. WNC completed its public offering of
$150.0 million aggregate principal amount 7.125 percent senior notes on
February 22, 1994. Interest expense in the 1994 periods results principally
from such notes.
Other operating costs and expenses. Other operating expenses increased
45 percent to $2.9 million in the second quarter of 1994 from $2.0 million in
the second quarter of 1993, and increased 91 percent to $6.3 million in the
first six months of 1994 from $3.3 million in the first six months of 1993,
primarily as a result of the additional costs incurred in establishing WNC as
a separate holding company. <PAGE>
<PAGE> 20
<TABLE>
<CAPTION>
CCP:
Three months ended June 30,
----------------------------------------------
1994 1993
-------------------- ---------------------
Included in Included in
Total Conseco's Total Conseco's
CCP Accounts CCP Accounts
--- -------- --- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . . . $ 28.1 $ - $30.9 $ -
Investment activity:
Net investment income . . . . . . . . 92.8 - 107.3 -
Net trading income. . . . . . . . . . - - 3.2 -
Net realized gain . . . . . . . . . . 9.4 - 14.2 -
Equity in earnings of CCP . . . . . . . - 9.2 - 9.6
Equity in earnings of BLH . . . . . . . - - - -
Merchant banking income . . . . . . . . - - - -
Total revenues. . . . . . . . . . . . . . 130.3 9.2 155.6 9.6
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 16.3 - 20.2 -
Interest expense on annuities
and financial products 51.6 - 66.0 -
Interest expense on long-term debt. . . 2.3 - 4.0 -
Interest expense on short-term
investment borrowing 2.3 - .7 -
Amortization related to operations . . 6.3 - 7.7 -
Amortization and change in future policy
benefits related to realized gains. . 5.5 - 3.6 -
Other operating costs and expenses. . . 9.9 - 13.1 -
Income before taxes and
extraordinary charge 36.1 9.2 40.3 9.6
Income tax expense . . . . . . . . . . . 13.6 .6 13.5 .7
Income before extraordinary charge. . . . 22.5 8.6 26.8 8.9
Extraordinary charge. . . . . . . . . . . - - - -
Net income. . . . . . . . . . . . . . . . 22.5 8.6 26.8 8.9
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings. . . . . . . . . . $20.6 $8.6 $17.9 $8.9
Net trading income . . . . . . . . . - - 2.1 -
Net realized gain . . . . . . . . . . 1.9 - 6.8 -
Extraordinary charge. . . . . . . . . - - - -
Net income . . . . . . . . . . . . . 22.5 8.6 26.8 8.9
</TABLE>
<PAGE>
<PAGE> 21
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------------
1994 1993
-------------------- ---------------------
Included in Included in
Total Conseco's Total Conseco's
CCP Accounts CCP Accounts
--- -------- --- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . . . $ 58.2 $ - $63.2 $ -
Investment activity:
Net investment income . . . . . . . . 188.0 - 208.4 -
Net trading income. . . . . . . . . . - - 9.7 -
Net realized gain . . . . . . . . . . 10.9 - 19.9 -
Equity in earnings of CCP . . . . . . . - 17.2 - 17.3
Equity in earnings of BLH . . . . . . . - - 1.2 -
Merchant banking income . . . . . . . . - - 10.5 -
Total revenues. . . . . . . . . . . . . . 257.1 17.2 312.9 17.3
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 33.2 - 42.3 -
Interest expense on annuities and
financial products 105.4 - 128.5 -
Interest expense on long-term debt. . . 5.1 - 8.4 -
Interest expense on short-term
investment borrowings 3.9 - .9 -
Amortization related to operations . . 13.1 - 15.1 -
Amortization and change in future policy
benefits related to realized gains. . 6.4 - 8.8 -
Other operating costs and expenses. . . 22.2 - 24.3 -
Income before taxes and
extraordinary charge 67.8 17.2 84.6 17.3
Income tax expense . . . . . . . . . . . 24.9 1.2 29.5 1.3
Income before extraordinary charge. . . . 42.9 16.0 55.1 16.0
Extraordinary charge. . . . . . . . . . . 1.3 .5 - -
Net income. . . . . . . . . . . . . . . . 41.6 15.5 55.1 16.0
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings. . . . . . . . . . $40.6 $16.0 $41.8 $16.0
Net trading income . . . . . . . . . - - 6.3 -
Net realized gain . . . . . . . . . . 2.3 - 7.0 -
Extraordinary charge. . . . . . . . . 1.3 .5 - -
Net income . . . . . . . . . . . . . 41.6 15.5 55.1 16.0
</TABLE>
CCP's earnings during the second quarters of 1994 and 1993 and the first
six months of 1994 and 1993 were affected by: (i) reduced interest expense
resulting from the reduction in CCP's long-term debt through scheduled and
unscheduled principal payments and lower interest rates; (ii) reduced trading
income resulting from less favorable market conditions; (iii) the merchant
banking income earned in the first quarter of 1993; and (iv) reduced operating
costs resulting from lower policy maintenance expenses and other factors.
Conseco's equity in the earnings of CCP during this period was affected by
these factors and changes in Conseco's ownership interest in CCP resulting
from: (i) Conseco's acquisition of 2.3 million additional shares of CCP after
the first quarter of 1993; and (ii) CCP's repurchase of 1.6 million common
shares in open market transactions in the first six months of 1994. Conseco's
equity in the earnings of CCP in the first six months of 1994 included a $.5
million extraordinary charge related to CCP's prepayment of debt. At June 30,
1994, Conseco owned 42 percent of the common stock of CCP. Such shares owned
by Conseco had a net carrying value of $218.1 million, a fair value of
approximately $235.4 million (based on the June 30, 1994 market value of
$20.375 per share) and a total cost to Conseco of $102.8 million.
<PAGE>
<PAGE> 22
CCP was a partner in the investment of Conseco Capital Partners, L.P. (the
"Partnership") in BLH. In conjunction with BLH's IPO, CCP's investment in the
Partnership was exchanged for approximately 2.8 percent of the common stock of
BLH. Through the date of the IPO, CCP recognized equity in earnings of BLH of
$1.2 million in the first quarter of 1993. A gain on the sale of stock by BLH
of $10.5 million was recognized in the first quarter of 1993. After the IPO,
CCP's investment in BLH is carried at fair value, with any unrealized gain or
loss, net of tax, included directly in shareholders' equity.
Because Conseco's investment in BLH is accounted for using the
consolidation method, Conseco's ownership interest in BLH through CCP is
included in the "BLH" segment. Conseco's ownership interest in the gain
recognized by CCP in conjunction with BLH's IPO is included in the "Merchant
Banking" segment.
WHOLLY OWNED INSURANCE SUBSIDIARIES:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . $13.0 $17.2 $30.5 $34.3
Investment activity:
Net investment income . . . . . . 18.3 28.5 38.9 65.6
Net trading income. . . . . . . . .1 .3 .1 9.9
Net realized gain (loss). . . . . (2.1) (.9) (9.7) .6
Total revenues. . . . . . . . . . . . 29.3 45.1 59.8 110.4
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits . . . . 16.0 18.3 34.5 36.4
Interest expense on annuities and
financial products. . . . . . . . 2.9 8.1 7.2 33.6
Amortization related to operations 1.4 2.1 2.8 4.1
Amortization related to realized
gains and losses 1.1 (1.0) (1.1) 6.4
Other operating costs and expenses. 4.9 3.7 8.7 7.2
Income before taxes . . . . . . . . . 5.0 14.1 7.4 22.9
Income tax expense . . . . . . . . . 1.2 4.6 2.3 7.7
Net income. . . . . . . . . . . . . . 3.8 9.5 5.1 15.2
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings . . . . . . . $4.4 $9.4 $10.7 $13.0
Net trading income . . . . . . . .1 - .1 6.5
Net realized gain (loss). . . . . (.7) .1 (5.7) (4.3)
Net income . . . . . . . . . . . 3.8 9.5 5.1 15.2
</TABLE>
Insurance policy income. Insurance policy income relates primarily to
premiums from products with mortality and morbidity features. The amount of
insurance policy income in 1994 reflects the decreased emphasis on generating
new premiums from such products.
<PAGE>
<PAGE> 23
Net investment income. Net investment income of the wholly owned insurance
subsidiaries decreased 36 percent to $18.3 million in the second quarter of
1994 from $28.5 million in the second quarter of 1993, and decreased 41 percent
to $38.9 million in the first six months of 1994 from $65.6 million in the
first six months of 1993. Such decrease is the result of several factors
including: (i) a reduction in investment income related to the separate account
activities; (ii) the surrender for redemption of $50 million stated value of
ICH preferred stock used to purchase additional shares of BLH; (iii) lower
yields on the investment portfolios; and (iv) for the six month periods the
recapture of reinsurance by Western from Conseco's wholly owned insurance
subsidiaries on March 31, 1993, which resulted in a decrease of $1.3 billon in
insurance liabilities and invested assets. In addition, during the second
quarters of 1994 and 1993, fixed maturity investments were redeemed prior to
their scheduled maturity dates, resulting in additional investment income of
approximately $.1 million and $.6 million, respectively. Such additional
investment income was $.2 million and $2.3 million in the first six months of
1994 and 1993, respectively.
Net trading income. The wholly owned insurance subsidiaries had $.1
million of net trading income (after applicable expenses and taxes) in the
second quarter of 1994, compared to no trading income in the second quarter of
1993. Net trading income was $.1 million and $6.5 million in the first six
months of 1994 and 1993, respectively. Net trading income often fluctuates
from period to period as market conditions change for trading activities.
Net realized gains. Net realized gains (after applicable expenses,
amortization and taxes) often fluctuate from period to period. Fixed maturity
investments of $51.2 million and $70.6 million were sold in the second quarters
of 1994 and 1993, respectively, and $151.6 million and $399.2 million were sold
in the first six months of 1994 and 1993, respectively. Such securities were
sold in response to changes in the investment environment which created
opportunities to enhance the risk profile of the investment portfolio by
replacing existing securities with alternative securities without adversely
affecting the matching of expected maturities of assets and liabilities.
The realization of investment gains and losses affects the timing of the
amortization of the cost of policies produced and the cost of policies
purchased. As a result of realized gains and losses from the sales of fixed
maturities in the second quarters of 1994 and 1993, amortization related to
realized gains and losses was $1.1 million and $(1.0) million, respectively.
As a result of realized gains and losses of fixed maturities in the first six
months of 1994 and 1993, amortization related to realized gains and losses was
$(1.1) million and $6.4 million, respectively.
Insurance policy benefits and change in future policy benefits. These
accounts decreased 13 percent to $16.0 million in the second quarter of 1994
from $18.3 million in the second quarter of 1993 as a result of a decrease in
death benefits in the second quarter of 1994.
Interest expense on annuities and financial products. Interest expense on
annuities and financial products decreased 64 percent to $2.9 million in the
second quarter of 1994 from $8.1 million in the second quarter of 1993, and
decreased 79 percent to $7.2 million in the first six months of 1994 from $33.6
million in the first six months of 1993. Such decrease was a result of: (i) a
reduction in amounts credited to the separate accounts as a result of the
aforementioned reduction in investment income related to these accounts; and
(ii) for the six month periods the aforementioned reinsurance recapture by
Western. The average rate credited on all insurance liabilities was
approximately 7.0 percent at June 30, 1994 and approximately 7.1 percent at
June 30, 1993.
<PAGE> 24
Amortization related to operations. Amortization related to operations
decreased in the first six months of 1994 from the same period in 1993 as a
result of the aforementioned reinsurance recapture.
SERVICES PROVIDED FOR FEES:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenue:
Investment management $ 9.0 $ 8.3 $ 18.6 $16.1
Commissions 5.9 3.0 9.2 4.9
Administrative services, net of
directly related expenses 2.9 1.7 4.4 2.8
Total revenue 17.8 13.0 32.2 23.8
Less intercompany eliminations (2.6) (5.2) (4.1) (8.9)
Revenues reported 15.2 7.8 28.1 14.9
Net income attributable to:
Investment management 3.8 4.0 8.7 7.7
Commissions .1 (0.5) .3 (.6)
Administrative services 1.8 1.1 2.8 1.8
Net income 5.7 4.6 11.8 8.9
</TABLE>
Conseco's fee revenues include: (i) fees for investment management and
mortgage origination and servicing; (ii) commissions earned for insurance and
investment product marketing and distribution; and (iii) administrative fees
for policy administration, data processing, product marketing and executive
management services. To the extent these services are provided to entities
that are included in the financial statements on a consolidated basis, the
intercompany fees are eliminated in consolidation.
Growth in total fees during the second quarter of 1994 compared to the
second quarter of 1993 as well as the first six months of 1994 compared to the
first six months of 1993, was the result of an increase in fee-producing
activities provided to both affiliated clients and others. Commission revenues
in the second quarter of 1994 include $2.3 million related to the buyout of a
marketing agreement by a bank.
<PAGE>
<PAGE> 25
MERCHANT BANKING ACTIVITIES:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Incentive earnings allocation - - $ - $ 36.6
Gain on sale of stock - - 65.3 101.5
Total revenues - - 65.3 138.1
Income tax expense - - 22.9 53.4
Net income - - 42.4 84.7
</TABLE>
The 1994 gain related to the sale of a majority interest in WNC. The 1993
incentive earnings allocation was earned when total returns realized by the
other partners in the first partnership exceeded prescribed targets. The 1993
gain related to the public sale of shares by BLH.
CORPORATE AND OTHER:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net investment income $1.5 $ 2.7 $ 3.2 $ 9.0
Total revenues (.5) 3.5 3.0 11.2
Interest expense on long-term debt 6.0 6.8 13.9 14.9
Other operating costs and expenses 7.3 10.5 14.3 19.7
Income tax benefit 4.0 4.2 7.8 7.1
Loss before extraordinary charge 9.8 9.6 17.4 16.3
Extraordinary charge on
extinguishment of debt - (.2) 1.9 8.8
Net loss 9.8 9.4 19.3 25.1
</TABLE>
These operations include financing costs for debt on which Conseco is
directly liable and the costs associated with the holding company operations.
Net investment income decreased in the second quarter of 1994 and in the six
months of 1994 from the same periods in 1993 as a result of: (i) lower average
invested assets; and (ii) decreased yields on such invested assets. The lower
average invested assets resulted principally from purchases of additional
shares of BLH and CCP in the third quarter of 1993 and repurchases of Conseco
shares in the third quarter of 1993 and the six months ended June 30, 1994,
offset by proceeds from the sale of WNC shares in the first quarter of 1994.
Other operating costs and expenses decreased 30 percent to $7.3 million in
the second quarter of 1994 from $10.5 million in the second quarter of 1993,
and decreased 27 percent to $14.3 million in the first six months of 1994 from
$19.7 million in the first six months of 1993 as a result of compensation costs
based on the Company's earnings.
During the first six months of 1994, the Company repaid certain debt, as
described in the notes to the consolidated financial statements included
herein, resulting in an extraordinary charge of $1.9 million (net of a $1.0
million tax benefit). During the first six months of 1993, the Company also
repaid certain debt resulting in an extraordinary charge of $8.8 million (net
of a $4.6 million tax benefit).
<PAGE> 26
PREMIUMS COLLECTED
Insurance policy income shown on the Company's financial statements in
accordance with generally accepted accounting principles consists of premiums
received for policies which have life contingencies or morbidity features and
of certain policy charges and fees. For annuity and universal life contracts
without such features, premiums collected are not reported as revenues, but
rather are reported as deposits to insurance liabilities. Revenues for
products recognized as deposits to insurance liabilities are recognized over
time in the form of investment income and surrender or other charges.
Premiums collected by BLH. Premiums collected by BLH for the second quarter
of 1994 were $375.1 million, of which $84.1 million were recorded as deposits
to policy liability accounts. This compared to $354.7 million collected and
$63.1 million recorded as deposits to policy liability accounts in the second
quarter of 1993. Premiums collected by BLH for the first six months of 1994
were $760.1 million, of which $147.2 million were recorded as deposits to
policy liability accounts. This compared to $720.8 million collected and $115.5
million recorded as deposits to policy liability accounts in the first six
months of 1993. Collected premiums by business segment were as follows:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Individual health:
Medicare supplement $138.4 $131.4 $296.3 $279.8
Long-term care 31.9 28.1 64.0 56.1
Other 29.7 36.5 62.1 74.8
------ ------ ------ ------
Total individual health 200.0 196.0 422.4 410.7
Annuities 75.1 57.7 136.8 106.2
Individual life 23.1 23.7 46.4 46.8
Group and other 76.9 77.3 154.5 157.1
------ ------ ------ ------
Total $375.1 $354.7 $760.1 $720.8
====== ====== ====== ======
</TABLE>
Medicare supplement premiums collected increased 5 percent to $138.4
million in the second quarter of 1994 from $131.4 million in the second quarter
of 1993, and increased 6 percent to $296.3 million in the first six months of
1994 from $279.8 million in the first six months of 1993. New business,
improved persistency, rate increases and payment mode changes contributed to
this increase. Annualized new business premiums were approximately $39 million
in the first six months of 1994 and 1993.
Long-term care collected premiums increased 14 percent to $31.9 million in
the second quarter of in 1994 from $28.1 million in the second quarter of 1993,
and increased 14 percent to $64.0 million in the first six months of 1994 from
$56.1 million in the first six months of 1993. Growth in new business and a
larger base of renewal premiums contributed to this increase. Annualized new
business premiums increased 36 percent to $13.3 million in the first six months
of 1994 from $9.8 million in the first six months of 1993.
Annuity premiums collected increased 30 percent to $75.1 million in the
second quarter of 1994 from $57.7 million in the second quarter of 1993, and
increased 29 percent to $136.8 million in the first six months of 1994 from
$106.2 million in the first six months of 1993. Virtually all of this increase
related to sales of single premium deferred annuities. The increase occurred
because of an increased marketing emphasis placed on annuity sales and because
of the low rates available on alternative investments, such as certificates of
deposit.
Collected premiums for other individual health products decreased 19
percent to $29.7 million in the second quarter of 1994 from $36.5 million in
the second quarter of 1993, and decreased 17 percent to $62.1 million in the
first six months of 1994 from $74.8 million in the first six months of 1993.
This decrease was anticipated due to prior steps taken to improve the
profitability of these products.
<PAGE> 27
Premiums collected by Conseco's wholly owned insurance subsidiaries.
Premiums collected by Conseco's wholly owned insurance subsidiaries decreased
14 percent to $18.4 million in the second quarter of 1994 from $21.4 million
in the second quarter of 1993, and decreased 53 percent to $44.4 million in the
first six months of 1994 from $95.1 million in the first six months of 1993.
During the first six months of 1993, the Company collected $55.5 million of
premiums from guaranteed investment contracts and deposit funds for qualified
retirement plans maintained by a subsidiary of the Company. Conseco's wholly
owned subsidiaries are not actively marketing new products.
LIQUIDITY AND CAPITAL RESOURCES
The comparison of June 30, 1994 balances to December 31, 1993 balances in
the consolidated balance sheet is largely affected by the deconsolidation of
Western, effective January 1, 1994. Additional changes in the consolidated
balance sheet reflect growth through Conseco's three earnings activities
previously discussed and the long-term debt and capital stock transactions
described in the accompanying notes to consolidated financial statements.
The following unaudited pro forma balance sheet data at December 31, 1993,
are presented as if the IPO of WNC and related transactions had occurred on
such date (dollars in millions):
<TABLE>
<S> <C>
Investment in WNC. . . . . . . . . . . . .$ 254.6
Total investments. . . . . . . . . . . . . 4,317.7
Total assets . . . . . . . . . . . . . . . 6,020.1
Total liabilities. . . . . . . . . . . . . 4,628.9
Shareholders' equity . . . . . . . . . . . 1,167.4
</TABLE>
The decrease in shareholders' equity in the first six months of 1994
resulted from the capital transactions described in "Changes in Capital Stock"
in the notes to the consolidated financial statements and a decline in
unrealized appreciation (depreciation) of $216.0 million to reflect the
decrease in the market value of the Company's investments, partially offset
by the increase in shareholders' equity from earnings. The decline in
unrealized appreciation (depreciation) is recorded consistent with the
requirements of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities. This decrease resulted
from the higher interest rate environment, which generally caused the market
value of fixed maturities to decrease.
The ratio of debt for which the Company is directly liable to shareholders'
equity decreased to .27-to-1 at June 30, 1994, from .36-to-1 at December 31,
1993, as a result of the repayment of debt, partially offset by borrowings
under a new revolving credit agreement described in "Changes in Long-Term Debt"
in the notes to the consolidated financial statements. Book value per common
share was $23.02 at June 30, 1994 compared to $33.78 at December 31, 1993. The
decline was due to the decrease in common equity described in the preceding
paragraph, offset by the decrease in shares outstanding described in "Changes
in Capital Stock" in the notes to the consolidated financial statements. The
return on average common equity was 30 percent (annualized) for the six months
ended June 30, 1994, compared to 37 percent for the year ended December 31,
1993. This decrease occurred primarily because of fluctuations in net trading
gain (loss), net realized gain (loss) and merchant banking income during these
periods, offset by the decrease in average common shareholders' equity in the
first six months of 1994 compared to the year ended December 31, 1993.
Dividends declared on common stock for the six months ended June 30, 1994,
were $.25 per share.
<PAGE>
<PAGE> 28
The amortized cost, estimated fair value and carrying value of fixed
maturities (all of which were actively managed) were as follows at June 30,
1994:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and
obligations of United States government
corporations and agencies. . . . . . $ 65.5 $ .6 $ 4.5 $ 61.6
Obligations of states and political subdivisions 7.5 - .4 7.1
Debt securities issued by foreign governments 18.7 - .9 17.8
Public utility securities. . . . . . . 564.0 4.3 62.7 505.6
Other corporate securities . . . . . . 1,307.6 3.7 88.6 1,222.7
Mortgage-backed securities . . . . . . 1,055.0 1.6 82.9 973.7
-------- ----- ------ --------
Total fixed maturities . . . . . . $3,018.3 $10.2 $240.0 $2,788.5
======== ===== ====== ========
</TABLE>
The following table sets forth the quality of fixed maturity investments
as of June 30, 1994, classified in accordance with the highest rating by a
nationally recognized statistical rating organization, or, if not rated by such
firms, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") as follows: for purposes of the table, NAIC Class 1 is
included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-" and Classes 4 to
6, "B+ and below."
<TABLE>
Investment Percent of Percent of
Rating Fixed Maturities Total Investments
------ ---------------- -----------------
<S> <C> <C>
AAA. . . . . . . . . . 40% 27%
AA . . . . . . . . . . 7 5
A. . . . . . . . . . . 22 15
BBB+ . . . . . . . . . 5 3
BBB. . . . . . . . . . 8 6
BBB- . . . . . . . . . 11 7
--- --
Investment grade 93 63
--- --
BB+. . . . . . . . . . 3 2
BB . . . . . . . . . . - -
BB-. . . . . . . . . . 1 1
B+ and below . . . . . 3 2
--- --
Below investment grade 7 5
--- --
Total fixed maturities 100% 68%
=== ==
</TABLE>
Fixed maturities which were below investment grade had a total estimated
fair value and carrying value of $187.1 million and an amortized cost of $202.3
million at June 30, 1994.
During the first six months of 1994, the Company wrote down investments and
accrued investment income totaling $.2 million as a result of changes in
conditions which caused the Company to conclude that the issuers may be unable
to comply with the terms of the securities. These writedowns were recorded as
realized losses. The Company recorded writedowns of $5.2 million in the
comparable period of 1993. The amortized cost, carrying value and fair value
of fixed maturity investments in default as to the payment of principal or
interest were $9.9 million, $10.5 million and $10.5 million, respectively, at
June 30, 1994. <PAGE>
<PAGE> 29
Mortgage-backed securities at June 30, 1994, included collateralized
mortgage obligations of $550.5 million and mortgage-backed pass-through
securities of $423.2 million. Although mortgage-backed securities are subject
to risks involving the timing of cash flows due to prepayments, the Company
seeks to limit its risk by: (i) purchasing securities which are backed by
collateral with lower prepayment sensitivity (such as mortgages purchased at
a discount from par value and mortgages that are extremely seasoned); (ii)
avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities); and (iii)
concentrating on securities with prepayment protected structures (such as
planned amortization class ("PAC") collateralized mortgage obligations). PAC
instruments represented approximately 50 percent of the Company's
mortgage-backed securities at June 30, 1994. At June 30, 1994, the par value,
amortized cost and estimated fair value of investments in mortgage-backed
securities summarized by interest rates on the underlying collateral were
comprised of the following:
<TABLE>
<CAPTION>
Par Amortized Estimated
Value Cost Fair Value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-through securities:
Below 7% . . . . . . . . . . . . . . . . . . . $ 303.8 $ 304.3 $278.1
7% - 8%. . . . . . . . . . . . . . . . . . . . 134.3 137.4 128.1
8% - 9%. . . . . . . . . . . . . . . . . . . . 5.4 5.5 5.4
Above 9% . . . . . . . . . . . . . . . . . . . 11.4 11.4 11.6
Planned amortization class CMO instruments:
Below 7% . . . . . . . . . . . . . . . . . . . 219.1 207.6 185.4
7% - 8%. . . . . . . . . . . . . . . . . . . . 249.7 245.1 226.0
8% - 9%. . . . . . . . . . . . . . . . . . . . 58.1 58.7 56.4
Above 9% . . . . . . . . . . . . . . . . . . . 19.9 20.6 20.1
Other CMO instruments:
Below 7% . . . . . . . . . . . . . . . . . . . 11.0 10.4 9.4
Above 9% . . . . . . . . . . . . . . . . . . . 52.9 54.0 53.2
-------- -------- ------
Total mortgage-backed securities . . . . . $1,065.6 $1,055.0 $973.7
======== ======== ======
</TABLE>
At June 30, 1994, the balance of mortgage loans was comprised of 85 percent
commercial loans, 2 percent residential loans and 13 percent residual interests
in collateralized mortgage obligations. Less than 1 percent of mortgage loans
were noncurrent at June 30, 1994. There were no material realize losses on
mortgage loans during the six months ended June 30, 1994 and 1993,
respectively. At June 30, 1994, the Company had a loan loss reserve of $.9
million.
Borrowings under reverse repurchase agreements and dollar-roll transactions
were $189.7 million at June 30, 1994, and were collateralized by pledged
securities with fair values approximately equal to the borrowings. Such
borrowings averaged approximately $268.5 million during the first six months
of 1994, compared to approximately $324.6 million during the same period of
1993.
<PAGE>
<PAGE> 30
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from generally accepted
accounting principles. The Company's life insurance subsidiaries that are
included on a consolidated basis in these financial statements reported the
following amounts to regulatory agencies at June 30, 1994, after appropriate
eliminations of intercompany accounts among such subsidiaries (dollars in
millions):
<TABLE>
<S> <C>
Statutory capital and surplus . . . $381.0
Asset valuation reserve . . . . . . 27.5
Interest maintenance reserve. . . . 70.2
------
Total. . . . . . . . . . . . . . $478.7
======
</TABLE>
In connection with the acquisition of BLH, the capital of one of the life
insurance subsidiaries (Bankers Life Insurance Company of Illinois) was
increased by providing cash in exchange for a surplus debenture. The unpaid
balance of the surplus debenture of $460.0 million at June 30, 1994, is
considered a part of statutory capital and surplus of the life insurance
subsidiary. Payments to BLH of principal and interest on the surplus debenture
may be made from available funds only with the approval of the Illinois
Department of Insurance when its Director is satisfied that the financial
condition of the subsidiary warrants that action. Such approval may not be
withheld provided the surplus of the subsidiary exceeds, after such payment,
approximately $128 million. Such subsidiary's surplus at June 30, 1994, was
$311.3 million. During April 1994, such subsidiary made a scheduled principal
payment on the surplus debenture of $25.0 million plus accrued interest.
At June 30, 1994, the ratio of such consolidated statutory account balances
to consolidated statutory liabilities (excluding AVR, IMR, liabilities from
separate account business and short-term collateralized borrowings) was 15
percent, compared to a ratio of 11.4 percent (17.1 percent excluding the
accounts of Western) at December 31, 1993.
During the six months ended June 30, 1994, the Company's wholly owned life
insurance subsidiaries paid no dividends to the parent company. Approximately
$18.7 million is available for distribution in 1994 without the permission of
state regulatory authorities.
<PAGE>
<PAGE> 31
PENDING ACQUISITIONS
Kemper Corporation
On June 26, 1994, Conseco and Kemper Corporation ("Kemper") signed a
definitive merger agreement under which a wholly owned subsidiary of Conseco
will be merged into Kemper. It is contemplated the combined entity would
operate under the Kemper name. Under the agreement, each of the issued and
outstanding shares of Kemper common stock would be converted into the right to
receive $56.00 in cash and a fraction of a share of Conseco common stock
determined by dividing $11.00 by the average closing price of Conseco common
stock prior to the merger (such fraction to be not more than .2418 nor less
than .1982). Based on Conseco's closing price on Friday, June 24, 1994, the
total consideration would be $67.00 per Kemper share, and the total value of
the transaction would be approximately $3.25 billion. In connection with the
closing, it is contemplated that CCP II will purchase Kemper's life insurance
and real estate subsidiaries.
Consummation of the merger is subject to customary terms and conditions,
including approvals by the stockholders of Kemper and Conseco, regulatory
authorities and by the boards and shareholders of Kemper's mutual funds, and
to obtaining the required financing.
Conseco and CCP II have obtained a commitment letter from Citibank N.A. to
provide in excess of $1.2 billion of senior secured bank financing for the
transaction. Morgan Stanley & Co. Inc. has provided Conseco with a letter
stating that it is highly confident that up to $750 million of subordinated
debt financing will be available for the transaction. The remaining cash
required for the merger, approximately $550 million (including estimated
transaction, restructuring and other costs), is expected to be provided by
Conseco and other existing investors in CCP II.
Kemper, headquartered in Long Grove, Illinois, is a financial services
holding company with principal operations in asset management, life insurance
and securities brokerage. Kemper has approximately $90 billion in life
insurance in force and operates one of the 10 largest full-service brokerage
firms in the United States. Kemper has the nation's seventh-largest mutual
fund family, with $45 billion in assets under management, and also manages $22
billion in assets for Kemper's life insurance companies and other institutional
customers.
The Statesman Group, Inc.
On May 1, 1994, Conseco signed a definitive merger agreement with The
Statesman Group, Inc. ("Statesman") pursuant to which CCP II will acquire
Statesman for approximately $350 million. Under the agreement, Statesman's
shareholders would receive $15.25 per share, plus the right to receive up to
another $2.00 in cash per share, based on the outcome of Statesman's pending
litigation against the U.S. government concerning Statesman's former savings
bank subsidiary. The transaction, which is subject to the approval of
Statesman's shareholders and the receipt of all necessary regulatory approvals,
is expected to close in the third quarter of 1994. Statesman is a financial
services holding company with assets of $4.6 billion. In 1993, Statesman
collected $1.0 billion of annuity premiums and recorded net income of $37.2
million.
CalFarm Life Insurance Company
In April 1994, the Company announced it executed a letter of intent with
Zenith National Insurance Corp. ("Zenith") to acquire CalFarm Life Insurance
Company ("CalFarm") for approximately $120 million in cash, subject to the
execution of a definitive agreement and the receipt of all necessary regulatory
approvals. Subsequent to the Company's announcement, Zenith reconsidered its
decision to sell CalFarm and terminated negotiations.
SUBSEQUENT EVENT
On July 13 1994, the Company confirmed it is exploring the possible sale of
one or more of its equity interests in WNC, CCP and BLH. Any such sales are
subject to receiving fair value. Proceeds from any sale are anticipated to be
used for general corporate purposes and to reduce the public debt and/or
Conseco equity which otherwise would be issued in connection with the Kemper
merger.
<PAGE> 32
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 7, 1994, the shareholders voted upon of the following matters at the
annual shareholders meeting:
a)The election of Ngaire E. Cuneo to serve a two-year term and Rollin M.
Dick, James D. Massey and Dennis E. Murray, Sr., to serve three-year
terms. The results of the voting were as follows (there were no broker
non-votes):
<TABLE>
<CAPTION>
Ngaire E. Rollin M. James D. Dennis E.
Cuneo Dick Massey Murray, Sr.
----- ---- ------ -----------
<S> <C> <C> <C> <C>
For 23,487,055 23,503,217 23,494,547 23,502,997
Withheld 102,123 85,961 94,631 86,181
</TABLE>
b)The adoption of the 1994 Stock and Incentive Plan. Shareholders cast
13,943,903 votes for and 4,120,380 votes against the 1994 Stock and
Incentive Plan. There were 195,533 abstentions and 5,329,362 broker
non-votes.
c)The approval of the Performance-Based Compensation Bonus Plan for
Executive Vice Presidents (the "Bonus Plan"). Shareholders cast
16,910,209 votes for and 1,222,377 against the Bonus Plan proposal.
There were 127,230 abstentions and 5,329,362 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a)Exhibits.
2.1 Agreement and Plan of Merger dated as of June 26, 1994, among
Conseco, Inc., KC Acquisition, Inc. and Kemper Corporation ("Merger
Agreement").
11.1 Computation of Earnings Per Share - Primary.
11.2 Computation of Earnings Per Share - Fully Diluted.
99.1 Pro forma consolidated financial statements
b)Reports on Form 8-K. A report on Form 8-K dated June 26, 1994 was filed
with the Commission to report under Item 5 the Merger Agreement and to
report under Item 7c the joint press release of the Registrant and Kemper
Corporation issued June 27, 1994, regarding the Merger Agreement.
<PAGE>
<PAGE> 33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO, INC.
Dated: August 15, 1994 By: ROLLIN M. DICK
-----------------------
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 26, 1994,
AMONG
CONSECO, INC.,
KC ACQUISITION, INC.
AND
KEMPER CORPORATION
<PAGE>
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER
SECTION 1.1. The Merger 5
SECTION 1.2. Closing 5
SECTION 1.3. Effective Time 6
SECTION 1.4. Effects of the Merger 6
SECTION 1.5. Certificate of Incorporation; By-laws 6
SECTION 1.6. Directors 6
SECTION 1.7. Officers 7
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS
SECTION 2.1. Effect on Capital Stock 7
SECTION 2.2. Stock Option Plans 9
SECTION 2.3. Exchange of Certificates 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of
the Company 13
SECTION 3.2. Representations and Warranties of
the Parent and Sub 23
<PAGE>
<PAGE> 3
Page
----
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO
MERGER
SECTION 4.1. Conduct of Business of the Company 29
SECTION 4.2. Other Actions 32
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. Preparation of Form S-4 and the
Joint Proxy Statement 32
SECTION 5.2. Meetings of Stockholders 33
SECTION 5.3. Letter of Company's Accountants 33
SECTION 5.4. Letter of Parent's Accountants 33
SECTION 5.5. Access to Information; Confidentiality 34
SECTION 5.6. Best Efforts 34
SECTION 5.7. Benefit Plans and Employment Agreements 34
SECTION 5.8. Indemnification and Insurance 37
SECTION 5.9. Public Announcements 38
SECTION 5.10. Acquisition Proposals 38
SECTION 5.11. Fiduciary Duties 39
SECTION 5.12. Consents, Approvals and Filings 39
SECTION 5.13. Company Satisfaction of the Conditions
of Section 15 of the 1940 Act 39
SECTION 5.14. Advisory Contract Consents 40
SECTION 5.15. Certain Fees and Expenses 40
SECTION 5.16. Compliance with Section 15(f) of the
1940 Act by Parent 41
SECTION 5.17. Affiliates and Certain Stockholders 41
SECTION 5.18 NYSE Listing 41
SECTION 5.19. Stockholder Litigation 41
SECTION 5.20. Financing 42
SECTION 5.21. Board Action Relating to Stock Option Plans 42
<PAGE>
<PAGE> 4
Page
----
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's Obligation
To Effect the Merger 42
SECTION 6.2. Conditions to Obligations of Parent
and Sub 44
SECTION 6.3. Conditions to Obligation of the Company 45
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination 45
SECTION 7.2. Effect of Termination 46
SECTION 7.3. Amendment 46
SECTION 7.4. Extension; Waiver 46
SECTION 7.5. Procedure for Termination, Amendment,
Extension or Waiver 47
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Nonsurvival of Representations and
Warranties 47
SECTION 8.2. Fees and Expenses 47
SECTION 8.3. Definitions 47
SECTION 8.4. Notices 48
SECTION 8.5. Interpretation 49
SECTION 8.6. Counterparts 49
SECTION 8.7. Entire Agreement; Third-Party Beneficiaries 49
SECTION 8.8. Governing Law 49
SECTION 8.9. Assignment 50
SECTION 8.10. Enforcement 50
SECTION 8.11. Severability 50
EXHIBIT A - Affiliate Letter<PAGE>
<PAGE> 5
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 26, 1994
AMONG
CONSECO, INC.,
AN INDIANA CORPORATION ("PARENT"),
KC ACQUISITION, INC.
A DELAWARE CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF
PARENT ("SUB"),
AND
KEMPER CORPORATION,
A DELAWARE CORPORATION (THE "COMPANY").
WHEREAS, the Board of Directors of each of Parent, Sub and the
Company has adopted resolutions approving this Agreement, pursuant to which Sub
shall be merged with and into the Company and the Company shall become a wholly
owned direct subsidiary of Parent (the "Merger"); and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained in this Agreement, the parties
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Delaware
General Corporation Law (the "DGCL"), Sub shall be merged with and into the
Company at the Effective Time (as hereinafter defined). Upon the Effective
Time, the separate existence of Sub shall cease, and the Company shall continue
as the surviving corporation (the "Surviving Corporation").
SECTION 1.2. Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 7.1 and subject to the satisfaction or waiver of the
conditions set forth in Article VI, the closing of the Merger (the "Closing")
will take place at 1:00 p.m. on the second business day following the date on
which the last to be fulfilled or waived of the conditions set forth in Section
6.1 and subsections (c) and (d) of Section 6.2 shall be fulfilled or waived in
accordance with this Agreement (the "Closing Date"), at the offices of Cravath,
Swaine & Moore, 825 Eighth Avenue, New York, New York, unless another date,
time or place is agreed to in writing by the parties hereto.
<PAGE>
<PAGE> 6
SECTION 1.3. Effective Time. The parties hereto will file with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
on the date of the Closing (or on such other date as Parent and the Company may
agree) a certificate of merger or other appropriate documents, executed in
accordance with the relevant provisions of the DGCL, and make all other filings
or recordings required under the DGCL in connection with the Merger. The
Merger shall become effective upon the filing of the certificate of merger with
the Delaware Secretary of State, or at such later time as is specified in the
certificate of merger (the "Effective Time").
SECTION 1.4. Effects of the Merger. The Merger shall have the
effects set forth in Section 259 of the DGCL. Without limiting the generality
of the foregoing, and subject thereto, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of the Company and Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
SECTION 1.5. Certificate of Incorporation; By-laws. (a) The Second
Restated Certificate of Incorporation of the Company (the "Charter"), as in
effect immediately prior to the Effective Time, shall be amended as of the
Effective Time so that Article FOURTH of the Charter reads in its entirety as
follows: "The total number of shares of all classes of capital stock which the
corporation shall have authority to issue is 7,000,100 shares which shall be
divided into two classes as follows: 7,000,000 shares of Preferred Stock,
without par value, and 100 shares of Common Stock, par value $1.00 per share."
and, as so amended the Charter shall, from and after the Effective Time, be
the Certificate of Incorporation of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
(b) The By-laws of the Company as in effect at the Effective Time
shall, from and after the Effective Time, be the By-laws of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
SECTION 1.6. Directors. The directors of the Company at the
Effective Time shall, from and after the Effective Time, be the directors of
the Surviving Corporation, until the earlier of their resignation or removal
or until their respective successors are duly elected and qualified, as the
case may be.
<PAGE>
<PAGE> 7
SECTION 1.7. Officers. The officers of the Company at the Effective
Time shall, from and after the Effective Time, be the officers of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS
SECTION 2.1. Effect on Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of (i)
any shares of common stock, par value $5.00 per share, of the Company (the
"Common Stock") or any other shares of capital stock of the Company or (ii) any
shares of capital stock of Sub:
(a) Common Stock of Sub. Each share of common stock of Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable
share of Common Stock, par value $1.00 per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Parent-Owned Common Stock.
Each share of Common Stock issued and outstanding immediately prior to the
Effective Time that is owned by the Company or by any subsidiary of the Company
or by Parent, Sub or any other subsidiary of Parent (other than shares in trust
accounts, managed accounts, custodial accounts and the like that are
beneficially owned by third parties and shares held in the ordinary course of
business by subsidiaries of the Company or Parent that are insurance companies
or broker-dealers) shall automatically be cancelled and retired and shall cease
to exist, and no cash or other consideration shall be delivered or deliverable
in exchange therefor.
(c) Conversion of Common Stock. Each share of Common Stock
issued and outstanding immediately prior to the Effective Time (other than
shares to be cancelled in accordance with Section 2.1(b) and other than
Dissenting Common Shares (as defined in Section 2.1(e)) shall be converted into
the right to receive (i) $56.00 per share, without interest (the "Cash
Consideration"), and (ii) the fraction (rounded to the nearest ten-thousandth
of a share) (the "Conversion Number") of a validly issued, fully paid and
nonassessable share of common stock, without par value, of Parent ("Parent
Common Stock") determined by dividing $11.00 by the Average Parent Price (as
defined below) (the "Stock Consideration"). The "Average Parent Price" shall
be equal to the average of the closing prices of the Parent Common Stock on the
New York Stock Exchange ("NYSE") Composite Transactions Reporting System, as
reported in The Wall Street Journal, for the 20 trading days immediately
preceding the second trading day prior to the Effective Time (the "Trading
Average"); provided, however, that if the Trading Average is less than $45.50,
then the Average Parent Price shall be $45.50, and if the Trading Average is
greater than $55.50, then the Average Parent Price shall be $55.50. The Cash
Consideration, the Stock Consideration and any cash to be paid in accordance
with Section 2.3 in lieu of fractional shares of Parent Common Stock are
referred to collectively as the "Merger Consideration".
<PAGE>
<PAGE>8
(d) Preferred Stock. Each share of (i) Series A Cumulative
Convertible Preferred Stock of the Company (the "Series A Preferred Stock"),
(ii) Series C Cumulative Preferred Stock of the Company (the "Series C
Preferred Stock"), (iii) Series D Index Exchangeable Preferred Stock of the
Company (the "Series D Preferred Stock") and (iv) Series E Cumulative
Convertible Preferred Stock of the Company (the "Series E Preferred Stock")
issued and outstanding immediately prior to the Effective Time (other than
Dissenting Preferred Shares (as defined in Section 2.1(e))) will remain
outstanding as one validly issued, fully paid and nonassessable share of
preferred stock of the Surviving Corporation subsequent to the Effective Time,
subject to the respective terms and covenants thereof. The Series A Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock are referred to collectively as the "Company Preferred Stock".
(e) Dissenting Shares. (i) Notwithstanding anything in this
Agreement to the contrary, shares of Common Stock issued and outstanding
immediately prior to the Effective Time held by a holder (if any) who has the
right to demand, and who properly demands, an appraisal of such shares in
accordance with Section 262 of the DGCL (or any successor provision)
("Dissenting Common Shares") shall not be converted into a right to receive
Merger Consideration unless such holder fails to perfect or otherwise loses
such holder's right to such appraisal, if any. If, after the Effective Time,
such holder fails to perfect or loses any such right to appraisal, each such
share of such holder shall be treated as a share that had been converted as of
the Effective Time into the right to receive Merger Consideration in accordance
with this Section 2.1. The Company shall give prompt notice to Parent of any
demands received by the Company for appraisal of shares of Common Stock, and
Parent shall have the right to participate in and direct all negotiations and
proceedings with respect to such demands. The Company shall not, except with
the prior written consent of Parent, make any payment with respect to, or
settle or offer to settle, any such demands.
(ii) Notwithstanding anything in this Agreement to the contrary,
shares of Company Preferred Stock issued and outstanding immediately prior to
the Effective Time held by a holder (if any) who has the right to demand, and
who properly demands, an appraisal of such shares in accordance with Section
262 of the DGCL ("Dissenting Preferred Shares") shall not be deemed to remain
outstanding as of the Effective Time unless such holder fails to perfect or
otherwise loses such holder's right to such appraisal, if any. If, after the
Effective Time, such holder fails to perfect or loses any such right to
appraisal, such shares shall be treated as if they had remained outstanding as
of the Effective Time. The Company shall give prompt notice to Parent of any
demands received by the Company for appraisal of shares of Company Preferred
Stock, and Parent shall have the right to participate in and direct all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, make any payment with
respect to, or settle or offer to settle, any such demands.
<PAGE>
<PAGE> 9
(f) Cancellation and Retirement of Common Stock. As of the
Effective Time, all certificates representing shares of Common Stock, other
than certificates representing shares to be cancelled in accordance with
Section 2.1(b) or Dissenting Common Shares, issued and outstanding immediately
prior to the Effective Time, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing any such shares of Common Stock shall
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration upon surrender of such certificate in accordance with
Section 2.3.
(g) Cancellation of Certain Restricted Stock Grants. Immediately
following the execution and delivery of this Agreement each share of restricted
stock granted under the 1993 Senior Executive Long-Term Incentive Plan shall
be cancelled. In addition, Parent hereby consents to the adoption by the
Company of a plan under which each individual who has had a share cancelled
pursuant to this Section 2.1(g) may receive immediately prior to the Effective
Time a cash payment up to the sum of (x) the Cash Consideration plus (y) the
Stock Value Amount, multiplied by the number of shares cancelled. For purposes
of this Agreement, the term "Stock Value Amount" shall mean the product of (x)
the Conversion Number and (y) the Average Parent Price (determined without
regard to the proviso to the definition thereof).
SECTION 2.2. Stock Option Plans. (a) As of the date hereof, the
unexercisable portion of each outstanding option to purchase shares of Common
Stock (a "Company Stock Option") issued under the Company's 1990 Stock Option
Plan, 1985 Amended Stock Option Plan, 1982 Incentive Stock Option Plan and Non-
Management Director Stock Option Plan (collectively, the "Company Stock Option
Plans") shall become immediately exercisable in full, subject to all
expiration, lapse and other terms and conditions thereof.
(b) The Company Stock Options set forth on Section 2.2 of the
disclosure schedule (the "Disclosure Schedule") delivered to Parent by the
Company at the time of execution of this Agreement shall be assumed by Parent
(an "Assumed Option"). Each Assumed Option shall be exercisable for a number
of shares of Parent Common Stock calculated by multiplying the number of shares
of Common Stock subject to such Company Stock Option as of the Effective Time
by a fraction, the numerator of which is the sum of (1) the Stock Value Amount
and (2) the Cash Consideration and the denominator of which is the Average
Parent Price. The exercise price for each share of Parent Common Stock under
an Assumed Option shall be calculated by multiplying the exercise price for one
share of Common Stock under the related Company Stock Option as of the
Effective Time by a fraction, the numerator of which is the Average Parent
Price and the denominator of which is the sum of (1) the Stock Value Amount and
(2) the Cash Consideration.
<PAGE>
<PAGE> 10
(c) Each Company Stock Option then outstanding (other than Assumed
Options) shall be cancelled immediately prior to the Effective Time in exchange
for an amount in cash equal to the product of (i) the number of shares of
Common Stock subject to such Company Stock Option immediately prior to the
Effective Time and (ii) the excess of (1) the sum of (A) the Stock Value Amount
and (B) the Cash Consideration over (2) the per share exercise price of such
Company Stock Option.
SECTION 2.3. Exchange of Certificates. (a) Paying Agent. As of
the Effective Time, Parent shall deposit, or shall cause to be deposited, with
or for the account of a bank or trust company designated by Parent, which shall
be reasonably satisfactory to the Company (the "Paying Agent"), for the benefit
of the holders of shares of Common Stock and the holders of shares of Series
A Preferred Stock and Series E Preferred Stock (together, the "Convertible
Preferred Stock"), cash in an aggregate amount sufficient to pay the aggregate
Cash Consideration and certificates representing the shares of Parent Common
Stock representing the aggregate Stock Consideration (assuming in each case the
full conversion of all outstanding shares of Series A Preferred Stock and
Series E Preferred Stock) (such amount and certificates, together with any
dividends or distributions with respect to such certificates, being hereinafter
referred to as the "Payment Fund").
(b) Exchange Procedures. As soon as practicable after the Effective
Time, each holder of an outstanding certificate or certificates which prior
thereto represented shares of Common Stock shall, upon surrender to the Paying
Agent of such certificate or certificates and acceptance thereof by the Paying
Agent, be entitled to the amount of cash and a certificate representing that
number of whole shares of Parent Common Stock (and cash in lieu of fractional
shares of Parent Common Stock as contemplated by this Section 2.3) which the
aggregate number of shares of Common Stock previously represented by such
certificate or certificates surrendered shall have been converted into the
right to receive pursuant to Section 2.1(c) of this Agreement. The Paying
Agent shall accept such certificates upon compliance with such reasonable terms
and conditions as the Paying Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. If the
consideration to be paid in the Merger (or any portion thereof) is to be
delivered to any person other than the person in whose name the certificate
representing shares of Common Stock surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such exchange shall pay to the Paying
Agent any transfer or other taxes required by reason of the payment of such
consideration to a person other than the registered holder of the certificate
surrendered, or shall establish to the satisfaction of the Paying Agent that
such tax has been paid or is not applicable. After the Effective Time, there
shall be no further transfer on the records of the Company or its transfer
agent of certificates representing shares of Common Stock and if such
certificates are presented to the Company for transfer, they shall be cancelled
against delivery of the Merger Consideration as hereinabove provided. Until
surrendered as contemplated by this Section 2.3(b), each certificate
representing shares of Common Stock (other than certificates representing
shares to be cancelled in accordance with Section 2.1(b) or Dissenting Common
Shares), shall be deemed at any time after the Effective Time to represent only
the right to receive upon such surrender the Merger Consideration, without any
interest thereon, as contemplated by Section 2.1. No interest will be paid
or will accrue on any cash payable as Merger Consideration.
<PAGE>
<PAGE> 11
(c) Letter of Transmittal. Promptly after the Effective Time (but
in no event more than 5 days thereafter), the Surviving Corporation shall
require the Paying Agent to mail to each record holder of certificates that
immediately prior to the Effective Time represented shares of Common Stock
which have been converted pursuant to Section 2.1, a form of letter of
transmittal and instructions for use in surrendering such certificates and
receiving the consideration to which such holder shall be entitled therefor
pursuant to Section 2.1.
(d) Distributions with Respect to Unexchanged Shares. No dividends
or other distributions with respect to Parent Common Stock with a record date
after the Effective Time shall be paid to the holder of any certificate that
immediately prior to the Effective Time represented shares of Common Stock
which have been converted pursuant to Section 2.1, until the surrender for
exchange of such certificate in accordance with this Article II. Following
surrender for exchange of any such certificate, there shall be paid to the
holder of such certificate, without interest, (i) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to the number of whole
shares of Parent Common Stock into which the shares of Common Stock represented
by such certificate immediately prior to the Effective Time were converted
pursuant to Section 2.1, and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective
Time, but prior to such surrender, and with a payment date subsequent to such
surrender, payable with respect to such whole shares of Parent Common Stock.
(e) No Further Ownership Rights in Common Stock. The Merger
Consideration paid upon the surrender for exchange of certificates representing
shares of Common Stock in accordance with the terms of this Article II shall
be deemed to have been issued and paid in full satisfaction of all rights
pertaining to the shares of Common Stock theretofore represented by such
certificates, subject, however, to the Surviving Corporation's obligation (if
any) to pay any dividends or make any other distributions with a record date
prior to the Effective Time which may have been declared by the Company on such
shares of Common Stock in accordance with the terms of this Agreement or prior
to the date of this Agreement and which remain unpaid at the Effective Time.
<PAGE>
<PAGE> 12
(f) No Fractional Shares. (i) No certificates or scrip
representing fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of certificates that immediately prior to the Effective
Time represented shares of Common Stock which have been converted pursuant to
Section 2.1, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of Parent.
(ii) Notwithstanding any other provisions of this Agreement, each
holder of shares of Common Stock who would otherwise have been entitled to
receive a fraction of a share of Parent Common Stock (after taking into account
all certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
Parent Common Stock multiplied by the Average Parent Price.
(g) Termination of Payment Fund. Any portion of the Payment Fund
which remains undistributed to the holders of the certificates representing
shares of Common Stock or Convertible Preferred Stock for 120 days after the
Effective Time shall be delivered to Parent, upon demand, and any holders of
shares of Common Stock who have not theretofore complied with this Article II
shall thereafter look only to Parent and only as general creditors thereof for
payment of their claim for any Merger Consideration and any dividends or
distributions with respect to Parent Common Stock.
(h) No Liability. None of Parent, Sub, the Surviving Corporation
or the Paying Agent shall be liable to any person in respect of any cash,
shares, dividends or distributions payable from the Payment Fund delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law. If any certificates representing shares of Common Stock shall not
have been surrendered prior to five years after the Effective Time (or
immediately prior to such earlier date on which any Merger Consideration in
respect of such certificate would otherwise escheat to or become the property
of any Governmental Entity (as defined in Section 3.1(c))), any such cash,
shares, dividends or distributions payable in respect of such certificate
shall, to the extent permitted by applicable law, become the property of the
Surviving Corporation, free and clear of all claims or interest of any
person previously entitled thereto.
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(i) Investment of Payment Fund. The Paying Agent shall invest the
Payment Fund, as directed by Parent, in (i) direct obligations of the United
States of America, (ii) obligations for which the full faith and credit of the
United States of America is pledged to provide for the payment of principal and
interest or (iii) commercial paper rated the highest quality by both Moody's
Investors Services, Inc. and Standard & Poor's Corporation, and any net
earnings with respect thereto shall be paid to Parent as and when requested by
Parent; provided that any such investment or any such payment of earnings shall
not delay the receipt by holders of shares of Common Stock of the Merger
Consideration or holders of shares of Convertible Preferred Stock of the
amounts then due with respect to any shares of Convertible Preferred Stock
theretofore converted in accordance with the terms thereof or otherwise impair
such holders' respective rights hereunder. In the event the Payment Fund shall
realize a loss on any such investment, Parent shall promptly thereafter deposit
in such Payment Fund on behalf of the Surviving Corporation cash in an amount
sufficient to enable such Payment Fund to satisfy all remaining obligations
originally contemplated to be paid out of such Payment Fund.
(j) Conversion of the Convertible Preferred Stock. Until the
Payment Fund is terminated pursuant to Section 2.3(g), Parent and the Surviving
Corporation shall, and shall require the Paying Agent to, make the Payment Fund
available for the purpose of paying amounts due with respect to any shares of
Convertible Preferred Stock theretofore converted in accordance with the terms
thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the Company. The
Company represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. Each of the
Company and each Significant Subsidiary of the Company (as hereinafter
defined) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated
and has the requisite corporate power and authority to carry on its
business as now being conducted. Each of the Company and each Significant
Subsidiary of the Company is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole. The Company has delivered to Parent
complete and correct copies of its Charter and By-laws, as amended to the
date of this Agreement. For purposes of this Agreement, a "Significant
Subsidiary" of the Company means each of Federal Kemper Life Assurance
Company, Kemper Financial Companies, Inc. ("KFC"), Kemper Financial
Services, Inc. ("KFS"), Kemper Investors Life Insurance Company, Kemper
Securities Holdings, Inc. and Kemper Securities, Inc ("KSI") and any other
subsidiary of the Company that would constitute a Significant Subsidiary
within the meaning of Rule 1-02 of Regulation S-X of the Securities and
Exchange Commission (the "SEC").
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<PAGE> 14
(b) Capital Structure. The authorized capital stock of the Company
consists of (i) 200,000,000 shares of Common Stock, par value $5.00 per
share, and (ii) 20,000,000 shares of preferred stock, without par value
(the "Preferred Stock"). At the close of business on May 31, 1994:
(i) 33,545,959 shares of Common Stock were issued and outstanding,
4,060,388 shares of Common Stock were reserved for issuance pursuant to
outstanding Company Stock Options, 53,928 shares of Common Stock were
reserved for issuance upon conversion of shares of Series A Preferred
Stock, 4,755,996 shares of Common Stock were reserved for issuance upon
conversion of shares of Series E Preferred Stock and 31,611,214 shares of
Common Stock were held by the Company in its treasury; (ii) 6,690,636.5
shares of Preferred Stock, consisting of 23,998 shares of Series A
Preferred Stock, 2,000,000 shares of Series C Preferred Stock, 66,638.5
shares of Series D Preferred Stock and 4,600,000 shares of Series E
Preferred Stock, were issued and outstanding; and (iii) 500,000 shares of
Series B Junior Participating Preferred Stock were reserved for issuance
upon exercise of the rights (the "Rights") distributed to the holders of
Common Stock pursuant to the Rights Agreement dated as of July 18, 1990,
between the Company and Harris Trust and Savings Bank, as Rights Agent
(the "Rights Agreement"). Except as set forth above, at the close of
business on May 31, 1994, no shares of capital stock or other equity
securities of the Company were issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are,
and all shares which may be issued pursuant to the Company Stock Option
Plans or the Kemper Corporation Stock Purchase and Dividend Reinvestment
Plan (the "Dividend Reinvestment Plan") or upon the conversion of the
Series A Preferred Stock and the Series E Preferred Stock or the exchange
of the Series D Preferred Stock will be, when issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. Except as set forth in Section 3.1(b) of the Disclosure Schedule,
no bonds, debentures, notes or other indebtedness of the Company or any
Significant Subsidiary of the Company having the right to vote (or
convertible into, or exchangeable for, securities having the right to
vote) on any matters on which the stockholders of the Company or any
Significant Subsidiary of the Company may vote are issued or outstanding.
Except as disclosed in Section 3.1(b) of the Disclosure Schedule, all the
outstanding shares of capital stock of each Significant Subsidiary of the
Company have been validly issued and are fully paid and nonassessable and
are owned by the Company, by one or more subsidiaries of the Company or
by the Company and one or more such subsidiaries, free and clear of all
pledges, claims, liens, charges, encumbrances and security interests
of any kind or nature whatsoever (collectively, "Liens"). Except as set
forth above or in Section 3.1(b) of the Disclosure Schedule, neither the
Company nor any Significant Subsidiary of the Company has any outstanding
option, warrant, subscription or other right, agreement or commitment
which either (i) obligates the Company or any Significant Subsidiary of
the Company to issue, sell or transfer, repurchase, redeem or otherwise
acquire or vote any shares of the capital stock of the Company or any
Significant Subsidiary of the Company or (ii) restricts the transfer of
Common Stock. The authorized capital stock of KFC consists of 150,000,000
shares of common stock, par value $.10 per share, which shares are divided
into 135,000,000 shares of Class A Common Stock and 15,000,000 shares of
Class B Common Stock. At the close of business on March 31, 1994,
43,268,038 shares of Series A Common Stock of KFC and 8,334.6464 shares
of Series B Common Stock of KFC were issued and outstanding, 192,645
shares of Series B Common Stock of KFC were reserved for issuance pursuant
to outstanding KFC employee stock options, no shares of Preferred Stock
of KFC were outstanding and $44.2 million aggregate principal amount of
KFC's floating rate convertible subordinated debentures was outstanding
and not subject to mandatory redemption, which are convertible into an
aggregate of 1,690,580.0017 shares of Series B Common Stock of KFC. $33.7
million aggregate principal amount of KFC's floating rate convertible
subordinated debentures outstanding and not subject to mandatory
redemption is currently redeemable, and all outstanding KFC floating rate
convertible subordinated debentures will be redeemable on and after May
10, 1995. If determined as of March 31, 1994 in accordance with the terms
of KFC's Fourth Restated Certificate of Incorporation, the formula
purchase price per share for repurchases by KFC of shares of its Series
B Common Stock would be negative $9.25 per share.
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<PAGE> 15
(c) Authority; Noncontravention. The Company has the
requisite corporate power and authority to enter into this Agreement and,
subject to the approval of its stockholders as set forth in Section 6.1(a)
with respect to the consummation of the Merger, to consummate the
transactions contemplated by this Agreement. The execution and delivery
of this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of the Company, subject, in the
case of the Merger, to the approval of its stockholders as set forth in
Section 6.1(a). This Agreement has been duly executed and delivered by
the Company and, assuming this Agreement constitutes the valid and binding
agreement of Parent and Sub, constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms. Except as disclosed in Section 3.1(c) of the Disclosure Schedule,
the execution and delivery of this Agreement do not, and the consummation
of the transactions contemplated by this Agreement and compliance with the
provisions hereof will not, (i) conflict with any of the provisions of the
Charter or By-laws of the Company or the comparable documents of any
Significant Subsidiary of the Company, (ii) subject to the governmental
filings and other matters referred to in the following sentence, conflict
with, result in a breach of or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a material
benefit under, or require the consent of any person under, any indenture
or other agreement, permit, concession, franchise, license or similar
instrument or undertaking to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or any of
their assets is bound or affected, or (iii) subject to the governmental
filings and other matters referred to in the following sentence,
contravene any law, rule or regulation of any state or of the United
States or any political subdivision thereof or therein, or any order,
writ, judgment, injunction, decree, determination or award currently in
effect, which, in the case of clauses (ii) and (iii) above, singly or
in the aggregate, would have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole. No consent, approval or authorization of,
or declaration or filing with, or notice to, any governmental agency or
regulatory authority (a "Governmental Entity") which has not been received
or made, is required by or with respect to the Company or any of its
subsidiaries in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for (i) the filing of premerger
notification and report forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") with respect to the
Merger and with respect to the transactions contemplated by the Citibank
Commitment Letter (as hereinafter defined), (ii) the filings and/or
notices required under the insurance laws of the jurisdictions set forth
in Section 3.1(c)(i) of the Disclosure Schedule, (iii) the filing with the
SEC of (x) a proxy statement relating to the approval by the stockholders
of the Company of the Merger and certain other corporate matters (such
proxy statement, together with the proxy statement relating to the
approval of the issuance of Parent Common Stock in the Merger by an
affirmative vote of the holders of a majority of the shares of the Parent
Common Stock present, or represented, and entitled to vote thereon at the
meeting of holders of Parent Common Stock to be called therefor (the
"Parent Stockholder Approval"), in each case as amended or supplemented
from time to time, the "Joint Proxy Statement"), and (y) such reports
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (iv) the filing of the
certificate of merger with the Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which the
Company is qualified to do business, (v) the consents, approvals and
notices as are set forth in Sections 5.13 and 5.14 of this Agreement
required under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), (vi) such other consents, approvals, authorizations,
filings or notices as are set forth in Section 3.1(c)(ii) of the
Disclosure Schedule and (vii) any applicable filings under state
anti-takeover laws, or filings, authorizations, consents or approvals the
failure to make or obtain which, in the aggregate, would not have a
material adverse effect on the business, financial condition or results
of operations of the Company and its subsidiaries taken as a whole.
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(d) SEC Documents. (i) The Company has filed all required reports,
schedules, forms, statements and other documents with the SEC since
January 1, 1994 (such reports, schedules, forms, statements and other
documents other than those that were filed by the Company with the SEC in
connection with the proxy contest initiated by General Electric Capital
Corporation are hereinafter referred to as the "SEC Documents"); (ii) as
of their respective dates, the SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC promulgated thereunder applicable to such
SEC Documents, and none of the SEC Documents as of such dates contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and (iii) the consolidated financial statements of
the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
(except, in the case of unaudited consolidated quarterly statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto) and
fairly present the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited quarterly statements, to normal
year-end audit adjustments). Except to the extent that information
contained in any SEC Document has been revised or superseded by a later
Filed SEC Document (as defined in Section 3.1(f)), none of the SEC
Documents contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
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(e) Information Supplied. None of the information supplied or to
be supplied by the Company specifically for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 to be filed with
the SEC by Parent in connection with the issuance of Parent Common Stock
in the Merger (the "Form S-4") will, at the time the Form S-4 is filed
with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading
or (ii) the Joint Proxy Statement will, at the date it is first mailed to
the Company's stockholders or at the time of the Stockholders Meeting (as
defined in Section 5.2), contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Joint
Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder,
except that no representation or warranty is made by the Company with
respect to statements made or incorporated by reference therein based on
information supplied by Parent or Sub specifically for inclusion or
incorporation by reference in the Joint Proxy Statement.
(f) Absence of Certain Changes or Events. Except as disclosed in
the SEC Documents filed and publicly available prior to the date of this
Agreement (the "Filed SEC Documents") or in Section 3.1(f) of the
Disclosure Schedule, since the date of the most recent audited financial
statements included in the Filed SEC Documents, the Company and its
subsidiaries have conducted their business only in the ordinary course,
and there has not been (i) any change which would have a material adverse
effect on the business, financial condition or results of operations of
the Company and its subsidiaries taken as a whole, (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether
in cash, stock or property) with respect to any of the Company's
outstanding capital stock (other than regular quarterly cash
dividends of $.23 per share of Common Stock and regular cash dividends on
Company Preferred Stock, in each case in accordance with usual record and
payment dates and in accordance with the Company's present dividend
policy), (iii) any split, combination or reclassification of any of its
outstanding capital stock or any issuance or the authorization of any
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its outstanding capital stock, (iv) (x) any
granting by the Company or any of its subsidiaries to any executive
officer or other employee of the Company or any of its subsidiaries of any
increase in compensation, except in the ordinary course of business
consistent with prior practice or as was required under employment
agreements in effect as of the date of the most recent audited financial
statements included in the Filed SEC Documents, (y) any granting by the
Company or any of its subsidiaries to any such executive officer of any
increase in severance or termination pay, except in the ordinary course
of business consistent with prior practice or as was required under any
employment, severance or termination agreements in effect as of the date
of the most recent audited financial statements included in the Filed SEC
Documents or (z) any entry by the Company or any of its subsidiaries into
any employment, severance or termination agreement with any such executive
officer except in the ordinary course of business consistent with prior
practice (it being understood that, as used in this clause (iv), "prior
practice" shall mean the practice of the Company and its subsidiaries
prior to 1994) or (v) any change in accounting methods, principles or
practices by the Company or any of its subsidiaries materially affecting
its assets, liabilities or business, except insofar as may have been
required by a change in generally accepted accounting principles. Parent
acknowledges that there may be or have been disruptions to the Company's
business as a result of the anticipation of a merger or acquisition
involving the Company and/or its subsidiaries, and Parent and Sub agree
that such disruptions and any changes attributable thereto shall not
constitute a breach of clause (i) of this Section 3.1(f).
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(g) Absence of Changes in Benefit Plans. Except as disclosed in the
Filed SEC Documents or in Section 3.1(g) of the Disclosure Schedule, since
the date of the most recent audited financial statements included in the
Filed SEC Documents, there has not been any adoption or amendment in any
material respect by the Company or any of its subsidiaries of any
collective bargaining agreement or any Benefit Plan (as defined in Section
3.1(h)). Except as disclosed in the Filed SEC Documents or in Section
3.1(g) of the Disclosure Schedule, there exist no employment, consulting,
severance, termination or indemnification agreements, arrangements or
understandings between the Company or any of its subsidiaries and any
current or former employee, officer or director of the Company or any of
its subsidiaries.
(h) Benefit Plans. (i) Each "employee pension benefit plan" (as
defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) (hereinafter a "Pension Plan"), "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA) (hereinafter
a "Welfare Plan"), and each other plan, arrangement or policy (written or
oral) relating to stock options, stock purchases, compensation, deferred
compensation, severance, fringe benefits or other employee benefits, in
each case maintained or contributed to, or required to be maintained or
contributed to, by the Company and its subsidiaries for the benefit of any
present or former officers, employees, agents, directors or independent
contractors of the Company or any of its subsidiaries (all the foregoing
being herein called "Benefit Plans") has been administered in accordance
with its terms except where failure to administer in accordance with such
terms would not have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries
taken as a whole. The Company, its subsidiaries and all the Benefit Plans
are in compliance with the applicable provisions of ERISA, the Internal
Revenue Code of 1986, as amended (the "Code"), all other applicable laws
and all applicable collective bargaining agreements except where failure
to comply would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole.
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<PAGE> 19
(ii) None of the Company or any other person or entity that together
with the Company is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code (each a "Commonly Controlled Entity") (a) has
incurred any liability to a Pension Plan covered by Title IV of ERISA
(other than for contributions not yet due) or to the Pension Benefit
Guaranty Corporation (other than for the payment of premiums not yet due)
that, when aggregated with other such liabilities, would result in a
material liability to the Company, which liability has not been fully paid
as of the date hereof.
(iii) No Commonly Controlled Entity is required to contribute to any
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has
withdrawn from any multiemployer plan where such withdrawal has resulted
or would result in any "withdrawal liability" (within the meaning of
Section 4201 of ERISA) that has not been fully paid.
(i) Taxes. (i) Each of the Company and its subsidiaries has filed
all tax returns and reports required to be filed by it or requests for
extensions to file such returns or reports have been timely filed, granted
and have not expired, except to the extent that such failures to file or
to have extensions granted that remain in effect individually and in the
aggregate would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole. All tax returns filed by the Company and
each of its subsidiaries are complete and accurate except to the extent
that such failure to be complete and accurate would not have a material
adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries taken as a whole. The
Company and each of its subsidiaries has paid (or the Company has paid
on the subsidiaries' behalf) all taxes shown as due on such returns, and
the most recent financial statements contained in the Filed SEC Documents
reflect an adequate reserve for all taxes payable by the Company and its
subsidiaries for all taxable periods and portions thereof accrued through
the date of such financial statements.
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(ii) No deficiencies for any taxes have been proposed, asserted or
assessed against the Company or any of its subsidiaries that are not
adequately reserved for, except for deficiencies that individually or in
the aggregate would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole, and, except as set forth on Section 3.1(j)
of the Disclosure Schedule, no requests for waivers of the time to assess
any such taxes have been granted or are pending. The Federal and Illinois
income tax returns of the Company and each of its subsidiaries
consolidated in such returns have been examined by and settled with the
United States Internal Revenue Service or the Illinois Department of
Revenue, as the case may be, or the statute of limitations on assessment
or collection of any Federal or Illinois income taxes due from the
Company or any of its subsidiaries has expired, for all taxable years of
the Company or any of its subsidiaries through the taxable year ended
December 31, (a) 1983 for Federal income taxes, (b) 1979 for Illinois
insurance unitary income taxes and (c) 1987 for Illinois non-insurance
unitary income taxes.
(iii) As used in this Agreement, "taxes" shall include all Federal,
state, local and foreign income, property, sales, excise, employment,
payroll, withholding and other taxes, tariffs or governmental charges of
any nature whatsoever.
(j) No Excess Parachute Payments; Section 162(m) of the Code. (i)
Except as disclosed in Section 3.1(j) of the Disclosure Schedule, any
amount that could be received (whether in cash or property or the vesting
of property) as a result of any of the transactions contemplated by this
Agreement by any employee, officer or director of the Company or any of
its affiliates who is a "disqualified individual" (as such term is defined
in proposed Treasury Regulation Section 1.280G-1) under any employment,
severance or termination agreement, other compensation arrangement or
Benefit Plan currently in effect would not be characterized as an "excess
parachute payment" (as such term is defined in Section 280G(b)(1) of the
Code).
(ii) Except as disclosed in Section 3.1(j) of the Disclosure
Schedule, the disallowance of a deduction under Section 162(m) of the Code
for employee remuneration will not apply to any amount paid or payable by
the Company or any subsidiary of the Company under any contract, Benefit
Plan, program, arrangement or understanding currently in effect.
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<PAGE> 21
(k) Voting Requirements. The affirmative vote of a majority of the
votes cast by the holders of the shares of Common Stock entitled to vote
thereon at the Stockholders Meeting with respect to the approval of the
Merger is the only vote of the holders of any class or series of the
Company's capital stock necessary to approve this Agreement and the
transactions contemplated by this Agreement.
(l) Compliance with Applicable Laws. (i) Each of the Company and
its subsidiaries and the Company Funds has in effect all Federal, state,
local and foreign governmental approvals, authorizations, certificates,
filings, franchises, licenses, notices, permits and rights ("Permits")
necessary for it to own, lease or operate its properties and assets and
to carry on its business as now conducted, and there has occurred no
default under any such Permit, except for the lack of Permits and for
defaults under Permits which lack or default individually or in the
aggregate would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole. Except as disclosed in the Filed SEC
Documents, the Company and its subsidiaries and the Company Funds are in
compliance with all applicable statutes, laws, ordinances, rules,
orders and regulations of any Governmental Entity, except for possible
noncompliance which individually or in the aggregate would not have a
material adverse effect on the business, financial condition or results
of operations of the Company and its subsidiaries taken as a whole.
Except as disclosed in the Filed SEC Documents and except for routine
examinations by state Governmental Entities charged with supervision of
insurance companies ("Insurance Regulators"), as of the date of this
Agreement, to the knowledge of the Company, no investigation by any
Governmental Entity with respect to the Company or any of its subsidiaries
or any of the Company Funds is pending or threatened, other than, in each
case, those the outcome of which, as far as reasonably can be foreseen,
will not have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries
taken as a whole.
(ii) The Annual Statements (including without limitation the Annual
Statements of any separate accounts) for the year ended December 31, 1993,
together with all exhibits and schedules thereto, and financial statements
relating thereto, and any actuarial opinion, affirmation or certification
filed in connection therewith, and the Quarterly Statements for the
periods ended after January 1, 1994, together with all exhibits and
schedules thereto, with respect to each subsidiary of the Company that is
a regulated insurance company (an "Insurance Company"), in each case as
filed with the applicable Insurance Regulator of its jurisdiction of
domicile, were prepared in conformity with statutory accounting practices
prescribed or permitted by such Insurance Regulator applied on a
consistent basis ("SAP"), present fairly, to the extent required by and
in conformity with SAP, the statutory financial condition of such
Insurance Company at their respective dates and the results of operations,
changes in capital and surplus and cash flow of such Insurance Company for
each of the periods then ended, and were correct in all material respects
when filed and there were no material omissions therefrom when filed. No
deficiencies or violations material to the financial condition or
operations of any Insurance Company have been asserted in writing by any
Insurance Regulator which have not been cured or otherwise resolved to
the satisfaction of such Insurance Regulator and which have not been
disclosed in writing to Parent prior to the date of this Agreement.
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<PAGE> 22
(m) Opinion of Financial Advisor. The Company has received the
opinion of Goldman, Sachs & Co., dated the date hereof, to the effect
that, as of such date, the consideration to be received in the Merger by
the Company's stockholders is fair to the Company's stockholders.
(n) Article Fifteenth of the Charter. The Board of Directors of the
Company (including a majority of the "Continuing Directors", as defined
in the Charter) has approved the execution and delivery by the Company of
this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement, and such approval is
sufficient to render inapplicable to this Agreement, the Merger and the
other transactions contemplated by this Agreement the restrictions
contained in Article Fifteenth of the Charter.
(o) Rights Agreement. The Rights Agreement has been amended so as
to provide that neither Parent nor Sub will become an "Acquiring Person",
and that no "Stock Acquisition Date" or "Distribution Date" (as such terms
are defined in the Rights Agreement) will occur, solely as a result of the
approval, execution or delivery of this Agreement or the consummation of
the Merger.
(p) Brokers. No broker, investment banker, financial advisor or
other person, other than Goldman, Sachs & Co., the fees and expenses of
which will be paid by the Company, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company.
(q) Ineligible Persons. None of the Company or any "affiliated
person" (as defined in the 1940 Act) thereof (i) is ineligible pursuant
to Section 9(a) of the 1940 Act to serve as an investment adviser (or in
any other capacity contemplated by the 1940 Act) to a registered
investment company or (ii) to the best knowledge of the senior officers
of the Company as of the date hereof, has engaged in any of the conduct
specified in Section 9(b) of the 1940 Act or Section 203(e) of the
Advisers Act prior to the date hereof that would be reasonably likely to
result in SEC action to disqualify the Company or any of its affiliates
as an investment adviser.
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<PAGE> 23
SECTION 3.2. Representations and Warranties of Parent and Sub.
Parent and Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and
Sub and each Significant Subsidiary of Parent (as hereinafter defined) is
a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is incorporated and has the
requisite corporate power and authority to carry on its business as now
being conducted. Each of Parent and Sub and each Significant Subsidiary
of Parent is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure
to be so qualified or licensed (individually or in the aggregate) would
not have a material adverse effect on the business, financial condition
or results of operations of Parent and its subsidiaries taken as a
whole. Parent has delivered to the Company complete and correct copies
of its Articles of Incorporation and By-laws, as amended to the date of
this Agreement. For purposes of this Agreement, a "Significant
Subsidiary" of Parent means any subsidiary of Parent that would constitute
a Significant Subsidiary within the meaning of Rule 1-02 of Regulation S-X
of the SEC.
(b) Capital Structure. The authorized capital stock of Parent
consists of 500,000,000 shares of Parent Common Stock, without par value,
and 20,000,000 shares of preferred stock, without par value. At the close
of business on June 24, 1994, (i) 24,435,774 shares of Parent Common Stock
and 5,749,725 shares of $3.25 Series D Cumulative Convertible Preferred
Stock of Parent were issued and outstanding, (ii) 16,138,366 shares of
Parent Common Stock were held by subsidiaries of Parent or by Parent in
its treasury, (iii) 5,986,666 shares of Parent Common Stock were reserved
for issuance pursuant to outstanding options to purchase shares of Parent
Common Stock granted under Parent's stock option plans (the "Parent Stock
Plans") and (iv) 4,509,509 shares of Parent Common Stock were reserved for
issuance upon conversion of Parent's $3.25 Series D Cumulative Convertible
Preferred Stock. Except as set forth above, at the close of business on
June 24, 1994, no shares of capital stock or other voting securities of
Parent were issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of Parent are, and all shares which may be issued
pursuant to this Agreement will be, when issued, duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights.
The authorized capital stock of Sub consists of 1,000 shares of common
stock, par value $1.00 per share, all of which have been validly issued,
are fully paid and nonassessable and are owned by Parent free and clear
of any Lien. No bonds, debentures, notes or other indebtedness of Parent
or any Significant Subsidiary of Parent having the right to vote (or
convertible into, or exchangeable for, securities having the right to
vote) on any matters on which the stockholders of Parent or any
Significant Subsidiary of Parent may vote are issued or outstanding. All
the outstanding shares of capital stock of each Significant Subsidiary of
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<PAGE> 24
Parent (other than Bankers Life Holding Corporation) have been validly
issued and are fully paid and nonassessable and are owned by Parent, free
and clear of all Liens. Except as set forth above, neither Parent nor any
Significant Subsidiary of Parent has any outstanding option, warrant,
subscription or other right, agreement or commitment which either (i)
obligates Parent or any Significant Subsidiary of Parent to issue, sell
or transfer, repurchase, redeem or otherwise acquire or vote any shares
of the capital stock of Parent or any Significant Subsidiary of Parent or
(ii) restricts the transfer of Parent Common Stock.
(c) Authority; Noncontravention. Parent and Sub have all requisite
corporate power and authority to enter into this Agreement and, subject
to the Parent Stockholder Approval with respect to the issuance of Parent
Common Stock in the Merger, to consummate the transactions contemplated
by this Agreement. The execution and delivery of this Agreement by Parent
and Sub and the consummation by Parent and Sub of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of Parent and Sub and by the stockholder of
Sub, subject, in the case of the issuance of Parent Common Stock in the
Merger, to the Parent Stockholder Approval. This Agreement has been duly
executed and delivered by and, assuming this Agreement constitutes the
valid and binding agreement of the Company, constitutes a valid and
binding obligation of each of Parent and Sub, enforceable against such
party in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated
by this Agreement and compliance with the provisions of this Agreement
will not (i) conflict with any of the provisions of the Articles of
Incorporation or By-laws of Parent, the Certificate of Incorporation or
By-laws of Sub or the comparable documents of any Significant Subsidiary
of Parent, (ii) subject to the governmental filings and other matters
referred to in the following sentence, conflict with, result in a breach
of or default (with or without notice or lapse of time, or both) under,
or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a material benefit under, or require the consent
of any person under, any indenture, or other agreement, permit,
concession, franchise, license or similar instrument or undertaking to
which Parent or any of its subsidiaries is a party or by which Parent or
any of its subsidiaries or any of their assets is bound or affected, or
(iii) subject to the governmental filings and other matters referred to
in the following sentence, contravene any law, rule or regulation of any
state or of the United States or any political subdivision thereof or
therein, or any order, writ, judgment, injunction, decree, determination
or award currently in effect, which, in the case of clauses (ii) and (iii)
above, singly or in the aggregate, would have a material adverse effect
on the business, financial condition or results of operations of Parent
and its subsidiaries taken as a whole. No consent, approval or
authorization of, or declaration or filing with, or notice to, any
Governmental Entity which has not been received or made is required by or
with respect to Parent or Sub in connection with the execution and
delivery of this Agreement by Parent or Sub or the consummation by Parent
or Sub, as the case may be, of any of the transactions contemplated by
this Agreement, except for (i) the filing of premerger notification and
report forms under the HSR Act with respect to the Merger and with respect
to the transactions contemplated by the Citibank Commitment Letter, (ii)
the filings and/or notices required under the insurance laws of the
jurisdictions set forth in Section 3.1(c)(i) of the Disclosure Schedule,
(iii) the filing with the SEC of the Form S-4, the Joint Proxy Statement
relating to the Parent Stockholder Approval and such reports under the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (iv) the filing of the certificate of
merger with the Delaware Secretary of State, and appropriate documents
with the relevant authorities of other states in which the Company is
qualified to do business, (v) such other consents, approvals,
authorizations, filings or notices as are set forth in Section 3.1(c)(ii)
of the Disclosure Schedule and (vi) any applicable filings under state
anti-takeover laws, or filings, authorizations, consents or approvals the
failure to make or obtain which, in the aggregate, would not have a
material adverse effect on the business, financial condition or
results of operations of Parent and its subsidiaries taken as a whole.
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(d) SEC Documents. Parent has filed all required reports,
schedules, forms, statements and other documents with the SEC since
January 1, 1994 (the "Parent SEC Documents"). As of their respective
dates, the Parent SEC Documents complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case
may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Parent SEC Documents, and none of the Parent SEC
Documents as of such dates contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Parent included in the Parent SEC Documents comply as to
form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with generally accepted accounting principles
(except, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present
the consolidated financial position of Parent and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments). Except
to the extent that information contained in any Parent SEC Document has
been revised or superseded by a later Filed Parent SEC Document (as
defined in Section 3.2(f)), none of the Parent SEC Documents contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
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<PAGE> 26
(e) Information Supplied. None of the information supplied or to
be supplied by Parent or Sub specifically for inclusion or incorporation
by reference in (i) the Form S-4 will, at the time the Form S-4 is filed
with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
or (ii) the Joint Proxy Statement will, at the date the Joint Proxy
Statement is first mailed to Parent's stockholders or at the time of the
Parent Stockholders Meeting (as defined in Section 5.2), contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Form S-4 will comply as to form in all material
respects with the requirements of the Securities Act and the rules and
regulations promulgated thereunder and the Joint Proxy Statement will
comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder, except
that no representation or warranty is made by Parent or Sub with respect
to statements made or incorporated by reference in either the Form S-4 or
the Joint Proxy Statement based on information supplied by the Company
specifically for inclusion or incorporation by reference therein.
(f) Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Documents filed and publicly available prior to the date
of this Agreement (the "Filed Parent SEC Documents"), since the date of
the most recent audited financial statements included in the Filed Parent
SEC Documents, Parent has conducted its business only in the ordinary
course, and there has not been (i) any change which would have a material
adverse effect on the business, financial condition or results of
operations of Parent and its subsidiaries, taken as a whole, (ii) any
declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) with respect to any of Parent's
outstanding capital stock (other than regular quarterly cash dividends of
$.125 per share on Parent Common Stock and regular cash dividends on the
Parent's $3.25 Series D Cumulative Convertible Preferred Stock, in each
case in accordance with usual record and payment dates and in accordance
with the Parent's present dividend policy), (iii) any split, combination
or reclassification of any of its outstanding capital stock or any
issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock,
or (iv) any change in accounting methods, principles or practices by
Parent materially affecting its assets, liabilities or business, except
insofar as may have been disclosed in the Filed Parent SEC Documents or
required by a change in generally accepted accounting principles.
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<PAGE> 27
(g) Voting Requirements. The affirmative vote of the holders of a
majority of the shares of Parent Common Stock present, or represented, and
entitled to vote thereon at the Parent Stockholders Meeting with respect
to the issuance of shares of Parent Common Stock in the Merger is the only
vote of the holders of any class or series of Parent's capital stock
necessary to approve this Agreement and the transactions contemplated by
this Agreement.
(h) Opinion of Financial Advisor. Parent has received the opinion
of Morgan Stanley & Co. Incorporated, to the effect that, as of the date
of this Agreement, the consideration to be paid to the Company's
stockholders in the Merger is fair to Parent from a financial point of
view.
(i) Benefit Plans. Parent and its subsidiaries are in compliance
in all material respects with the applicable provisions of ERISA and the
Code with respect to each material "employee benefit plan" (as defined in
Section 3(3) of ERISA) maintained, contributed to or required to be
maintained or contributed to by Parent or its subsidiaries for the benefit
of any present officers, employees or directors of Parent or any of its
subsidiaries in the United States.
(j) Taxes. (i) Each of Parent and its subsidiaries has filed all
tax returns and reports required to be filed by it or requests for
extensions to file such returns or reports have been timely filed, granted
and have not expired, except to the extent that such failures to file or
to have extensions granted that remain in effect individually or in the
aggregate would not have a material adverse effect on Parent. All tax
returns filed by Parent and each of its subsidiaries are complete and
accurate in all material respects to the knowledge of Parent. Parent and
each of its subsidiaries have paid (or Parent has paid on its
subsidiaries' behalf) all taxes shown as due on such returns, and the most
recent financial statements contained in the Filed Parent SEC Documents
reflect an adequate reserve for all taxes payable by Parent and its
subsidiaries for all taxable periods and portions thereof accrued through
the date of such financial statements.
(ii) No deficiencies for any taxes have been proposed, asserted or
assessed against Parent or any of its subsidiaries that are not adequately
reserved for, except for deficiencies that individually or in the
aggregate would not have a material adverse effect on Parent, and no
requests for waivers of the time to assess any such taxes have been
granted or are pending. The Federal and Indiana income tax returns of
Parent and each of its subsidiaries consolidated in such returns have been
examined by and settled with the United States Internal Revenue Service
or the Indiana Department of Revenue, as the case may be, or the statute
of limitations for the assessment or collection of Federal or Indiana
income taxes due from Parent or its subsidiaries has expired, for all
taxable years of Parent or any of its subsidiaries through and including,
the taxable year ended December 31, 1989, for Federal income taxes and
December 31, 1991, for Indiana income taxes.
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<PAGE> 28
(k) Compliance with Applicable Laws. Each of Parent, its
subsidiaries and any other entity controlled by or under common control
with Parent the business, financial condition or results of operations of
which is material to Parent and its subsidiaries, taken as a whole (a
"Material Parent Entity") has in effect all Permits necessary for it to
own, lease or operate its properties and assets and to carry on its
business as now conducted, and there has occurred no default under any
such Permit, except for the lack of Permits and for defaults under Permits
which lack or default individually or in the aggregate would not have a
material adverse effect on the business, financial condition or results
of operations of Parent and its subsidiaries taken as a whole. Except as
disclosed in the Filed Parent SEC Documents, Parent, its subsidiaries and
the Material Parent Entities are in compliance with all applicable
statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity, except for possible noncompliance which individually
or in the aggregate would not have a material adverse effect on the
business, financial condition or results of operations of Parent and its
subsidiaries taken as a whole.
(l) Commitment Letters. True and correct copies of the Senior
Facilities Commitment Letter dated June 21, 1994, from Citibank, N.A., and
Citicorp Securities, Inc. to Parent (the "Citibank Commitment Letter"),
the letter dated June 22, 1994, from Morgan Stanley & Co. Incorporated
to Parent (the "Morgan Stanley Highly Confident Letter") and the letter
dated June 23, 1994, from the general partner of Conseco Capital Partners
II, L.P. to the Chairman of the Board of the Company (the "CCP II Letter")
have been delivered to the Company.
(m) No Prior Activities. Sub has not incurred, and will not incur,
directly or through any subsidiary, any liabilities or obligations for
borrowed money or otherwise, except incidental liabilities or obligations
not for borrowed money incurred in connection with its organization and
except in connection with obtaining financing in connection with the
Merger. Except as contemplated by this Agreement, Sub (i) has not
engaged, directly or through any subsidiary, in any business activities
of any type or kind whatsoever, (ii) has not entered into any agreements
or arrangements with any person or entity, and (iii) is not subject to or
bound by any obligation or undertaking.
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<PAGE> 29
(n) Ineligible Persons. None of Parent or any "affiliated person"
(as defined in the 1940 Act) thereof (i) is ineligible pursuant to Section
9(a) of the 1940 Act to serve as an investment adviser (or in any other
capacity contemplated by the 1940 Act) to a registered investment company
or (ii) to the best knowledge of the senior officers of Parent as of the
date hereof, has engaged in any of the conduct specified in Section 9(b)
of the 1940 Act or Section 203(e) of the Advisers Act prior to the date
hereof that would be reasonably likely to result in SEC action to
disqualify Parent or any of its affiliates as an investment adviser.
(o) Brokers. No broker, investment banker, financial advisor or
other person, other than Morgan Stanley & Co. Incorporated, the fees and
expenses of which will be paid by Parent, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO
MERGER
SECTION 4.1. (a) Conduct of Business of the Company. Except as
contemplated by this Agreement, during the period from the date of this
Agreement to the Effective Time, the Company shall, and shall cause its
subsidiaries to, act and carry on their respective businesses in the ordinary
course of business and, to the extent consistent therewith, use reasonable
efforts to preserve intact their current business organizations, keep available
the services of their current key officers and employees and preserve the
goodwill of those engaged in material business relationships with them. Without
limiting the generality of the foregoing, during the period from the date of
this Agreement to the Effective Time, the Company shall not, and shall not
permit any of its subsidiaries to, without the prior consent of Parent:
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<PAGE> 30
(i) (x) declare, set aside or pay any dividends on, or make any
other distributions (whether in cash, stock or property) in respect of,
any of the Company's outstanding capital stock (other than regular
quarterly cash dividends not in excess of $.23 per share of Common Stock
and regular cash dividends on Company Preferred Stock, in each case with
usual record and payment dates and in accordance with the Company's
present dividend policy), (y) split, combine or reclassify any of its
outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock, or (z) purchase, redeem or otherwise acquire
any shares of outstanding capital stock or any rights, warrants or options
to acquire any such shares except, in the case of clause (z), for the
acquisition of shares of Common Stock from holders of Company Stock
Options and Director Options in full or partial payment of the exercise
price payable by such holder upon exercise of Company Stock Options or
Director Options outstanding on the date of this Agreement, any mandatory
redemption of the securities of KFC in accordance with the terms thereof
and as contemplated by Section 2.2(c);
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities other than (w)
pursuant to the Dividend Reinvestment Plan, (x) upon the exercise of
Company Stock Options and Director Options outstanding on the date of this
Agreement, (y) upon the conversion of shares of Preferred Stock
outstanding on the date of this Agreement or (z) in accordance with their
respective terms, upon the conversion of any floating rate convertible
subordinated debentures of KFC or the exercise of any stock options
respecting the common stock of KFC;
(iii) amend its articles of organization, by-laws or other
comparable charter or organizational documents;
(iv) acquire any business or any corporation, partnership, joint
venture, association or other business organization or division thereof,
except as disclosed in Section 4.1(a)(iv) of the Disclosure Schedule;
(v) sell, mortgage or otherwise encumber or subject to any Lien or
otherwise dispose of any of its properties or assets that are material to
the Company and its subsidiaries taken as a whole, except in the ordinary
course of business, as disclosed in Section 4.1(a)(v) of the Disclosure
Schedule or as contemplated by Section 6.1(g) hereof;
(vi) (x) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, other than indebtedness owing to or
guarantees of indebtedness owing to the Company, KFC or any direct or
indirect wholly-owned subsidiary of the Company or KFC or (y) make any
loans or advances to any other person, other than to the Company, to KFC
or to any direct or indirect wholly-owned subsidiary of the Company or KFC
and other than routine advances to employees, except in the case of either
(x) or (y) as disclosed in Section 4.1(a)(vi) of the Disclosure Schedule
or, with respect to Kemper Clearing Corp., in the ordinary course of
business;
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<PAGE> 31
(vii) make any tax election or settle or compromise any income
tax liability that could reasonably be expected to be material to the
Company and its subsidiaries taken as a whole;
(viii) except as disclosed in Section 4.1(a)(viii) of the Disclosure
Schedule, pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of the Company included in the Filed SEC Documents or
incurred since the date of such financial statements in the ordinary
course of business consistent with past practice;
(ix) except in the ordinary course of business, modify, amend or
terminate any material agreement, permit, concession, franchise, license
or similar instrument to which the Company or any subsidiary is a party
or waive, release or assign any material rights or claims thereunder; or
(x) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) Conduct of Business by Parent. During the period from the date
of this Agreement to the Effective Time, Parent shall, and shall cause its
subsidiaries to, carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and,
to the extent consistent therewith, use all reasonable efforts to preserve
intact their current business organizations, keep available the services of
their current officers and employees and preserve their relationships with
customers, suppliers, licensors, licensees, distributors and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, Parent shall not, and shall not permit any of its
subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any
outstanding capital stock of Parent (other than regular quarterly cash
dividends of $.125 per share of Parent Common Stock and regular cash
dividends on the Parent's $3.25 Series D Cumulative Convertible Preferred
Stock, in each case with usual record and payment dates and in accordance
with Parent's present dividend policy) or (y) split, combine or reclassify
any of its outstanding capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of Parent's outstanding capital stock (other than exchanges in the
ordinary course under Parent's employee stock plans);
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<PAGE> 32
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, in each case if any
such action could reasonably be expected to (A) delay materially the date
of mailing of the Joint Proxy Statement or, (B) if it were to occur after
such date of mailing, require an amendment of the Joint Proxy Statement;
(iii) acquire any business or any corporation, partnership, joint
venture, association or other business organization or division thereof,
in each case if any such action could reasonably be expected to (A) delay
materially the date of mailing of the Joint Proxy Statement or, (B) if it
were to occur after such date of mailing, require an amendment of the
Joint Proxy Statement; or
(iv) authorize any of, or commit or agree to take any of, the
foregoing actions.
SECTION 4.2. Other Actions. The Company and Parent shall not,
and shall not permit any of their respective subsidiaries to, take any action
that would, or that could reasonably be expected to, result in (i) any of the
representations and warranties of such party set forth in this Agreement that
are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions of the Merger set forth in
Article VI not being satisfied.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. Preparation of Form S-4 and the Joint Proxy
Statement. (a) As soon as practicable following the date of this Agreement,
the Company and Parent shall prepare and file with the SEC the Joint Proxy
Statement and Parent shall prepare and file with the SEC the Form S-4, in which
the Joint Proxy Statement will be included as a prospectus. Each of the
Company and Parent shall use its best efforts to have the Form S-4 declared
effective under the Securities Act as promptly as practicable after such
filing. The Company will use its best efforts to cause the Joint Proxy
Statement to be mailed to the Company's stockholders, and Parent will use its
best efforts to cause the Joint Proxy Statement to be mailed to Parent's
stockholders, in each case as promptly as practicable after the Form S-4 is
declared effective under the Securities Act. Parent shall also take any action
(other than qualifying to do business in any jurisdiction in which it is not
now so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of Parent Common Stock in the Merger and
the Company shall furnish all information concerning the Company and the
holders of the Common Stock as may be reasonably requested in connection with
any such action.
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<PAGE> 33
SECTION 5.2. Meetings of Stockholders. The Company will take all
action necessary in accordance with applicable law and its Charter and By-laws
to convene a meeting of its stockholders (the "Stockholders Meeting") to
consider and vote upon the approval of the Merger. Parent will take all action
necessary in accordance with applicable law and its Articles of Incorporation
and By-laws to convene a meeting of its stockholders (the "Parent Stockholders
Meeting") to consider and vote upon the approval of the issuance of Parent
Common Stock in the Merger. Subject to Section 5.11 hereof in the case of the
Company, the Company and Parent will, through their respective Boards of
Directors, recommend to their respective stockholders approval of the foregoing
matters. Without limiting the generality of the foregoing, the Company agrees
that, subject to its right to terminate this Agreement pursuant to Section
5.11, its obligations pursuant to the first sentence of this Section 5.2 shall
not be affected by (i) the commencement, public proposal, public disclosure or
communication to the Company of any Acquisition Proposal (as defined in Section
5.10) or (ii) the withdrawal or modification by the Board of Directors of
the Company of its approval or recommendation of this Agreement or the Merger.
Parent and the Company will use reasonable efforts to hold the Stockholders
Meeting and the Parent Stockholders Meeting on the same day and use their best
efforts to hold such Meetings as soon as practicable after the date hereof.
SECTION 5.3. Letter of the Company's Accountants. The Company
shall use its best efforts to cause to be delivered to Parent a letter of KPMG
Peat Marwick, the Company's independent public accountants, dated a date within
two business days before the date on which the Form S-4 shall become effective
and a letter of KPMG Peat Marwick, dated a date within two business days before
the Closing Date, each addressed to Parent, in form and substance reasonably
satisfactory to Parent and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4.
SECTION 5.4. Letter of Parent's Accountants. Parent shall use its
best efforts to cause to be delivered to the Company a letter of Coopers &
Lybrand, Parent's independent public accountants, dated a date within two
business days before the date on which the Form S-4 shall become effective and
a letter of Coopers & Lybrand, dated a date within two business days before the
Closing Date, each addressed to the Company, in form and substance reasonably
satisfactory to the Company and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4.
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<PAGE> 34
SECTION 5.5. Access to Information; Confidentiality. Each of the
Company and Parent shall, and shall cause each of its respective subsidiaries
to, afford to the other party and to the officers, employees, counsel,
financial advisors and other representatives of such other party reasonable
access during normal business hours during the period prior to the Effective
Time to all its properties, books, contracts, commitments, personnel and
records and, during such period, each of the Company and Parent shall, and
shall cause each of its respective subsidiaries to, furnish as promptly as
practicable to the other party such information concerning its business,
properties, financial condition, operations and personnel as such other party
may from time to time reasonably request. Except as required by law, Parent
will hold, and will cause its respective directors, officers, partners,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to hold, any nonpublic information obtained from the Company in
confidence to the extent required by, and in accordance with, the provisions
of the letter dated May 25, 1994, between Parent and the Company. Except as
required by law, the Company will hold, and will cause its directors, officers,
partners, employees, accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic information obtained from
Parent in confidence to the extent required by, and in accordance with, the
provisions of the letter dated June 23, 1994, between Parent and the Company.
SECTION 5.6. Best Efforts. Upon the terms and subject to the
conditions and other agreements set forth in this Agreement, each of the
parties agrees to use its best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions contemplated by this Agreement.
SECTION 5.7. Benefit Plans and Employment Agreements. (a) Parent
currently intends to cause the Surviving Corporation and each of its
subsidiaries to maintain employee benefit plans which provide aggregate
benefits to Continuing Employees (as defined below) that are comparable to
those currently provided by Parent to its employees.
(b) Notwithstanding the provisions of Section 5.7(a):
(i) Each benefit plan made available to Continuing Employees after
the Effective Time shall be offered to Continuing Employees (and, if
applicable, their dependents) without any waiting period and the Surviving
Corporation and, if applicable, Parent shall cause any restrictions and
limitations for pre-existing conditions or insurability to be waived
(other than any pre-existing conditions of lack of insurability that
constituted a restriction or limitation with respect the benefits
available to a Continuing Employee immediately prior to the Effective
Time).
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(ii) Each Continuing Employee shall be given full credit for his or
her pre-Effective Time service with the Company or any of its subsidiaries
(and, to the extent such service is recognized under any Benefit Plan of
the Company or any of its subsidiaries as of the Effective Time, service
with any predecessor employer) for all purposes (other than for benefit
accrual under any defined benefit Pension Plan) under any benefit plan
offered to Continuing Employees on or after the Effective Time.
(iii) As of the Effective Time, Continuing Employees participating
in the defined contribution Benefit Plans (including any non-contributory
supplemental benefit plans) of the Company and each of its subsidiaries
shall be fully vested as to all amounts contributed or accrued through the
Effective Time or, if later, as a result of the following sentence. In
addition, Parent shall cause the Surviving Corporation and each of its
subsidiaries or affiliates, as appropriate, to contribute to each of such
Benefit Plans (or in the case of an unfunded Benefit Plan, shall credit)
for the benefit of individuals who are Eligible Employees (as defined
below) on December 31, 1994, (x) all matching and salary based
contributions for 1994 currently provided for in such Benefit Plan not
made prior to the Effective Time and (y) all discretionary contributions
for 1994 provided for in such Benefit Plans, subject in the case of this
clause (y) to achievement of the performance goals set forth in Section
5.7(b)(iii) of the Disclosure Schedule.
(iv) Parent shall cause the Surviving Corporation and each of its
subsidiaries or affiliates, as appropriate, not later than February 28,
1995, to pay each bonus eligible individual who is an Eligible Employee
on date of payment an incentive cash bonus for 1994 not less than a Target
Bonus (or, in the case of an Eligible Employee whose employment is
terminated prior to December 31, 1994, a pro rata Target Bonus) subject
to the achievement of the performance goals set forth in Section
5.7(b)(iii) of the Disclosure Schedule. Target Bonus means (x) an
individual's current target bonus under the incentive compensation program
in which such individual participates, or (y) if no such specific target
currently exists, two-thirds of the incentive cash bonus received by such
individual for 1993 (or if such individual was not employed until after
January 1, 1993, the bonus received by similarly situated individuals for
1993).
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(v) Parent shall cause the Surviving Corporation and each of its
subsidiaries and affiliates to maintain severance benefits after the
Effective Time for each Continuing Employee that are no less favorable to
such Continuing Employee than those provided under the severance plans
included in Section 5.7(b)(v) of the Disclosure Schedule, until the first
anniversary of the Effective Time (or until the second anniversary of the
Effective Time in the case of the Kemper Corporation Change of Control
Severance Program).
(vi) Parent shall cause the Surviving Corporation and each of its
subsidiaries and affiliates to continue, after the Effective Time, to make
medical expense benefits available to each individual retired as of the
Effective Time and then participating in the various retiree medical
expense benefits programs and plans currently sponsored by the Company and
its subsidiaries, that are no less favorable to such individuals than the
medical expense benefits provided under such programs or plans as of the
date hereof.
(c) As used in Sections 5.7(a) and 5.7(b):
(i) "Continuing Employees" means all employees of Company or a
subsidiary of the Company as of the Effective Time.
(ii) "Eligible Employees" at any date means all Continuing Employees
other than employees who have resigned voluntarily prior to such date or
whose employment has been terminated for "Cause" prior to such date.
(iii) "Cause" means (x) willful breach of, willful neglect of or
willful refusal to perform the duties associated with a Continuing
Employee's employment or (y) commission of a felony, or a misdemeanor
involving dishonesty, fraud, theft, larceny or embezzlement.
(d) The Surviving Corporation agrees to honor and shall not
challenge the validity and enforceability of the termination protection
agreements between the Company and the individuals listed in Section 5.7(d) of
the Disclosure Schedule.
(e) The Surviving Corporation agrees to honor all, and shall not
challenge the validity and enforceability of any, obligations of the Company
and its subsidiaries to non-management directors, including, without
limitation, the obligations under the Kemper Corporation Director Deferred
Compensation Program and the Kemper Corporation Director Retirement Plan.
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SECTION 5.8. Indemnification and Insurance. Parent and Sub agree
that all rights to indemnification and exculpation from liability for acts or
omissions occurring prior to the Effective Time now existing in favor of the
current or former directors, officers or employees of the Company and its
subsidiaries as provided in their respective certificates of incorporation or
by-laws shall survive the Merger and shall continue in full force and effect
in accordance with their terms for a period of not less than six years from the
Effective Time. Parent will cause to be maintained for a period of not less
than six years from the Effective Time the Company's current directors' and
officers' insurance and indemnification policy to the extent that it provides
coverage for events occurring prior to the Effective Time (the "D&O Insurance")
for all persons who are directors, officers or employees of the Company or any
subsidiary on the date of this Agreement, so long as the annual premium
therefor would not be in excess of 200% of the last annual premium paid prior
to the date of this Agreement (200% of such premium, the "Maximum Premium");
provided, however, that Parent may, in lieu of maintaining such existing D&O
Insurance as provided above, cause comparable coverage to be provided under any
policy maintained for the benefit of the directors and officers of Parent or
any of its subsidiaries, so long as (i) the issuer thereof has at least an
equal claims-paying rating and (ii) the material terms thereof are no less
advantageous than the existing D&O Insurance to the extent commercially
available. If the existing D&O Insurance expires, is terminated or cancelled
during such six-year period, Parent will use all reasonable efforts to cause
to be obtained as much D&O Insurance as can be obtained for the remainder of
such period for an annualized premium not in excess of the Maximum Premium, on
terms and conditions no less advantageous than the existing D&O Insurance to
the extent commercially available. The Company represents to Parent that the
Maximum Premium is $1,840,000.
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SECTION 5.9. Public Announcements. Parent and Sub, on the one
hand, and the Company, on the other hand, will consult with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press release or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange.
SECTION 5.10. Acquisition Proposals. From and after July 6, 1994,
the Company shall not, nor shall it permit any of its subsidiaries to, nor
shall it authorize or permit any officer, director or employee of, or any
investment banker, attorney or other advisor or representative of, the Company
or any of its subsidiaries to, directly or indirectly, (i) solicit, initiate
or encourage the submission of any Acquisition Proposal (as hereinafter
defined) or (ii) participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal. Prior to July
6, 1994, the Company, any of its subsidiaries or any officer, director or
employee of, or any investment banker, attorney or other advisor or
representative of, the Company or any of its subsidiaries may do any of the
foregoing. On or after July 6, 1994, the Company, its subsidiaries and all
officers, directors, employees of, and all investment bankers, attorneys and
other advisors and representatives of, the Company and its subsidiaries shall
cease doing any of the foregoing; provided, however, that on or after July 6,
1994, notwithstanding the provisions of the first sentence of this Section
5.10, the Company, any of its subsidiaries or any officer, director or employee
of, or any investment banker, attorney or other advisor or representative of,
the Company or any of its subsidiaries may, following the receipt of an
Acquisition Proposal by the Company that the Board of Directors of the Company
determines in good faith, following consultation with outside counsel, would
permit the Board of Directors to take any of the actions referred to in the
first sentence of Section 5.11, participate in negotiations regarding such
Acquisition Proposal. Notwithstanding anything in this Agreement to the
contrary, from and after July 6, 1994, the Company shall promptly advise Parent
orally and in writing of the receipt by it (or any of the other entities or
persons referred to above) after the date hereof of any Acquisition Proposal,
or any inquiry which could lead to any Acquisition Proposal, the material terms
and conditions of such Acquisition Proposal or inquiry, and the identity of the
person making any such Acquisition Proposal or inquiry. The Company will keep
Parent fully informed of the status and details of any such Acquisition
Proposal or inquiry. Without limiting the foregoing, it is understood that any
violation of the restrictions set forth in the first sentence of this Section
5.10 by any officer, director or employee of the Company or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of the Company or any of its subsidiaries, whether or not such
person is purporting to act on behalf of the Company or any of its subsidiaries
or otherwise, shall be deemed to be a breach of this Section 5.10 by the
Company. For purposes of this Agreement, "Acquisition Proposal" means any
proposal with respect to a merger, consolidation, share exchange or similar
transaction involving the Company or any Significant Subsidiary of the Company,
or any purchase of all or any significant portion of the assets of the Company
or any Significant Subsidiary of the Company, or any equity interest in the
Company or any Significant Subsidiary of the Company, other than the
transactions contemplated hereby or by the Citibank Commitment Letter.
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SECTION 5.11. Fiduciary Duties. The Board of Directors of the
Company shall not (i) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to Parent or Sub, the approval or recommendation by such Board
of Directors of this Agreement or the Merger, (ii) approve or recommend, or
propose to approve or recommend, any Acquisition Proposal or (iii) enter into
any agreement with respect to any Acquisition Proposal, unless the Company
receives an Acquisition Proposal and the Board of Directors of the Company
determines in good faith, following consultation with outside counsel, that in
order to comply with its fiduciary duties to stockholders under applicable law
it is necessary for the Board of Directors to withdraw or modify its approval
or recommendation of this Agreement or the Merger, approve or recommend such
Acquisition Proposal, enter into an agreement with respect to such Acquisition
Proposal or terminate this Agreement. In the event the Board of Directors of
the Company takes any of the foregoing actions, the Company shall, concurrently
with the taking of any such action, pay to Parent the Section 5.15(a) Fee or
the Section 5.15(b) Fee, as applicable, plus all Expenses pursuant to Section
5.15. Nothing contained in this Section 5.11 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to
the Company's stockholders which, in the good faith reasonable judgment of the
Board of Directors of the Company based on the advice of outside counsel, is
required under applicable law; provided that the Company does not withdraw or
modify, or propose to withdraw or modify, its position with respect to the
Merger or approve or recommend, or propose to approve or recommend, an
Acquisition Proposal. Notwithstanding anything contained in this Agreement to
the contrary, any action by the Board of Directors permitted by this Section
5.11 shall not constitute a breach of this Agreement by the Company.
SECTION 5.12. Consents, Approvals and Filings. (a) The Company
and Parent will make and cause their respective subsidiaries to make all
necessary filings, as soon as practicable, including, without limitation, those
required under the HSR Act, the Securities Act, the Exchange Act, the 1940 Act,
the Advisers Act and applicable state insurance laws in order to facilitate
prompt consummation of the Merger and the other transactions contemplated by
this Agreement. In addition, the Company and Parent will each use their best
efforts, and will cooperate fully with each other (i) to comply as promptly as
practicable with all governmental requirements applicable to the Merger and the
other transactions contemplated by this Agreement and (ii) to obtain as
promptly as practicable all necessary permits, orders or other consents of
Governmental Entities and consents of all third parties necessary for the
consummation of the Merger and the other transactions contemplated by this
Agreement. Each of the Company and Parent shall use reasonable efforts to
provide such information and communications to Governmental Entities as such
Governmental Entities may reasonably request.
(b) Each of the parties shall provide to the other party copies of
all applications in advance of filing or submission of such applications to
Governmental Entities in connection with this Agreement.
SECTION 5.13. Company Satisfaction of the Conditions of Section 15
of the 1940 Act. (a) The Company shall, and shall cause each of KFS and the
applicable subsidiaries of KFS (collectively, with KFS, the "Asset Management
Subsidiaries") to, use their best efforts to cause the boards of
trustees/directors of the Company Funds to approve, and to solicit their
respective shareholders as promptly as practicable with regard to the approval
of, new investment advisory agreements with the Asset Management Subsidiaries
acting as investment advisers for such funds, to be effective on or as promptly
as practicable after the Effective Time, pursuant to the provisions of Section
15 of the 1940 Act, and consistent with all requirements of the 1940 Act
applicable thereto, provided that such agreements are identical in all respects
to the existing agreements other than the term of the agreement. For purposes
of this Agreement, "Company Funds" shall mean the registered investment
companies for which the Company or any subsidiary acts as investment adviser
or sub-adviser. Each Company Fund is identified in Section 5.13 of the
Disclosure Schedule.
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(b) The Company shall, and shall cause each of the Asset Management
Subsidiaries to, use their best efforts to ensure the satisfaction of the
conditions set forth in Section 15(f) of the 1940 Act with respect to each of
the Company Funds.
SECTION 5.14. Advisory Contract Consents. As promptly as
practicable, the Company shall cause the non-investment company advisory
clients of the Asset Management Subsidiaries to be informed of the transactions
contemplated by this Agreement and shall give such clients an opportunity to
terminate their advisory contracts with such Asset Management Subsidiaries or
any of their affiliates. Parent agrees that the Company may satisfy this
obligation insofar as it relates to non-investment company advisory clients by
providing them with the notice contemplated by the first sentence of this
Section 5.14 and obtaining such clients' consent in the form of actual or
implied consent by way of informing such clients of the Asset Management
Subsidiaries' intention to continue the advisory services, pursuant to the
Asset Management Subsidiaries' existing contracts with such clients, subject
to such clients' right to terminate such contracts within 60 days of receipt
of such notice, and that each such client's consent will be implied if it
continues to accept the services without rejection during such specified 60 day
period.
SECTION 5.15. Certain Fees and Expenses. (a) The Company shall
pay to Parent upon demand $25 million (the "Section 5.15(a) Fee"), payable in
same-day funds, plus all Expenses (as defined below), if an Acquisition
Proposal is commenced, publicly proposed, publicly disclosed or communicated
to the Company (or the willingness of any person to make an Acquisition
Proposal is publicly disclosed or communicated to the Company) and the Board
of Directors of the Company prior to July 6, 1994, in accordance with Section
5.11, withdraws or modifies its approval or recommendation of this Agreement
or the Merger, approves or recommends such Acquisition Proposal, enters into
an agreement with respect to such Acquisition Proposal, terminates this
Agreement, approves any transaction pursuant to Section 11(a)(ii)(B) or 13(d)
of the Rights Agreement or amends or waives any provision of the Rights
Agreement or redeems the Rights issued thereunder.
(b) The Company shall pay to Parent upon demand $100 million (the
"Section 5.15(b) Fee"), payable in same-day funds, plus all Expenses, if a bona
fide Acquisition Proposal is commenced, publicly proposed, publicly disclosed
or communicated to the Company (or the willingness of any person to make such
an Acquisition Proposal is publicly disclosed or communicated to the Company)
and (i) the Board of Directors of the Company on or after July 6, 1994, in
accordance with Section 5.11, withdraws or modifies its approval or
recommendation of this Agreement or the Merger, approves or recommends such
Acquisition Proposal, enters into an agreement with respect to such Acquisition
Proposal, terminates this Agreement, approves any transaction pursuant to
Section 11(a)(ii)(B) or 13(d) of the Rights Agreement or amends or waives any
provision of the Rights Agreement or redeems the Rights issued thereunder or
(ii) the requisite approval of the Company's stockholders for the Merger is not
obtained at the Stockholders Meeting and the Section 5.15(a) Fee did not and
has not become due and payable.
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(c) For purposes of this Section, "Expenses" shall mean all
documented out-of-pocket fees and expenses incurred or paid by or on behalf of
Parent in connection with the Merger or the consummation of any of the
transactions contemplated by this Agreement, including all bank fees, financing
fees, printing costs and fees and expenses of counsel, investment banking
firms, accountants, experts and consultants to Parent; provided, however, that
prior to July 6, 1994, Expenses shall not exceed $15.0 million.
SECTION 5.16. Compliance with Section 15(f) of the 1940 Act by
Parent. Parent shall use its best efforts to assure the satisfaction of the
conditions of Section 15(f) of the 1940 Act with respect to each of the Company
Funds.
SECTION 5.17. Affiliates and Certain Stockholders. Prior to the
Closing Date, the Company shall deliver to Parent a letter identifying all
persons who are, at the time the Merger is submitted for approval to the
stockholders of the Company, "affiliates" of the Company for purposes of Rule
145 under the Securities Act. The Company shall use its best efforts to cause
each such person to deliver to Parent on or prior to the Closing Date a written
agreement substantially in the form attached as Exhibit A hereto. Parent shall
not be required to maintain the effectiveness of the Form S-4 or any other
registration statement under the Securities Act for the purposes of resale of
Parent Common Stock by such affiliates and the certificates representing Parent
Common Stock received by such affiliates in the Merger shall bear a customary
legend regarding applicable Securities Act restrictions and the provisions of
this Section 5.17.
SECTION 5.18. NYSE Listing. Parent shall use its best efforts to
cause the shares of Parent Common Stock to be issued in the Merger to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Closing Date.
SECTION 5.19. Stockholder Litigation. The Company shall give
Parent the opportunity to participate in the defense or settlement of any
stockholder litigation against the Company and its directors relating to the
transactions contemplated by this Agreement; provided, however, that no such
settlement shall be agreed to without Parent's consent, which consent shall not
be unreasonably withheld.
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SECTION 5.20. Financing. Parent will use its best efforts to obtain
the financing referred to in the Citibank Commitment Letter, the Morgan Stanley
Highly Confident Letter and the CCP II Letter. The Company will, and will
cause its subsidiaries to, cooperate with Parent and take all reasonable
actions necessary in order to assist Parent in obtaining such financing.
SECTION 5.21. Board Action Relating to Stock Option Plans. As
soon as practicable following the date of this Agreement, the Board of
Directors of the Company (or, if appropriate, any committee administering a
Company Stock Option Plan) shall adopt such resolutions or take such actions
as may be required to adjust the terms of all outstanding Company Stock Options
in accordance with Section 2.2 and shall make such other changes to the Company
Stock Option Plans as it deems appropriate to give effect to the Merger
(subject to the approval of Parent, which shall not be unreasonably withheld).
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger is
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the stockholders of
the Company entitled to cast at least a majority of the votes which all
stockholders of the Company are entitled to cast thereon and the Parent
Stockholder Approval shall have been obtained.
(b) Governmental and Regulatory Consents. All filings required to
be made prior to the Effective Time with, and all consents, approvals,
permits and authorizations required to be obtained prior to the Effective
Time from, Governmental Entities, including, without limitation, those set
forth in Section 3.1(c)(i) of the Disclosure Schedule, in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company, Parent and Sub will have
been made or obtained (as the case may be); provided, however, that such
consents, approvals, permits and authorizations may be subject to (i)
conditions customarily imposed by insurance regulatory authorities or (ii)
other conditions that would not reasonably be expected to have a material
adverse effect on the business, financial condition or results of
operations of Parent and its subsidiaries taken as a whole (after giving
effect to the consummation of the Merger).
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(c) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have otherwise expired.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however, that
the parties invoking this condition shall use reasonable efforts to have
any such order or injunction vacated.
(e) Company Fund Approvals. In accordance with Section 15 of the
1940 Act, the respective boards of trustees/directors of the Company
Funds, including in each case a majority of trustees/directors who are not
parties to the investment advisory contracts of such Company Funds or
"interested persons" (as such term is defined in the 1940 Act) of any such
party (the "Non-Interested Directors"), and holders of a majority of the
outstanding voting securities (as such term is defined in the 1940 Act)
of Company Funds which, as of May 31, 1994, represented at least 90% of
all of the net assets of all of the Company Funds as of such date, shall
have approved new investment advisory contracts with the Asset Management
Subsidiaries acting as investment advisers of such funds upon terms
identical with those of each such Company Fund (other than changes in the
term of the contract); and the board of trustees/directors, including a
majority of the Non-Interested Directors, of each of the Company Funds
which has approved a new investment advisory contract shall have approved
new underwriting, distribution or dealer contracts, if any, with the
applicable subsidiaries of the Company that are parties to such agreements
pursuant to Section 15 of the 1940 Act and any other requirements
applicable thereto contained in the 1940 Act.
(f) Advisory Client Approvals. The Company shall have obtained, in
accordance with Section 5.14, the consent of non-investment company
advisory clients of the Asset Management Subsidiaries who are not
affiliated with the Company and who, as of May 31, 1994, represent at
least 80% of all of the net assets under management as of such date for
all such advisory clients not affiliated with the Company.
(g) Compliance with Section 15(f) of the 1940 Act. At the time of
the Closing: (i) at least 75% of the members of the board of
trustees/directors of each Company Fund which has approved a new
investment advisory contract shall not be "interested persons" (as such
term is defined in the 1940 Act) of Parent (or such other entity which
will act as adviser to such Company Funds following the Effective Time),
of the Company or of any affiliate of the Company that was the investment
adviser of any such Company Fund immediately preceding the Effective Time;
and (ii) the requirements of Section 15(f)(1)(B) of the 1940 Act shall
have been complied with in that no "unfair burden" shall have been imposed
on any of the Company Funds as a result of this Agreement, the
transactions contemplated hereunder, new investment advisory contracts or
otherwise.
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(h) Investors Fiduciary Trust Company. The Company will have
divested its ownership interest in Investors Fiduciary Trust Company or
Parent shall have obtained all regulatory approvals required in connection
with acquiring the Company's interest in Investors Fiduciary Trust
Company.
(i) NYSE Listing. The shares of Parent Common Stock issuable to the
Company's stockholders pursuant to this Agreement shall have been approved
for listing on the NYSE, subject to official notice of issuance.
(j) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
SECTION 6.2. Conditions to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are further subject to the
following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in Section 3.1 that are qualified as
to materiality shall be true and correct and the representations and
warranties of the Company set forth in Section 3.1 that are not so
qualified shall be true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing Date as though made
on and as of the Closing Date, except to the extent such representations
and warranties speak as of an earlier date, and Parent shall have received
a certificate signed on behalf of the Company by the chief executive
officer and the chief financial officer of the Company to the effect set
forth in this paragraph.
(b) Performance of Obligations of the Company. The Company shall
have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and
Parent shall have received a certificate signed on behalf of the Company
by the chief executive officer and the chief financial officer of the
Company to such effect.
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(c) Affiliates. Parent shall have received from each affiliate
named in the letter referred to in Section 5.17 an executed copy of an
agreement substantially in the form of Exhibit A hereto.
(d) Financing. Parent shall have obtained all financing necessary
to pay the aggregate Cash Consideration payable in connection with the
Merger.
SECTION 6.3. Conditions to Obligation of the Company. The
obligation of the Company to effect the Merger is further subject to the
following conditions:
(a) Representations and Warranties. The representations and
warranties of Parent and Sub set forth in Section 3.2 that are qualified
as to materiality shall be true and correct and the representations and
warranties of Parent and Sub set forth in Section 3.2 that are not so
qualified shall be true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing Date as though made
on and as of the Closing Date, except to the extent such representations
and warranties speak as of an earlier date, and the Company shall have
received a certificate signed on behalf of Parent by the chief executive
officer and the chief financial officer of Parent to the effect set
forth in this paragraph.
(b) Performance of Obligations of Parent and Sub. Parent and Sub
shall have performed in all material respects all obligations required to
be performed by them under this Agreement at or prior to the Closing Date,
and the Company shall have received a certificate signed on behalf of
Parent by the chief executive officer and the chief financial officer of
Parent to such effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination. This Agreement may be terminated and
abandoned at any time prior to the Effective Time, whether before or after
approval of matters presented in connection with the Merger by the stockholders
of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company:
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(i) if, upon a vote at a duly held Stockholders Meeting or
Parent Stockholders Meeting or any adjournment thereof, any required
approval of the stockholders of the Company or Parent, as the case
may be, shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before
March 31, 1995, unless the failure to consummate the Merger is the
result of a willful and material breach of this Agreement by the
party seeking to terminate this Agreement;
(iii) if any Governmental Entity shall have issued an order,
decree or ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and
nonappealable; or
(iv) if the Board of Directors of the Company shall have
exercised its rights set forth in Section 5.11 of this Agreement; or
(c) by the Company, if definitive documentation with respect to the
bank financing contemplated by the Citibank Commitment Letter (or with
respect to any alternative bank financing that provides, in the aggregate,
the same amount of financing) shall not have been executed by August 31,
1994.
SECTION 7.2. Effect of Termination. In the event of termination of
this Agreement by either the Company or Parent as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent, Sub or the Company, other than the last
two sentences of Section 5.5 and Sections 3.1(p), 3.2(o), 5.15, 7.2 and 8.2.
Nothing contained in this Section shall relieve any party from any liability
resulting from any wilful and material breach of the representations,
warranties, covenants or agreements set forth in this Agreement.
SECTION 7.3. Amendment. Subject to the applicable provisions of
the DGCL, at any time prior to the Effective Time, the parties hereto may
modify or amend this Agreement, by written agreement executed and delivered by
duly authorized officers of the respective parties; provided, however, that
after approval of the Merger by the stockholders of the Company, no amendment
shall be made which reduces the consideration payable in the Merger or
adversely affects the rights of the Company's stockholders hereunder without
the approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.
SECTION 7.4. Extension; Waiver. At any time prior to the Effective
Time, the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c)
subject to Section 7.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure
of any party to this Agreement to assert any of its rights under this Agreement
or otherwise shall not constitute a waiver of such rights.
<PAGE>
<PAGE> 47
SECTION 7.5. Procedure for Termination, Amendment, Extension or
Waiver. A termination of this Agreement pursuant to Section 7.1, an amendment
of this Agreement pursuant to Section 7.3 or an extension or waiver pursuant
to Section 7.4 shall, in order to be effective, require in the case of Parent,
Sub or the Company, action by its Board of Directors or the duly authorized
designee of its Board of Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Nonsurvival of Representations and Warranties. None
of the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 8.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time, including, without
limitation, Section 5.16.
SECTION 8.2. Fees and Expenses. Except as provided otherwise in
Section 5.15, whether or not the Merger shall be consummated, each party hereto
shall pay its own expenses incident to preparing for, entering into and
carrying out this Agreement and the consummation of the transactions
contemplated hereby, except that expenses incurred in connection with printing
and mailing the Joint Proxy Statement and the S-4, and the costs of preparing
and distributing proxy materials to and of holding the meetings of the Company
Funds' shareholders will be shared equally by Parent and the Company.
SECTION 8.3. Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly
or indirectly, through one or more intermediaries, controls, is controlled
by, or is under common control with, such first person;
(b) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
and
<PAGE>
<PAGE> 48
(c) a "subsidiary" of any person means another person 50% of the
equity securities of which are owned directly or indirectly by such first
person; provided, however, that joint ventures or partnerships engaged
in the business of real estate development, management or ownership shall
not be deemed to be subsidiaries unless such first person owns directly
or indirectly 80% of the equity securities of such joint venture or
partnership.
SECTION 8.4. Notices. All notices, requests, claims, demands and
other communications under this Agreement shall be in writing and shall be
deemed given if delivered personally or sent by overnight courier (providing
proof of delivery) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to
Conseco, Inc.
11825 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Lawrence W. Inlow, Esq.
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attention: Allen Finkelson, Esq.
(b) if to the Company, to
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
Attention: David B. Mathis
Chairman of the Board and
Chief Executive Officer
<PAGE>
<PAGE> 49
with copies to:
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
Attention: Kathleen A. Gallichio
Senior Vice President,
General Counsel and
Corporate Secretary
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Charles I. Cogut, Esq.
SECTION 8.5. Interpretation. When a reference is made in this
Agreement to a Section or Schedule, such reference shall be to a Section of,
or a Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation".
SECTION 8.6. Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties.
SECTION 8.7. Entire Agreement; Third-Party Beneficiaries. This
Agreement and the other agreements referred to herein constitute the entire
agreement, and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement. This Agreement is not intended to confer upon any person other than
the parties hereto and the third party beneficiaries referred to in the
following sentence any rights or remedies. The parties hereto expressly intend
the provisions of Sections 5.7(b) and (c), 5.8 and 5.16 to confer a benefit
upon and be enforceable by, as third party beneficiaries of this Agreement, the
third persons referred to in, or intended to be benefitted by, such provisions.
SECTION 8.8. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
<PAGE>
<PAGE> 50
SECTION 8.9. Assignment. Neither this Agreement nor any of the
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise by any of the parties
without the prior written consent of the other parties, and any such assignment
that is not consented to shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 8.10. Enforcement. The parties agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the State of Delaware, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of Delaware in the event
any dispute arises out of this Agreement or any of the transactions
contemplated by this Agreement, (b) agrees that it will not attempt to deny or
defeat such personal jurisdiction or venue by motion or other request for leave
from any such court and (c) agrees that it will not bring any action relating
to this Agreement or any of the transactions contemplated by this Agreement in
any court other than a Federal court sitting in the State of Delaware.
SECTION 8.11. Severability. Whenever possible, each provision or
portion of any provision of this Agreement will be interpreted in such manner
as to be effective and valid under applicable law but if any provision or
portion of any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision
had never been contained herein.
IN WITNESS WHEREOF, Parent, Sub and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
CONSECO, INC.
STEPHEN C. HILBERT
---------------------------
Name: Stephen C. Hilbert
Title: Chairman of the Board, President
and Director
Attest:
---------------------------
Name:
Title:
[CORPORATE SEAL]
<PAGE>
<PAGE> 51
KC ACQUISITION, INC.
STEPHEN C. HILBERT
---------------------------
Name: Stephen C. Hilbert
Title: President and Chief
Executive Officer
Attest:
---------------------------
Name:
Title:
[CORPORATE SEAL]
KEMPER CORPORATION
DAVID B. MATHIS
---------------------------
Name: David B. Mathis
Title: Chairman of the Board and Chief
Executive Officer
Attest:
KATHLEEN A. GALLICHIO
---------------------------
Name: Kathleen A. Gallichio
Title: Corporate Secretary
[CORPORATE SEAL]
<PAGE>
<PAGE> 52
DISCLOSURE SCHEDULES
INDEX
Section Caption in Agreement
- - ------- --------------------
2.2 Company Stock Options to be Assumed
3.1 (b) Capital Structure
3.1 (c) Authority; Noncontravention
3.1 (c) (i) State Insurance Filings
3.1 (c) (ii) Other Consents
3.1 (f) Absence of Certain Changes or Events
3.1 (g) Absence of Changes in Benefits Plans
3.1 (i) Tax Extension Waiver Requests
3.1 (j) Excess Parachute Payments; Section 162 (m)
of the Code
4.1 (a) (iv) Pending Acquisitions
4.1 (a) (v) Disposition of Properties
4.1 (a) (vi) Borrowings
4.1 (a) (viii) Settlement of Claims
5.7 (b) (iii) Performance Goals
5.7 (b) (v) Severance Plans
5.7 (d) Termination Protection Agreements
5.13 Company Funds
<PAGE> 1
EXHIBIT 11.1
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(unaudited)
Three months Six months
ended June 30, ended June 30,
--------------------- --------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period 25,849,939 25,152,815 25,311,773 24,911,148
Weighted average shares issued (acquired)
during the period:
Treasury stock acquired (703,979) (116,165) (2,662,583) (58,083)
Exercise of stock options 17,663 33,515 3,377,730 244,437
Preferred stock conversions - 210 - 105
Common equivalent shares related to:
Stock options at average market price 897,729 3,808,618 946,404 3,835,919
Employee stock plans 425,538 369,435 422,303 371,785
----------- ----------- ------------ ------------
Weighted average primary shares outstanding 26,486,890 29,248,428 27,395,627 29,305,311
=========== =========== ============ ============
Net income for primary earnings per share:
Net income as reported $34,190,000 $51,408,000 $114,334,000 $182,926,000
Less preferred stock dividends (4,672,000) (6,047,000) (9,343,000) (10,796,000)
----------- ----------- ------------ ------------
Net income for primary earnings per share $29,518,000 $45,361,000 $104,991,000 $172,130,000
=========== =========== ============ ============
Net income per primary common share $1.11 $1.55 $3.83 $5.87
===== ===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 11.2
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(unaudited)
Three months Six months
ended June 30, ended June 30,
--------------------- --------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average primary shares outstanding 26,486,890 29,248,428 27,395,627 29,305,311
Incremental common equivalent shares:
Related to options and employee stock plans based
on market price at the end of the period 73 41,372 - 44,795
Related to convertible preferred stock 4,509,509 4,509,515 4,509,509 3,883,269
----------- ------------ ------------ ------------
Weighted average fully diluted
shares outstanding 30,996,472 33,799,315 31,905,136 33,233,375
=========== =========== ============ ============
Net income for fully diluted
earnings per share:
Net income as reported $34,190,000 $51,408,000 $114,334,000 $182,926,000
Less preferred stock dividends - (1,375,000) - (2,750,000)
----------- ----------- ------------ ------------
Net income for fully diluted
earnings per share $34,190,000 $50,033,000 $114,334,000 $180,176,000
=========== =========== ============ ============
Net income per fully diluted
common share $1.10 $1.48 $3.58 $5.42
===== ===== ===== =====
</TABLE>
<PAGE> 1
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the six months ended June 30, 1994
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
Conseco to Investment in: Pro Forma
as Reported WNC (A) BLH (B) Total
----------- ------- ------- ------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $634.0 $ (.1)(8) $633.9
Investment activity:
Net investment income 141.9 .5 (8) 142.4
Net trading losses (2.4) (2.4)
Net realized losses (11.6) 4.2 (8) (7.4)
Equity in earnings of CCP Insurance, Inc. 17.2 17.2
Equity in earnings of Western National Corporation 31.4 (11.1) (1) 20.3
Fee revenue 28.1 28.1
Merchant banking income 65.3 (65.3) (2) -
Other income .2 .2
------ ------ ---- -----
Total revenues 904.1 (76.4) 4.6 832.3
------ ------ ---- -----
Benefits and expenses:
Insurance policy benefits 456.3 456.3
Change in future policy benefits 19.8 .6 (8) 20.4
Interest expense on annuities and financial products 32.8 32.8
Interest expense on long-term debt 25.2 (1.3) (3) .3 (8) 24.2
Interest expense on investment borrowings 4.9 4.9
Amortization related to operations 62.5 1.5 (8) 64.0
Amortization related to realized gains (.9) .6 (8) (.3)
Other operating costs and expenses 105.9 (2.3)(8) 103.6
------ ------ ---- -----
Total benefits and expenses 706.5 (1.3) .7 705.9
------ ------ ---- -----
Income before income taxes, minority interest
and extraordinary charge 197.6 (75.1) 3.9 126.4
Income tax expense 58.3 (22.0) (6) 1.4 (8) 37.7
------ ------ ---- -----
Income before minority interest and
extraordinary charge 139.3 (53.1) 2.5 88.7
Less minority interest 22.6 - - 22.6
------ ------ ---- -----
Income before extraordinary charge $116.7 $(53.1) $2.5 $66.1
====== ====== ==== =====
Earnings before extraordinary charge per common share and
common equivalent share:
Primary:
Weighted average shares 27,396,000 27,396,000
========== ==========
Earnings before extraordinary charge $3.92 $2.07
===== =====
Fully diluted:
Weighted average shares 31,905,000 31,905,000
========== ==========
Earnings before extraordinary charge $3.66 $2.07
===== =====
<FN>
The accompanying notes are an integral part
of the pro forma consolidated statement of operations.
</TABLE>
<PAGE>
<PAGE> 2
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1993
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
Conseco to Investment in: Pro Forma
as Reported WNC (A) BLH (B) CCP (C) Total
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 1,293.8 $(20.8)(4) $(.3) (8) $ - $1,272.7
Investment activity:
Net investment income 896.2 (610.1)(4) (5.4) (7) (1.6)(14) 279.5
.4 (8)
Net trading income 93.1 (49.6)(4) 1.4 (8) 44.9
Net realized gains 149.5 (92.7)(4) 8.1 (8) 64.9
Equity in earnings of CCP Insurance, Inc. 37.4 2.7 (15) 40.1
Equity in earnings of Western National Corporation - 130.0 (4) 47.4
(82.6)(4)
Gain on sale of Bankers Life Holding Corporation 101.5 - (101.5) (9) -
Incentive earnings allocation from
the Partnership 36.6 (36.6) (9) -
Fee revenue 26.5 12.7 (4) 41.5
2.3 (5)
Other income 1.4 1.4
------- ------ ---- ----- -------
Total revenues 2,636.0 (710.8) (133.9) 1.1 1,792.4
------- ------ ---- ----- -------
Benefits and expenses:
Insurance policy benefits 1,007.8 (101.9)(4) (.2) (8) 905.7
Change in future policy benefits 60.0 (19.3)(4) (3.2) (8) 37.5
Interest expense on annuities and
financial products 408.5 (333.1)(4) 75.4
Interest expense on long-term debt 58.0 (11.0)(3) .2 (8) 54.4
(1.5)(10)
8.7 (11)
Interest expense on investment borrowings 10.6 (6.2)(4) 4.4
Amortization related to operations 140.2 (15.5)(4) 9.5 (8) 134.2
Amortization and change in future policy benefits
related to realized gains 126.3 (84.3)(4) 5.6 (8) 47.6
Other operating costs and expenses 214.4 4.3 (4) .9 (8) 219.6
------- ------ ---- ----- -------
Total benefits and expenses 2,025.8 (567.0) 20.0 - 1,478.8
------- ------ ---- ----- -------
(Continued on next page)
<FN>
The accompanying notes are an integral part
of the pro forma consolidated statement of operations.
</TABLE>
<PAGE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, Continued
for the year ended December 31, 1993
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
Conseco to Investment in: Pro Forma
as Reported WNC (A) BLH (B) CCP (C) Total
----------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Income before income taxes, minority
interest and extraordinary charge 610.2 (143.8) (153.9) 1.1 313.6
Income tax expense 223.1 (74.5)(4) 2.4 (8) (.4) (16) 99.0
8.0 (6) (59.6)(12)
------- ------ ------ ------ -------
Income before minority interest and
extraordinary charge 387.1 (77.3) (96.7) 1.5 214.6
Less minority interest 78.2 (21.9)(13) 56.3
------- ------ ------ ------ -------
Income before extraordinary charge $ 308.9 $(77.3) $(74.8) $ 1.5 $ 158.3
======= ====== ====== ====== =======
Earnings before extraordinary charge per common
share and common equivalent share:
Primary:
Weighted average shares 29,245,000 29,245,000
========== ==========
Earnings before extraordinary charge $9.86 $4.71
===== =====
Fully diluted:
Weighted average shares 33,495,000 33,495,000
========== ==========
Earnings before extraordinary charge $9.12 $4.62
===== =====
<FN>
The accompanying notes are an integral part
of the pro forma consolidated statements of operations.
</TABLE>
<PAGE>
<PAGE> 4
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
BASIS OF PRESENTATION
The unaudited pro forma consolidated statements of operations of Conseco,
Inc. ("Conseco" or the "Company") are presented as if the following
transactions had all occurred on January 1, 1993: (1) the initial public
offering of Western National Corporation ("WNC") (as described below and
reported in the filing under Form 8-K dated February 15, 1994); (2) the initial
public offering of Bankers Life Holding Corporation ("BLH") and the purchase
of additional shares of common stock of BLH by Conseco (as described below and
reported in filings under Form 8-K dated November 9, 1992 and September 30,
1993) and (3) the secondary public offering of CCP Insurance, Inc. ("CCP") and
the purchase of additional shares of common stock of CCP by Conseco (as
described below and reported in the filing under Form 8-K dated September 30,
1993).
The pro forma consolidated financial statements are based on the
historical financial statements of Conseco, WNC, BLH and CCP and should be
read in conjunction with the financial statements and notes of those companies.
The pro forma data are not necessarily indicative of the results of operations
of Conseco had those transactions occurred on January 1, 1993, nor the results
of future operations, nor do they reflect changes that might have resulted from
the current management of the companies throughout the entire period. Certain
amounts in the pro forma consolidated statement of operations for the year
ended December 31, 1993, have been reclassified to conform to the presentation
in the consolidated statement of operations for the six months ended June 30,
1994, included in the Company's Form 10-Q for the six months ended June
30, 1994.
PRO FORMA ADJUSTMENTS
(A) Transactions Relating to Investment in Western National Corporation
On February 15, 1994, WNC completed the initial public offering of 37.2
million shares of common stock, including overallotment shares purchased by
the underwriters. A total of 2.3 million shares were sold by WNC and 34.9
million shares were sold by Conseco. In addition, pursuant to an employment
agreement, Conseco sold .2 million shares to the President of WNC at the
initial public offering price less underwriting discounts and commissions.
Prior to the initial public offering, Western National Life Insurance Company
("Western") was a wholly owned subsidiary of Conseco. WNC was formed in October
1993 as a Delaware corporation to be the holding company for Western. In
connection with the organization of WNC and the transfer of the stock of
Western to WNC by Conseco, WNC issued 60 million shares of its common stock and
a $150.0 million, 6.75 percent senior note due March 31, 1996 (the "Conseco
Note") to Conseco. Such transactions are described in the Prospectus dated
February 8, 1994 (the "Prospectus"), filed pursuant to Rule 424(b) with
the Securities and Exchange Commission, in connection with the Registration
Statement of WNC on Form S-1 (No. 33-70022). On February 22, 1994, WNC
completed a public offering of $150.0 million aggregate principal amount of
its 7.125 percent senior notes due February 15, 2004 (the "Senior Notes"). The
net proceeds from the offering of $147.5 million (after original issue
discount, underwriting discount and estimated offering expenses) and certain
proceeds from WNC's initial public offering of common stock were used to repay
the Conseco Note.
The shares issued in the offering and the related transaction represent
a 60 percent interest in WNC. The remaining common shares, which represent a
40 percent interest, are held by Conseco. Net pre-tax proceeds to Conseco from
the repayment of the Conseco Note and the sale of WNC shares totaling $537.9
million were used to repay a $200 million senior unsecured loan and for other
general corporate purposes. Conseco did not receive any proceeds from the
sale of 2.3 million shares by WNC.
<PAGE>
<PAGE> 5
Adjustments to give effect to the sale of common stock of WNC by Conseco
and related transactions are summarized as follows:
(1) Equity in earnings of WNC is adjusted to reflect (i) the reduction in
Conseco's ownership interest as a result of the initial public offering
and (ii) WNC's interest expense on the Senior Notes.
(2) The gain on the sale resulting from WNC's IPO and related transactions
is eliminated.
(3) Interest expense is reduced to reflect the repayment of the $200 million
senior unsecured loan using the proceeds from the sales of WNC shares.
(4) After the initial public offering by WNC, Conseco continues to own 40
percent of WNC but no longer exercises unilateral control over its
activities. Accordingly, Conseco's investment in WNC is reflected under
the equity method. Conseco's historical consolidated statements of
operations are adjusted to reflect Conseco's investment in WNC on the
equity basis from the beginning of the periods presented.
(5) Fee revenue is adjusted to reflect the new insurance services agreement
with WNC.
(6) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
(B) Transactions Relating to Investment in Bankers Life Holding
Corporation
Effective October 31, 1992, Conseco Capital Partners, L.P. (the
"Partnership") completed the acquisition of Bankers Life and Casualty Insurance
Company ("BLC") and its subsidiary, Certified Life Insurance Company,
(collectively "Bankers Life") through Bankers Life Holding Corporation ("BLH").
The acquisition was accounted for as a purchase and was reflected in the
operations of Conseco from its effective date.
On March 25, 1993, BLH completed an initial public offering of 19.6
million shares of its common stock at $22 per share. Proceeds from the
offering of $405.3 million (after underwriting and issuance costs) were used
by BLH to redeem all outstanding preferred stock, to retire all junior
subordinated debt, to prepay a portion of the senior debt and for other
corporate purposes. After the offering, Conseco owned 31 percent of the common
shares of BLH. As a result of the offering, Conseco recorded a one-time gain
of $59.3 million (net of tax of $39.9 million), representing Conseco's direct
percentage share of the increase in BLH's shareholders' equity account
attributable to the proceeds of the offering. In addition, Conseco recorded
a gain of $2.2 million (net of tax of $.1 million), representing Conseco's
indirect percentage share (through the Company's ownership of CCP) of CCP's
percentage share of the increase in BLH's shareholders' equity account
attributable to the proceeds of the offering. The Partnership was liquidated
by distribution of all of its remaining assets to the partners as of March 31,
1993. The Partnership agreement provided incentive compensation to Conseco as
the general partner in the form of transfers from the limited partners of a
portion of their returns in excess of prescribed targeted returns. The
distribution of BLH shares to the limited partners caused such targets to be
exceeded, resulting in incentive compensation to Conseco of $21.9 million, net
of tax of $14.7 million.
On September 30, 1993, Conseco completed the acquisition of 13.3 million
shares of common stock of BLH from I.C.H. Corporation ("ICH") for $287.6
million. The shares purchased represented 24 percent of the outstanding shares
of common stock of BLH, increasing Conseco's ownership of shares of common
stock of BLH to 56 percent.
<PAGE>
<PAGE> 6
The purchase price for the shares acquired from ICH was paid by the
surrender for redemption of $50.0 million stated value of ICH preferred stock
owned by Conseco and the payment of $237.6 million in cash. The cash payment
was funded with available cash and the net proceeds from a $200.0 million
senior unsecured loan. Such loan was repaid in February 1994 by Conseco using
the proceeds from the sale of WNC common stock (see (C) relating to the WNC
initial public offering).
The acquisition is accounted for on a step-basis and, accordingly, (i)
the portion of BLH's net assets acquired by Conseco in the initial acquisition
made by the Partnership is valued as of that acquisition date (as described in
note 1 to the consolidated financial statements included in the Company's 1993
Form 10-K), (ii) the portion of BLH's net assets most recently acquired by
Conseco is valued as of September 30, 1993, and (iii) the portion of BLH's net
assets owned by minority interests is valued based on BLH's consolidated
financial statements. The values of the assets and liabilities of BLH included
in Conseco's consolidated balance sheet at June 30, 1994, as filed in the
Registrant's Form 10-Q for the quarterly period ended June 30, 1994,
represented the combination of the values determined by the purchase accounting
described in the preceding sentence.
The net assets of BLH acquired by Conseco were recorded under the
purchase method described above. Adjustments to give effect to the initial
public offering of BLH, the purchase of additional shares of common stock of
BLH by Conseco and the financing and capital restructuring transactions related
to these events as if such transactions occurred on January
1, 1993, are summarized as follows:
(7) Net investment income is reduced as a result of the following
transactions in conjunction with Conseco's most recent purchase of
the common stock of BLH: (i) the redemption of ICH preferred stock
and (ii) the use of short-term investments to fund a portion of the
purchase.
(8) As described above, the purchase of BLH is accounted for as a step
acquisition. The values included in the historical consolidated
statements of operations of Conseco for the six months ended June
30, 1994, and the year ended December 31, 1993, are based on values
determined at the actual purchase dates of Conseco's investments.
Insurance policy income, net investment income, net trading income,
net realized gains, insurance policy benefits, change in future
policy benefits, interest expense on long-term debt, amortization
expense, other operating costs and expenses and income tax expense
are adjusted to reflect the effects of the purchase method of
accounting as if Conseco's purchases of the common shares of BLH
were completed on January 1, 1993.
(9) The gain on sale of stock by BLH and the incentive earnings
allocation from the Partnership which occurred concurrently with the
initial public offering are assumed to have occurred prior to the
period presented.
(10) Interest expense is reduced for the effects of the debt repaid from
the proceeds of the initial public offering of common stock by BLH.
(11) Interest expense is recorded to reflect interest on the debt issued
to partially finance the most recent purchase of common stock of BLH
by Conseco. Interest expense is calculated based on an assumed
rate of 5.4 percent. Interest expense also reflects the
amortization of debt issuance costs.
(12) All pro forma adjustments to operations are tax affected based on
the appropriate rate for the specific item.
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(13) Minority interest is adjusted to reflect the ownership of common
stock of BLH by minority interests subsequent to all of the
acquisition and financing transactions related to BLH's initial
public offering and the purchase of additional shares of common
stock of BLH by Conseco, as if such transactions had occurred on
January 1, 1993.
(C) Transactions Related to Investment in CCP Insurance, Inc.
In July 1992, CCP, a holding company for the Partnership's first three
acquisitions (Great American Reserve Insurance Company acquired in June 1990,
Jefferson National Life Insurance Company acquired in November 1990 and
Beneficial Standard Life Insurance Company acquired in April 1991), completed
an initial public offering of 8.0 million shares of its common stock, with net
proceeds to CCP totaling $111.2 million. The shares issued in the offering
represented a 31 percent ownership interest in the common stock outstanding of
CCP. After the initial public offering, the remaining ownership interest in
CCP was held by Conseco and others who exchanged certain of their investments
in the Partnership and its acquired subsidiaries for common stock of CCP. CCP
is included in Conseco's historical financial statements on the equity basis
effective July 1, 1992.
In September 1993, CCP completed a secondary public offering in which CCP
sold 3.0 million shares of its common stock and certain shareholders sold 6.5
million shares of CCP common stock. Proceeds of approximately $80.9 million
from the offering of common shares by CCP (after underwriting and issuance
costs) were added to CCP's funds for general corporate purposes. CCP received
no proceeds from the sale of shares by the selling shareholders. In a separate
transaction, Conseco purchased 2.0 million shares of CCP common stock from the
selling shareholders for $53.6 million. In addition, Conseco purchased .3
million shares of CCP common stock in open market transactions for $5.9 million
during the nine months ended September 30, 1993. After these transactions,
Conseco owned 40 percent of the common stock of CCP.
The investment in CCP by Conseco has been recorded on the equity method
of accounting. The excess of the carrying value of Conseco's investment in CCP
over Conseco's underlying equity in CCP's net assets is amortized on the
straight-line basis over a 40-year period. Adjustments to give effect to the
additional purchases of CCP common stock by Conseco, as if such transactions
occurred on January 1, 1993, are summarized as follows:
(14) Net investment income is reduced as a result of the use of
short-term investments to fund the additional purchases of CCP
common stock.
(15) As described above, Conseco owned 40 percent of CCP. The adjustment
to equity in earnings of CCP reflects the change in Conseco's
ownership in CCP as a result of the purchases of additional shares
of CCP common stock by Conseco.
(16) All pro forma adjustments to operations are tax affected based on
the appropriate rate for the specific item.
