<PAGE> 1
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO
RULE 901(d) OF REGULATION NO. S-T.
----------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Date of Report (date of earliest event reported):
February 15, 1994
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
CONSECO, INC.
State of Incorporation:
Indiana
Commission File IRS Employer Id.
No. 0-11164 No. 35-1468632
Address of Principal Executive Offices:
11825 North Pennsylvania Street
Carmel, Indiana 46032
Telephone No.
(317) 573-6100
----------------------------------------------
<PAGE>
<PAGE> 2
CONSECO, INC. AND SUBSIDIARIES
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 15, 1994, Western National Corporation ("WNC") completed the
initial public offering of 37,202,500 shares of common stock, including
overallotment shares purchased by the underwriters. A total of 2,300,000
shares were sold by WNC and 34,902,500 shares were sold by Conseco, Inc.
("Conseco" or the "Company"). In addition, Conseco sold 150,000 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 60,000,000
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 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 2,300,000 shares by WNC. Effective January 1, 1994, WNC is
included in Conseco's financial statements on the equity method.
The Company and WNC have entered into an insurance services agreement
whereby the Company will provide certain services for a ten-year term,
including data processing, investment management and certain other
investment-related services. The agreement to provide data processing services
is non-terminable for a period of ten years. The agreement to provide
investment management, investment accounting and reporting services and related
treasury services under the insurance services agreement is non-terminable for
the initial period of five years, except in the case of breach, and is
terminable by WNC during the next five years upon payment of a termination fee
which declines annually. Other services which have been provided to Western
by the Company, such as policy administration, accounting, actuarial, tax,
legal and other day-to-day administrative services, will continue to be
provided by the Company under the insurance services agreement for so long as
WNC requests them.
Western and a subsidiary of the Company are parties to an agreement under
which Western is provided with mortgage loan origination and administrative
services. WNC has agreed under a separation agreement not to terminate this
agreement for ten years. The separation agreement also provides for
indemnities between the Company and WNC with respect to certain structured
settlement liabilities, tax liabilities and securities law liabilities.
Pursuant to a stockholder agreement, the Company has the right to
designate two of the nominees slated by WNC's Board of Directors for election
to the Board so long as the Company continues to own at least 20 percent of the
outstanding shares of common stock of WNC. If the Company's ownership falls
below the 20 percent level but remains at least 10 percent, the Company may
designate one nominee. The stockholder agreement also provides certain
registration rights to the Company and certain first offer rights to WNC.
One of Western's primary marketing companies in the financial institutions
market is MDS of New Jersey, Inc. which is a subsidiary of Conseco.
<PAGE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO, INC.
Dated: February 23, 1994 By: /s/ ROLLIN M. DICK
------------------
Rollin M. Dick
Executive Vice President and
Chief Financial Officer
<PAGE>
<PAGE> 4
ITEM 7(b). PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF CONSECO, INC. AND
SUBSIDIARIES.
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1993
(Dollars in millions)
(Unaudited)
ASSETS
<CAPTION>
Pro Forma
Adjustments
Reflecting
Transactions
Related
to
Conseco Investment Pro Forma
as Reported in WNC (A) Total
----------- ---------- -----
<S> <C> <C> <C>
Investments:
Fixed maturities:
Actively managed at fair value $10,214.6 $(7,468.9) (1) $2,745.7
Held to maturity at amortized cost 1.1 (1.1) (1) -
Equity securities at fair value 31.3 (20.8) (1) 10.5
Mortgage loans 154.6 (80.3) (1) 74.3
Credit-tenant loans 277.7 (238.6) (1) 39.1
Policy loans 190.8 (71.9) (1) 118.9
Investment in CCP Insurance, Inc. 242.0 242.0
Investment in Western National Corporation - 769.9 (1) 252.2
(15.0) (2)
(502.7) (3)
Other invested assets 47.2 (12.8) (1) 34.4
Trading account securities 387.6 (292.4) (1) 95.2
Short-term investments 391.8 (106.1) (1) 638.6
15.0 (2)
537.9 (3)
(200.0) (4)
Assets held in separate accounts 82.5 - 82.5
--------- --------- --------
Total investments 12,021.2 (7,687.8) 4,333.4
Accrued investment income 196.3 (144.1) (1) 52.2
Reinsurance receivables 515.4 (74.7) (1) 440.7
Cost of policies purchased 602.0 (46.6) (1) 555.4
Cost of policies produced 159.9 (7.7) (1) 152.2
Goodwill, net 317.8 317.8
Property and equipment at cost, net 69.5 69.5
Other assets 126.5 (5.9) (1) 120.6
--------- --------- --------
Total assets $14,008.6 $(7,966.8) $6,041.8
--------- --------- --------
--------- --------- --------
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 5
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1993
(Dollars in millions)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
Pro Forma
Adjustments
Reflecting
Transactions
Related
to
Conseco Investment Pro Forma
as Reported in WNC (A) Total
----------- ---------- -----
<S> <C> <C> <C>
Liabilities:
Insurance liabilities $10,705.5 $(7,346.5) (1) $3,359.0
Income tax liabilities 144.8 (16.0) (1) 130.0
2.0 (3)
(.8) (4)
Investment borrowings 734.7 (442.9) (1) 291.8
Other liabilities 280.9 3.4 (1) 284.3
Liabilities related to separate accounts 80.4 80.4
Notes payable of Conseco 412.6 (197.8) (4) 214.8
Notes payable of Bankers Life Holding Corporation
not direct obligations of Conseco 310.7 310.7
--------- --------- --------
Total liabilities 12,669.6 (7,998.6) 4,671.0
--------- --------- --------
Minority interest 214.2 214.2
--------- --------- --------
Shareholders' equity:
Preferred stock 287.5 287.5
Common stock and additional paid-in capital 100.3 100.3
Unrealized appreciation of securities, net 136.2 (28.1) (3) 108.1
Retained earnings 600.8 61.3 (3) 660.7
(1.4) (4)
--------- --------- --------
Total shareholders' equity 1,124.8 31.8 1,156.6
--------- --------- --------
Total liabilities and shareholders' equity $14,008.6 $(7,966.8) $6,041.8
--------- --------- --------
--------- --------- --------
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 6
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1993
(Dollars in millions, except per share amounts)
(unaudited)
<CAPTION>
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco --------------------------------- Pro Forma
as Reported BLH (B) CCP (C) WNC (A) Total
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 967.0 $ - $ - $(16.3) (1) $ 950.7
Investment activity:
Net investment income 664.1 (5.4) (11) (1.6) (29) (448.4) (1) 227.6
18.9 (5)
Net trading income 77.8 0.2 (12) (40.0) (1) 38.0
Net realized gains 104.3 2.3 (12) (54.5) (1) 52.1
Equity in earnings of CCP Insurance, Inc. 25.9 2.7 (25) 28.6
Equity in earnings of Western National
Corporation - 97.0 (1) 35.3
(61.7) (6)
Gain on sale of stock by Bankers
Life Holding Corporation:
Attributable to Conseco's direct ownership 99.2 (99.2) (13) -
Attributable to Conseco's indirect ownership
through CCP Insurance, Inc. 2.3 (2.3) (13) -
Incentive earnings allocation from
the Partnership 36.6 (36.6) (13) -
Fee revenue 13.2 15.3 (1) 30.2
1.7 (7)
Other income 8.9 8.9
------- ------ ---- ------ -------
Total revenues 1,999.3 (141.0) 1.1 (488.0) 1,371.4
------- ------ ---- ------ -------
Benefits and expenses:
Insurance policy benefits 752.5 (77.1) (1) 675.4
Change in future policy benefits 52.2 (4.9) (12) (14.3) (1) 23.7
(9.3) (14)
Interest expense on annuities and
financial products 308.3 (245.9) (1) 62.4
Interest expense on long-term debt 42.5 (1.5) (15) (8.7) (8) 41.0
8.7 (16)
Interest expense on investment borrowings 7.6 (4.7) (1) 2.9
Amortization related to operations 100.8 0.4 (12) (11.5) (1) 88.3
(1.4) (14)
Amortization and change in future policy
benefits related to realized gains 84.5 1.0 (12) (49.3) (1) 33.8
(2.4) (14)
Other operating costs and expenses 164.0 2.6 (12) 10.6 (1) 177.2
------- ------ ---- ------ -------
Total benefits and expenses 1,512.4 (6.8) - (400.9) 1,104.7
------- ------ ---- ------ -------
(Continued on next page)
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 7
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, Continued
for the nine months ended September 30, 1993
(Dollars in millions, except per share amounts)
(unaudited)
<CAPTION>
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco --------------------------------- Pro Forma
as Reported BLH (B) CCP (C) WNC (A) Total
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Income before income taxes,
minority interest and
extraordinary charge 486.9 (134.2) 1.1 (87.1) 266.7
Income tax expense 180.5 1.7 (12) (.4) (31) (54.7) (1) 86.0
(53.8) (17) 12.7 (9)
------- ------ ------ ------ -------
Income before minority interest
and extraordinary charge 306.4 (82.1) 1.5 (45.1) 180.7
Less minority interest 60.4 (14.5) (18) 45.9
------- ------ ------ ------ -------
Income before extraordinary charge $ 246.0 $(67.6) $ 1.5 $(45.1) $ 134.8
------- ------ ------ ------ -------
------- ------ ------ ------ -------
Earnings before extraordinary charge per
common share and common equivalent share:
Primary:
Weighted average shares 29,269,000 29,269,000
---------- ----------
---------- ----------
Earnings before extraordinary charge $7.86 $4.06
----- -----
----- -----
Fully diluted:
Weighted average shares 33,448,000 33,448,000
---------- ----------
---------- ----------
Earnings before extraordinary charge $7.26 $3.94
----- -----
----- -----
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 8
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1992
(Dollars in millions, except per share amounts)
(unaudited)
<CAPTION>
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco --------------------------------- Pro Forma
as Reported BLH (B) CCP (C) WNC (A) Total
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 378.7 $ 944.1 (10) $(67.1) (26) $(38.7) (1) $1,217.0
Investment activity:
Net investment income 888.6 105.2 (10) (182.7) (26) (507.8) (1) 321.5
(7.1) (11) (3.3) (28) 25.2 (5)
5.5 (19) (2.1) (29)
Net trading income 35.9 (5.3) (26) (25.0) (1) 5.6
Net realized gains 124.3 (33.6) (10) (22.7) (26) (72.4) (1) 31.0
(2.6) (12)
38.0 (19)
Equity in earnings of CCP Insurance, Inc. 15.8 14.0 (26) 32.2
.6 (25)
1.8 (30)
Equity in earnings of Western National
Corporation - 102.2 (1) 35.9
(66.3) (6)
Gain on sale of stock of LifeRe Corporation 36.4 36.4
Gain on sale of stock by CCP Insurance, Inc. 11.1 (11.1) (27) -
Incentive earnings allocation from
the Partnership 9.3 (9.3) (27) -
Fee revenue 10.6 15.8 (1) 29.9
3.5 (7)
Other income 3.8 (1.9) (10) 3.9 (26) 5.7
(.1) (12)
Equity in earnings of LifeRe Corp. 11.3 11.3
------- ------- ------ ------ -------
Total revenues 1,525.8 1,047.5 (283.3) (563.5) 1,726.5
------- ------- ------ ------ -------
(Continued on next page)
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 9
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, Continued
for the year ended December 31, 1992
(Dollars in millions, except per share amounts)
(unaudited)
<CAPTION>
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco --------------------------------- Pro Forma
as Reported BLH (B) CCP (C) WNC (A) Total
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Benefits and expenses:
Insurance policy benefits 334.7 667.4 (10) (36.9) (26) (93.7) (1) 871.5
Change in future policy benefits 40.2 52.9 (10) 2.2 (26) (36.5) (1) 17.2
(9.6) (12)
(32.0) (14)
Interest expense on annuities and
financial products 506.8 23.8 (10) (124.5) (26) (267.1) (1) 139.0
Interest on long-term debt 46.2 (7.4) (15) (16.4) (26) (11.6) (8) 59.8
11.6 (16)
37.4 (20)
Interest expense on investment
borrowings 8.8 (1.6) (26) (6.1) (1) 1.1
Amortization related to operations 62.2 79.4 (10) (13.4) (26) (7.0) (1) 140.1
5.6 (12)
13.3 (14)
Amortization related to realized gains 93.4 (13.7) (26) (64.6) (1) 15.1
Other operating costs and expenses 103.5 138.5 (10) (22.3) (26) 2.1 (1) 212.1
1.7 (12)
2.1 (14)
(15.3) (21)
1.1 (22)
.7 (23)
------- ------- ------ ------ -------
Total benefits and expenses 1,195.8 971.2 (226.6) (484.5) 1,455.9
------- ------- ------ ------ -------
Income before income taxes,
minority interest and
extraordinary charge 330.0 76.3 (56.7) (79.0) 270.6
Income tax expense 124.6 5.9 (10) (17.0) (26) (53.0) (1) 87.0
(.1) (12) (13.1) (31) 16.2 (9)
12.2 (17)
11.3 (24)
------- ------- ------ ------ -------
(Continued on next page)
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 10
<TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, Continued
for the year ended December 31, 1992
(Dollars in millions, except per share amounts)
(unaudited)
<CAPTION>
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco --------------------------------- Pro Forma
as Reported BLH (B) CCP (C) WNC (A) Total
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Income before minority interest
and extraordinary charge 205.4 47.0 (26.6) (42.2) 183.6
Less minority interest 30.6 21.8 (18) (16.3) (26) 36.1
------- ------- ------ ------ -------
Income before extraordinary
charge $ 174.8 $ 25.2 $(10.3) $ (42.2) $ 147.5
------- ------- ------ ------ -------
------- ------- ------ ------ -------
Earnings before extraordinary charge
per common share and common
equivalent share:
Primary:
Weighted average shares 29,479,000 29,479,000
---------- ----------
---------- ----------
Earnings before extraordinary
charge $5.59 $4.72
----- -----
----- -----
Fully diluted:
Weighted average shares 29,603,000 29,603,000
---------- ----------
---------- ----------
Earnings before extraordinary
charge $5.56 $4.70
----- -----
----- -----
<FN>
The accompanying notes are an integral part
of the pro forma consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 11
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
The unaudited pro forma consolidated balance sheet of Conseco, Inc.
("Conseco" or the "Company") is presented as if the initial public offering of
Western National Corporation ("WNC") had occurred on September 30, 1993. The
unaudited pro forma consolidated statements of operations of Conseco are
presented as if the following transactions had all occurred on January 1, 1992:
(1) the initial public offering of WNC; (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
initial 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, 1992, 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, 1992, have been reclassified to conform to the presentation
in the consolidated statement of operations for the nine months ended September
30, 1993, included in the Company's Form 10-Q for the nine months ended
September 30, 1993.
PRO FORMA ADJUSTMENTS
(A) Transactions Relating to Investment in Western National Corporation
On February 15, 1994, WNC completed the initial public offering of
37,202,500 shares of common stock, including overallotment shares purchased
by the underwriters. A total of 2,300,000 shares were sold by WNC and
34,902,500 shares were sold by Conseco. In addition, pursuant to an employment
agreement, Conseco sold 150,000 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 60,000,000 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 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 2,300,000 shares by WNC.
<PAGE>
<PAGE> 12
Adjustments to give effect to the sale of common stock of WNC by Conseco
and related transactions are summarized as follows:
(1) 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 financial statements are adjusted to
deconsolidate the accounts of Western and reflect Conseco's investment in WNC
on the equity basis.
(2) The investment in WNC was reduced by a $73.8 million dividend paid by
Western to Conseco in December 1993 and increased by a $58.8 million capital
contribution by Conseco to WNC prior to the completion of the initial public
offering.
(3) In connection with the organization of WNC and the transfer of Western
common stock to WNC, WNC issued to Conseco a $150.0 million, 6.75 percent
senior note due March 31, 1996 (the "Conseco Note"). On February 22, 1994, WNC
completed the public offering of $150.0 million aggregate principal amount of
its 7.125 percent Senior Notes (the "Senior Notes"). The net proceeds from the
sale of $147.5 million (after original issue discount, underwriting discount
and estimated offering expenses) and certain proceeds from WNC's initial public
offering were used to repay the Conseco Note.
Short-term investments, investment in WNC, income tax liabilities,
unrealized appreciation of securities and retained earnings are adjusted to
reflect the sale of common shares of WNC by Conseco.
(4) Notes payable of Conseco is reduced to reflect the repayment of a $200
million senior unsecured loan using proceeds from the sale of WNC common stock.
Retained earnings and income tax liabilities are adjusted to reflect the
extraordinary loss on the early extinguishment and the related tax benefit.
(5) Net investment income is increased to reflect the reinvestment of
Conseco's proceeds from the repayment of the Conseco Note, the sale of WNC
common shares and the dividend from WNC, net of the capital contribution to
WNC, at an annual interest rate of 7 percent.
(6) 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, (ii)
WNC's interest expense on the Senior Notes and (iii) the increase in WNC's
expenses related to the insurance services agreement with Conseco.
(7) Fee revenue is adjusted to reflect the new insurance services agreement
with WNC.
(8) Interest expense is reduced to reflect the repayment of the $200 million
senior unsecured loan using the proceeds from the sales of WNC shares.
(9) All pro forma adjustments to operations were tax affected based on the
appropriate rate for the specific item.
<PAGE>
<PAGE> 13
(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 19,550,000
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 Insurance, Inc., "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.
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 (the "Senior Loan"). The Senior Loan bears interest at
a variable rate of either LIBOR plus an applicable margin or prime rate plus
an applicable margin for periods of one, two, three or six months, as selected
by the Company from time to time (such rate selected for the period October 5,
1993, to November 5, 1993, was 4.3125 percent). There is no margin for the
rate based on a prime rate until July 1, 1994; thereafter, the margin is .5
percent. The applicable margin for the rate based on LIBOR is 1.125 percent
through June 30, 1994, and 1.5 percent thereafter. The principal amount of the
Senior Loan is payable in three installments as follows: September 30, 1994
- - $25 million; September 30, 1995 - $25 million; and March 31, 1996 - $150
million. Under the provisions of the Senior Loan, the Company must prepay the
loan in the event of certain defined reductions in the ownership interests in
the Company's subsidiaries and the Company must comply with other covenants,
including the maintenance of specific financial ratios. As previously
described herein, this note was repaid in February 1994.
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 1992 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 September 30, 1993, as filed in the
Registrant's Form 10-Q for the quarterly period ended September 30, 1993,
represented the combination of the values determined by the purchase accounting
described in the preceding sentence.
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The net assets of BLH acquired by Conseco were recorded under the purchase
method described above. Additional studies are continuing to verify the
estimated fair values of the acquired assets and liabilities; adjustments may
be necessary as additional information is obtained. 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, 1992, are summarized as follows:
(10) Actual results of Bankers Life for the ten months ended October 31, 1992.
(11) Net investment income was 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.
(12) 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 nine months ended September 30, 1993, and the
year ended December 31, 1992, were based on values determined prior to
Conseco's most recent purchase. Net trading income, net realized gains, change
in future policy benefits, amortization expense, other operating costs and
expenses and income tax expense were adjusted to reflect the effects of the
purchase method of accounting as a step acquisition as if Conseco's most recent
acquisition of the common shares of BLH was completed on January 1, 1992.
(13) The gain on sale of stock by BLH and the incentive earnings allocation
from the Partnership which occurred concurrently with the initial public
offering were assumed to have occurred prior to the period presented.
(14) The following adjustments were made to reflect the changes in expenses
resulting from the step basis purchase method of accountings if such
transactions occurred on January 1, 1992.
- Change in future policy benefits was adjusted to reflect revised
assumptions for mortality, morbidity and interest rates.
- Other operating costs and expenses (principally commissions paid in
excess of ultimate renewal commission rates) of $2.1 million incurred
in 1992 on policies issued prior to 1992 had previously been
capitalized. Costs incurred after the acquisition related to policies
in force at the date of the acquisition are not capitalized under
purchase accounting methods; therefore, the previously capitalized
amounts were expensed. However, such costs were considered in
determining the cost of policies purchased and the amortization
thereof.
- Amortization of cost of policies produced was reduced to reflect the
reduction in the cost of policies produced account from the purchase
adjustments.
- Amortization of cost of policies purchased was increased based on the
same assumptions used to determine the estimated fair value of that
business.
- Amortization of goodwill was adjusted for the increased goodwill.
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(15) Interest expense was reduced for the effects of the debt repaid from the
proceeds of the initial public offering of common stock by BLH.
The repayment of this debt resulted in an extraordinary charge for BLH of
$4.8 million, net of a $2.5 million tax benefit. Conseco's share of this
charge was not considered in the pro forma consolidated statement of
operations, consistent with Rule 11-02 of Regulation S-X.
(16) Interest expense was recorded to reflect interest on the debt issued to
partially finance the most recent purchase of common stock of BLH by Conseco.
Interest expense was calculated based on an assumed rate of 5.4 percent.
Interest expense also reflected the amortization of debt issuance costs.
(17) All pro forma adjustments to operations were tax affected based on the
appropriate rate for the specific item.
(18) Minority interest was 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, 1992.
(19) In accordance with the Acquisition Agreement for the acquisition of
Bankers Life by the Partnership, certain assets were transferred and/or sold
to ICH, its affiliates or others prior to closing which resulted in additional
funds available to Bankers Life for reinvestment purposes. Investment income
of Bankers Life for the first ten months of 1992 was adjusted to reflect the
reinvestment of the net proceeds from such transfers, generally at a new money
rate of 7.8 percent (before investment management expense of .2 percent) and
to remove investment income attributable to both the assets disposed and the
short-term investments used by BLH to acquire Bankers Life. The realized
investment losses recorded during the first ten months of 1992 related to the
investments transferred were also eliminated.
(20) Interest expense was adjusted to record, for the first ten months of 1992,
interest on the debt issued to finance the initial acquisition of BLC by the
Partnership using interest rates of 11.0 percent on the junior subordinated
debt, 13.0 percent on the senior subordinated notes and an assumed interest
rate of 6.5 percent on the senior term loan. Interest expense was also
adjusted to reflect the amortization of debt issuance costs.
(21) Management investment advisory services are provided by Conseco subsequent
to the acquisition. Other operating expenses recorded by Bankers Life in the
ten months ended October 31, 1992, were reduced for the difference between fees
for such services charged by a subsidiary of ICH and fees from Conseco.
(22) As of October 31, 1992, BLC had not yet adopted Financial Accounting
Standards Board Statement No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions" ("SFAS 106"). In order to report on a basis
consistent with Conseco, which previously adopted SFAS 106, BLC adopted SFAS
106 for purposes of these pro forma statements, resulting in additional expense
of $1.1 million.
(23) Expenses related to an agents' deferred compensation benefit plan for the
ten months ended October 31, 1992, were increased to reflect a change in the
discount rate used subsequent to the acquisition.
(24) Income tax expense in Bankers Life's historical consolidated statement of
operations reflected an $11.3 million benefit for the utilization of capital
loss carryforwards. Income tax expense was increased to eliminate such
benefits, which were assumed to have been recognized on January 1, 1992.
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(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 in June 1990, Jefferson
National Life Insurance Company in November 1990 and Beneficial Standard Life
Insurance Company in April 1991), completed an initial public offering of
8,010,700 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 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 owns 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
initial public offering of CCP and related transactions including subsequent
purchases of CCP common stock by Conseco, as if such transactions occurred on
January 1, 1992, are summarized as follows:
(25) As described above, Conseco owns 40 percent of CCP. The adjustment to
equity in earnings of CCP Insurance, Inc. reflects the change in Conseco's
ownership in CCP as a result of the initial public offering and purchases of
additional shares of CCP common stock by Conseco.
(26) CCP's accounts were consolidated with Conseco for periods prior to July
1, 1992. The pro forma statement of operations was adjusted to reflect
Conseco's investment in CCP under the equity method for the six months ended
June 30, 1992.
(27) The gain on sale of stock by CCP and incentive earnings allocation which
occurred concurrently with the initial public offering were assumed to have
occurred prior to the periods presented.
(28) Net investment income was reduced to reflect foregone dividends resulting
from the redemption of CCP preferred stock held by a subsidiary of Conseco,
which redemption by CCP occurred by using a portion of the proceeds from the
initial public offering.
(29) Net investment income was reduced as a result of the use of short-term
investments to fund the additional purchases of CCP common stock.
(30) Conseco's equity in CCP is adjusted to reflect the reduced interest and
preferred stock dividends resulting from the refinancing transactions which
occurred concurrently with CCP's initial public offering of common stock.
(31) All pro forma adjustments to operations were tax affected based on the
appropriate rate for the specific item.
