SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: August 2, 1996
CONSECO, INC.
State of Incorporation:
Indiana
Commission File Number IRS Employer Id. Number
No. 1-9250 No. 35-1468632
Address of Principal Executive Offices:
11825 North Pennsylvania Street
Carmel, Indiana 46032
Telephone No.
(317) 817-6100
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Item 2. Acquisition or Disposition of Assets......................................................... 3
Item 7. Financial Statements and Exhibits
(a) Life Partners Group, Inc. and Subsidiaries Unaudited
Consolidated Financial Statements as of June 30, 1996,
and for the six months ended June 30, 1996 and 1995
Consolidated Balance Sheet........................................................... 5
Consolidated Statement of Operations................................................. 7
Consolidated Statement of Stockholders' Equity....................................... 8
Consolidated Statement of Cash Flows................................................. 9
Notes to Consolidated Financial Statements........................................... 10
Life Partners Group, Inc. and Subsidiaries Audited
Consolidated Financial Statements as of December 31,
1995 and 1994, and for each of the three years ended
December 31, 1995
Report of Independent Accountants.................................................... 18
Consolidated Balance Sheet........................................................... 19
Consolidated Statement of Operations................................................. 20
Consolidated Statement of Stockholders' Equity....................................... 21
Consolidated Statement of Cash Flows................................................. 23
Notes to Consolidated Financial Statements........................................... 24
(b) Pro Forma Consolidated Financial Information of Conseco, Inc. and Subsidiaries.......... 55
Pro forma Consolidated Statement of Operations for the year ended
December 31, 1995................................................................. 56
Pro forma Consolidated Statement of Operations for the six months
ended June 30, 1996............................................................... 57
Pro Forma Consolidated Balance Sheet as of June 30, 1996............................. 58
Notes to Pro Forma Consolidated Financial Statements................................. 60
(c) Exhibits
2.5 Agreement and Plan of Merger dated as of March 11, 1996
</TABLE>
2
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 2, 1996, Conseco, Inc. ("Conseco") completed its merger with
Life Partners Group, Inc. ("LPG"), in a transaction pursuant to which LPG became
a wholly owned subsidiary of Conseco (the "Merger"). The Merger was consummated
pursuant to an Agreement and Plan of Merger dated March 11, 1996. In the Merger,
each of the issued and outstanding shares of LPG common stock was converted into
.5833 of a share of Conseco's common stock. A total of 16.3 million shares of
the Conseco common stock (or equivalent shares) with a value of $588.4 million
were issued.
The acquisition of LPG will be accounted for under the purchase method of
accounting in the third quarter of 1996. Under this method, the cost to acquire
LPG will be allocated to the assets and liabilities acquired based on fair
values as of the date of the Merger, with the excess of the total purchase cost
over the fair value of the assets acquired less the fair values of the
liabilities assumed recorded as goodwill.
3
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(a). Financial Statements and Exhibits
(a) Life Partners Group, Inc. and Subsidiaries Unaudited
Consolidated Financial Statements as of June 30, 1996, and
for the six months ended June 30, 1996 and 1995.
4
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
ASSETS
June 30, December 31,
1996 1995
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Fixed maturities:
Held-to-maturity, at amortized cost........................................................... $ 661,193 $ 678,826
Available-for-sale, at fair value............................................................. 2,731,180 2,672,365
Equity securities, at fair value................................................................ 23,818 23,721
Mortgage loans on real estate, at amortized cost................................................ 103,222 110,214
Investment in real estate, at cost, net of accumulated depreciation............................. 4,564 4,921
Policy loans.................................................................................... 227,439 226,212
Collateral loans................................................................................ 4,686 4,373
Cash and short-term investments................................................................. 79,121 197,684
Other invested assets........................................................................... 68,945 59,593
---------- ----------
Total investments........................................................................... 3,904,168 3,977,909
Notes and accounts receivable and uncollected premiums............................................. 31,228 29,303
Receivable from reinsurers......................................................................... 279,640 244,828
Accrued investment income.......................................................................... 55,980 54,785
Deferred policy acquisition costs, net............................................................. 265,416 238,736
Cost of insurance acquired......................................................................... 300,893 306,015
Goodwill, net of accumulated amortization.......................................................... 99,501 100,470
Deferred income taxes.............................................................................. 9,716 -
Other assets....................................................................................... 28,147 28,819
---------- ----------
Total assets................................................................................ $4,974,689 $4,980,865
========== ==========
(continued on next page)
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED BALANCE SHEET, continued
(Dollars in thousands, except per share amount)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1996 1995
---- ----
(unaudited) (audited)
<S> <C> <C>
Future policy benefits and claims.................................................................. $ 737,116 $ 708,226
Dividends, endowments and other policyholder funds................................................. 89,531 86,162
Policyholder account balances...................................................................... 3,331,094 3,271,906
Deferred policy fees............................................................................... 85,938 80,590
Investment borrowings.............................................................................. 71,547 73,585
Notes payable:
Due within one year............................................................................. 26,591 15,000
Due after one year.............................................................................. 212,332 231,083
Federal income taxes payable:
Current......................................................................................... 5,110 13,444
Deferred........................................................................................ - 25,812
Other liabilities.................................................................................. 63,814 74,548
---------- ----------
Total liabilities........................................................................... 4,623,073 4,580,356
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized; 28,189,593 and 27,911,851 shares
issued and outstanding at June 30, 1996 and December 31, 1995, respectively................... 28 28
Additional paid-in capital...................................................................... 286,572 287,863
Net unrealized investment gains (losses)........................................................ (3,517) 58,269
Retained earnings............................................................................... 68,533 54,349
---------- ----------
Total stockholders' equity.................................................................. 351,616 400,509
---------- ----------
Total liabilities and stockholders' equity.................................................. $4,974,689 $4,980,865
========== ==========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Universal life and investment product charges............... $ 70,280 $ 64,970 $ 139,962 $ 118,379
Universal life charges ceded to client companies............ (6,867) (7,575) (14,355) (14,679)
Universal life and investment product surrender
charges, net.............................................. 5,162 4,916 9,203 8,178
Traditional life and annuity premiums....................... 14,223 15,272 28,206 28,113
Traditional reinsurance premiums............................ (11,415) (11,089) (22,096) (19,022)
Accident and health insurance premiums, net................. 6,990 7,083 14,818 8,478
---------- ---------- --------- ---------
Total premium income and other considerations............. 78,373 73,577 155,738 129,447
Net investment income....................................... 72,665 73,932 146,225 134,948
Net realized gains (losses)................................. 408 (143) 2,296 2,418
Other income................................................ 1,429 917 2,619 1,824
---------- --------- --------- ---------
Total revenues............................................ 152,875 148,283 306,878 268,637
---------- --------- --------- ---------
Benefits and expenses:
Policyholder benefits....................................... 34,906 46,569 69,486 76,829
Interest credited to policyholders.......................... 44,622 43,907 88,574 78,189
Amortization of deferred policy acquisition costs,
costs of insurance acquired and deferred policy fees...... 32,024 20,300 64,317 32,472
Other operating expenses.................................... 18,009 23,493 35,870 50,243
Acquisition and merger expenses............................. 7,091 - 7,891 -
Amortization of goodwill.................................... 722 687 1,439 1,284
Interest expense............................................ 5,839 6,600 11,812 11,977
---------- --------- --------- ---------
Total expenses............................................ 143,213 141,556 279,389 250,994
---------- --------- --------- ---------
Earnings before income taxes................................... 9,662 6,727 27,489 17,643
Federal income tax expense.................................. 5,174 2,361 11,622 6,378
---------- --------- --------- ---------
Net earnings................................................... $ 4,488 $ 4,366 $ 15,867 $ 11,265
========== ========= ========= =========
Weighted average common shares and common
equivalent shares outstanding............................... 28,441,048 27,542,276 28,400,337 26,845,898
========== ========== ========== ==========
Net earnings per common share and common
equivalent share outstanding................................ $0.16 $0.16 $0.56 $0.42
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(unaudited)
Net
Additional unrealized Total
Common paid-in investment Retained stockholders'
stock capital gains (losses) earnings equity
----- ------- -------------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995............................ $26 $245,652 $(22,783) $70,751 $293,646
Common stock issued for cash....................... - 1,942 - - 1,942
Common stock issued in acquisition of
subsidiaries..................................... 2 39,457 - - 39,459
Cash dividends paid on common stock................ - - - (3,018) (3,018)
Compensation for management options................ - 812 - - 812
Change in unrealized gains (losses), net........... - - 81,052 - 81,052
Net loss........................................... - - - (13,384) (13,384)
--- -------- --------- ------- --------
Balance at December 31, 1995.......................... 28 287,863 58,269 54,349 400,509
Common stock issued for cash....................... - 528 - - 528
Common stock retained in lieu of cash
on exercise of stock options..................... - (1,819) - - (1,819)
Cash dividends paid on common stock................ - - - (1,683) (1,683)
Change in unrealized gains (losses), net........... - - (61,786) - (61,786)
Net earnings....................................... - - - 15,867 15,867
--- -------- --------- ------- --------
Balance at June 30, 1996.............................. $28 $286,572 $ (3,517) $68,533 $351,616
=== ======== ========= ======= ========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Six months ended
June 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................................................................. $ 15,867 $ 11,265
Adjustments to reconcile net earnings to net cash used by operating activities:
Realized gains.............................................................................. (2,296) (2,418)
Adjustments relating to universal life and annuity products:
Interest credited to account balances..................................................... 75,074 63,930
Charges for mortality and administration.................................................. (125,607) (103,700)
Depreciation and amortization............................................................... 3,055 2,831
Decrease in future policy benefits.......................................................... (10,106) (11,972)
Increase in reserve liability on modified coinsurance agreements............................ 12,570 5,587
Increase in deferred policy acquisition costs............................................... (15,019) (26,651)
Amortization of cost of insurance acquired, net............................................. 21,689 14,657
Amortization of deferred policy fees........................................................ (8,818) (5,898)
Decrease in currently payable taxes......................................................... (8,334) (1,520)
Deferred tax (benefit) expense.............................................................. (1,872) 6,755
(Decrease) increase in policy liabilities, other policyholder funds, and other liabilities.. (7,878) 20,635
Increase in notes and accounts receivable and accrued investment income..................... (3,120) (112)
Amortization of bond and mortgage loan discount and premium, net............................ (719) 29
Other, net.................................................................................. (5,365) (12,317)
--------- ---------
Net cash used by operating activities.................................................. (60,879) (38,899)
--------- ---------
Cash flows from investing activities:
Sales of fixed maturities:
Available-for-sale.......................................................................... 59,895 153,574
Held-to-maturity............................................................................ 2,307 9,802
Maturities of fixed maturities:
Available-for-sale.......................................................................... 86,400 40,393
Held-to-maturity............................................................................ 18,193 34,045
Sales of other long-term invested assets...................................................... 21,157 22,643
(Increase) decrease in policy loans, net...................................................... (1,227) 122
Purchases of fixed maturities................................................................. (325,990) (209,921)
Purchases of other long-tem invested assets................................................... (24,441) (11,369)
Purchase of subsidiaries, net of cash and short-term investments acquired..................... - (20,591)
--------- ---------
Net cash provided (used) by investing activities....................................... (163,706) 18,698
--------- ---------
Cash flows from financing activities:
Policyholder contract deposits................................................................ 265,151 226,515
Policyholder contract withdrawals............................................................. (148,436) (138,890)
Proceeds from issuance of common stock........................................................ 528 1,653
Change in principal of investment borrowings.................................................. (2,038) (12,030)
Proceeds from notes payable................................................................... - 36,000
Principal repayments on notes payable......................................................... (7,500) (53,073)
Cash dividends paid on common stock........................................................... (1,683) (1,346)
--------- ---------
Net cash provided by financing activities.............................................. 106,022 58,829
--------- ---------
Net (decrease) increase in cash and short-term investments............................. (118,563) 38,628
Cash and short-term investments at beginning of period........................................... 197,684 41,715
--------- --------
Cash and short-term investments at end of period................................................. $ 79,121 $ 80,343
========= ========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
9
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes to the unaudited consolidated financial statements
should be read in conjunction with the notes to consolidated financial
statements contained in the 1995 Form 10-K of Life Partners Group, Inc. ("Life
Partners"). Life Partners and its consolidated subsidiaries are collectively
referred to as the "Company."
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of June 30, 1996, and
for the quarters ended June 30, 1996 and 1995, and for the six months ended June
30, 1996 and 1995, reflect all adjustments, consisting solely of normal
recurring items, which are necessary for a fair presentation of financial
position, results of operations and cash flows on a basis consistent with that
of the prior audited consolidated financial statements.
The Company has reclassified certain prior period information to conform to
the 1996 presentation.
ACQUISITIONS
On April 28, 1995, Life Partners Group, Inc. acquired Lamar Financial
Group, Inc. ("Lamar"), together with all its subsidiaries, including Lamar Life
Insurance Company of Jackson, Mississippi, for a purchase price of $77 million.
The acquisition was accounted for using the purchase method, and the results of
operations of Lamar were included in the consolidated statement of operations
from the date of acquisition.
The following unaudited pro forma information presents the consolidated
results of operations of the Company and Lamar as if the acquisitions had been
effective at the beginning of the period presented, after giving effect to
adjustments to reflect the acquisition and the financing related thereto.
<TABLE>
<CAPTION>
Pro forma
six months
ended
June 30, 1995
-------------
(in thousands,
except share data)
<S> <C>
Revenues............................................................ $306,644
Earnings before income taxes........................................ 19,385
Net earnings........................................................ 12,366
Net earnings per share.............................................. $0.44
Weighted average common shares and common
equivalent shares outstanding.................................... 28,156,705
</TABLE>
The above unaudited pro forma information was intended for informational
purposes only.
10
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
CHANGES IN STOCKHOLDERS' EQUITY
During the six months ended June 30, 1996, 432,083 option shares previously
granted under the Company's incentive stock option plan were exercised and 5,858
options were forfeited. Included in the options exercised during the period were
352,941 options exercised by the former chairman of the Company, net of 166,914
shares remitted to the Company in lieu of cash. Also during 1996, the Stock
Option Committee of the Life Partners Board of Directors granted additional
options to purchase 157,400 shares of common stock reserved under the Company's
stock option plan to certain key employees and executive officers of the
Company. The options are exercisable at prices ranging from $13.50 to $13.75 per
share, vest equally over three or five year periods, and expire in 2006. In
addition, on February 14, 1996, the Company repriced certain common stock
options to reflect the market value of the Company's common stock on the date of
repricing. Such repricing reduced the exercise price of certain previously
granted shares to $13.50 per share from previous prices ranging from $16.75 to
$20.25. In exchange for the reduction in exercise price, the number of stock
options previously granted was reduced by a ratio of the new exercise price
divided by the original exercise price. A total of 856,800 previously granted
option shares were subject to the repricing, which correspondingly reduced the
total number of option shares outstanding by 237,673. At June 30, 1996, 957,822
options were unexercised and outstanding.
In addition, warrants to purchase 12,573 shares were exercised by the
former chairman of the Company during the six months ended June 30, 1996 at a
price of $3.98 per share. At June 30, 1996, no further warrants were
outstanding.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 establishes fair value based accounting and
reporting standards for all transactions in which a company acquires goods or
services by issuing equity securities, including stock-based compensation plans.
Under SFAS 123, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. The fair value of stock options is determined using an
option-pricing model. This statement encourages, but does not require, companies
to adopt the fair value based method of accounting to recognize compensation
expense for employee stock compensation plans. However, it does require a
company to comply with the disclosure requirements set forth in the statement.
The Company continues to utilize the accounting in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and beginning with
year end 1996, and thereafter, expects to make pro forma disclosures of net
income as if the fair value based method of accounting defined in SFAS 123 had
been applied.
NOTES PAYABLE
Notes payable at June 30, 1996 and December 31, 1995 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Amount outstanding
Face amount net of unamortized
outstanding issuance costs
----------------------- -------------------------
June 30, December 31, June 30, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Borrowings under Bank Credit Facility............................ $148,678 $156,178 $148,194 $155,581
12-3/4% senior subordinated notes due 2002....................... 95,100 95,100 90,729 90,502
-------- -------- -------- --------
$243,778 $251,278 $238,923 $246,083
======== ======== ======== ========
</TABLE>
Wabash has certain surplus debentures outstanding to Life Partners.
Payments made by Wabash on these surplus debentures are used by Life Partners to
pay principal and interest on Life Partners' notes payable. Accordingly, the
principal and interest payment terms of the surplus debentures are structured,
subject to certain surplus restrictions, to provide essentially all cash
required to meet Life Partners' obligations under the bank credit facility and
the senior subordinated notes.
11
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
INVESTMENTS
Investment income by type of investment was as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Gross investment income:
Fixed maturities....................................................................... $132,051 $120,238
Short-term investments................................................................. 2,573 3,484
Policy loans........................................................................... 7,353 7,194
Other invested assets.................................................................. 3,402 5,210
Mortgage loans......................................................................... 5,147 3,619
Equity securities...................................................................... 715 939
Collateral loans....................................................................... 136 53
Investment real estate................................................................. 438 527
-------- --------
Gross investment income.............................................................. 151,815 141,264
Less:
Investment expenses.................................................................... 3,476 2,311
Interest expense on investment borrowings.............................................. 2,114 4,005
-------- --------
Net investment income................................................................ $146,225 $134,948
======== ========
</TABLE>
Following is an analysis of net realized gains on investments (in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Fixed maturities.......................................................................... $ 887 $ 458
Equity securities......................................................................... 118 1,874
Other..................................................................................... 1,291 86
------ ------
$2,296 $2,418
====== ======
</TABLE>
12
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The cost and estimated fair values of equity securities are as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
June 30, 1996 cost gains losses fair value
- ------------- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
Preferred stock.................................................. $18,936 $1,333 $2,211 $18,058
Common stock..................................................... 4,262 3,094 1,596 5,760
------- ------ ------ -------
Totals........................................................ $23,198 $4,427 $3,807 $23,818
======= ====== ====== =======
December 31, 1995
- -----------------
Preferred stock.................................................. $18,984 $1,123 $502 $19,605
Common stock..................................................... 1,945 2,271 100 4,116
------- ------ ---- -------
Totals........................................................ $20,929 $3,394 $602 $23,721
======= ====== ==== =======
</TABLE>
The amortized cost and estimated fair values of debt securities classified
as fixed maturity investments held-to-maturity are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
June 30, 1996 cost gains losses fair value
- ------------- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
United States treasury securities and obligations of United
States government corporations and agencies................... $ 1,950 $ 76 $ - $ 2,026
Obligations of states and political subdivisions................. 2,392 222 - 2,614
Debt securities issued by foreign governments.................... 16,256 68 459 15,865
Corporate securities............................................. 514,233 21,911 9,205 526,939
Mortgage-backed securities....................................... 71,992 564 779 71,777
Other debt securities............................................ 54,370 3,206 730 56,846
-------- ------- ------- --------
Totals........................................................ $661,193 $26,047 $11,173 $676,067
======== ======= ======= ========
</TABLE>
13
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
December 31, 1995 cost gains losses fair value
- ----------------- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
United States treasury securities and obligations of United
States government corporations and agencies................... $ 2,024 $ 44 $ - $ 2,068
Obligations of states and political subdivisions................. 2,420 307 - 2,727
Debt securities issued by foreign governments.................... 16,272 1,014 - 17,286
Corporate securities............................................. 533,110 36,273 4,280 565,103
Mortgage-backed securities....................................... 74,470 4,959 107 79,322
Other debt securities............................................ 50,530 4,641 301 54,870
-------- ------- ------ --------
Totals........................................................ $678,826 $47,238 $4,688 $721,376
======== ======= ====== ========
</TABLE>
The amortized cost and estimated fair values of debt securities classified
as investments available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
June 30, 1996 cost gains losses fair value
- ------------- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
United States treasury securities and obligations of United
States government corporations and agencies................... $ 88,188 $ 1,412 $ 886 $ 88,714
Obligations of states and political subdivisions................. 8,393 191 317 8,267
Debt securities issued by foreign governments.................... 18,429 31 1,010 17,450
Corporate securities............................................. 1,230,876 25,898 30,573 1,226,201
Mortgage-backed securities....................................... 1,140,482 16,464 15,275 1,141,671
Other debt securities............................................ 253,540 2,867 7,530 248,877
---------- ------- ------- ----------
Totals........................................................ $2,739,908 $46,863 $55,591 $2,731,180
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
December 31, 1995 cost gains losses fair value
- ----------------- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
United States treasury securities and obligations of United
States government corporations and agencies................... $ 93,368 $ 4,620 $ 110 $ 97,878
Obligations of states and political subdivisions................. 8,443 273 - 8,716
Debt securities issued by foreign governments.................... 18,440 673 66 19,047
Corporate securities............................................. 1,044,051 52,822 11,965 1,084,908
Mortgage-backed securities....................................... 1,147,848 52,606 1,345 1,199,109
Other debt securities............................................ 249,325 14,584 1,202 262,707
---------- -------- ------- ----------
Totals........................................................ $2,561,475 $125,578 $14,688 $2,672,365
========== ======== ======= ==========
</TABLE>
14
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
REINSURANCE
Policyholder benefits reflects the reduction of policy and contract claims
by amounts recovered from reinsurers of $65.5 million and $41.4 million,
including accident and health claims recovered from reinsurers of $42.2 million
and $16.6 million for the six months ended June 30, 1996 and 1995, respectively.
Accident and health premiums are reported net of premiums ceded to reinsurers of
$45.0 million and $20.1 million for the six months ended June 30, 1996 and 1995,
respectively.
FEDERAL INCOME TAXES
Life Partners and its non-life insurance subsidiaries each file a separate
corporate federal income tax return. The life insurance subsidiaries file a
consolidated federal income tax return.
The components of the provision for income taxes on operating earnings are
as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Current tax provision (benefit)........................................................... $13,494 $ (377)
Deferred tax provision (benefit).......................................................... (1,872) 6,755
------- ------
Total income tax provision............................................................. $11,622 $6,378
======= ======
</TABLE>
SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash payments for interest expense and income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
Interest expense.......................................................................... $12,959 $10,925
Income taxes.............................................................................. 20,725 7,200
</TABLE>
In connection with the acquisition of Lamar, liabilities were assumed as
follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, including cash and short-term
investments of $20,591 ............................................ $1,004,182
Cash paid............................................................. (37,937)
Common stock issued................................................... (39,459)
----------
Fair value of liabilities assumed.................................. $ 926,786
==========
</TABLE>
15
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SUBSEQUENT EVENT
On August 2, 1996, the Company completed its merger with Conseco, Inc.
("Conseco"). As a result of the merger, the Company became a wholly owned
subsidiary of Conseco. In the merger, each of the issued and outstanding shares
of LPG common stock was converted into .5833 of a share of Conseco common stock.
A total of 16.3 million shares of Conseco common stock (or equivalent shares)
with a value of approximately $588 million were issued. As a result of Conseco's
ownership of the Company, a new basis of accounting under the "push down" method
will be adopted by the Company in the third quarter of 1996. Under this method,
the assets and liabilities of the Company will reflect Conseco's cost basis,
which is based on the fair values of the Company's assets and liabilities at the
effective date of the merger.
As a result of the merger, Conseco plans to relocate the Company's
operations to Conseco's headquarters in Carmel, Indiana, by August 30, 1996.
During the first six months of 1996, the Company incurred costs related to
the Acquisition of the Company by Conseco totaling $7.9 million. Such costs
include but are not limited to, financial advisory services, and attorney and
accounting fees.
16
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(a). Financial Statements and Exhibits, continued
(a), continued
Life Partners Group, Inc. and Subsidiaries Audited
Consolidated Financial Statements as of December 31, 1995
and 1994, and for each of the three years ended December 31,
1995.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Life Partners Group, Inc.
We have audited the accompanying consolidated balance sheets of Life
Partners Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Life Partners
Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As more fully explained in Note 1(d) to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standard No.
115, "Accounting For Certain Investments in Debt and Equity Securities",
effective December 31, 1993.
Coopers & Lybrand L.L.P.
Denver, Colorado
March 27, 1996
18
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Investments:
Fixed maturities:
Held-to-maturity, at amortized cost.......................................... $ 678,826 $ 1,570,034
Available-for-sale, at fair value............................................ 2,672,365 1,058,710
Equity securities, at fair value............................................... 23,721 27,510
Mortgage loans on real estate, at amortized cost............................... 110,214 34,177
Investment real estate, at cost, net of accumulated depreciation............... 4,921 2,796
Policy loans................................................................... 226,212 192,909
Collateral loans............................................................... 4,373 1,825
Cash and short-term investments................................................ 197,684 41,715
Other invested assets.......................................................... 59,593 56,039
------------- -------------
Total investments............................................................ 3,977,909 2,985,715
Notes and accounts receivable and uncollected premiums........................... 29,303 20,607
Receivable from reinsurers....................................................... 244,828 78,176
Federal income tax recoverable................................................... 6,444
Accrued investment income........................................................ 54,785 46,340
Deferred policy acquisition costs, net........................................... 238,736 276,938
Cost of insurance acquired....................................................... 306,015 234,471
Goodwill, net of accumulated amortization........................................ 100,470 84,079
Other assets..................................................................... 28,819 15,996
------------- -------------
$ 4,980,865 $ 3,748,766
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits and claims................................................ $ 708,226 $ 625,814
Dividends, endowments and other policyholder funds............................... 86,162 64,479
Policyholder account balances.................................................... 3,271,906 2,354,169
Deferred policy fees............................................................. 80,590 78,700
Investment borrowings............................................................ 73,585 63,786
Notes payable:
Due within one year............................................................ 15,000 15,000
Due after one year............................................................. 231,083 195,460
Federal income taxes payable:
Current........................................................................ 13,444
Deferred....................................................................... 25,812 13,889
Other liabilities................................................................ 74,548 43,823
------------- -------------
4,580,356 3,455,120
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized; 27,911,851 and
25,530,334 shares issued and outstanding at December 31, 1995 and 1994,
respectively.................................................................... 28 26
Additional paid-in capital....................................................... 287,863 245,652
Net unrealized investment gains (losses)......................................... 58,269 (22,783)
Retained earnings................................................................ 54,349 70,751
------------- -------------
400,509 293,646
------------- -------------
$ 4,980,865 $ 3,748,766
============= =============
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Universal life and investment product charges.................. $ 252,925 $ 199,512 $ 180,013
Universal life charges ceded to client companies............... (29,564) (22,275) (15,861)
Universal life and investment product surrender charges, net... 16,364 12,750 13,380
Traditional life and annuity premiums.......................... 56,593 50,501 54,658
Traditional reinsurance premiums............................... (40,416) (28,109) (27,551)
Accident and health insurance premiums, net.................... 24,178 5,512 6,125
-------------- -------------- --------------
Total premium income and other considerations................ 280,080 217,891 210,764
Net investment income.......................................... 277,068 225,378 221,131
Net realized gains (losses).................................... 15,785 (19,652) 18,404
Other income................................................... 3,183 4,626 5,433
-------------- -------------- --------------
Total revenues............................................... 576,116 428,243 455,732
-------------- -------------- --------------
Benefits and expenses:
Policyholder benefits.......................................... 153,307 110,870 102,202
Interest credited to policyholders............................. 165,415 136,853 139,442
Amortization of deferred policy acquisition costs, costs of
insurance acquired, and deferred policy fees.................. 148,659 46,224 52,020
Other operating expenses....................................... 94,784 52,709 51,905
Amortization of goodwill....................................... 2,745 2,388 2,323
Interest expense............................................... 27,861 20,728 25,980
-------------- -------------- --------------
Total expenses............................................... 592,771 369,772 373,872
-------------- -------------- --------------
Earnings (loss) before income taxes and extraordinary items...... (16,655) 58,471 81,860
Federal income tax expense (benefit)........................... (3,271) 21,265 29,868
-------------- -------------- --------------
Earnings (loss) before extraordinary items....................... (13,384) 37,206 51,992
Extraordinary loss, net of tax effect.......................... 2,558 4,776
-------------- -------------- --------------
Net earnings (loss).............................................. (13,384) 34,648 47,216
Less dividends in kind on preferred stock...................... (3,978)
-------------- -------------- --------------
Net earnings (loss) applicable to common stock................... $ (13,384) $ 34,648 $ 43,238
============== ============== ==============
Weighted average common shares and common equivalent share
outstanding..................................................... 27,127,171 26,111,032 23,407,192
============== ============== ==============
Earnings (loss) per common share and common equivalent share outstanding:
Earnings (loss) before extraordinary items..................... $ (0.49) $ 1.43 $ 2.05
Extraordinary loss............................................. (0.10) (0.20)
-------------- -------------- --------------
Net earnings (loss).......................................... $ (0.49) $ 1.33 $ 1.85
============== ============== ==============
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
NET
UNREALIZED
CLASS A CLASS B ADDITIONAL INVESTMENT RETAINED
PREFERRED COMMON COMMON COMMON PAID-IN GAINS EARNINGS
STOCK STOCK STOCK STOCK CAPIAL (LOSSES) (DEFICIT)
--------- ------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993...... $ 118,005 $ 13 $ 1 $ 69,909 $ 46,081 $ (4,150)
Common stock issued for cash,
net of related offering
costs.......................... $ 11 174,860
Cash dividends paid on Common
Stock.......................... (950)
Conversion of Class A and Class
B Common Stock to Common
Stock.......................... 14 (13) (1)
Preferred stock dividends in
kind........................... 3,978 (3,978)
Redemption of preferred stock... (121,983)
Compensation for management
options........................ 163
Change in unrealized gains
(losses), net.................. (17,977)
Net earnings.................... 47,216
--------- --- --- -- ----------- ----------- -----------
Balance at December 31, 1993.... 0 25 0 0 244,932 28,104 38,138
Common stock issued for cash.... 1 377
Cash dividends paid on Common
Stock.......................... (2,035)
Compensation for and tax benefit
of management options.......... 343
Change in unrealized gains
(losses), net.................. (50,887)
Net earnings.................... 34,648
--------- --- --- -- ----------- ----------- -----------
Balance at December 31, 1994.... 0 26 0 0 245,652 (22,783) 70,751
Common Stock issued for cash.... 1,942
Common Stock issued in
acquisition of subsidiaries.... 2 39,457
Cash dividends paid on Common
Stock.......................... (3,018)
Tax benefit of management
options exercised.............. 812
Change in unrealized gains
(losses), net.................. 81,052
Net earnings (loss)............. (13,384)
--
--------- --- --- --------- ---------- ---------
Balance at December 31, 1995.... $ 0 $ 28 $ 0 $ 0 $ 287,863 $ 58,269 $ 54,349
========= === ==== == ========= ========= =========
(Continued)
21
<PAGE>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(IN THOUSANDS)
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at January 1, 1993...... $ 229,859
Common stock issued for cash,
net of related offering
costs.......................... 174,871
Cash dividends paid on Common
Stock.......................... (950)
Conversion of Class A and Class
B Common Stock to Common
Stock..........................
Preferred stock dividends in
kind...........................
Redemption of preferred stock... (121,983)
Compensation for management
options........................ 163
Change in unrealized gains
(losses), net.................. (17,977)
Net earnings.................... 47,216
------------
Balance at December 31, 1993.... 311,199
Common stock issued for cash.... 378
Cash dividends paid on Common
Stock.......................... (2,035)
Compensation for and tax benefit
of management options.......... 343
Change in unrealized gains
(losses), net.................. (50,887)
Net earnings.................... 34,648
------------
Balance at December 31, 1994.... 293,646
Common Stock issued for cash.... 1,942
Common Stock issued in
acquisition of subsidiaries.... 39,459
Cash dividends paid on Common
Stock.......................... (3,018)
Tax benefit of management
options exercised.............. 812
Change in unrealized gains
(losses), net.................. 81,052
Net earnings (loss)............. (13,384)
-----------
Balance at December 31, 1995.... $ 400,509
===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
LIFE PARTNERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................................... $ (13,384) $ 34,648 $ 47,216
Adjustments to reconcile net earnings (loss) to net cash used by operating
activities:
Extraordinary loss, net of tax effect................................. 2,558 4,776
Net realized (gains) losses........................................... (15,785) 19,652 (18,404)
Adjustments relating to universal life and annuity products:
Interest credited to account balances............................... 138,465 110,946 114,294
Charges for mortality and administration............................ (223,361) (177,237) (164,152)
Depreciation and amortization......................................... 5,494 4,945 5,504
Decrease in future policy benefits.................................... (13,253) (3,470) (20,591)
Increase in reserve liability on modified coinsurance agreements...... 17,571 12,534 5,471
Decrease (increase) in deferred policy acquisition costs, net......... 20,561 (64,912) (61,588)
Amortization of cost of insurance acquired, net....................... 41,406 25,566 27,869
Amortization of deferred policy fees.................................. (17,025) (4,206) (6,275)
Increase (decrease) in currently payable taxes........................ 19,888 (12,738) 6,683
Deferred tax expense (benefit)........................................ (22,539) 19,168 (27,759)
Increase in policy liabilities, other policyholder funds, and other
liabilities.......................................................... 14,959 13,601 15,693
Increase in notes and accounts receivable and accrued investment
income............................................................... (1,311) (2,903) (10,402)
Amortization of bond and mortgage loan discount and premium, net...... 573 (663) (9,472)
Other, net............................................................ (8,908) (190) (3,313)
--------- ----------- -----------
Net cash used by operating activities............................... (56,649) (22,701) (94,450)
--------- ----------- -----------
Cash flows from investing activities:
Sales of fixed maturities:
Available-for-sale.................................................... 301,100 1,303,540 1,011,137
Held-to-maturity...................................................... 33,480 262,355
Maturities of fixed investments:
Available-for-sale.................................................... 92,451 89,173 149,831
Held-to-maturity...................................................... 71,588 64,097 113,031
Sales of other long-term invested assets.................................. 60,670 28,459 141,623
Decrease (increase) in policy loans, net.................................. (4,396) (3,528) 6,689
Purchases of fixed maturities............................................. (389,269) (1,842,038) (1,842,986)
Purchases of other long-term invested assets.............................. (24,809) (43,714) (46,396)
Purchase of subsidiaries, net of cash and short-term investments
acquired................................................................. (20,591)
--------- ----------- -----------
Net cash provided (used) by investing activities.................... 120,224 (404,011) (204,716)
--------- ----------- -----------
Cash flows from financing activities:
Policyholder contract deposits............................................ 458,737 384,738 577,005
Policyholder contract withdrawals......................................... (261,828) (196,261) (194,157)
Proceeds from issuance of common stock.................................... 1,942 408 187,086
Costs related to common stock issuance.................................... (30) (12,215)
Proceeds from notes payable............................................... 50,000 160,000
Proceeds from investment borrowings, net.................................. 63,786
Principal repayments on investment borrowings............................. (92,866)
Principal payments on notes payable and indebtedness to related party..... (60,573) (3,822) (265,025)
Deferred loan costs related to notes payable and indebtedness to related
party.................................................................... (898) (7,087)
Cash dividends paid on common stock....................................... (3,018) (2,035) (950)
Redemption of preferred stock............................................. (121,983)
--------- ----------- -----------
Net cash provided by financing activities........................... 92,394 245,886 322,674
--------- ----------- -----------
Net increase (decrease) in cash and short-term investments.................. 155,969 (180,826) 23,508
Cash and short-term investments at beginning of year........................ 41,715 222,541 199,033
--------- ----------- -----------
Cash and short-term investments at end of year.............................. $ 197,684 $ 41,715 $ 222,541
========= =========== ===========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
23
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Life Partners
Group, Inc. ("Life Partners") and its wholly-owned subsidiaries (together the
"Company") from the date of acquisition. The subsidiaries consist of
Philadelphia Life Insurance Company ("Philadelphia Life"), Massachusetts General
Life Insurance Company ("Massachusetts General"), Lamar Life Insurance Company
("Lamar Life"), Wabash Life Insurance Company ("Wabash"), Independent Processing
Services, Inc. ("IPS"), Travel Partners Group, Inc. ("TPG"), Philadelphia Life
Asset Planning Company ("PLAPCO"), Stratford Capital Group, Inc. ("Stratford
Capital"), Lamar Life International, Inc. ("LLII"), Whitehall Fund Managers,
Inc. ("WFM"), Eagles National Corporation ("ENC"), and Partners Risk Management
Company ("PRMC").
All significant intercompany accounts and transactions have been eliminated
in consolidation.
(b) BASIS OF PRESENTATION
The Company's insurance subsidiaries maintain their accounts in conformity
with accounting practices prescribed or permitted by state insurance regulatory
authorities. In the accompanying financial statements such accounts have been
adjusted to conform with generally accepted accounting principles ("GAAP") (see
Note 13).
(c) NATURE OF OPERATIONS
Life Partners is an insurance holding company that, through its three
principal life insurance subsidiaries, sells a diverse portfolio of universal
life insurance and annuity products to individuals. The Company also maintains
an existing block of traditional, universal life and annuity business in force.
The Company markets its life insurance products through two separate marketing
systems; the Client Company marketing system (including affiliated companies)
and the Regional Director marketing system. While both systems rely on
independent agents to consummate sales, the Client Company System further offers
qualified members of its life insurance sales force the opportunity to
participate in and share in the profitability of an agent-owned reinsurance
company. Of the Company's total gross annualized premiums on new life insurance
sales, 71.6%, 77.6%, and 71.9% were generated by agents participating in the
Client Company marketing system during 1995, 1994 and 1993, respectively.
(d) INVESTMENTS
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standard No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES ("SFAS 115") issued by the Financial Accounting Standards
Board ("FASB"). Under SFAS 115, fixed-maturity securities classified as
investments held-to-maturity are carried at amortized cost because the Company
has the intent and the ability to hold such securities to maturity. Although the
Company has the ability and intent to hold these investments to maturity,
infrequent and unusual conditions could occur under which certain investments
designated as held to maturity would be sold. Such conditions include unforeseen
changes in asset quality, significant changes in tax law affecting the taxation
of securities, significant business acquisitions or dispositions, and changes in
regulatory capital requirements or permissible investments. Fixed-maturities
that may be sold prior to maturity are included in the Company's
available-for-sale account at fair value. The classification of investments is
determined at the date of purchase and is reevaluated at each balance sheet
date.
The effect of the adoption of SFAS 115 was to decrease stockholders' equity
by approximately $0.8 million. This net decrease consisted of an increase of
approximately $6.6 million from securities which were previously classified as
held-to-maturity and transferred to available-for-sale, and a decrease of
approximately $7.4 million for securities which were previously classified as
actively
24
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
managed investments, which were carried at fair value, and were transferred to
held-to-maturity. The adoption of SFAS 115 had no effect on net earnings or cash
flows. SFAS 115 prohibits restatement of prior years' financial statements.
In November 1995, the Company transferred certain securities between the
available-for-sale and held-to-maturity classifications as permitted by an
implementation guide issued by the Financial Accounting Standards Board (See
Note 4).
Premiums and discounts on fixed maturity investments are amortized over the
term of the security, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in net investment
income.
Principal prepayments affect the cash flow pattern and yield of
mortgage-backed securities. The amortization of discounts and premiums takes
into consideration actual and future estimated principal prepayments. The
Company utilizes estimated prepayment speed information obtained from published
sources or from estimates developed by its investment advisors. The effects on
the yield of a security from changes in principal prepayments are recognized
retrospectively, except for interest only or residual interest structured
securities which are recognized prospectively. The degree to which a security is
susceptible to yield adjustments is influenced by the difference between its
carrying value and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayment in a changing interest rate environment, and
the repayment priority for structured securities such as collateralized mortgage
obligations.
Mortgage loans are stated at the aggregate unpaid principal balances, less
unamortized discount and less allowance for possible losses. Real estate held
for investment is stated at cost, less allowances for depreciation and, as
appropriate, provisions for possible losses. Real estate acquired through
foreclosure is stated at lower of cost or market.
Policy and collateral loans are stated at the aggregate unpaid principal
balances.
For purposes of the statements of cash flows, cash and short-term
investments include commercial paper, invested cash, and other investments with
original maturities of three months or less, and are reflected at cost.
Other invested assets consist primarily of limited partnerships acquired
prior to 1995, which are accounted for under the cost method. Certain of these
limited partnership investments are related party transactions (see Note 14).
During 1995, 1994 and 1993, the Company owned certain derivative investments
in the form of interest rate swap agreements. During the term of an interest
rate swap, the net swap settlement amount is accrued over the unexpired term as
an adjustment of interest income. Gains or losses on termination are deferred
and amortized as an interest adjustment over the remaining original life of the
underlying financial instrument, or reflected in operations as appropriate.
During 1994 the Company entered into certain reverse repurchase finance
agreements related to the purchase of certain mortgage-backed securities. These
financings were collateralized by mortgage-backed securities with fair market
values in excess of the loan value. Such transactions are accounted for as
short-term collateralized borrowings and generally terminate within 120 days.
Net realized investment gains and losses are included in the determination
of net earnings (loss). Unrealized investment gains and losses on marketable
equity securities and fixed maturity investments available-for-sale, net of
amortization of deferred policy acquisition costs, deferred policy fees and
related deferred tax effect, if any, are charged or credited directly to
stockholders' equity and do
25
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not affect net earnings (loss). If a decline in the market value of an
individual investment is considered to be other than temporary, the difference
between amortized book value and net realizable value is recorded as a realized
investment loss. Net realizable value is based on quoted market prices or
discounted cash flows in the absence of quoted market prices. The cost of
investments sold is determined on a specific identification basis (see Note 4).
Changes in the interest rate environment have a direct, inverse impact on
the market value of fixed income investments. It is reasonably possible that
changes in interest rates will occur in the near term and that such changes
could have a material effect on the carrying value of available-for-sale fixed
maturity and equity securities, with an offsetting effect to stockholders'
equity, net of the related effects on deferred policy acquisition costs,
deferred policy fees, costs of insurance acquired and related deferred income
taxes. The impact of the adjustment to investments carried at market value
resulting from interest rate fluctuations and related adjustments to other
accounts do not have a direct impact on the Company's results of operations.
During 1995, the FASB issued Statement of Financial Accounting Standards No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS AND FOR LONG LIVED
ASSETS TO BE DISPOSED OF ("SFAS 121"), which is effective for fiscal years
beginning after December 15, 1995. The Company does not believe that the
application of the provisions of SFAS 121 will have a material effect on its
financial condition or results of operations.
(e) DEFERRED POLICY ACQUISITION COSTS
Costs which vary with and are primarily related to the acquisition of new
business have been deferred to the extent that such costs are deemed recoverable
through future revenues. These costs include commissions, certain costs of
policy issuance and underwriting, and certain variable agency selling expenses.
For traditional life products, deferred costs are amortized with interest over
the premium paying period in proportion to the ratio of annual premium revenue
to the anticipated total premium revenue. Deferred policy acquisition costs
related to universal life, interest-sensitive life, and annuity products are
amortized with interest in relation to the present value, using the assumed
crediting rate, of expected positive gross profits on the products, with a
provision during earlier profitable periods for losses occurring in latter
periods. Retrospective adjustments of these amounts are made when the Company
revises its estimates of current or future gross profits and losses, including
investment gains and losses related to changes in market interest rates to be
realized from a group of policies. Anticipated investment income is considered
in the determination of recoverability of deferred policy acquisition costs.
<TABLE>
<CAPTION>
Changes in deferred policy acquisitions costs are as follows (in thousands):
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year................................................. $ 276,938 $ 200,475 $ 144,307
Capitalization of costs incurred........................................... 103,717 89,776 92,014
Interest accretion......................................................... 16,982 14,322 11,205
Adjustment for unrealized gains and losses on fixed maturity investments
available-for-sale........................................................ (17,641) 11,551 (5,420)
Amortization............................................................... (141,260) (39,186) (41,631)
----------- ----------- -----------
Balance, end of year....................................................... $ 238,736 $ 276,938 $ 200,475
=========== =========== ===========
</TABLE>
The determination of expected future gross profits and losses is based on
historical gross profits and management's estimates and assumptions regarding
future investment spreads, maintenance expenses, mortality and persistency of
the block of business. The accuracy of the estimates and
26
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assumptions are impacted by several factors, including factors outside the
control of management such as movements in interest rates. It is reasonably
possible that conditions impacting the estimates and assumptions will change and
that changes may result in future adjustments to deferred policy acquisition
costs. At December 31, 1995, the Company reassessed its expectations of future
gross profits and losses resulting in an additional net change in deferred
acquisition costs, deferred policy fees and provision for losses of $66.6
million. This change in estimate related to deferred expenses and fees, and
provision for losses was included as an expense in the 1995 Consolidated
Statement of Operations.
(f) COST OF INSURANCE ACQUIRED
A portion of the purchase price paid for the Company's insurance
subsidiaries was allocated to the cost of insurance acquired based on the
actuarially determined future profits from policies acquired with the purchase
of the insurance subsidiaries. The portion of the asset relating to the
acquisition of subsidiaries in 1990 is amortized without interest in relation to
expected future gross profits, adjusted prospectively for changes in
assumptions, including direct charge-offs for any excess of the unamortized
asset over the present value of projected future profits.
Additionally, the Company assumed a block of annuity business in 1993 and
consummated the Lamar Life acquisition in 1995 (See Note 2), of which portions
of the respective purchase prices were allocated to the cost of the policies
acquired. These assets are amortized with interest in relation to expected gross
profits, using the assumed crediting interest rate, including direct charge-offs
for any excess of the unamortized asset over the present value of expected gross
profits. Retrospective adjustments of the amounts related to the 1993 and 1995
business acquired are made when the Company revises its estimates of expected
future gross profits and losses with respect to the policies acquired.
The estimation of future gross profits and losses with respect to cost of
insurance acquired is subject to the same estimation process and is impacted by
the same factors as discussed above under deferred policy acquisition costs.
27
<PAGE>
<TABLE>
<CAPTION>
Changes in the cost of insurance acquired are as follows (in thousands):
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year................................................. $ 234,471 $ 260,037 $ 272,543
Additional cost of insurance acquired...................................... 127,377 15,363
Interest accretion......................................................... 5,695 614 414
Adjustment for unrealized gains and losses on fixed maturity investments
available for sale........................................................ (14,427)
Amortization............................................................... (47,101) (26,180) (28,283)
----------- ----------- -----------
Balance, end of year....................................................... $ 306,015 $ 234,471 $ 260,037
=========== =========== ===========
</TABLE>
Future amortization is estimated at $47.8 million, $41.3 million, $36.4
million, $30.9 million, and $26.5 million for the years 1996, 1997, 1998, 1999,
and 2000, respectively. Due to changes in estimates of future gross profits and
losses, the estimated future amortization is expected to increase as compared to
prior year estimates.
(g) GOODWILL
Goodwill is amortized on the straight-line basis over a 40 year period.
Accumulated amortization of goodwill was $13.8 million and $11.1 million at
December 31, 1995 and 1994, respectively. The Company continually evaluates
whether current events and circumstances warrant adjustments to
28
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the carrying value and/or the estimated amortization period of goodwill and
other intangibles. An adjustment to the carrying value or amortization period is
based on future undiscounted cash flows. At this time, the Company believes that
no significant impairment of the goodwill and other intangibles has occurred and
that no reduction of the estimated amortization period is warranted.
(h) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits of traditional life products has
been computed by the net level premium method based on estimated future
investment yield, mortality, and withdrawal experience. Reserve interest
assumptions are graded to rates between 7.25% and 8.5%. Mortality assumptions
are based on the 1965-70 Basic Experience Table. Withdrawal assumptions vary by
year of issue, age of the insured, and type of insurance. Mortality and
withdrawal assumptions are based on actual experience, modified as necessary to
reflect anticipated trends and to include provisions for possible unfavorable
deviations. The assumptions vary by plan, year of issue, and duration.
Substantially all of the traditional life products were issued prior to 1984.
The future policy benefit reserves include a provision for policyholder
dividends based upon dividend scales assumed at the date of purchase of acquired
companies or as presently contemplated.
Policy and contract claims include provisions for reported claims in process
of settlement, valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based on
prior experience of the Company.
Future policy benefits and claims are calculated using numerous assumptions
and estimates including interest rates, mortality and persistency, which are
intended to estimate the timing of payment of policyholder benefits and claims.
Actual results could differ from these estimates.
(i) POLICYHOLDER ACCOUNT BALANCES
Benefit reserves for universal life, including both variable and fixed
premium products, and annuity products are determined using the "retrospective
deposit" method and consist of policy account values before any surrender
charges.
(j) DEFERRED POLICY FEES
Certain front-end fees assessed against policyholder account balances on
universal life contracts are deferred and amortized with interest in relation to
the present value of expected gross profits on the product. Such amortization is
in direct proportion to amortization of deferred policy acquisition costs for a
given policy form and is netted with amortization of deferred policy acquisition
costs in the Consolidated Statements of Operations.
29
<PAGE>
<TABLE>
<CAPTION>
Changes in deferred policy fees are as follows (in thousands):
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year..................................................... $ 78,700 $ 59,058 $ 46,142
Capitalization................................................................. 21,348 22,241 19,850
Interest accretion............................................................. 4,867 4,133 3,569
Adjustment for unrealized gains and losses on fixed maturity investments
available-for-sale............................................................ (2,433) 1,607 (659)
Amortization................................................................... (21,892) (8,339) (9,844)
--------- --------- ---------
Balance, end of year........................................................... $ 80,590 $ 78,700 $ 59,058
========= ========= =========
</TABLE>
At December 31, 1995, the Company reassessed its expectations future gross
profits and losses resulting in additional amortization of Deferred Policy Fees
(See Note 1(e)).
30
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) LIABILITY FOR GUARANTY FUND ASSESSMENTS
Assessments are levied on the Company from time to time by guaranty fund
associations of states in which it is licensed to provide for payment of covered
claims or to meet other insurance obligations, subject to prescribed limits, of
insolvent insurance enterprises. Assessments are allocated to an insurer based
on the ratio of premiums written by an insurer to total premiums written in the
state. The term of the assessments depend on how each guaranty fund association
elects to fund its obligation. Assessments levied by certain states may be
recoverable through a reduction in future premium taxes. The Company provides a
liability, net of discount and estimated premium tax offsets, for estimated
future assessments of known insolvencies. Such liability was $2.7 million and
$0.5 million at December 31, 1995 and 1994, respectively. The Company determines
the liability utilizing a report prepared annually by the National Organization
of Life, Health and Accident Guaranty Associations which provides estimates of
assessments by insolvency. Although management believes the provision for
guaranty fund assessments is adequate for all known insolvencies, and does not
currently anticipate the need for any material additions to the reserve for
known insolvencies, it is reasonably possible that the estimates on which the
provision is based will change and that such changes may result in future
adjustments.
(l) RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES
Premium revenue for traditional life insurance products is reported as
earned when due. Benefits and expenses are associated with earned premiums so as
to result in recognition of profits over the premium paying period. This
association is accomplished by means of a provision for future policy benefit
reserves and the amortization of deferred policy acquisition costs. Revenues for
universal life policies and annuity products consist of policy charges for the
cost of insurance, policy administration charges, amortization of policy
initiation fees, and surrender charges. Expenses related to these products
include interest credited to policy account balances and benefit claims incurred
in excess of policy account balances. Premiums earned on group accident and
health insurance business are recorded as fees net of ceded commissions in
accident and health insurance premiums, net.
(m) EARNINGS PER SHARE
Net earnings per common share is based on the weighted average number of
common and common equivalent shares outstanding during the periods. Net loss per
common share is based on the weighted average number of common shares
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all common shares issued and options and warrants granted by
the Company during the twelve months preceding March 23, 1993, the date of the
Company's initial public offering, except those issued to General Electric
Capital Corporation ("GE Capital") upon exercise of the GE Capital warrants,
have been included in the calculation of common and common equivalent shares
outstanding as if they were outstanding for all periods presented (using the
treasury stock method and a public offering price of $17.00 per share).
(n) POSTRETIREMENT BENEFITS
The Company has no material liabilities for postretirement benefits. The
liabilities for certain individuals who were vested in the prior owner's plan or
in the prior Lamar Life plan are accounted for in accordance with Statement of
Financial Accounting Standards No. 106.
31
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(p) RECLASSIFICATIONS
The Company has reclassified the presentation of certain prior period
information to conform with the 1995 presentation. The reclassifications had no
effect on the financial position, results of operations or cash flows of the
Company.
2. ACQUISITION
On April 28, 1995, Life Partners Group, Inc. finalized an agreement to
acquire Lamar Financial Group, Inc. ("Lamar"), together with all its
subsidiaries, including Lamar Life Insurance Company of Jackson, Mississippi,
for a purchase price of $77 million.
<TABLE>
<CAPTION>
The acquisition is summarized as follows (in millions):
<S> <C>
Assets acquired:
Investments:
Fixed maturities....................................... $ 666
Others................................................. 166
---------
832
Cost of insurance acquired............................... 126
Goodwill................................................. 19
All other................................................ 233
---------
1,210
---------
Liabilities assumed:
Future policy benefits................................... 84
Policyholder account balances............................ 857
Debt..................................................... 46
All other................................................ 146
---------
1,133
---------
Net assets acquired........................................ $ 77
=========
Financed by:
Borrowings under bank credit facility...................... $ 36
Common stock (2,010,645 shares)............................ 39
Cash....................................................... 2
---------
$ 77
=========
</TABLE>
The acquisition was accounted for using the purchase method, and the results
of operations of Lamar were included in the consolidated statement of operations
from the date of acquisition. Also included in the results of operations is a
one time charge of $0.5 million for interest expense on the acquisition purchase
price. The fair value of assets and liabilities of Lamar were reflected in the
Company's consolidated balance sheet as of April 28, 1995, and goodwill recorded
as a result of the acquisition was increased by approximately $4.8 million due
to further evaluation of the fair values of
32
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION (CONTINUED)
the acquired assets and liabilities. Evaluation of fair values for acquired
assets and liabilities, including investments, cost of insurance purchased, and
insurance and annuity liabilities is continuing and allocation of the purchase
price may be further adjusted.
As of December 31, 1995, the Company had substantially completed the move of
the primary life, annuity and corporate functions of Lamar from its location in
Jackson, Mississippi, to the Company's headquarters in Englewood, Colorado. In
connection with this move, the Company has incurred and anticipates certain
additional closing and moving costs, costs to involuntarily terminate or
relocate employees, and terminate or renegotiate certain contracts. Management
has estimated these costs to total approximately $3.8 million, and has included
such estimated costs in the allocation of the acquired net assets of Lamar. Such
costs may be revised in future periods if actual costs deviate significantly
from the estimates.
The following unaudited pro forma information presents the consolidated
results of operations of the Company and Lamar as if the acquisitions had been
effective at the beginning of the periods presented, after giving effect to
adjustments to reflect the acquisition and the financing related thereto.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Revenues............................................................ $ 598,313 $ 530,641
Earnings (loss) before income taxes and extraordinary item.......... (14,919) 67,356
Earnings (loss) before extraordinary item........................... (12,289) 43,419
Net earnings (loss)................................................. (12,289) 40,861
Earnings (loss) per share before extraordinary item................. $ (0.44) $ 1.54
Net earnings (loss) per share....................................... $ (0.44) $ 1.45
Weighted average common shares and common equivalent shares
outstanding........................................................ 27,777,188 28,121,677
</TABLE>
The above unaudited pro forma information is intended for informational
purposes only and may not necessarily be indicative of the Company's future
results of operations.
3. NOTES PAYABLE
Notes payable at December 31, 1995, and December 31, 1994, are summarized
below (in thousands):
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
NET OF UNAMORTIZED
AMOUNT OUTSTANDING ISSUANCE COSTS
------------------------ ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Borrowings under bank credit facility (A)........... $ 156,178 $ 121,178 $ 155,581 $ 120,370
12 3/4% Senior Subordinated Notes Due 2002 (B)...... 95,100 95,100 90,502 90,090
----------- ----------- ----------- -----------
$ 251,278 $ 216,278 $ 246,083 $ 210,460
=========== =========== =========== ===========
</TABLE>
(A) On August 12, 1994, the unsecured syndicated credit facility was amended and
restated to include a $50 million revolving credit facility and various
other modifications. On April 28, 1995, the Company utilized $36 million of
the revolving credit facility in the acquisition of Lamar Financial
33
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE (CONTINUED)
Group, Inc. (See Note 2). On December 28, 1995, the Company utilized the
remaining $14 million of the facility. According to the amended agreement,
the $50 million outstanding principal will convert to a term loan effective
January 1, 1997, payable in quarterly installments through September 30,
1999. The outstanding principal under the existing term loan is payable in
quarterly installments through September 30, 1999. Both the outstanding term
loan principal and outstanding revolving loan principal may be designated as
a "base rate loan", a "eurodollar loan", or a combination of both at the
Company's option on a periodic basis.
Any principal portion designated as a base rate loan bears interest at a
rate per annum equal to the higher of (a) the Federal Funds Rate for such
day plus 1/2 of 1%, or (b) the Prime rate for such day. Any principal
portion designated as a eurodollar loan bears interest at a rate per annum
based upon the one, two, three, or six month LIBOR rate, plus a 1.0% margin.
At December 31, 1995, the entire outstanding term loan principal amount of
$106.2 million was designated by the Company as a eurodollar loan, bearing
interest based upon the six month LIBOR rate of 6.75%. The outstanding
revolving loan principal amount of $50 million was also designated by the
Company as a eurodollar loan. Of the outstanding revolving loan principal,
$36.0 million bears interest based on the six month LIBOR rate of 6.88%, and
$14.0 million bears interest based upon the three month LIBOR rate of 6.69%.
The loan agreement under the bank credit facility contains covenants, the
most restrictive of which limits payments by the Company for dividends to 3%
of net worth as defined in the agreement.
(B) On July 30, 1992, Life Partners completed a public offering of $100 million
of unsecured senior subordinated notes. The notes bear interest at the rate
of 12 3/4% (payable semi-annually on January 15 and July 15), and the
principal of the notes is payable in a single installment at maturity on
July 15, 2002. The notes are redeemable at Life Partners' option at any time
after July 15, 1997, and there are no sinking fund requirements. The notes
may be redeemed by Life Partners at redemption prices of 103.643% and
101.831% of the outstanding principal balances in the 12-month periods
commencing July 15, 1997 and 1998, respectively, or at 100% thereafter. One
of Life Partners' subsidiaries purchased $4.9 million of the notes in 1993.
The following summary sets forth the principal balance of maturities of
notes payable during each of the next five years (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996..................................................... $ 15,000
1997..................................................... 38,182
1998..................................................... 48,182
1999..................................................... 54,814
2000 and thereafter...................................... 95,100
---------
$ 251,278
=========
</TABLE>
The components of interest expense associated with notes payable are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Notes payable........................................................ $ 23,225 $ 20,728 $ 23,584
Indebtedness to related party........................................ 2,396
--------- --------- ---------
Total............................................................ $ 23,225 $ 20,728 $ 25,980
========= ========= =========
</TABLE>
34
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE (CONTINUED)
Interest expense for the year ended December 31, 1995, as reported in the
consolidated statement of operations, also includes interest paid or accrued to
the Internal Revenue Service relating to assessments on prior tax years of $4.2
million (See Note 12), and interest expense of $0.5 million associated with
purchase accounting of Lamar (See Note 2).
To the extent that loans were payable to GE Capital, which owned
approximately 40% of the outstanding common stock of Life Partners at January 1,
1993, under the Senior Loan Agreement, they were classified as "Indebtedness to
related party." To the extent that loans are payable to unaffiliated third
parties, they are classified as "Notes payable" (see Note 9).
The interest and principal payment terms of surplus debentures payable by
Wabash to Life Partners are structured, subject to certain surplus restrictions,
to provide sufficient cash to meet all payment terms on these loan agreements
(see Note 7).
4. INVESTMENTS
Investment income by type of investment was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Gross investment income:
Fixed maturities............................................. $ 251,403 $ 211,318 $ 199,164
Policy loans................................................. 14,732 12,212 12,691
Short-term investments....................................... 6,583 4,277 4,848
Other invested assets........................................ 5,360 4,179 4,877
Mortgage loans............................................... 9,445 3,041 4,043
Equity securities............................................ 1,866 1,336 1,113
Collateral loans............................................. 214 106 118
Investment real estate....................................... 1,506 337 246
----------- ----------- -----------
Gross investment income.................................... 291,109 236,806 227,100
----------- ----------- -----------
Less: Investment expenses...................................... 6,060 6,293 5,969
Interest expense on investment borrowings................ 7,981 5,135
----------- ----------- -----------
Net investment income.......................................... $ 277,068 $ 225,378 $ 221,131
=========== =========== ===========
</TABLE>
Following is an analysis of net realized gains (losses) on investments (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities................................................. $ 1,253 $(10,122) $(13,063)
Equity securities................................................ 14,577 (1,126) 33,845
Other............................................................ (45) (8,404) (2,378)
--------- ---------- ----------
$ 15,785 $(19,652) $18,404
========= ========== ==========
</TABLE>
Realized investment gains (losses) resulted in (decelerated) accelerated net
amortization expense for deferred policy acquisition and deferred policy fees of
$(8,039,000), $12,000 and $4,773,000 during the years ended December 31, 1995,
1994 and 1993, respectively.
Realized investment losses for other than temporary declines in the market
values of debt securities totaled $9.2 million, $7.1 million, and $54.5 million
in 1995, 1994, and 1993, respectively.
35
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
During 1995, the Company sold $35.1 million of fixed maturity investments
which were previously classified as held-to-maturity. Such sales were primarily
the result of significant deterioration of creditworthiness of the issuers.
Based upon available information, the Company concluded that, in all
probability, substantial amounts due would not be collected or there would be
delay in collection, causing the Company to sell these securities. As a result
of such sales, the Company realized net losses of $1.6 million in 1995.
The cost and estimated fair values of equity securities are as follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
December 31, 1995:
Preferred stock....................................... $ 18,984 $ 1,123 $ 502 $ 19,605
Common stock.......................................... 1,945 2,271 100 4,116
--------- ---------- ---------- ---------
Totals............................................ $ 20,929 $ 3,394 $ 602 $ 23,721
========= ========== ========== =========
December 31, 1994:
Preferred stock....................................... $ 8,760 $ 231 $ 1,134 $ 7,857
Common stock.......................................... 5,745 14,057 149 19,653
--------- ---------- ---------- ---------
Totals............................................ $ 14,505 $ 14,288 $ 1,283 $ 27,510
========= ========== ========== =========
</TABLE>
The amortized cost and estimated fair values of debt securities classified
as fixed maturity investments held-to-maturity are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1995:
United States treasury securities and obligations of United
States government corporations and agencies................... $ 2,024 $ 44 $ 2,068
Obligations of states and political subdivisions............... 2,420 307 2,727
Debt securities issued by foreign government................... 16,272 1,014 17,286
Corporate securities........................................... 533,110 36,273 $ 4,280 565,103
Mortgage-backed securities..................................... 74,470 4,959 107 79,322
Other debt securities.......................................... 50,530 4,641 301 54,870
----------- ---------- --------- -----------
Totals..................................................... $ 678,826 $ 47,238 $ 4,688 $ 721,376
=========== ========= ========= ===========
</TABLE>
36
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
December 31, 1994:
United States treasury securities and obligations of
United States government corporations and agencies....... $ 32,725 $ 44 $ 1,964 $ 30,805
Obligations of states and political subdivisions.......... 757 88 845
Debt securities issued by foreign governments............. 19,077 2,851 16,226
Corporate securities...................................... 1,047,684 7,991 71,981 983,694
Mortgage-backed securities................................ 226,205 55 12,814 213,446
Other debt securities..................................... 243,586 456 20,807 223,235
------------- ---------- ---------- -------------
Totals................................................ $ 1,570,034 $ 8,634 $ 110,417 $ 1,468,251
============= ========== =========== =============
</TABLE>
The amortized cost and estimated fair values of debt securities classified
as investments available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
December 31, 1995:
United States treasury securities and obligations of
United States government corporations and agencies....... $ 93,368 $ 4,620 $ 110 $ 97,878
Obligations of states and political subdivisions.......... 8,443 273 8,716
Debt securities issued by foreign governments............. 18,440 673 66 19,047
Corporate securities...................................... 1,044,051 52,822 11,965 1,084,908
Mortgage-backed securities................................ 1,147,848 52,606 1,345 1,199,109
Other debt securities..................................... 249,325 14,584 1,202 262,707
------------- ----------- --------- -------------
Totals................................................ $ 2,561,475 $ 125,578 $ 14,688 $ 2,672,365
============= =========== ========= =============
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
December 31, 1994:
United States treasury securities and obligations of United
States government corporations and agencies............... $ 94,245 $ 238 $ 5,629 $ 88,854
Obligations of states and political subdivisions........... 1,427 79 1,348
Debt securities issued by foreign government............... 4,859 615 4,244
Corporate securities....................................... 389,856 3,794 20,066 373,584
Mortgage-backed securities................................. 575,181 3,272 30,974 547,479
Other debt securities...................................... 47,218 365 4,382 43,201
------------- --------- --------- -------------
Totals................................................. $ 1,112,786 $ 7,669 $ 61,745 $ 1,058,710
============= ========= ========= =============
</TABLE>
37
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Held-to-Maturity:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less.................................................. $ 990 $ 983
Due after one year through five years.................................... 75,968 77,322
Due after five years through ten years................................... 214,310 225,881
Due after ten years...................................................... 313,088 337,868
----------- -----------
604,356 642,054
Mortgage-backed securities............................................... 74,470 79,322
----------- -----------
$ 678,826 $ 721,376
=========== ===========
</TABLE>
Available-for-Sale:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less.............................................. $ 26,400 $ 26,599
Due after one year through five years................................ 240,530 249,527
Due after five years through ten years............................... 547,760 573,534
Due after ten years.................................................. 598,937 623,596
------------- -------------
1,413,627 1,473,256
Mortgage-back securities............................................. 1,147,848 1,199,109
------------- -------------
$ 2,561,475 $ 2,672,365
============= =============
</TABLE>
In November 1995, the Financial Accounting Standards Board issued "A GUIDE
TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES" which permitted a one-time reassessment of the
appropriateness of the classifications of all securities. Based on such
reassessment, the Company transferred certain securities from the
held-to-maturity portfolio to the available-for-sale portfolio in November 1995.
The transferred securities had an amortized cost of approximately $1,201.4
million and net unrealized gains of approximately $52.1 million. The transfer
resulted in an increase of approximately $26.4 million to shareholders' equity.
Such reassessment does not change management's intent to hold other debt
securities to maturity.
Gross gains of $25.3 million and gross losses of $14.8 million were realized
in 1995 from the sale of investments in debt securities; gross gains of $19.0
million and gross losses of $22.0 million were realized in 1994; and gross gains
of $47.6 million and gross losses of $6.2 million were realized in 1993.
At December 31, 1995, the Company held cash and short-term investments of
Dreyfus Treasury Cash Management Fund with a carrying amount of $58.7 million,
which was greater than 10% of stockholders' equity at December 31, 1995.
38
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
At December 31, 1994, the carrying amount, fair value and effective yield of
high-risk collateralized mortgage obligations included in fixed maturities were
$11.6 million, $10.7 million and 14.8%, respectively. At December 31, 1995, the
Company did not hold any collateralized mortgage obligations which would be
considered high-risk.
The carrying value of investments that have produced no investment income
for the three years ended December 31, 1995, 1994 or 1993 was not material to
the Company's consolidated financial position.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Company entered into interest rate swap
agreements during 1991 and 1993 for the purpose of minimizing exposure to
fluctuations in interest rates of specific assets held by the Company. The
notional amount of such matched swaps outstanding at December 31, 1994 and 1993,
was $20 million, and $120 million, respectively. During 1994, certain swaps were
terminated resulting in an aggregate loss of approximately $6.8 million. During
the first quarter of 1995, the Company terminated its remaining swaps which
resulted in an aggregate loss of approximately $116,000.
Following is an analysis of the components of net unrealized gains (losses),
net of tax on investments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
Investments carried at estimated fair value:
Available-for-sale fixed maturities..................................... $ 110,890 $ (54,076)
Equity securities....................................................... 2,792 13,005
----------- ----------
113,682 (41,071)
Less effect on other balance sheet accounts:
Deferred policy acquisition costs....................................... (11,510) 6,131
Cost of insurance acquired.............................................. (14,427)
Deferred policy fees.................................................... 1,485 (244)
Deferred income taxes................................................... (31,140) 12,535
Other................................................................... 179 (134)
----------- ----------
Net unrealized gains (losses) on investments............................ $ 58,269 $ (22,783)
=========== ==========
</TABLE>
5. CONCENTRATIONS OF CREDIT RISK
The Company held unrated or non-investment grade corporate debt securities,
excluding senior secured debt securities and mezzanine financing securities, as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Carrying value, net of loss reserves.......................................... $ 146.2 $ 101.9
Market value.................................................................. 150.0 100.8
Percentage of fixed maturity investments...................................... 4% 4%
Percentage of total cash and invested assets.................................. 4% 3%
Number of issuers............................................................. 74 77
</TABLE>
39
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CONCENTRATIONS OF CREDIT RISK (CONTINUED)
Additionally, the Company held investments in non-investment grade senior
secured debt securities and mezzanine financing securities as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Carrying value....................................................... $ 61.8 $ 68.3
Market value......................................................... 61.3 68.3
Percentage of fixed maturity investments............................. 2% 3%
Percentage of total cash and invested assets......................... 2% 2%
Numbers of issuers................................................... 20 24
</TABLE>
6. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value. None of the financial
instruments are held for trading purposes.
(a) FIXED MATURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE
For those securities held-to-maturity and available-for-sale, fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities or discounted future cash flows.
(b) EQUITY SECURITIES
For equity securities, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
(c) MORTGAGE LOANS ON REAL ESTATE
Fair value is estimated by grouping mortgage loans into homogeneous
categories and using quoted market prices for securities backed by similar
loans, adjusted for differences in loan characteristics.
(d) SHORT-TERM INVESTMENTS
For short-term instruments, the carrying amount is a reasonable estimate of
fair value.
(e) INVESTMENT CONTRACT LIABILITIES
For annuity contracts which do not possess significant insurance risks, cash
surrender value is a reasonable estimate of fair value.
(f) NOTES PAYABLE
For borrowings under the senior loan agreement and the bank credit facility,
which are subject to floating rates of interest, the outstanding balance is a
reasonable estimate of fair value. Fair value of borrowings under the senior
subordinated notes due in 2002 equals quoted market price at the reporting date.
(g) INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the swap agreements at the reporting
date, taking into account current interest rates and the current
creditworthiness of the swap counterparties.
40
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
(h) NOTES AND ACCOUNTS RECEIVABLE AND UNCOLLECTED PREMIUMS
Notes and accounts receivable and uncollected premiums are primarily
insurance contract related receivables which are determined based upon the
underlying insurance liabilities and related reinsurance amounts, and thus are
excluded for the purpose of fair value disclosure by paragraph 8(c) of SFAS 107.
The estimated fair values of the Company's financial instruments required to
be valued by SFAS 107 are as follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities:
Held-to-maturity................................. $ 678,826 $ 721,376 $ 1,570,034 $ 1,468,251
Available-for-sale............................... 2,672,365 2,672,365 1,058,710 1,058,710
Equity securities.................................. 23,721 23,721 27,510 27,510
Mortgage loans on real estate...................... 110,214 100,003 34,177 34,184
Policy loans (A)................................... 226,212 192,909
Short-term investments............................. 71,744 71,744 5,537 5,537
Other invested assets (B).......................... 59,593 56,039
Financial liabilities:
Investment contract liabilities.................... 1,246,807 1,152,950 888,514 810,187
Notes payable:
Senior subordinated notes due 2002............... 90,502 101,548 90,090 101,282
Bank credit facility............................. 155,581 155,581 120,370 120,370
Unrecognized financial instruments:
Interest rate swaps in a net receivable position
(C)............................................... 76 (219)
</TABLE>
(A) It is not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to related
policy liability rates. Policy loans are carried at the aggregate unpaid
principal balances in the consolidated balance sheets, and earn interest at
rates ranging from 4% to 9%. Individual policy liabilities in all cases
equal or exceed outstanding policy loan balances.
(B) Other invested assets consist primarily of limited partnership investments
acquired prior to 1995 and carried at cost, for which the determination of
fair value is not practicable. The carrying value of limited partnership
investments were $42.1 million and $45.8 million at December 31, 1995 and
1994, respectively.
(C) The amount shown under "carrying amount" represents accrued interest on the
unrecognized notional amounts of interest rate swaps.
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS
At December 31, 1995 and 1994, substantially all of consolidated
stockholders' equity represented net assets of insurance subsidiaries that
cannot be transferred to Life Partners in the form of dividends, loans, or
advances without prior regulatory approval. Funds are transferred from Wabash to
Life Partners in the form of interest and principal payments on the surplus
debentures (see Note 3).
41
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)
Generally, the net assets of the other insurance subsidiaries available for
transfer to Wabash are limited to the greater of the respective insurance
subsidiary's net gain from operations during the preceding year or 10% of the
respective subsidiary's net surplus as of the end of the preceding year, as
determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities. Payment of dividends in excess of such amounts
would generally require approval by the regulatory authorities. During 1996,
$37.7 million is available for payment of dividends by insurance subsidiaries to
Wabash without prior approval.
8. PREFERRED STOCK
At December 31, 1995 and 1994, Life Partners has 10,000,000 authorized
shares of Series Life Partners Series Preferred Stock with $.01 par value and
$1,000 per share stated value, 250,000 shares of which are designated as 15%
Series A Exchangeable Preferred Stock.
On March 31, 1993, as a result of the receipt of proceeds from the issuance
of common stock through an initial public offering, all outstanding shares of
Series A Exchangeable Preferred Stock and accrued PIK Dividends were redeemed.
There were no outstanding shares at December 31, 1995 and 1994 (See Note 9).
9. COMMON STOCK
On March 23, 1993, the Company amended its certificate of incorporation to,
among other things, change its authorized Class A Common Stock and Class B
Common Stock into one class of stock of the Company designated as Common Stock.
Upon the effectiveness of such amendment, each of the 13,150,749 issued and
outstanding shares of Class A Common Stock and 1,234,675 issued and outstanding
shares of Class B Common Stock were automatically converted into one share of
Common Stock. During 1995 and 1994 the Company paid approximately $3,018,192, or
$0.11 per share, and $2,035,000, or $0.08 per share, in cash dividends on the
Common Stock, respectively.
On March 31, 1993, the Company issued 11,000,000 shares of $.001 par value
Common Stock through an initial public offering at a price of $17 per share.
Also included in the offering were 5,806,440 shares of Common Stock previously
owned by GE Capital. The Company did not receive any proceeds from the sale of
the GE Capital shares. The net proceeds to the Company from the offering were
used to redeem all outstanding shares of Series A Exchangeable Preferred Stock
and accrued PIK Dividends for $122.0 million and to prepay $51.7 million on the
notes payable.
At December 31, 1993, there were 37,719 shares of Common Stock reserved for
issuance to three directors pursuant to warrants issued during 1991 and 1992.
During 1994, two of the directors exercised their warrants and were each issued
12,573 shares of Common stock at an exercise price of $3.98 per share. The
remaining warrant has an exercise price of $3.98 per share, is currently
exercisable by the holder, and, if unexercised, will expire on November 12,
1996. The option price was determined by the Compensation Committee of the Board
of Directors in February 1991 and represented a 25% premium over the previous
sale of stock in March 1990. In August 1993, the Board of Directors formally
granted options to a director to purchase 10,000 shares of Common Stock at an
exercise price of $21.00 per share. The options vest in equal amounts in 1994,
1995, and 1996, and expire in 2003.
At December 31, 1995, and 1994, there were 352,941 shares of Common Stock
reserved for issuance pursuant to an option which was granted to an officer in
1991 at an exercise price of $5.31 per share. The option vested in October 1992
and expires on November 1, 2001. Upon issuance the shares will be subject to
transfer and voting restrictions imposed under an agreement among Life Partners
42
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCK (CONTINUED)
and its stockholders. At issuance, the option price was greater than the fair
value of the stock, based on the value negotiations with the option holder and
the restrictions placed on the sale of the stock by virtue of a pledge and a
stockholders agreement.
On November 30, 1994 the Company granted options to purchase 250,000 shares
of Common Stock to the Company's chief executive officer. The options are
exercisable at $20.25 per share, vest equally over a five year period, and
expire in 2003.
In addition, Life Partners has reserved 800,000 shares of Common Stock for
future issuance pursuant to a stock option plan which is for the benefit of
officers and key employees. Stock options were formally granted by the
Compensation Committee of the Life Partners Board of Directors at a price not
less than market value on the date of grant. They are exercisable for up to ten
years from the date of grant and vest equally over a three or five year period.
Options outstanding under this stock option plan are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------------
OPTION PRICE 1995 1994 1993
------------------------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1.......................... $ 3.28 to $20.25 612,101 606,134 606,400
Granted during the year........................... $19.13 to $20.25 84,400
$16.75 100,800
$12.62 to $18.50 685,600
Exercised during the year......................... $ 3.28 to $20.25 (370,872) (93,766) (25,998)
Forfeited during the year......................... (53,734) (1,067) (58,668)
Transferred into plan............................. 250,000
--------- --------- ----------- --------- ----------
Outstanding at December 31........................ $ 3.28 to $20.25 1,123,095 612,101 606,134
=========== ========= ==========
Portion thereof that is exercisable at
December 31..................................... $ 3.28 to $20.25 202,022 278,469 166,512
=========== ========= ==========
Available for future grant........................ 186,269 68,135 167,868
=========== ========= ==========
</TABLE>
43
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCK (CONTINUED)
Capital stock activity for the years 1995, 1994, and 1993 was as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
AUTHORIZED --------------------------------------------
PER SERIES 1995 1994 1993
----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Preferred stock (authorized 10,000,000 shares):
15% Series A Exchangeable Preferred Stock............ 250,000
Balance, beginning of year........................... 118,005
Preferred stock dividends in kind.................... 3,978
Redemption of preferred stock........................ (121,983)
------------- ------------- --------------
Balance, end of year................................. 0
============= ============= ==============
Common Stock Class A (authorized 50,000,000 shares):
Balance, beginning of year........................... 13,150,749
Conversion of Class A Common Stock to
Common Stock....................................... (13,150,749)
------------- ------------- --------------
Balance, end of year................................. 0
============= ============= ==============
Common Stock, Class B (authorized 2,000,000 shares):
Balance, beginning of year........................... 1,234,675
Conversion of Class B Common Stock to
Common Stock....................................... (1,234,675)
------------- ------------- --------------
Balance, end of year................................. 0
============= ============= ==============
Common Stock (authorized 50,000,000 shares):
Balance, beginning of year........................... 25,530,334 25,411,422
Common Stock issued in initial public
offering........................................... 11,000,000
Common Stock issued in acquisition of
subsidiaries....................................... 2,010,645
Exercise of stock options to
purchase Common Stock.............................. 370,872 93,766 25,998
Exercise of stock warrants to purchase
common stock....................................... 25,146
Conversion of Class A Common Stock to
Common Stock....................................... 13,150,749
Conversion of Class B Common Stock to
Common Stock....................................... 1,234,675
------------- ------------- --------------
Balance, end of year................................. 27,911,851 25,530,334 25,411,422
============= ============= ==============
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). SFAS 123 establishes fair value based accounting and
reporting standards for all transactions in which a company acquires goods or
services by issuing equity securities, including stock-based compensation plans.
Under SFAS 123, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. The fair value of
44
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCK (CONTINUED)
stock options is determined using an option-pricing model. This statement
encourages, but does not require, companies to adopt the fair value based method
of accounting to recognize compensation expense for employee stock compensation
plans. However, it does require a company to comply with the disclosure
requirements set forth in the statement. The Company expects to continue to
utilize the accounting in Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and in 1996, and thereafter, expects to make pro
forma disclosures of net income as if the fair value based method of accounting
defined in SFAS 123 had been applied.
10. REINSURANCE
The life insurance subsidiaries have retention limits for acceptance of risk
on life insurance policies at various levels up to $1 million, for business
issued prior to 1987. Effective January 1, 1987, the retention limit for new
policy issues has been set at various levels up to $500,000. There are
reinsurance agreements with various companies whereby insurance in excess of the
respective subsidiaries' retention limits is reinsured. To the extent that
reinsuring companies become unable to meet their obligations under these
agreements, the subsidiaries remain contingently liable. Insurance in force
ceded at December 31, 1995 and 1994 under risk sharing arrangements totaled
approximately $16.4 billion and $11.0 billion, respectively. The liability for
future policy benefits is stated exclusive of amounts applicable to such risk
sharing reinsurance ceded as of December 31, 1995, and 1994 of $86.5 million and
$75.2 million, respectively. Policyholder benefits reflects the reduction of
death and accident and health claims by amounts recovered from reinsurers of
$114.3 million, $42.9 million and $41.4 million for the years ended December 31,
1995, 1994, and 1993, respectively.
Accident and health premiums are net of assumed premiums of $41.4 million
and ceded premiums of $71.4 million for the year ended December 31, 1995. The
Company did not have material reinsurance for accident and health business prior
to the Lamar acquisition in 1995.
Massachusetts General has ceded a block of insurance under a coinsurance
agreement generally known as "financial reinsurance." Net statutory surplus
provided by this treaty was $1.3 million and $2.9 million at December 31, 1995
and 1994, respectively. Lamar Life has also ceded a block of insurance under a
coinsurance agreement that is considered financial reinsurance. Net surplus
provided by this treaty was $8.2 million at December 31, 1995. These reinsurance
agreements represent financing arrangements and, in accordance with generally
accepted accounting principles, are not reflected as reinsurance in the
accompanying financial statements except for the risk fees paid to or received
from the reinsurers.
The Company held assets and reserves of approximately $192.0 million and
$161.6 million at December 31, 1995 and 1994, respectively, under modified
coinsurance agreements with reinsurance companies owned by certain of the
Company's agents.
During July 1993 the Company entered into a coinsurance agreement whereby
the Company received $140.1 million in cash and assumed $154.6 million in
annuity fund liabilities, which were subject to surrender penalties aggregating
$17.2 million.
11. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
IPS leases office facilities in Englewood, Colorado. In July, 1994 the
Company renegotiated certain provisions of the master lease agreement. The
minimum rental commitment under the revised noncancelable lease is $1.1 million
per year through June, 2014 and $2.6 million per year through the lease
expiration date in July, 2016. The Company has no other significant long-term
leases. Rental expense for the years 1995, 1994, and 1993 was approximately $1.9
million, $2.0 million, and $2.7 million, respectively.
45
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES (CONTINUED)
Wabash and Life Partners, as guarantor of the obligations of Wabash, entered
into an agreement with Perot Systems Corporation ("Perot") to provide data
processing services to the Company through February, 2001. Fees under the
servicing agreement are based upon usage, with minimum annual fees of $3.6
million. The agreement is subject to an option available in 1996 whereby Wabash
could pay a fee of approximately $4 million to terminate the agreement. The
Company is negotiating with Perot regarding this option as part of a review of
its data processing arrangements.
At December 31, 1994, Philadelphia Life and Massachusetts General were
defendants in a class action originally instituted by a former agent and
policyholder of Philadelphia Life. In the case, the plaintiff alleged that these
companies breached the terms of certain universal life policies by increasing
the cost of insurance rates to pass on a portion of their increased tax
liability resulting from the passage of the Revenue Reconciliation Act in 1990,
which act contained provisions requiring the recognition of taxable income by
the insurer on a percentage of actual premium received on existing, as well as
subsequently written, individual life policies (the so called "DAC tax"). On
July 31, 1995 the Federal District Court in California approved a settlement of
this action following notice to members of the class. The recording of the
liability associated with this settlement and other related litigation resulted
in a pre-tax expense of $14.2 million for the year ended December 31, 1995.
In addition, various other lawsuits and claims are pending against the
Company. The Company has established a liability of approximately $1 million in
its financial statements, as of December 31, 1995, for litigation contingencies.
While this provision was established based upon management's judgment as to the
probable exposure associated with the disposition of these lawsuits, there can
be no assurance that the Company's ultimate liability, if any, in connection
with such lawsuits will not exceed the provisions established therefor.
In connection with the Company's acquisition of certain of its insurance
subsidiaries, the seller, I.C.H. Corporation ("I.C.H.") agreed to indemnify the
Company relative to various matters pertaining to the Internal Revenue Service
("IRS") examination for periods prior to the acquisition of said insurance
subsidiaries. To the extent the IRS examination of preacquisition tax years
results in an increase in the Company's tax in years subsequent to the
examination, I.C.H. has contractually agreed to reimburse the Company for
certain disallowed deductions relating to Philadelphia Life. In addition, the
Company believes that I.C.H. is liable for damages in postacquisition tax years
with respect to Massachusetts General and other insurance subsidiaries resulting
from I.C.H.'s failure to satisfy certain contractual covenants in connection
with such tax examinations. Philadelphia Life is also a party to an
indemnification agreement between Tenneco Inc. ("Tenneco"), I.C.H. and others
included in the acquisition agreement pursuant to which I.C.H. acquired
Philadelphia Life and other insurance companies from Tenneco pursuant to which
Tenneco agreed to indemnify Phliadelphia Life for certain lost deductions.
On October 10, 1995, I.C.H. filed under Chapter 11 for bankruptcy
protection. I.C.H., in publicly released documents, has stated that it has
reached a tentative agreement with the IRS for tax years through 1989 whereby
I.C.H.'s insurance subsidiaries would be subject to approximately $68 million of
federal income tax liability and interest for years in which certain of the
Company's insurance subsidiaries were members of the consolidated federal tax
group to which such tax liability related. All members of a consolidated group
of companies may be, under federal law, jointly and severally liable for tax
deficiencies related to such group. The Company has been informed that I.C.H.
has made payment to the IRS for the tax liability and interest. I.C.H. has
orally advised the Company of an intention to file suit against certain
subsidiaries of the Company for contribution of their respective shares of such
tax deficiency. Based upon the indemnification provisions and other relevant
documents, the Company does not believe that it will be responsible for an
allocable share of said taxes.
46
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES (CONTINUED)
The Company has received a determination from an IRS examination of certain
agent compensation practices in certain of its life insurance subsidiaries. The
Company has protested and appealed the assessment. It is possible that the
ultimate resolution of this examination could result in additional employment
taxes, interest and penalties for the period under examination, as well as
future periods which are subject to examination. The Company believes that it
has made adequate provision for the potential outcome of the appeal.
12. FEDERAL INCOME TAXES
Life Partners and its direct non-life subsidiary companies acquired in the
Lamar acquisition file a consolidated non-life federal income tax return. The
life insurance subsidiaries file a consolidated life federal income tax return.
Non-life subsidiaries of the insurance companies each file a separate federal
income tax return.
The components of the provision (benefit) for income taxes on operating
earnings (loss) before income taxes and extraordinary items are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current tax provision................................................ $ 19,268 $ 2,097 $ 39,971
Deferred tax provision (benefit)..................................... (22,539) 19,168 (10,103)
--------- --------- ---------
Total income tax provision (benefit)............................. $ (3,271) $ 21,265 $ 29,868
========= ========= =========
</TABLE>
A reconciliation of the income tax provision (benefit) based on the
prevailing corporate tax rate of 35% to the provision reflected in the
consolidated financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed expected income tax expense (benefit) at statutory regular
tax rate............................................................ $ (5,829) $ 20,465 $ 28,651
Amortization of goodwill............................................. 961 835 813
Dividends received deduction......................................... (379) (93) (91)
Change in corporate tax rate......................................... 479
Other................................................................ 1,976 58 16
--------- --------- ---------
Total income tax provision (benefit)............................. $ (3,271) $ 21,265 $ 29,868
========= ========= =========
</TABLE>
The Company recorded a general provision for tax contingencies of $2.0
million at December 31, 1995. The result of this provision was to decrease the
Company's 1995 effective tax rate by 12%.
47
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FEDERAL INCOME TAXES (CONTINUED)
The temporary differences that give rise to a deferred tax asset (liability)
at December 31, 1995 and 1994, relate to the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Investments.............................................................. $ (24,696) $ 13,862
Deferred policy acquisition costs and cost of insurance acquired......... (216,668) (181,267)
Future policy benefits and policyholder account balances................. 173,940 117,797
Policy acquisition expenses.............................................. 37,280 26,087
Net operating loss carryforwards......................................... 3,103 6,672
Other.................................................................... 3,259 2,960
------------ ------------
Deferred tax liability................................................... (23,782) (13,889)
Valuation allowance...................................................... (2,030)
------------ ------------
Deferred tax liability -- net of valuation allowance..................... $ (25,812) $ (13,889)
============ ============
</TABLE>
As of December 31, 1995, Life Partners has $8.9 million in federal net
operating loss carryforwards which have expiration dates from 2006 through 2009.
A valuation allowance of $2.0 million has been established as of the
purchase date for certain operating loss carryforwards and temporary differences
of non-life companies acquired in the Lamar acquisition. The valuation allowance
against deferred tax assets will be continually evaluated and any adjustments
will be allocated to reduce goodwill or other noncurrent intangible assets of
the acquired companies.
Included in interest expense in the consolidated statement of operations for
the year ended December 31, 1995, is a provision for interest of $4.2 million on
federal income tax deficiencies relating to prior year taxes. I.C.H. has reached
a settlement agreement with the IRS whereby certain of the Company's tax
deductions which relate to amortization of purchased intangibles have been
disallowed. The provision for interest includes the interest cost related to
these lost deductions. As a result of the IRS settlement, the tax basis of
certain assets of Philadelphia Life was increased. The effect of this increase
will result in a refund of federal income taxes paid in years these assets were
sold with a corresponding receipt of interest. No receivable has been
established for the interest attributable to the refund of taxes since the
amount and timing are uncertain at this time.
The IRS has examined federal income tax returns of certain Life Partners
companies through the 1991 tax year. An examination was also performed on
certain Lamar Financial Group subsidiary returns through the 1994 preacquisition
tax years. In addition, the Company has been informed that the IRS intends to
begin an examination of certain Life Partners' insurance subsidiaries income tax
returns for 1992, 1993, and 1994 tax years. The Company does not anticipate any
significant adjustments which would materially affect the financial position or
results of operations of the Company.
Under previous life insurance company tax laws, a portion of the Company's
gain from operations which was not subject to current income taxation was
accumulated for tax purposes as Policyholders' Surplus Accounts. The aggregate
accumulation in this account was approximately $7.6 million at December 31,
1995. Should the accumulation in the Policyholders' Surplus Accounts exceed
certain stated maximums, or if certain other events occur, all or a portion of
the amount may be subject to federal income taxes at rates then in effect.
Deferred taxes have not been established for such amounts since the Company does
not anticipate paying taxes on the Policyholders' Surplus Accounts.
48
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13.PERMITTED STATUTORY ACCOUNTING PRACTICES AND SUPPLEMENTAL STATUTORY FINANCIAL
INFORMATION
Life Partners' insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
their respective state insurance departments. Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Wabash received written approval from Kentucky Department of Insurance to
acquire certain Life Partners insurance subsidiaries as of March 30, 1990 and
further received permission for the acquisition of Lamar as of April 28, 1995.
Investment practices prescribed by the Commonwealth of Kentucky limit such
investments in subsidiaries to 50% of the excess of capital and surplus over the
minimum required capital and surplus of $1 million, or such higher percentage of
the excess as may be approved. At December 31, 1995, Wabash's investment in
affiliates exceeded the 50% limitation by $108.1 million, as permitted by the
Kentucky Department of Insurance.
Combined statutory surplus for Life Partner's insurance subsidiaries at
December 31, 1995 and 1994 was $153.6 million and $127.9 million, respectively,
and combined statutory net income for the years ended December 31, 1995, 1994
and 1993 was $36.7 million, $15.4 million and $38.5 million, respectively.
Combined statutory operating earnings, excluding income tax and interest
expense, was $78.1 million, $75.8 million, and $83.5 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
14. RELATED PARTY TRANSACTIONS
In connection with the purchase of the life insurance subsidiaries on March
30, 1990, Wabash entered into a financial advisory agreement with certain
shareholders pursuant to which certain shareholders provide financial advisory
services to Wabash and the other insurance subsidiaries for an annual fee. This
fee was $0.5 million for 1993 and 1994. The financial advisory agreement was
terminated on December 31, 1994. During 1994, the Company entered into another
agreement with these shareholders in which the Company agreed to pay a fee for
services rendered in connection with the acquisition of Lamar Life Insurance
Company. The fee agreed upon is 1% of the aggregate consideration paid and
amounted to $1.3 million. The Company anticipates entering into similar
agreements with the shareholders regarding future acquisitions.
In August 1990, the Company committed to invest $10 million, as a limited
partner, in acquisition transactions in which an affiliate of a stockholder is
the ultimate managing partner. In 1993, the Company increased its commitment in
these transactions by an additional $10 million. As of December 31, 1994 and
1995, the Company had invested approximately $17.4 million and $23.4 million as
a limited partner in twelve acquisitions. During 1995, the Company committed to
invest an aggregate of $4.5 million in two limited partnerships in which this
affiliate is also the ultimate managing partner. Of this commitment, $1.4
million is on a standby basis and is subject to increase by $0.8 million upon
the occurrence of certain contingencies. As of December 31, 1995, the Company
had invested $1.2 million in these limited partnerships. In 1993, a senior term
loan and approximately $5 million of senior subordinated notes the Company had
previously loaned to certain of the companies acquired were repaid. During 1993,
the remaining senior subordinated notes were written off.
In June 1990, the Company committed to invest $10 million, as a limited
partner, in acquisition transactions in which another stockholder serves as the
ultimate general partner. During 1992, the Company's previous investment as a
limited partner in three acquisitions totaling $7.1 million was converted to
common stock of the acquired companies. All of the stock was sold during 1993
and 1994.
49
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1993, the Company's previous investment as a limited partner in a fourth
acquisition of $2.9 million was converted to common stock of the acquired
company. All of the stock was sold during 1994 and 1995.
During 1992 and 1993, the Company committed to invest an aggregate of $10
million, as a limited partner, in real estate transactions in which an affiliate
of a stockholder is the ultimate managing partner. As of December 31, 1994 and
1995, the Company had invested $9.1 million and $13.9 million, respectively, in
this limited partnership. As of December 31, 1993, the Company had invested $2.5
million in another limited partnership controlled by an affiliate of this
stockholder. During 1994, the Company committed to invest an additional $5.0
million in the limited partnership. As of December 31, 1995, the Company's
investment in this limited partnership totaled $6.5 million.
As of December 31, 1995 and 1994, the Company had invested $2 million, as a
limited partner in an acquisition in which an affiliate of a stockholder is the
managing partner. In addition, as of December 31, 1993, the Company had invested
$7.1 million, in a Senior Loan of the company acquired. The loan was paid off in
March 1994. During 1994, the Company committed to invest $1.0 million in another
acquisition sponsored by an affiliate of this stockholder. As of December 31,
1995, no investment had been made in this acquisition.
During 1993, the Company invested $4.0 million as a limited partner in an
investment transaction in which another stockholder serves as the ultimate
general partner.
In 1993, the Company paid GE Capital a quarterly agency fee of $100,000 and
a loan administration fee of $221,000 for its capacity as agent under the Senior
Loan Agreement. Additionally, GE Capital was paid $1.1 million in Senior Loan
consent fees in connection with the March 1993 public offering.
50
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. LINES OF BUSINESS
The Company operates principally in the individual life insurance, annuity
and accident and health lines of business. Assets and related investment income
are allocated to the lines of business on their respective liabilities and to
corporate based on the total capital structure. Information as to the Company's
lines of business is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Individual life.......................................................... $ 411,043 $ 332,131 $ 329,960
Annuity products......................................................... 83,414 69,715 56,629
Accident and health...................................................... 25,377 6,497 6,827
Corporate................................................................ 40,497 39,552 43,912
Net realized gains (losses).............................................. 15,785 (19,652) 18,404
----------- ----------- -----------
Total revenues......................................................... $ 576,116 $ 428,243 $ 455,732
=========== =========== ===========
Individual life.......................................................... $ (63,070) $ 64,825 $ 40,486
Annuity products......................................................... 3,855 (4,594) 10,348
Accident and health...................................................... 8,846 1,468 1,746
Corporate................................................................ 40,497 39,552 43,912
Net realized gains (losses).............................................. 15,785 (19,652) 18,404
Amortization related to individual life realized gains (losses).......... (289) (476)
Amortization related to annuity products realized gains (losses)......... 8,327 (12) (4,257)
Amortization of goodwill................................................. (2,745) (2,388) (2,323)
Interest expense......................................................... (27,861) (20,728) (25,980)
----------- ----------- -----------
Earnings (loss) before income taxes and extraordinary item............. $ (16,655) $ 58,471 $ 81,860
=========== =========== ===========
</TABLE>
Earnings on the individual life and annuity lines include net charges of
$58.5 million and $8.1 million, respectively, relating to the revision of
estimated future gross profits used to amortize deferred policy acquisition
costs and deferred policy fees (See Note 1).
16. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash payments for interest expense and income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Interest expense..................................................... $ 23,862 $ 18,628 $ 23,263
Income taxes......................................................... 18,229 14,500 44,380
</TABLE>
Noncash financing activities include and the payment of dividends in kind on
the preferred stock (see Note 8).
Purchases of fixed maturities available-for-sale and held-to-maturity in
1995, totaled $376.0 million and $13.3 million, respectively. Purchases of fixed
maturities available-for-sale and held-to-maturity in 1994 totaled $853.2
million and $988.8 million, respectively.
51
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
In connection with the acquisition of Lamar, liabilities were assumed as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired.......................... $1,004,182
Cash paid.............................................. (37,937)
Common stock issued.................................... (39,459)
----------
Fair value of liabilities assumed...................... $ 926,786
==========
</TABLE>
17. EXTRAORDINARY LOSS
In 1993, the Company realized extraordinary losses in the aggregate of $7.3
million resulting from the extinguishment of debt. The extraordinary losses are
reflected net of the estimated tax effect of $2.5 million.
An extraordinary loss in the amount of $3.9 million was realized by the
Company in 1994 due to the amendment and restatement of the borrowings under the
bank credit facility, and is reflected net of $1.4 million in estimated taxes.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings (loss) per common share for each quarter are computed independently
of earnings per share for the year. Due to the transactions affecting the
weighted average number of shares outstanding in each quarter and due to the
uneven distribution of earnings during the year, the sum of the quarterly
earnings (loss) per share may not equal the earnings (loss) per share for the
year.
<TABLE>
<CAPTION>
1995
------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
----------- ----------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total premium income and other considerations............................. $ 55.8 $ 73.6 $ 75.2 $ 75.5
Earnings (loss) before income taxes....................................... 10.9 6.7 23.2 (57.5)
Net earnings (loss) applicable to common stock............................ 6.9 4.4 14.8 (39.5)
Net earnings (loss) per common share and common equivalent share.......... $ 0.26 $ 0.16 $ 0.53 $ (1.42)
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
----------- ----------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total premium income and other considerations............................. $ 54.1 $ 54.1 $ 55.3 $ 54.4
Earnings (loss) before income taxes and extraordinary item................ 20.5 17.9 20.4 (0.3)
Net earnings (loss) applicable to common stock............................ 13.2 11.4 10.4 (0.4)
Earnings (loss) per common share and common equivalent share:
Earnings (loss) before extraordinary item............................... $ 0.51 $ 0.44 $ 0.50 $ (0.01)
Extraordinary loss...................................................... (0.10)
--------- --------- --------- ---------
Net earnings (loss)................................................... $ 0.51 $ 0.44 $ 0.40 $ (0.01)
========= ========= ========= =========
</TABLE>
Quarterly results of operations are based on numerous estimates, principally
related to policy reserves, the amortization of cost of policies purchased, the
amortization of cost of policies produced and income taxes. Such estimates are
revised quarterly and are ultimately adjusted to year-end amounts. When such
revisions are determined, they are reported as part of operations of the current
quarter. During the fourth quarter of 1995, the Company reassessed its estimates
relating to deferred
52
<PAGE>
LIFE PARTNERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
policy acquisition costs and deferred policy fees, resulting in a $66.6 million
net reduction in such balances (See Note 1). Also during the fourth quarter of
1995, the Company revised its liability for guarantee fund assessments,
resulting in a $1.9 million increase in the liability (See Note 1).
19. SUBSEQUENT EVENT
On March 11, 1996, the Company and Conseco, Inc. ("Conseco") jointly entered
into a definitive merger agreement providing for all shareholders of the Company
to receive Conseco stock for each of their shares through a share exchange based
upon a value of $21.00 per share for Life Partners stockholders. The total value
of the transaction would be approximately $840 million, including $600 million
to purchase the Company's outstanding common stock and $240 million of existing
debt to be assumed by Conseco. Under the merger agreement, Life Partners would
become a wholly owned subsidiary of Conseco. Consummation of the merger is
subject to customary terms and conditions, including approval by both the
stockholders of the Company and Conseco and regulatory authorities. A
termination fee of $20 million is payable under certain circumstances by either
party if its shareholders do not approve the transaction.
53
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(b). Financial Statements and Exhibits, continued
(b) Pro forma consolidated financial statements of Conseco, Inc.
and subsidiaries.
54
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The unaudited pro forma consolidated statement of operations of
Conseco, Inc. ("Conseco") for the year ended December 31, 1995, and for the six
months ended June 30, 1996, present the consolidated operating results for
Conseco as if the acquisition of Life Partners Group, Inc. ("LPG") (the
"Merger") had occurred on January 1, 1995.
The pro forma consolidated statement of operations data for Conseco for
the year ended December 31, 1995, set forth in the unaudited pro forma
consolidated statement of operations under the column "Pro forma Conseco before
the Merger" reflect the prior application of certain pro forma adjustments for
the following transactions, all of which have already occurred, as if such
transactions had occurred on January 1, 1995: (i) the acquisition of all of the
outstanding common stock of CCP Insurance, Inc. ("CCP") not previously owned by
Conseco and related transactions (including the repayment of the a $250.0
million revolving credit agreement); (ii) the increase of Conseco's ownership in
Bankers Life Holding Corporation (BLH) to 90.5 percent, as a result of purchases
of common shares of BLH by Conseco and BLH during 1995 and the first three
months of 1996; (iii) the issuance of 4.37 million shares of Preferred
Redeemable Increased Dividend Equity Securities Convertible Preferred Stock
("PRIDES") of Conseco in January 1996; (iv) the BLH tender offer and repurchase
of its 13% Senior Subordinated Notes due 2002 (the "13% Notes") and related
financing transactions completed in March 1996; and (v) the debt restructuring
of American Life Holdings, Inc. ("AGP") in the fourth quarter of 1995. Such pro
forma adjustments are set forth in Exhibit 99.1 included in Conseco's Form 8-K
dated April 10, 1996.
The pro forma consolidated statement of operations data for Conseco for
the six months ended June 30, 1996, set forth in the unaudited pro forma
consolidated statement of operations under the column "Pro Forma Conseco before
the Merger" reflect the prior application of certain pro forma adjustments for
the following transactions, all of which have already occurred, as if such
transactions had occurred on January 1, 1995: (i) the issuance of 4.37 million
shares of PRIDES in January 1996; and (ii) the BLH tender offer for and
repurchase of the 13% Notes and related financing transactions completed in
March 1996. Such pro forma adjustments are set forth in Exhibit 99.1 included in
Conseco's Form 10-Q for the quarterly period ended June 30, 1996.
The unaudited pro forma consolidated balance sheet as of June 30, 1996,
gives effect to the Merger as if it had occurred on June 30, 1996.
The unaudited pro forma consolidated statement of operations data of
LPG for the year ended December 31, 1995, set forth under the column "Pro forma
LPG before the Merger" reflect the prior application of the pro forma
adjustments for the acquisition of Lamar Life Insurance Company (completed on
April 28, 1995) as if such acquisition had occurred on January 1, 1995. Such pro
forma adjustments are set forth in Exhibit 99.1 included in LPG's Form 8-K dated
April 10, 1996.
The pro forma consolidated financial statements are based on the
historical financial statements of Conseco and LPG and should be read in
conjunction with their respective financial statements and notes. The pro forma
data are not necessarily indicative of the results of operations or financial
condition of Conseco had these transactions occurred on January 1, 1995, nor the
results of future operations. Conseco anticipates cost savings and additional
benefits as a result of certain of the transactions contemplated in the pro
forma financial statements. Such benefits and any other changes that might have
resulted from management of the combined companies have not been included as
adjustments to the pro forma consolidated financial statements. Certain amounts
from the prior periods have been reclassified to conform to the current
presentation.
The unaudited pro forma consolidated financial statements reflect cost
allocations for the Merger based on: (i) the values of LPG's assets and
liabilities as of the assumed dates of Merger; and (ii) appraisals and other
studies, which are not yet complete. Accordingly, the final allocations will be
different from the amounts included in the accompanying pro forma consolidated
financial statements. Although the final allocations will differ, the pro forma
consolidated financial statements reflect management's best estimate based on
currently available information as if the Merger had occurred on the assumed
dates of Merger.
55
<PAGE>
CONSECO, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1995
(Amounts in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro forma Pro forma Pro forma Pro forma
Conseco LPG adjustments Conseco
before the before the relating to reflecting the
Merger Merger the Merger Merger
---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,464.9 $287.9 $ - $1,752.8
Investment activity:
Net investment income 1,138.5 299.4 16.0 (1) 1,457.8
(0.3) (2)
4.8 (3)
(0.6) (4)
Net trading income 2.5 - - 2.5
Net realized gains 185.7 15.8 2.4 (1) 203.9
Fee revenue 33.9 - - 33.9
Restructuring income 15.2 - - 15.2
Other income 9.4 3.2 - 12.6
-------- --------- --------- -------
Total revenues 2,850.1 606.3 22.3 3,478.7
-------- --------- --------- -------
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 1,106.4 155.0 - 1,261.4
Interest expense on annuities and financial products 585.2 173.3 - 758.5
Interest expense on notes payable 110.7 28.1 (0.6) (4) 132.9
(1.1) (5)
(4.2) (6)
Interest expense on investment borrowings 22.2 8.0 - 30.2
Amortization related to operations 207.8 165.0 (75.5) (7) 308.8
11.5 (8)
Amortization related to realized gains 126.0 (8.0) 15.6 (9) 133.6
Other operating costs and expenses 272.4 99.8 (15.8) (6) 356.4
--------- ---------- ---------- --------
Total benefits and expenses 2,430.7 621.2 (70.1) 2,981.8
--------- ---------- ---------- --------
Income (loss) before income taxes,
minority interest and extraordinary charge 419.4 (14.9) 92.4 496.9
Income tax expense (benefit) 163.3 (2.6) (2.5) (6) 193.4
35.2 (11)
--------- ---------- ---------- --------
Income (loss) before minority interest and
extraordinary charge 256.1 (12.3) 59.7 303.5
Minority interest 72.5 - - 72.5
--------- ---------- ---------- --------
Income (loss) before extraordinary charge $ 183.6 $ (12.3) $ 59.7 $ 231.0
========= ========== ======= ========
Earnings per common shares and common equivalent share:
Primary:
Weighted average shares outstanding 50.5 16.3 (12) 66.8
===== ==== =====
Income before extraordinary charge $3.27 $3.18
===== =====
Fully diluted:
Weighted average shares outstanding 59.7 16.3 (12) 76.0
===== ==== =====
Income before extraordinary charge $3.07 $3.04
===== =====
<FN>
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
56
<PAGE>
CONSECO, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the six months ended June 30, 1996
(Amounts in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro forma Pro forma Pro forma
Conseco adjustments Conseco
before the LPG relating to reflecting the
Merger historical the Merger Merger
---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 741.4 $155.8 $ - $ 897.2
Investment activity:
Net investment income 561.9 148.3 7.4 (1) 719.0
(0.2) (2)
2.2 (3)
(0.6) (4)
Net trading losses (7.3) - - (7.3)
Net realized gains 10.2 2.3 1.9 (1) 14.4
Fee revenue 20.1 - - 20.1
Restructuring income 30.4 - - 30.4
Other income 7.6 2.6 - 10.2
------- ------ ------ --------
Total revenues 1,364.3 309.0 10.7 1,684.0
-------- ------ ----- ---------
Benefits and expenses:
Insurance policy benefits and change in
future policy benefits 556.5 69.5 - 626.0
Interest expense on annuities and financial products 289.7 88.6 - 378.3
Interest expense on notes payable 51.4 11.8 (0.6) (4) 62.2
(0.4) (5)
Interest expense on investment borrowings 8.6 2.1 - 10.7
Amortization related to operations 99.5 65.6 (2.4) (7) 168.3
5.6 (8)
Amortization related to realized gains 12.3 0.1 1.8 (9) 14.2
Acquisition and merger expenses - 7.9 (7.9) (10) -
Other operating costs and expenses 122.0 35.9 - 157.9
------ ------ ------- --------
Total benefits and expenses 1,140.0 281.5 (3.9) 1,417.6
------- ------ ------- --------
Income before income taxes, minority interest
and extraordinary charge 224.3 27.5 14.6 266.4
Income tax expense 85.3 11.6 5.5 (11) 102.4
------- ------ ------- --------
Income before minority interest and
extraordinary charge 139.0 15.9 9.1 164.0
Minority interest 23.5 - - 23.5
------- ------ ------ --------
Income before extraordinary charge $ 115.5 $ 15.9 $ 9.1 $ 140.5
======== ====== ====== ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 52.0 16.3 (12) 68.3
====== ==== ====
Income before extraordinary charge $2.05 $1.93
===== =====
Fully diluted:
Weighted average shares outstanding 61.5 16.3 (12) 77.8
====== ==== =====
Income before extraordinary charge $1.88 $1.81
===== =====
<FN>
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
57
<PAGE>
CONSECO, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1996
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Pro forma Pro forma
adjustments Conseco
Conseco LPG relating to reflecting the
historical historical the Merger Merger
---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed maturity securities
at fair value $12,500.8 $2,731.2 $661.2 (13) $15,872.3
15.0 (14)
(35.9) (15)
Held-to-maturity fixed maturity securities - 661.2 (661.2) (13) -
Equity securities at fair value 82.3 23.8 (6.5) (16) 99.6
Mortgage loans 311.0 103.2 (10.0) (14) 404.2
Credit-tenant loans 309.7 - - 309.7
Policy loans 301.2 227.5 - 528.7
Other invested assets 113.5 78.2 - 191.7
Short-term investments 146.7 79.1 (8.5) (17) 217.3
Assets held in separate accounts 271.6 - - 271.6
--------- -------- ---------- --------
Total investments 14,036.8 3,904.2 (45.9) 17,895.1
Accrued investment income 228.1 56.0 - 284.1
Cost of policies purchased 1,209.5 300.9 (300.9) (18) 1,794.8
585.3 (18)
Cost of policies produced 561.2 265.4 (265.4) (19) 561.2
Reinsurance receivables 95.0 279.6 - 374.6
Income taxes 74.9 9.7 127.4 (20) 212.0
Goodwill 908.3 99.5 (99.5) (21) 1,508.0
599.7 (21)
Property and equipment 89.0 - - 89.0
Securities segregated for future redemption
of redeemable preferred stock of a
Partnership II entity 40.7 - - 40.7
Other assets 182.8 59.4 (8.0) (22) 234.2
--------- ------- ------- ---------
Total assets $17,426.3 $4,974.7 $592.7 $22,993.7
========== ======== ========= =========
(continued on the following page)
<FN>
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
58
<PAGE>
CONSECO, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET, continued
June 30, 1996
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Pro forma Pro forma
adjustments Conseco
Conseco LPG relating to reflecting the
historical historical the Merger Merger
---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $13,546.9 $4,243.7 $342.6 (23) $18,133.2
Income tax liabilities - 5.1 (5.1) (20) -
Investment borrowings 445.0 71.6 - 516.6
Other liabilities 344.1 63.8 50.0 (24) 457.9
Liabilities related to separate accounts 271.6 - - 271.6
Notes payable of Conseco 670.0 238.9 10.6 (25) 888.7
(30.8) (15)
Notes payable of Bankers Life Holding
Corporation, not direct obligations of Conseco 297.9 - - 297.9
Notes payable of Partnership II entities, not direct
obligations of Conseco 281.6 - (4.5) (15) 277.1
--------- ------- --------- --------
Total liabilities 15,857.1 4,623.1 362.8 20,843.0
--------- ------- -------- ---------
Minority interest 292.3 - (6.5) (16) 285.8
--------- -------- -------- --------
Shareholders' equity:
Preferred stock 536.5 - - 536.5
Common stock and additional paid-in capital 183.4 286.6 (286.6) (26) 771.8
588.4 (26)
Unrealized appreciation (depreciation) of securities (55.7) (3.5) (.4) (15) (56.1)
3.5 (26)
Retained earnings 612.7 68.5 (68.5) (26) 612.7
--------- ------- ------- --------
Total shareholders' equity 1,276.9 351.6 236.4 1,864.9
--------- -------- ------- --------
Total liabilities and shareholders' equity $17,426.3 $4,974.7 $592.7 $22,993.7
========= ======== ======= =========
<FN>
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
59
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
Allocation of Cost to Acquire LPG
The acquisition of LPG will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire LPG will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the Merger, with any excess of the total purchase cost over the fair value of
the assets acquired less the fair value of the liabilities assumed recorded as
goodwill. In the Merger, each outstanding share of LPG common stock was
converted into .5833 shares of Conseco common stock. A total of 16.3 million
shares of Conseco common stock (or equivalent shares) with a value of $588.4
million were issued to complete the Merger.
The cost to acquire LPG is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Net assets acquired based on assumed date of the
Merger (June 30, 1996) ............................................................ $357.6
Increase (decrease) in LPG's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the Merger:
Actively managed fixed maturity securities...................................... 676.2
Held-to-maturity fixed maturity securities...................................... (661.2)
Mortgage loans.................................................................. (10.0)
Cost of policies purchased (historical)......................................... (300.9)
Cost of policies purchased (related to the Merger).............................. 585.3
Cost of policies produced....................................................... (265.4)
Goodwill (historical)........................................................... (99.5)
Goodwill (related to the Merger)................................................ 587.2
Insurance liabilities .......................................................... (342.6)
Notes payable................................................................... (10.6)
Other........................................................................... 88.8
--------
Total estimated fair value adjustments..................................... 247.3
-------
Net assets acquired..................................................................... 604.9
Notes payable of LPG at acquisition..................................................... 249.5
-------
Total cost to acquire LPG.......................................................... $854.4
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the Merger as of January 1, 1995, are summarized below:
(1) Net investment income and net realized gains of LPG are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities and mortgage loans to their estimated
fair value.
(2) Net investment income is reduced for the lost interest income on
cash used to pay expenses incurred to complete the Merger.
(3) After the Merger, a subsidiary of Conseco will provide investment
advisory services to LPG. Investment advisory fees incurred by LPG
prior to the Merger are eliminated. LPG's pro forma net investment
income is not reduced to reflect the advisory fees to be paid under
agreements with the subsidiary of Conseco since, in accordance with
generally accepted accounting principles, such intercompany fees are
eliminated in consolidation and the subsidiary of Conseco will
provide such services without incurring additional costs.
60
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) Net investment income and interest expense on notes payable are
adjusted to reflect the following items which will be eliminated in
consolidation after the Merger: (i) actively managed fixed maturity
securities of Conseco include $6.3 million of LPG notes; and (ii)
actively managed fixed maturity securities of LPG include $25.1
million of Conseco notes and $4.5 million of notes of a subsidiary of
Conseco.
(5) Interest expense on notes payable of LPG is adjusted as a result of
restating notes payable of LPG to their estimated fair value and the
anticipated repayment of LPG's bank debt, using additional borrowings
from Conseco's credit facility (the "Conseco Credit Agreement").
(6) At the assumed Merger date, certain contingent liabilities related to
potential losses for tax examinations and a class action lawsuit
existed. Expenses incurred in 1995 with respect to such contingencies
are eliminated, since such amounts are considered in the accounting
for the Merger.
(7) Amortization of the cost of policies produced, the historical cost of
policies purchased and deferred revenues for policies sold by LPG
prior to January 1, 1995, are replaced with the amortization of the
cost of policies purchased (amortized in relation to estimated
profits on the policies purchased with interest equal to the contract
rates primarily ranging from 4.0 percent to 7.0 percent).
(8) LPG's historical amortization of goodwill is eliminated and replaced
with the amortization of goodwill recognized in the Merger. Such
amortization is recognized over a 40-year period on a straight-line
basis.
(9) Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased. Amortization of the
cost of policies purchased is adjusted to reflect amortization
related to the pro forma net realized gains of LPG during 1995.
(10) Acquisition and merger expenses are reduced to eliminate the merger
costs incurred by LPG during the six months ended June 30, 1996, in
connection with the Merger.
(11) Reflects the tax adjustments for all applicable pro forma
adjustments at the appropriate rate for the specific item.
(12) Common shares outstanding are increased to reflect the shares issued
in the Merger.
Adjustments to the pro forma consolidated balance sheet to give effect to
the Merger as of June 30, 1996, are summarized below:
(13) After the Merger, all held-to-maturity fixed maturity securities are
classified as actively managed fixed maturity securities consistent
with the intention of the new management.
(14) LPG's held-to-maturity fixed maturity securities and mortgage
loans are restated to estimated fair value.
(15) Actively managed fixed maturity securities of Conseco include $6.3
million of LPG notes which will be eliminated in consolidation after
the Merger. Actively managed fixed maturity securities of LPG include
$25.1 million of Conseco notes and $4.5 million of Partnership II
notes, both of which will be eliminated in consolidation after the
Merger. Unrealized appreciation (depreciation) is adjusted for the
unrealized gains related to these investments.
(16) Equity securities of LPG include $6.5 million of preferred stock of
a subsidiary of Partnership II which will be eliminated after the
Merger.
(17) Cash is reduced for expenses incurred to complete the Merger.
(18) LPG's historical cost of policies purchased is eliminated and
replaced with the cost of policies purchased recognized in the
Merger. Cost of policies purchased reflects the estimated fair value
of LPG's business in force and represents the portion of the cost to
acquire LPG that is allocated to the value of the right to receive
future cash flows from insurance contracts existing at June 30, 1996.
Such value is the present value of the actuarially determined
projected cash flows from the acquired policies.
61
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The 18 percent discount rate used to determine such value is the rate
of return required by Conseco to invest in the business being
acquired. In determining such rate of return, the following factors
are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
- Cost of capital available to fund the acquisition.
- The perceived likelihood of changes in insurance regulations and
tax laws.
- Complexity of the acquired company.
- Prices paid (i.e., discount rates used in determining valua-
tions) on similar blocks of business sold recently.
The value allocated to the cost of policies purchased is based on a
preliminary valuation; accordingly, this allocation may be adjusted
upon final determination of such value. Expected gross amortization
of such value using current assumptions and accretion of interest
based on an interest rate equal to the liability or contract rate
(such rates primarily ranging from 4.0 percent to 7.0 percent) for
each of the years in the five-year period ending June 30, 2001, are
as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
June 30, balance amortization of interest amortization balance
----------- ---------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1997 $585.3 $109.8 $32.4 $77.4 $507.9
1998 507.9 98.0 28.7 69.3 438.6
1999 438.6 83.0 24.7 58.3 380.3
2000 380.3 71.9 21.5 50.4 329.9
2001 329.9 61.9 18.4 43.5 286.4
</TABLE>
(19) LPG's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
(20) Reflects the tax adjustment for all applicable pro forma adjustments
at the appropriate rate for the specific item. In addition, deferred
tax liabilities of LPG are netted against the deferred tax assets
of Conseco.
(21) LPG's historical goodwill is eliminated and replaced with goodwill
determined for the Merger. Such goodwill reflects the excess of the
cost to acquire LPG over the net assets acquired.
(22) Other assets of Conseco are reduced to eliminate common stock of LPG
acquired by Conseco prior to the Merger.
(23) Deferred revenues on certain life insurance and annuity policies of
LPG are eliminated, since such amounts are reflected in the
determination of the cost of policies purchased. Additional insurance
liabilities are recognized to reflect future losses expected to occur
on certain products. Such additional liabilities were reflected in
the determination of the cost of policies purchased.
(24) A liability is established for various expenses incurred and
liabilities assumed in conjunction with Merger, including: (i)
liabilities assumed related to unfavorable contracts and leases; (ii)
direct acquisition costs; (iii) involuntary termination costs; and
(iv) relocation costs.
(25) Notes payable are adjusted to reflect their estimated fair value.
(26) The prior shareholders' equity of LPG is eliminated in conjunction
with the Merger. Other assets are reduced to eliminate Conseco's
investment in LPG common stock purchased prior to the Merger. Common
stock and additional paid-in capital is increased by the value of
Conseco common stock issued in the Merger.
62
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(c). EXHIBITS.
(c) Exhibits
2.5 Agreement and Plan of Merger dated March 11, 1996*
* Previously filed with Form 8-K dated March 11, 1996.
63
<PAGE>
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.
Date: August 16, 1996
CONSECO, INC.
By: /s/ ROLLIN M. DICK
-----------------------------
Rollin M. Dick
Executive Vice President
and Chief Financial Officer
64
