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: December 23, 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) Transport Holdings Inc. Unaudited Condensed
Consolidated Financial Statements as of September 30, 1996,
and for the nine months ended September 30, 1996 and 1995
Condensed Consolidated Balance Sheets................................................. 5
Condensed Consolidated Statements of Income........................................... 7
Condensed Consolidated Statements of Cash Flows....................................... 8
Condensed Consolidated Statements of Shareholders' Equity............................. 9
Notes to Condensed Consolidated Financial Statements.................................. 10
Transport Holdings Inc. Audited
Consolidated Financial Statements as of December 31,
1995 and 1994, and for each of the three years ended
December 31, 1995
Independent Auditors' Report ........................................................ 13
Consolidated Balance Sheets.......................................................... 14
Consolidated Statements of Income.................................................... 15
Consolidated Statements of Shareholders' Equity...................................... 16
Consolidated Statements of Cash Flows................................................ 17
Notes to Consolidated Financial Statements........................................... 18
(b) Pro Forma Consolidated Financial Information of Conseco, Inc. and Subsidiaries.......... 34
Pro forma Consolidated Statement of Operations for the nine months
ended September 30, 1996 ......................................................... 36
Pro forma Consolidated Statement of Operations for the year ended
December 31, 1995 ................................................................ 37
Pro Forma Consolidated Balance Sheet as of September 30, 1996........................ 38
Notes to Pro Forma Consolidated Financial Statements................................. 40
(c) Exhibits
2.8 Agreement and Plan of Merger dated as of September 25, 1996, by and between Conseco, Inc.
and Transport Holdings Inc.*
2.8.1 First Amendment to Agreement and Plan of Merger dated as of November 7, 1996, by and between
Conseco, Inc. and Transport Holdings Inc.**
* Previously filed with Form 8-K dated September 25, 1996 filed by Conseco, Inc.
** Previously filed as an exhibit to the Registration Statement on Form S-4 (file no. 333-14377)
filed by Conseco, Inc.
</TABLE>
2
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 23, 1996, Conseco, Inc. ("Conseco") completed its merger with
Transport Holdings Inc. ("THI"), in a transaction pursuant to which THI was
merged with and into Conseco, with Conseco being the surviving corporation (the
"Merger"). The Merger was consummated pursuant to an Agreement and Plan of
Merger dated as of September 25, 1996, as amended by the First Amendment to the
Agreement and Plan of Merger, dated as of November 7, 1996. In the Merger, each
outstanding share of THI common stock was exchanged for 1.4 shares of Conseco's
common stock. Conseco issued approximately 2.4 million shares of Conseco common
stock or common stock equivalents with a value of approximately $121.7 million
to acquire THI's common stock. In addition, pursuant to an exchange offer (the
"Exchange Offer"), all of THI's Subordinated Convertible Notes (the "THI
Convertible Notes") were exchanged for shares of Conseco common stock on an
equivalent basis as the shares issued in the Merger plus a cash premium. Such
THI Convertible Notes were converted into 2.1 million shares of Conseco common
stock with a value of approximately $106.2 million. Conseco also paid a premium
of approximately $10 million to the holders of the THI Convertible Notes in
conjunction with the Exchange Offer.
The acquisition of THI will be accounted for under the purchase method of
accounting in the fourth quarter of 1996. Under this method, the cost to acquire
THI 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) Transport Holdings Inc. Unaudited Condensed Consolidated
Financial Statements as of September 30, 1996, and for the
nine months ended September 30, 1996 and 1995.
4
<PAGE>
TRANSPORT HOLDINGS INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands)
September 30, December 31,
1996 1995
Assets (unaudited) (a) <F1>
----------- -----------
<S> <C> <C>
Fixed maturities available for sale, at market
(cost: 1996 - $476,722; 1995 - $482,626) $ 482,993 $ 518,303
Equity securities, at market
(cost: 1996 - $76; 1995 - $1,850) 1,074 3,473
Mortgage loans on real estate 8,335 9,348
Investment in real estate 301 195
Policy loans 16,886 18,487
Short-term investments 33,831 22,952
Other investments 6,212 4,872
----------- -----------
Total investments 549,632 577,630
Cash and cash equivalents 742 2,198
Accrued investment income 5,704 6,258
Premiums due and unpaid 3,339 4,918
Due from reinsurers 328,564 298,867
Due from agents 3,408 5,332
Value of insurance in force 10,778 12,177
Deferred policy acquisition costs 28,392 29,531
Debt issue costs 3,439 3,738
Other assets 7,868 9,839
----------- -----------
Total assets $ 941,866 $ 950,488
=========== ===========
(Continued)
<FN>
<F1>
(a) Condensed from audited financial statements.
</FN>
</TABLE>
5
<PAGE>
TRANSPORT HOLDINGS INC.
Condensed Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
(in thousands)
September 30, December 31,
1996 1995
Liabilities and Stockholders' Equity (unaudited) (a) <F1>
----------- -----------
<S> <C> <C>
Notes payable to banks $ 58,250 $ 60,250
Subordinated convertible notes payable 50,000 50,000
Future policy benefits 344,256 315,253
Unearned premiums 34,682 39,961
Policy and contract claims 241,653 229,179
Other policyholder funds 2,802 3,130
Income taxes payable 17,453 28,074
Accrued expenses and other liabilities 18,551 20,546
----------- -----------
Total liabilities 767,647 746,393
Stockholders' equity
Preferred stock, $0.01 par value per share, 2,000,000
shares authorized; shares issued and outstanding:
91,030 at September 30, 1996, 182,060 at December 31,
1995; redemption value: $25,630 at September 30, 1996,
$46,911 at December 31, 1995 22,758 45,515
Class A common stock, $0.01 par value per share,
8,000,000 shares authorized; shares issued and
outstanding: 1,592,048 at September 30, 1996, 1,590,461
at December 31, 1995 16 16
Class B common stock, $0.01 par value per share,
2,000,000 shares authorized, none issued - - - -
Paid in capital 169,732 169,665
Unrealized appreciation of securities, net 4,725 24,245
Retained (deficit) (23,012) (35,346)
----------- -----------
Total equity 174,219 204,095
----------- -----------
Total liabilities and stockholders' equity $ 941,866 $ 950,488
=========== ===========
<FN>
<F1>
(a) Condensed from audited financial statements.
</FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
6
<PAGE>
TRANSPORT HOLDINGS INC.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net premium income $ 26,829 $ 51,449 $ 82,451 $ 160,067
Investment income, net of related expenses 9,673 13,668 29,552 39,708
Realized investment gains 20 (449) 334 (80)
Other income 794 - - 1,394 - -
----------- ----------- ----------- -----------
Total revenues 37,316 64,668 113,731 199,695
Benefits and expenses:
Incurred claims and other policy benefits, net 17,040 34,762 54,101 108,479
Commissions 5,933 10,573 17,266 33,728
Capitalization of deferred policy acquisition costs (1,098) (2,838) (3,686) (10,495)
Amortization of deferred policy acquisition costs
and value of insurance in force 2,004 6,837 6,224 18,174
Interest expense and amortization
of debt issue costs 2,238 - - 6,795 - -
Expenses of spin-off and related transactions - - 2,209 - - 2,209
Other operating expenses 2,856 5,959 10,810 19,309
----------- ----------- ----------- -----------
Total benefits and expenses 28,973 57,502 91,510 171,404
----------- ----------- ----------- -----------
Income before tax 8,343 7,166 22,221 28,291
Provision for federal income tax 2,920 3,048 7,777 10,133
----------- ----------- ----------- -----------
Net income $ 5,423 $ 4,118 $ 14,444 $ 18,158
=========== =========== =========== ===========
Earnings per share:
Primary $ 2.88 $ 238.20 a <F2> $ 6.73 $ 3,116.72 a <F2>
=========== =========== =========== ===========
Fully diluted $ 1.68 $ 121.89 b <F3> $ 4.06 $ 1,594.82 b <F3>
=========== =========== =========== ===========
<FN>
<F2>
(a) Primary earnings per share was based on average shares outstanding of 17,288
for the three months ended September 30, 1995 and 5,826 for the nine months
then ended. Earnings per share as if the entire 1,590,461 shares outstanding
after the September 29, 1995 distribution had been outstanding for the entire
period would have been $2.59 for the three months ended September 30, 1995 and
$11.42 for the nine months then ended.
<F3>
(b) Fully diluted earnings per share was based on average shares outstanding of
33,786 for the three months ended September 30, 1995 and 11,386 for the nine
months then ended. Earnings per share as if the entire 3,108,266 shares
outstanding on a fully diluted basis after the September 29, 1995 distribution
had been outstanding for the entire period would have been $1.32 for the three
months ended September 30, 1995 and $5.84 for the nine months then ended.
</FN>
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
TRANSPORT HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended
September 30,
1996 1995
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 14,444 $ 18,158
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities (334) 80
Accretion of bond discount or premium (1,562) (1,059)
Amortization debt issue costs 454 - -
Directors fees paid in capital stock 67 - -
Change in assets and liabilities:
Accrued investment income 554 214
Premiums due and unpaid 1,579 1,146
Due from reinsurers (29,697) 12,114
Due from agents 1,924 1,774
Value of insurance in force 1,399 1,847
Deferred policy acquisition costs 1,139 5,831
Other assets 1,972 1,686
Reserves for future policy benefits and claims 35,870 11,778
Income taxes payable (110) (1,849)
Accrued expenses and other liabilities 1,109 (270)
----------- -----------
Net cash provided by operating activities 28,808 51,450
Investing activities:
Sale of fixed maturities 64,251 143,190
Maturity of fixed maturities 5,150 - -
Sale of common stock 2,487 53,170
Sale of preferred stock - - 1,936
Sale of investment in Travelers - - 35,200
Sale of real estate - - 16,585
Sale of mortgage - - 7,000
Purchase of fixed maturities (62,336) (300,359)
Purchase of common stock - - (46,637)
Principal payments on mortgages 1,013 1,508
Principal payments on policy loans 1,601 1,662
Security transactions in course of settlement (3,104) - -
Change in short-term and other invested assets (12,303) 23,652
----------- -----------
Net cash used in investing activities (3,241) (63,093)
Financing activities:
Issuance of long term debt - - 112,000
Debt issue costs - - (3,868)
Dividends paid - - (105,000)
Cost of preferred stock issue - - (466)
Issuance of warrants - - 93
Redemption of preferred stock (24,868) - -
Principal payments on bank debt (2,000) - -
Cost of borrowings capitalized (155) - -
----------- -----------
Net cash used in financing activities (27,023) 2,759
Decrease in cash and cash equivalents (1,456) (8,884)
Cash and cash equivalents at beginning of period 2,198 3,096
----------- -----------
Cash and cash equivalents at end of period $ 742 $ (5,788)
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for taxes $ 7,561 $ 11,982
Interest paid $ 6,696 $ - -
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
8
<PAGE>
TRANSPORT HOLDINGS INC.
Condensed Consolidated Statement of Stockholders' Equity
(unaudited)
(in thousands except share amounts)
<TABLE>
<CAPTION>
Unrealized
appreciation
Preferred Stock Class A Common Stock (depreciation)
Shares Shares Paid in of securities, Retained
Issued Amount Issued Amount Capital net Deficit Total
-------- -------- --------- ------ --------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 182,060 $ 45,515 1,590,461 $ 16 $ 169,665 $ 24,245 $ (35,346) $ 204,095
Net income 14,444 14,444
Issuance of shares to directors 1,587 0 67 67
Redemption of preferred stock (91,030) (22,757) (2,110) (24,867)
Unrealized investment losses,
net of taxes (19,520) (19,520)
-------- -------- --------- ------ --------- -------------- ---------- ----------
Balance, September 30, 1996 91,030 $ 22,758 1,592,048 $ 16 $ 169,732 $ 4,725 $ (23,012) $ 174,219
======== ======== ========= ====== ========= ============== ========== ==========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
9
<PAGE>
TRANSPORT HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Transport Holdings Inc. (the "Company") was incorporated under the laws of the
State of Delaware. The Company is the sole stockholder of Intermediate Holdings
Inc., a Delaware corporation. Intermediate Holdings Inc. is the sole stockholder
of THD Inc., a Delaware corporation organized in 1996 and TLSD Inc., a Delaware
corporation organized in 1995. THD Inc. is the sole shareholder of TLIC Life
Insurance Company, a Texas life insurance company organized in 1995. TLIC Life
Insurance Company is the sole shareholder of Transport Life Insurance Company, a
Texas life insurance company organized in 1958 and in continuous operation since
that time. Transport Life Insurance Company in turn owns all of the common stock
of Continental Life Insurance Company, a Texas insurance company formed and in
continuous operation since 1969, and a wholly owned subsidiary of Transport Life
Insurance Company since 1971. TLIC Life Insurance Company, Transport Life
Insurance Company, and Continental Life Insurance Company are principally
engaged in the supplemental life and health insurance business.
These condensed consolidated financial statements include the accounts of the
Company, Intermediate Holdings Inc., THD Inc., TLSD Inc., TLIC Life Insurance
Company, Transport Life Insurance Company, and Continental Life Insurance
Company, which have been combined for all periods presented. All material
intercompany accounts and transactions have been eliminated. Prior to September
1995, there were no material assets, liabilities, or results of operations for
any of the consolidated companies except Transport Life Insurance Company and
Continental Life Insurance Company.
2. Basis of Presentation
The condensed consolidated financial statements as of and for the three months
and nine months ended September 30, 1996 are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The interim financial statements
reflect all adjustments, consisting only of normal recurring adjustments, that
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods.
10
<PAGE>
These financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the Annual
Report dated March 22, 1996 and furnished to stockholders of the Company. The
results of operations for the three month and nine month periods ended September
30, 1996 should not be considered indicative of the results to be expected for
the entire year.
3. Earnings Per Share
Substantially all of the Company's Class A Common Stock was issued on September
29, 1995. On April 30, 1996, 1,587 shares of Class A Common Stock were issued to
certain of the Company's directors in payment of directors' fees. Primary
earnings per share was based on the weighted average number of Class A shares
outstanding plus the weighted average number of common stock equivalents
outstanding for stock options granted, using the treasury stock method. Fully
diluted earnings per share was based on the number of shares that would be
outstanding if the $50 million of subordinated convertible notes payable were
converted into Class A shares (if such notes were presently convertible into
Class A shares) and assuming the exercise of outstanding stock options using the
treasury stock method. None of the stock options outstanding were exercisable at
September 30, 1996.
On June 28, 1996, the Company redeemed 91,030 shares of preferred stock then
outstanding at a cost of approximately $25 million. Approximately $2 million was
charged to retained deficit for the excess of the redemption price, as
determined pursuant to the preferred stock certificate, over the carrying value
of the shares redeemed. This excess represented cumulative unpaid dividends on
the preferred stock redeemed for the period from issuance (September 29, 1995)
to redemption.
4. Pending Merger with Conseco, Inc.
On September 26, 1996, the Company announced that it had entered into an
agreement to merge with and into Conseco, Inc. of Carmel, Indiana. Under the
terms of the agreement, each share of the Company's common stock would be
exchanged for the number of shares of Conseco, Inc. common stock determined by
dividing $70 by the average trading price of the Conseco stock for the ten
trading days immediately preceding the second trading day prior to closing (such
number to be not more than 1.8301 nor less than 1.4000). The merger is subject
to stockholder and regulatory approvals.
11
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(a) Financial Statement and Exhibit, continued
(a), continued
Transport Holdings Inc. Audited Consolidated Financial
Statements as of December 31, 1995 and 1994, and for each
of the three years ended December 31, 1995.
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Transport Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Transport Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Transport
Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be
Disposed of."
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
Dallas, Texas
February 22, 1996
13
<PAGE>
TRANSPORT HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
(in thousands)
ASSETS
<S> <C> <C>
Fixed maturities available for sale, at market (cost: 1995 --
$482,626; 1994 -- $514,852) ............................................................. $518,303 $479,753
Equity securities, at market (cost: 1995 -- $1,850; 1994 -- $12,234) ....................... 3,473 12,416
Investment in Travelers, at market (cost $22,500) .......................................... -- 35,200
Mortgage loans on real estate .............................................................. 9,348 18,600
Investment in real estate .................................................................. 195 16,483
Policy loans ............................................................................... 18,487 20,223
Short-term investments ..................................................................... 22,952 94,755
Other investments .......................................................................... 4,872 3,942
----- -----
Total investments ....................................................................... 577,630 681,372
Cash and cash equivalents ................................................................. 2,198 3,096
Accrued investment income ................................................................ 6,258 8,358
Premiums due and unpaid .................................................................... 4,918 10,028
Due from reinsurers ........................................................................ 298,867 54,522
Due from agents ............................................................................ 5,332 4,261
Value of insurance in force ................................................................ 12,177 17,347
Deferred policy acquisition costs ........................................................ 29,531 89,455
Debt issue costs ........................................................................... 3,738 --
Other assets ............................................................................... 9,839 16,788
----- ------
Total assets ............................................................................ $950,488 $885,227
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to banks ..................................................................... $ 60,250 $ --
Subordinated convertible notes payable ..................................................... 50,000 --
Future policy benefits ..................................................................... 315,253 271,049
Unearned premiums .......................................................................... 39,961 51,436
Policy and contract claims ................................................................. 229,179 219,494
Other policyholder funds ................................................................... 3,130 2,540
Federal income taxes payable:
Current .................................................................................. 727 4,422
Deferred ................................................................................. 27,347 34,741
Accrued expenses and other liabilities ..................................................... 20,546 12,183
------ ------
Total liabilities ....................................................................... 746,393 595,865
Stockholders' equity
Preferred stock, $0.01 par value per share, 2,000,000 shares authorized, 182,060
shares issued and outstanding at December 31, 1995, redemption value
$46,911 at December 31, 1995........................................................... 45,515 --
Class A common stock, $0.01 par value per share, 8,000,000 shares authorized, 1,590,461 shares
issued and outstanding at December 31, 1995........................................... 16 --
Class B common stock, $0.01 par value per share, 2,000,000 shares authorized,
none issued............................................................................. -- --
Paid in capital............................................................................ 169,665 215,569
Unrealized appreciation (depreciation) of securities, net................................ 24,245 (22,694)
Retained (deficit) earnings................................................................ (35,346) 96,487
------- ------
Total equity .......................................................................... 204,095 289,362
------- -------
Total liabilities and stockholders' equity ............................................. $950,488 $885,227
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
14
<PAGE>
TRANSPORT HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------
(in thousands, except share amounts)
<S> <C> <C> <C>
Revenues:
Premium income ...................................................................... $ 226,006 $ 255,809 $ 274,790
Premiums ceded ...................................................................... (35,844) (28,131) (17,858)
------- ------- -------
Net premium income .................................................................. 190,162 227,678 256,932
Investment income, net of related expenses .......................................... 49,665 46,635 43,974
Other revenue ....................................................................... -- -- 3,301
Realized investment gains (losses) .................................................. 6,758 (3,393) 26,762
----- ------ ------
Total revenues .................................................................... 246,585 270,920 330,969
Benefits and expenses:
Claims and other policy benefits .................................................... 119,698 134,778 179,942
Reinsurance recoveries .............................................................. (16,976) (13,159) (18,288)
------- ------- -------
Net claims and other policy benefits .............................................. 102,722 121,619 161,654
Increase in future policy benefit reserves .......................................... 29,171 25,905 20,396
Commissions ......................................................................... 39,083 52,335 66,440
Capitalization of deferred policy acquisition costs ................................. (11,688) (21,931) (27,939)
Amortization of deferred policy acquisition
costs and value of insurance in force ............................................. 24,472 27,848 26,702
Interest expense and amortization of debt issue costs ............................... 2,340 -- --
Expenses of spin-off and related transactions ....................................... 2,209 -- --
Loss on sale of long term care business ............................................. 68,549 -- --
Other operating expenses ............................................................ 30,892 29,172 33,762
------ ------ ------
Total benefits and expenses ........................................................ 287,750 234,948 281,015
Income (loss) before tax .............................................................. (41,165) 35,972 49,954
Provision for federal income tax:
Current ............................................................................. 18,337 6,858 12,077
Deferred ............................................................................ (32,669) 6,163 5,072
------- ----- -----
(14,332) 13,021 17,149
------- ------ ------
Income (loss) before cumulative effect of change in accounting principle ...... (26,833) 22,951 32,805
Cumulative effect on prior years of a change in
accounting principle, net of taxes ................................................ -- -- (253)
------ ------ ------
Net (loss) income ............................................................. $ (26,833) $ 22,951 $ 32,552
========= ========= =========
Loss per share(a) ............................................................. $ (69.66) (b) (b)
========= ========== ========
<FN>
(a) Loss per share was based on average shares outstanding of 405,241 for the
year ended December 31, 1995. Loss per share as if the entire 1,590,461
shares outstanding after the September 29, 1995 distribution had been
outstanding for the entire period would have been ($17.75).
(b) No per share amounts were applicable to the 1994 and 1993 periods, which
were prior to the distribution of the Company's shares to the public.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
15
<PAGE>
TRANSPORT HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Class A appreciation
Preferred Stock Common Stock (depreciation) Retained
Shares Shares Paid-in of securities, Earnings
Issued Amount Issued Amount Capital net (Deficit) Total
------ ------ ------ ------ ------- --- --------- -----
(in thousands except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 .......... -- $ -- $-- $197,331 $ 2,809 $ 64,884 $ 265,024
Net income ......................... 32,552 32,552
Dividends paid ..................... (20,000) (20,000)
Capital contributions .............. 15,863 15,863
Tax benefit of stock options ....... 411 411
Unrealized investment gains, net of
taxes ............................ 9,218 9,218
------ ------ ------ ------ ------- -------- --------- -----
Balance December 31, 1993 .......... -- -- -- -- 213,605 12,027 77,436 303,068
Net income ......................... 22,951 22,951
Dividends paid ..................... (3,900) (3,900)
Capital contributions .............. 8,255 8,255
Noncash dividend ................... (6,573) (6,573)
Tax benefit of stock options ....... 282 282
Cumulative effect of adoption of
Statement No. 115 at January 1,
1994, net of taxes ............... 16,908 16,908
Unrealized investment losses, net of
taxes ............................ (51,629) (51,629)
------ ------ ------ ------ ------- ---------- --------- --------
Balance December 31, 1994........... -- -- -- 215,569 (22,694) 96,487 289,362
Net loss ........................... (26,833) (26,833)
Dividends paid ..................... (105,000) (105,000)
Issuance of common stock ........... 1,590,461 16 (16) --
Issuance of common stock purchase
warrants ......................... 93 93
Issuance of preferred stock......... 182,060 45,515 (45,515) --
Cost of preferred stock issued .... (466) (466)
Unrealized investment gains, net of
taxes ............................ 46,939 46,939
------ -------- -------- ------ ------- ---------- --------- --------
Balance December 31, 1995 182,060 $45,515 1,590,461 $16 $169,665 $24,245 $ (35,346) $204,095
======= ======= ========= === ======== ======== ========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE>
TRANSPORT HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Operating activities:
Net income ........................................ $ (26,833) $ 22,951 $ 32,552
Adjustments to reconcile net income to
net cash provided by operating activities:
(Gain) loss on sale of securities ............... (6,758) 3,393 (26,762)
Accretion of bond discount or premium ........... (1,598) (928) (4,193)
Amortization debt issue costs ................... 151 -- --
Change in assets and liabilities:
Change in real estate (depreciation) .......... -- 933 556
Accrued investment income ..................... 2,100 (959) (1,791)
Premiums due and unpaid ....................... 5,110 (303) (114)
Due from reinsurers ........................... (244,345) (5,162) 17,451
Due from agents ............................... (1,071) 2,735 734
Value of insurance in force ................... 5,170 5,856 6,220
Deferred policy acquisition costs ........... 59,924 61 (7,457)
Prepaid commissions .......................... 5,376 1,259 1,859
Intercompany receivables....................... -- -- 40,866
Other assets .................................. 1,573 1,383 864
Insurance reserves ............................ 43,004 6,854 39,328
Federal income taxes payable .................. (3,695) 2,521 (4,322)
Deferred income tax expense ................... (32,669) 6,163 5,072
Accrued expenses and other liabilities ..... 8,363 361 (5,774)
--------- ------- ------
Net cash (used in) provided by operating activities (186,198) 47,118 95,089
-------- ------ ------
Investing activities:
Sale of fixed maturities ....................... 430,813 199,933 256,243
Maturity of fixed maturities .................... 6,000 6,884 9,197
Sale of common stock............................ 8,614 85,596 110,680
Sale of preferred stock.......................... 2,258 22,369 13,882
Sale of investment in Travelers................. 35,200 -- --
Sale of real estate.............................. 16,585 -- --
Acquisition of real estate through foreclosure... (195) -- --
Sale of mortgage ................................ 7,000 -- --
Purchase of fixed maturities .................... (396,796) (231,091) (371,603)
Purchase of preferred stock ..................... -- (248) (3,853)
Purchase of common stock ........................ (28) (80,826) (102,708)
Principal payments on mortgages .............. 2,252 4,942 1,831
Principal payments on policy loans ............ 1,736 1,207 786
Change in short-term and other
invested assets 70,873 (49,346) (5,966)
------ ------- ------
Net cash provided by (used in) investing activities 184,312 (40,580) (91,511)
------- ------- -------
Financing activities:
Issuance of long term debt ...................... 112,000 -- --
Principal payments on long term debt ........... (1,750) -- --
Debt issue costs................................. (3,889) -- --
Dividends paid .................................. (105,000) (3,900) (20,000)
Capital contribution ............................ -- 282 16,274
Cost of preferred stock issue ................... (466) -- --
Issuance of warrants ............................ 93 -- --
--------- ------- -------
Net cash provided by (used in)
financing activities .............................. 988 (3,618) (3,726)
------- ------- ------
(Decrease) increase in cash and cash equivalents .. (898) 2,920 (148)
Cash and cash equivalents at beginning of year..... 3,096 176 324
----- ------- -------
Cash and cash equivalents at end of year.......... $2,198 $3,096 $ 176
====== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
17
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(1) Organization
Transport Holdings Inc. ("the Company") was incorporated in 1990 under
the laws of the State of Delaware. In a series of transactions which culminated
on September 29, 1995, the Company became the sole stockholder of Intermediate
Holdings Inc., a Delaware corporation. Intermediate Holdings Inc. is the sole
stockholder of TLIC Life Insurance Company, a Texas life insurance company, and
TLSD Inc., a Delaware corporation, both organized in 1995. TLIC Life Insurance
Company is the sole stockholder of Transport Life Insurance Company, a Texas
life insurance company organized in 1958 and in continuous operation since that
time. Transport Life Insurance Company in turn owns all of the common stock of
Continental Life Insurance Company, a Texas insurance company formed and in
continuous operation since 1969, and a wholly owned subsidiary of Transport Life
Insurance Company since 1971. Transport Life Insurance Company and Continental
Life Insurance Company are principally engaged in the supplemental life and
health insurance business. These products are marketed by two independent
agencies.
On September 29, 1995, all of the outstanding Class A common stock of
the Company was distributed to the stockholders of Travelers Group Inc.
("Travelers"). The Company was recapitalized on September 29, 1995 immediately
prior to the distribution of its shares. The recapitalization involved the
filing of a Restated Certificate of Incorporation which, among other things,
authorized Class A and Class B Common Stock, increased the number of authorized
shares of common stock, and authorized preferred stock. Upon the filing of the
Restated Certificate of Incorporation, all of the outstanding shares of common
stock then held by Travelers were exchanged for 1,590,461 shares of Class A
Common Stock, $0.01 par value. The financial statements of the previously
separate companies for prior periods have been restated on a consolidated basis.
These consolidated financial statements include the accounts of the
Company, Intermediate Holdings Inc., TLIC Life Insurance Company, Transport Life
Insurance Company, and Continental Life Insurance Company, which have been
combined for all periods presented. All material intercompany accounts and
transactions have been eliminated. Prior to 1995, there were no material assets,
liabilities, or results of operations for any of the consolidated companies
except Transport Life Insurance Company and Continental Life Insurance Company.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles prescribed for stock
life insurance companies for all years presented.
(b) Investments
Fixed maturities available for sale are valued at market. These
securities are classified as available for sale based on the possibility they
could be sold prior to maturity. Although no impairments in value have occurred
which would require adjustment to the carrying value of such securities, any
such impairment identified in the future would result in a reduction of the
carrying value and reflection of a corresponding realized capital loss in the
consolidated statement of income. The Company's policy is to recognize such an
impairment when the projected cash flows of these securities have been reduced
on an "other than temporary basis," so that the realizable value is reduced to
an amount less than the carrying value.
Equity securities include common and nonredeemable preferred stocks and
are carried at market value. Unrealized gains and losses on marketable equity
securities and fixed maturities available for sale, net of applicable income
taxes, are reflected as a direct charge or credit to stockholder's equity.
18
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Policy loans are reported at unpaid principal balances. Mortgage loans
are reported at unpaid principal balances, net of any unamortized premium or
discount. Real estate, other than property acquired in foreclosure, is reported
at cost net of depreciation.
Realized gains and losses on sales of investments are included in net
income. The cost of investment securities sold is determined based on the
specific identification method.
(c) Cash
Cash includes cash on deposit with banking institutions.
(d) Deferred Policy Acquisition Costs
Those costs of acquiring new business which vary with and are primarily
related to the production of new business have been deferred to the extent that
such costs are deemed recoverable from future premiums. Such costs include
commissions, certain costs of policy issuance and underwriting and certain
variable agency expenses.
Deferred costs related to life insurance and accident and health
policies are amortized over the premium paying period of the related policies in
proportion to the ratio of annual premium revenues to total anticipated premium
revenues. Such anticipated premium revenues are estimated using the same
assumptions used for computing liabilities for future policy benefits.
(e) Value of Insurance in Force
The value of insurance in force, net of amortization, represents the
actuarially determined present value of anticipated profits to be realized from
life and accident and health business in force at December 31, 1988 when
Transport Life Insurance Company was acquired in a purchase transaction, using
the same assumptions that were used for computing the related liabilities on the
date of acquisition. The value of insurance in force is amortized over the
estimated premium paying periods in relation to anticipated premiums.
Accretion of interest on value of insurance in force is calculated
based on the rates of interest used in setting the related policy reserves.
(f) Future Policy Benefits
Liabilities for future benefits on life and accident and health
policies are established in an amount adequate to meet the estimated future
obligations on policies in force. Liabilities for future policy benefits for
accident and health and other long-term life insurance policies have been
computed based on expected investment yields, morbidity, mortality, withdrawal
rates and other assumptions. These assumptions include a margin for adverse
deviation which varies with the characteristics of the plan of insurance, year
of issue, age of insured and other appropriate factors. Interest rates average
9% for life policies and 8% for accident and health policies. The morbidity,
mortality and withdrawal assumptions are based on the Company's experience as
well as industry experience and standards.
The establishment of liabilities for future policy benefits is
inherently based on estimates. Should actual future experience deviate
substantially from the Company's expectations, the liability for future policy
benefits may require adjustment in the future with respect to policies presently
in force. Of all of the Company's cancer insurance policies presently in force,
approximately 27% provide for radiation and chemotherapy benefits which are not
limited in amount. These benefits have been the subject of substantial inflation
over the past several years. The Company has applied for rate increases with
respect to these polices with the various state departments of insurance where
the Company does business. Rate increases were implemented in each of the last
three years. The Company expects to apply for future rate increases for these
policies as well. There can be
19
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
no assurance that future rate increases will be approved, or, if approved, will
be in the amounts requested. An inability to obtain future rate increases could
have a material adverse effect on the Company's financial position and results
of operations.
(g) Policy Claims and Benefits
A liability for unpaid claim costs, including an estimate for incurred
but not reported claims, is accrued when insured events occur. These estimates
are determined using case basis estimates and lag studies of past experience and
are reviewed regularly. Changes in estimates resulting from the review process
and differences between estimates and actual payments are recognized in income
in the period in which the estimates are changed or payments are made.
The nature of the Company's business is such that the time period over
which an individual claim is settled can range from a few months to ten or more
years. Because of the uncertainties surrounding the ultimate amount of claim
costs with respect to any particular case, claim liabilities may require
adjustment in the future with respect to claims which have been incurred as of
the date of these financial statements.
(h) Reinsurance Arrangements
The Company's reinsurance activities relate to both ordinary life and
accident and health reinsurance. The Company cedes insurance in order to limit
losses, minimize exposure on large risks, and effect business sharing
arrangements. Reinsurance is accomplished primarily through coinsurance and
yearly renewable term.
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of benefits paid
by ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company currently follows the policy of
reinsuring that portion of the risk in excess of $100,000 on any single life for
most life insurance plans. The Company also reinsures a portion of its accident
and health business.
In December 1995, the Company sold its long term care insurance
business. This transaction was effected by a reinsurance arrangement whereby the
Company ceded all of its retained long-term care business in force to the buyer.
(i) Federal Income Taxes
For the three months ended December 31, 1995, the Company will file two
consolidated income tax returns, one which includes Transport Holdings Inc. and
Intermediate Holdings Inc. and another which includes the life insurance
subsidiaries. For the nine months ended September 30, 1995 and the year 1994,
Travelers Insurance Company, an indirect wholly owned subsidiary of Travelers,
was the parent of the consolidated federal income tax return group which
included the Company. For 1993, the Company's operations were included in the
consolidated federal income tax return of Travelers Insurance Holdings Inc., an
indirect wholly owned subsidiary of Travelers.
Income taxes are provided based on taxes incurred for the three months
ended December 31, 1995. For prior periods, taxes were provided based on tax
allocation agreements which included the Company and generally represent those
taxes that would have been incurred if the Company had been filing its own
separate tax returns.
Income taxes have been provided in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
income taxes result from temporary differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Income taxes are not provided on the Company's retained earnings
designated as "policyholders' surplus" because such taxes will become payable
only to the extent such retained earnings are distributed as a dividend
20
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
or exceed limits prescribed by federal law. Distributions are not contemplated
from the Company's policyholders' surplus which aggregated approximately
$2,144,000 at December 31, 1995.
(j) Recognition of Revenues and Related Expenses
Premiums are recognized as revenue over the premium paying periods of
the policies. Benefits and expenses are associated with earned premiums so that
profits are recognized over the life of the related contracts. This association
is accomplished through the provision for future policy benefits and the
amortization of deferred policy acquisition costs.
(k) Use of 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 and
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 these estimates.
(l) Accounting Pronouncements
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses accounting and reporting for investments in
equity securities that have a readily determinable fair value and for all debt
securities. Those investments are classified in one of three categories. Debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as "held to maturity" and are reported at amortized
cost. Securities that are bought and held principally for the purpose of selling
them in the near term are classified as "trading securities" and are reported at
fair value, with unrealized gains and losses included in earnings. Securities
that are neither to be held to maturity nor to be sold in the near term are
classified as "available for sale" and are reported at fair value, with
unrealized gains and losses included as a component of stockholders' equity, net
of tax. The impact on consolidated stockholders' equity due to implementation of
this Statement was an increase of approximately $16,908,000 relating to
unrealized gains on the available for sale portfolio, net of deferred taxes.
In October 1994, the FASB issued Statement 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
Statement 119 requires disclosures about amounts, nature, and terms of
derivative financial instruments not subject to the reporting provisions of
Statement 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk." The disclosure provisions of Statement 119 require all entities to
distinguish between financial instruments held or issued for trading purposes
and financial instruments held or issued for purposes other than trading. The
Company does not utilize derivative instruments in its business activities and
has applied the reporting provisions of Statement 119 in these financial
statements.
In March 1995, the FASB issued Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement 121 established accounting standards for the recognition and
measurement of impairment on long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain intangibles to be disposed of. This statement does
not apply to long-lived assets such as deferred policy acquisition costs and
deferred tax assets. The Company adopted Statement 121 in the fourth quarter of
1995, the adoption of which did not have a material impact on the financial
statements.
21
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(3) Investments
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to investment income using the effective
interest method. Dividends and interest income are recognized when earned.
The amortized cost, unrealized gains and losses, and estimated market
values of investments in fixed maturity securities are as follows (in
thousands):
<TABLE>
<CAPTION>
At December 31, 1995
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and agencies ........................................ $138,066 $16,038 $-- $154,104
States, municipalities and political subdivisions ................... 18,114 966 -- 19,080
Corporate securities ................................................ 111,014 8,059 -- 119,073
Mortgage-backed securities .......................................... 191,114 9,187 (72) 200,229
Other debt securities ............................................... 24,318 1,571 (72) 25,817
------ ----- ------ -------
$482,626 $35,821 $(144) $518,303
======== ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and agencies .................................... $166,983 $ 373 $(14,509) $152,847
States, municipalities and political subdivisions ............... 7,882 2,362 (1,159) 9,085
Corporate securities ............................................ 112,530 1,224 (5,219) 108,535
Mortgage-backed securities ...................................... 186,377 1,094 (14,010) 173,461
Other debt securities ........................................... 41,080 18 (5,273) 35,825
------ ------ ------- --------
$514,852 $5,071 $(40,170) $479,753
======== ====== ======== ========
</TABLE>
The amortized cost and estimated market value of fixed maturities 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.
Fixed maturities available for sale (in thousands):
Amortized Fair
cost value
---- -----
Due in one year or less .......................... $ 5,144 $ 5,196
Due after one year through five years .......... 49,245 52,337
Due after five years through ten years .......... 124,540 131,988
Due after ten years .............................. 112,583 128,553
Mortgage-backed securities ....................... 191,114 200,229
------- -------
$482,626 $518,303
======== ========
There were no investments in any entity in excess of 10% of
stockholder's equity at December 31, 1995 and 1994, other than investments
issued or guaranteed by the U.S. government. Publicly traded fixed maturity
securities are valued based on quoted market prices. Private placement
securities are valued based on the credit quality and duration of marketable
securities deemed comparable by the Company, which may be of another issuer.
22
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Investment in real estate at December 31, 1995 consists of a shopping
center in Houston, Texas acquired by foreclosure. Investment in real estate at
December 31, 1994 consisted of an investment in land and commercial improvements
located in Minnesota with a net book value of $13,841,000 and properties in
Texas acquired via foreclosure with a net book value of $2,642,000. These
properties were sold in September 1995 to subsidiaries of Travelers in
connection with the distribution of the Company's stock.
Major categories of net investment income consist of the
following (in thousands):
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
Fixed maturity securities ......... $ 40,621 $ 35,899 $ 29,955
Policy loans ...................... 1,062 1,251 1,296
Mortgage loans .................... 1,668 2,000 2,624
Short-term investments ............ 3,934 3,104 2,490
Other ............................. 3,061 4,964 8,130
----- ----- -----
Investment revenue ................ 50,346 47,218 44,495
Investment expense ................ (681) (583) (521)
------- ------- -------
Net investment income ............. $ 49,665 $ 46,635 $ 43,974
======== ======== ========
Proceeds from sales of bonds during 1995 and 1994 were $430,813,000 and
$199,933,000, respectively. Gross realized gains and losses on such sales were
$9,735,000 and $3,916,000, respectively, for the year ended December 31, 1995
and $2,022,000 and $6,290,000, respectively, for the year ended December 31,
1994.
Net unrealized gains (losses) included in stockholders' equity at
December 31 were as follows (in thousands):
1995 1994
---- ----
Fixed maturities available for sale .................... $ 35,677 $(35,100)
Equity securities ...................................... 1,623 186
Provision for deferred income tax (expense) benefit .... (13,055) 12,220
------- ------
Net unrealized gains (losses) .......................... $ 24,245 $(22,694)
======== ========
Net realized gains (losses) were as follows (in thousands):
1995 1994 1993
---- ---- ----
Fixed maturities ............... $ 5,819 $ (4,268) $21,977
Equity securities .............. 512 815 4,754
Real estate .................... (69) -- --
Other .......................... 495 60 31
------- -------- -------
$ 6,757 $ (3,393) $26,762
======= ======== =======
Securities with an amortized cost of approximately $7,518,000 and
$7,503,000 at December 31, 1995 and 1994, respectively, were on deposit with
various state insurance departments to comply with applicable insurance laws.
In April 1994, the Company exchanged investment securities with a cost
of approximately $171,263,000 and a market value of approximately $167,114,000
with a subsidiary of Travelers for an equal amount, at market value, of
securities and cash. The transaction resulted in a loss of $2,697,000 net of tax
benefits of $1,452,000.
23
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(4) Long Term Borrowings
On September 29, 1995, the Company borrowed $62 million from a group of
banks and issued $50 million in subordinated convertible notes ($42 million of
Series A notes and $8 million of Series B notes).
The bank loans bear interest at a floating rate based, at the Company's
option, on a Eurodollar rate plus 1.25% or a rate which approximates the Chase
Manhattan Bank's prime rate plus 0.25%. The weighted average interest rate in
effect for the three months ended December 31, 1995 was 7.185%. Interest is
payable quarterly. The bank loans mature in September 2001, and call for
semi-annual principal payments. Payments aggregating $4.0 million are due in
1996; $6.75 million is due in 1997; $12.0 million is due in 1998; $14.0 million
is due in 1999; $15 million is due in 2000; and $8.5 million is due on maturity.
The subordinated convertible notes bear interest at 8.5% payable
semi-annually and mature in September 2005. No principal payments are required
until maturity. The notes become convertible into Class B Common stock in
September 1997 and become convertible into Class A Common stock in September
2000 (earlier under certain circumstances). The Series A notes become
convertible into 1,335,987 shares of common stock and the Series B notes become
convertible into 181,818 shares of common stock.
Interest expense on the bank loans is subject to fluctuation with
changes in prevailing market rates. The Company has the option to fix rates of
interest for periods of up to six months.
Cash payments for interest expense were $1,126,000 in 1995.
(5) Common Stock
Class A Common Stock and Class B Common Stock are identical except that
holders of Class A Common Stock are entitled to one vote for each share held and
holders of Class B Common Stock would be entitled to approximately 0.118 votes
per share held. There is presently no Class B Common Stock outstanding. If
issued, Class B Common Stock would become convertible into Class A Common Stock
in September 2000 (earlier in certain circumstances).
The terms of the bank debt and the subordinated convertible notes
restrict the payment of dividends on the common stock. Furthermore, the terms of
the preferred stock prohibit the payment of dividends on common stock except for
certain limited exceptions.
The Company has common stock purchase warrants outstanding at December
31, 1995 entitling the holders to purchase 250,000 shares of Class A common
stock for $55 per share. The warrants are held by trusts for the benefit of
family members of two of the Company's executives. The holders of the warrants
have the right to require the Company to register, at the Company's expense,
stock received from exercise of the warrants.
(6) Redeemable Preferred Stock
The Company's preferred stock has a redemption value per share of
$257.67 at December 31, 1995. Dividends, at 12% per year, are cumulative and, if
not declared and paid, are added to the redemption value quarterly. No dividends
are required to be paid until 2003. At December 31, 1995, the entire preferred
stock issue is held by Travelers. The preferred stock is redeemable at the
option of the Company at the redemption value plus accrued dividends. Should the
Company elect to redeem the preferred stock before September 1998, an additional
redemption premium would be required if the preferred stock were held by a party
other than Travelers. The Company must redeem the preferred stock in September
2006. The $1,396,000 aggregate excess of redemption value over carrying amount
at December 31, 1995 represents undeclared cumulative dividends in arrears,
which will be charged to retained earnings when and if declared.
At the option of the Company, after September 1997, the preferred stock
may be exchanged in whole, but not in part, for debt securities having a face
amount equal to the liquidation value of the preferred stock at the
24
<PAGE>
TRANSPORT HOL6ES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
date of the exchange and having economic terms substantially similar to the
preferred stock. Holders of the preferred stock or any debt securities for which
it may be exchanged have the right to require the Company to register these
securities at the Company's expense.
(7) Sale of Long Term Care Business
In December 1995, the Company completed a sale of its long term care
insurance business. The transaction was structured as a reinsurance arrangement
whereby the Company transferred approximately $249,970,000 in cash and
marketable securities to the buyer, who assumed all of the Company's liabilities
for the business on a coinsurance basis. Net liabilities for the sold business
were approximately $182,771,000 and costs associated with the sale were
approximately $1,350,000, resulting in a pre-tax loss of approximately
$68,549,000 on the sale.
In addition to the loss on the sale, $2,650,000 for costs of exiting
the long term care business was charged to earnings in 1995. These costs
included severance benefits for terminated employees and remaining contractual
payments on vacated office space.
The long term care business represented a substantial portion of the
Company's premium income and policies in force. There can be no assurance that
the Company will be able to eliminate all or substantially all of the expenses
which were associated with the marketing and administration of this block of
business.
(8) Expenses of Spin-off and Related Transactions
Results of operations for 1995 reflect a charge of $2,209,000 before
taxes for expenses associated with the distribution of the Company's shares and
the related transactions. In addition, $3,900,000 of costs associated with long
term borrowings were capitalized and are being amortized as a charge to income
over the life of the associated borrowings, using the effective interest method.
Expenses of $466,000 were charged to paid in capital in connection with the
issuance of preferred stock.
(9) Earnings Per Share
All of the Company's 1,590,461 outstanding shares of Class A Common
Stock were issued on September 29, 1995, and were outstanding for 93 days during
1995. Loss per share was based on the number of Class A shares outstanding.
Fully diluted loss per share is not presented because such a computation would
have the effect of decreasing the loss per share amount. The Company's
subordinated convertible notes become convertible into 1,517,806 shares of Class
B Common stock in September 1996 and into the same number of Class A Common
shares in 2000 (earlier under certain circumstances). The Company also has
outstanding 192,000 stock options granted during the fourth quarter of 1995, the
assumed exercise of which would increase the number of common shares outstanding
by 2,942 shares, using the treasury stock method.
(10) Transactions with Affiliates
In April 1994, the Company's investment in Travelers common stock with
a cost of $22,500,000 was exchanged for a Travelers preferred stock issue with a
market value of $35,200,000. The exchange resulted in an increase in paid-in
capital of $8,255,000 net of a deferred tax liability of $4,445,000. The
preferred stock was sold to Travelers in September 1995 in connection with the
distribution of the Company's stock. No gain or loss resulted from the sale.
During 1993, the Company terminated a reinsurance treaty with a
subsidiary of Travelers which resulted in a capital contribution of $15,863,000.
Effective January 1, 1994, the Company reinsured its credit insurance block of
business to a subsidiary of Travelers, resulting in a charge to paid-in capital
of $6,573,000.
25
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company has an investment advisory agreement with Associated
Madison Companies, Inc. (AMAD), a subsidiary of Travelers. AMAD provides, on a
fee basis to the Company, certain custodial and advisory services, including but
not limited to the possession and trading of securities, the recommendation of
investments and, subject to the Company's investment objectives, restrictions
and limitations, the execution and performance of the Company's investment
program. In 1995, 1994 and 1993, the Company paid fees to AMAD of approximately
$681,000, $583,000 and $521,000, respectively, under the terms of the investment
advisory agreement.
Until September 29, 1995, the Company had a service agreement with
Resource Deployment, Inc. (RDI), a wholly owned subsidiary of Travelers, under
which RDI provided certain management services to the Company. The Company paid
fees to RDI of approximately $1,350,000 for the nine months ended September 30,
1995, $1,800,000 in 1994 and none in 1993. After September 29, 1995, certain RDI
employees became employees of the Company.
(11) Reinsurance
Reinsurance contracts do not relieve the Company from its direct
obligations to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company; consequently, allowances are established
for any amounts determined to be uncollectible. At December 31, 1995, 1994 and
1993, no allowances were necessary. The Company evaluates the financial
condition of its reinsurers periodically.
Summarized financial information for the credit block of business
reinsured effective January 1, 1994 is as follows for 1993 (in thousands):
Premiums earned ......................................... $ 11,964
Investment income ....................................... 1,769
Other income ............................................ 3,301
-----
17,034
Benefits and expenses ................................... (17,139)
-------
Pretax operating loss ................................... $ (105)
========
Life insurance in force and related reinsurance amounts at December 31
are summarized as follows (in millions):
1995 1994 1993
---- ---- ----
Direct life insurance in force ............... $ 846 $ 1,234 $ 2,451
Reinsurance risk ceded to other companies .... (620) (985) (1,959)
---- ---- ------
Net life insurance in force .................. $ 226 $ 249 $ 492
===== ======= =======
Amounts recoverable from reinsurers at December 31 are summarized as
follows (in thousands):
1995 1994
---- ----
Future policy benefit reserves ceded .............. $159,006 $17,071
Unearned premiums ceded ........................... 34,064 19,436
Policy and contract claims ceded .................. 105,797 18,015
------- ------
Total amounts due from reinsurers ................. $298,867 $54,522
======== =======
Of the balances due from reinsurers at December 31, 1995, 86% of future
policy benefit reserves ceded, 69% of unearned premium reserves ceded, and 87%
of claim reserves ceded were due from a single reinsurer in
26
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
connection with the sale of the long term care business. The aggregate amount
due from this reinsurer was approximately $253,379,000 and was secured by assets
(generally marketable securities) held in trust at a commercial bank. The trust
fund balance was approximately $299,888,000 at December 31, 1995.
Of the balances due from reinsurers at December 31, 1994, all of
unearned premium reserves ceded and 52% of claim reserves ceded were due from a
single reinsurer.
(12) Policy and Contract Claims
Activity in the liability for policy and contract claims is summarized
as follows (in thousands):
1995 1994 1993
---- ---- ----
Beginning of year balance ............ $ 219,494 $ 215,737 $ 183,625
Less: reinsurance recoverables ....... (18,015) (13,776) (9,452)
------- ------- ------
Net balance beginning of year ........ 201,479 201,961 174,173
Incurred related to:
Current year ......................... 121,847 143,888 182,329
Prior years .......................... (19,125) (22,269) (20,675)
------- ------- -------
Net incurred ......................... 102,722 121,619 161,654
Paid related to:
Current year ......................... 24,873 44,592 57,779
Prior years .......................... 67,774 77,509 76,087
------ ------ ------
Total paid ........................... 92,647 122,101 133,866
Released in connection with
sale of long term carebusiness ...... 88,172 -- --
Net balance end of year .............. 123,382 201,479 201,961
Plus: reinsurance recoverables ....... 105,797 18,015 13,776
------- ------ ------
End of year balance .................. $ 229,179 $ 219,494 $ 215,737
========= ========= =========
The development of prior year claim reserves in all three years
reflects normal changes in actuarial estimates. Both paid and incurred claims
decreased from 1994 to 1995 because of the run-off of discontinued lines and the
sale of the long term care business.
(13) Deferred Policy Acquisition Costs
The following reflects the amounts of policy acquisition costs deferred
and amortized (in thousands):
1995 1994 1993
---- ---- ----
Deferred acquisition cost:
Beginning of year .................... $ 89,455 $ 89,516 $ 82,059
Capitalized .......................... 11,688 21,931 27,939
Amortized ............................ (19,300) (21,992) (20,482)
Extinguished in connection with
sale of long term care business ..... (52,312) -- --
------- ------ --------
End of year .......................... $ 29,531 $ 89,455 $ 89,516
======== ======== ========
27
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(14) Income Taxes
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% in 1995, 1994 and 1993 to pretax income as a
result of the following (in thousands):
1995 1994 1993
---- ---- ----
Income tax expense computed
at federal statutory rate .......... $(14,407) $ 12,590 $ 17,484
Increase (decrease) in income
taxes resulting from:
Tax exempt interest .................. -- (551) (1,079)
Dividends received deduction ......... (585) (685) (1,050)
Increase in tax rate(1%) ............. -- -- 1,790
Expenses of spin-off ................. 660 -- --
Other, net ........................... -- -- 4
Increase in valuation allowance
on deferred tax asset .............. -- 1,667 --
------- -------- --------
Total tax expense .................... $(14,332) $ 13,021 $ 17,149
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994 are presented below (in thousands):
1995 1994
---- ----
Deferred tax assets:
Claim settlements ......................... $ 1,167 $ 2,333
Investments ............................... 489 4,010
Accrued expenses .......................... 2,843 1,236
Deferred acquisition costs
and value of insurance in force .......... 981 --
Other, net ................................ 255 1,925
-------- --------
5,735 9,504
Less valuation allowance .................. -- (1,667)
-------- --------
$ 5,735 7,837
-------- --------
Deferred liabilities:
Deferred acquisition costs and
value of insurance in force ......... -- (18,201)
Investments ............................... (13,711) --
Policy reserves .......................... (16,941) (19,918)
Value of insurance licenses ............... (1,895) (1,947)
Other, net ................................ (535) (2,512)
-------- --------
(33,082) (42,578)
-------- --------
Net deferred liability .................... $(27,347) $(34,741)
======== ========
At December 31, 1995, the Company's life insurance tax filing group had
a net operating loss carryforward of approximately $1,183,000 and the Company's
non-life tax filing group had a net operating loss carryforward of approximately
$151,000. The Company had no tax credit carryforwards. During 1995, 1994 and
1993, the Company made approximately $22,032,000, $4,054,000 and $24,576,000 in
income tax payments, respectively.
(15) Employee Benefit Plans
Effective October 1, 1995, the Company sponsored a defined contribution
pension plan covering the majority of its employees. Employees who elect may
defer a portion of their compensation in a savings plan
28
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
governed by Internal Revenue Code Section 401(k). The Company matches part of
such employees' contributions. In addition, the Company may contribute an
additional amount which is allocated to the accounts of all eligible employees
(whether or not they participate in the savings plan) based on the employees'
age. Pension costs associated with the plan were $124,000 in 1995. Prior to
September 29, 1995, the Company participated in a plan sponsored by Travelers.
Pension costs allocated to the Company pursuant to the Travelers plan were
$220,000, $243,000 and $237,000 in 1995, 1994 and 1993, respectively.
Effective January 1, 1993, the Company implemented Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits." Statement 112 establishes accounting standards for
employers who provide benefits to former or inactive employees after employment,
but before retirement. These benefits include, but are not limited to, salary
continuation, supplemental unemployment, severance, disability-related
(including workers' compensation), job training and counseling, and continuation
of benefits such as health care and life insurance coverage. The statement
requires employers to recognize the cost of the obligation to provide these
benefits on an accrual basis, and employers must implement Statement 112 by
recognizing a cumulative effect of a change in accounting principle. This
resulted in a noncash after-tax charge to net income of $253,000 ($389,000
pre-tax) in 1993. The Company continues to fund benefits on a "pay-as- you-go"
basis. Payments and annual expense for providing postemployment benefits in 1995
and 1994 were not material.
(16) Stock Option Plan
The Company maintains a stock option plan pursuant to which 425,000
shares of common stock are reserved for issuance. The plan permits the Board of
Directors to grant incentive stock options and nonqualified stock options. The
following incentive stock options had been granted as of December 31, 1995:
Option Number
Grant Date Price of Shares
- ---------- ----- ---------
October 31, 1995 .......................... $ 39.45 62,657
December 15, 1995 ......................... $ 39.83 129,343
--------
192,000
========
None of the granted options were exercisable at December 31, 1995, and
no shares were issued in 1995 pursuant to the stock option plan. The options
vest over a five year period at 20% per year on the anniversary date of the
grant.
The plan also permits the Board of Directors to grant stock awards of
restricted stock. Such awards have conditions and restrictions which are
designed to encourage recipients to remain in the Company's service and retain
stock ownership in the Company. There were no restricted shares issued under the
plan in 1995.
(17) Fair Value of Invested Assets
The following information relates to estimated fair values of the
Company's financial instruments as of December 31, 1995 and 1994.
Fair values for bonds and common and preferred stocks were obtained
from independent brokers and published valuation guides, as disclosed in Note 3.
Mortgage and other loans are secured principally by commercial real
estate. Weighted average interest rates for these loan portfolios as of December
31, 1995 were approximately 10% with maturities ranging from 1996 to 2004.
Management believes that reported amounts approximate fair value.
29
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Real estate acquired by foreclosure is valued at the lower of estimated
market value at date of foreclosure or principal balance of the loan foreclosed.
Policy loans have a weighted average interest rate of 6% as of December
31, 1995 and 1994 and have no specified maturity dates. The aggregate market
value of policy loans approximates the carrying value reflected on the
consolidated balance sheet. These loans typically carry an interest rate that is
tied to the crediting rate applied to the related policy and contract reserves.
Policy loans are an integral part of the life insurance policies which the
Company has in force and cannot be valued separately.
Carrying values of amounts due from reinsurers and agents, other
receivables and certain other liabilities disclosed on the face of the balance
sheets approximate fair value due to the relatively short period to maturity of
the instruments.
For cash, cash equivalents and short-term investments, the carrying
amounts approximate fair value because of the short maturity of these
instruments.
(18) Contingent Liabilities and Commitments
(a) Litigation
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company and other monetary damages. In the opinion of the Company's management,
the ultimate liability, if any, resulting from disposition of these claims will
not have a material adverse effect on the Company's results of operations,
financial position, or liquidity.
In recent years, the Company's major/catastrophic hospital insurance
business has been the subject of claims by both private litigants and state
insurance regulators. These claims, certain of which have resulted in adverse
determinations against the Company, have generally involved allegations of
misrepresentations on the part of independent agents selling certain insurance
products of Transport Life Insurance Company (such agents were subsequently
terminated), and plaintiffs have often sought (and in at least two instances
have been awarded) punitive damages. Although such claims have declined in
number in the last three years, there can be no assurance that claims based upon
similar allegations will not be brought in the future by other persons or other
regulatory authorities. Any such existing claims, or any other types of claims
alleged in the future involving the marketing, sale or other aspects of the
Company's insurance products, which could include claims for actual and punitive
damages, or any regulatory actions which could impose fines or regulatory
restrictions on operations, could have a material adverse effect on the Company.
(b) Leases
The Company leases its home office building, data processing equipment
and other equipment. Future minimum lease commitments for noncancelable
operating leases and sublease commitments which will partially offset these
commitments are shown as follows (in thousands):
Net
Year Ended December 31, Leases Sub-leases Commitment
----------------------- ------ ---------- ----------
1996 $1,090 (598) $492
1997 1,028 (576) 452
1998 1,028 1,028
1999 573 573
2000 28 28
Rent expense, net of sublease income, incurred under such lease
agreements aggregated approximately $502,000, $645,000, and $1,236,000 in 1995,
1994 and 1993, respectively.
30
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(c) Reinsurance Dispute
In March 1995, the Company became involved in a dispute with several
foreign reinsurers concerning the underwriting of certain life policies written
from 1974 to 1985. In the opinion of the Company's management, the ultimate
liability, if any, resulting from disposition of this matter will not have a
material adverse effect on the Company's results of operations, financial
position, or liquidity.
(d) Declines in New Sales
The Company has experienced substantial declines in new sales over the
past several years, and has ceased marketing long term care insurance, which
accounted for a substantial part of the Company's premium income. Should the
decline in new sales continue, the Company's future earnings could be materially
adversely affected.
(19) Stockholders' Equity and Restrictions
The amount of statutory capital and surplus of the Company's insurance
subsidiaries was $150,056,249, $110,065,457 and $94,532,010 at December 31,
1995, 1994 and 1993, respectively. Statutes in Texas restrict the payment of
dividends by insurance companies to the available surplus funds derived from
their net profits. The maximum amount of cash dividends that may be declared
without regulatory approval in any twelve-month period is the greater of ten
percent (10%) of the insurer's statutory surplus, as shown by its last annual
statement on file with the Texas Department of Insurance, or one hundred percent
(100%) of statutory net gain from operations for the preceding year. The maximum
amount which may be paid by TLIC Life Insurance Company in 1996 without
regulatory approval is approximately $15,000,000.
TLIC Life Insurance Company, Transport Life Insurance Company and
Continental Life Insurance Company have calculated their risk based capital
("RBC") in accordance with the National Association of Insurance Commissioners'
Model Rule and the RBC rules as adopted by their state of domicile, Texas. The
RBC as calculated exceeded levels requiring company or regulatory action.
(20) Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1995
---------------------------------------------------------------------------
First Second Third Fourth Total
----- ------ ----- ------ -----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net premium income ................................ $ 55,815 $ 52,803 $ 51,449 $ 30,095 $ 190,162
Net investment income ............................. 12,637 13,403 13,668 9,957 49,665
Realized gains (losses) ........................... 479 (110) (449) 6,838 6,758
Loss on sale of long term care business ........... -- -- -- (68,549) (68,549)
Other benefits and expenses ....................... (58,095) (55,807) (57,502) (47,797) (219,201)
Provision for income taxes ........................ (3,638) (3,447) (3,048) 24,465 14,332
-------- -------- -------- -------- ---------
Net income ........................................ $ 7,198 $ 6,842 $ 4,118 $(44,991) $ (26,833)
======== ======== ======== ======== =========
Earnings (loss) per share ......................... (a) (a) $ 238.20 $ (29.15) $(69.66)(b)
(a) No per share amounts are applicable to the first and second
quarters, which were before the distribution of the Company's stock to the
public.
(b) Amounts shown are based on actual shares outstanding. Loss per
share as if the Company's stock which was distributed on September 29, 1995 had
been outstanding for the entire year would have been $(17.75).
</TABLE>
31
<PAGE>
TRANSPORT HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1994
---------------------------------------------------------------------------
First Second Third Fourth Total
----- ------ ----- ------ -----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net premium income ....................... $ 59,795 $ 57,606 $ 55,561 $ 54,716 $ 227,678
Net investment income .................... 10,731 11,133 12,605 12,166 46,635
Realized gains (losses) .................. 817 (3,565) (506) (139) (3,393)
Other benefits and expenses .............. (61,121) (59,353) (58,089) (56,385) (234,948)
Provision for income taxes ............... (2,848) (3,288) (3,394) (3,491) (13,021)
------ ------ ------ ------ -------
Net income ............................... $ 7,374 $ 2,533 $ 6,177 $ 6,867 $ 22,951
======== ======== ======== ======== =========
No per share amounts are applicable to the 1994 periods, which were prior
to distribution of the Company's stock to the public.
</TABLE>
32
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
_________________
ITEM 7(b). Financial Statements and Exhibits, continued
(b) Pro forma financial statements of Conseco, Inc. and
subsidiaries.
33
<PAGE>
CONSECO, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statement of operations of Conseco,
Inc. ("Conseco") for the nine months ended September 30, 1996, and for the year
ended December 31, 1995, presents the consolidated operating results for Conseco
as if the merger (the "Merger") of Transport Holdings Inc. ("THI") with and into
Conseco, 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 issuance of $275.0 million of Trust
Originated Preferred Securities ("TOPrS") having a distribution rate of 9.16
percent (the "TOPrS Offering") completed November 19, 1996; (ii) the issuance of
$325.0 million of Capital Trust Pass-through Securities ("TruPS") having a
distribution rate of 8.70 percent (the "TruPS Offering") completed November 27,
1996; (iii) the merger (the "ATC Merger") of American Travellers Corporation
("ATC") with and into Conseco completed December 17, 1996; (iv) the call for
redemption of Conseco's Series D Convertible Preferred Stock (the "Series D
Call") completed on September 26, 1996; (v) the acquisition of all of the
outstanding common stock of American Life Holdings, Inc. ("ALH"), not previously
owned by Conseco, and related transactions (the "ALH Transaction") completed on
September 30, 1996; (vi) the acquisition of Life Partners Group, Inc. (the "LPG
Merger") completed effective June 30, 1996; (vii) 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 borrowings
under Conseco's existing $250.0 million revolving credit agreement) completed
August 31, 1995; (viii) the increase of Conseco's ownership in Bankers Life
Holding Corporation ("BLH") to 90.4 percent, as a result of purchases of common
shares of BLH by Conseco and BLH during 1995 and the first three months of 1996;
(ix) the issuance of 4.37 million shares of Preferred Redeemable Increased
Dividend Equity Securities Convertible Preferred Stock ("PRIDES") of Conseco in
January 1996; (x) the BLH tender offer for and repurchase of its 13 percent
senior subordinated notes due 2002 and related financing transactions completed
in March 1996 (the "BLH Tender Offer"); and (xi) the debt restructuring of ALH
in the fourth quarter of 1995. Such pro forma adjustments are set forth in: (i)
Conseco's Current Report on Form 8-K dated December 17, 1996; (ii) Exhibit 99.2
included in Conseco's Current Report on Form 8-K dated September 25, 1996; (iii)
Conseco's Current Report on Form 8-K dated August 2, 1996; and (iv) Exhibit 99.1
included in Conseco's Current Report on Form 8-K dated April 10, 1996.
The pro forma consolidated statement of operations data for Conseco for the
nine months ended September 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 TOPrS Offering; (ii) the
TruPs Offering; (iii) the ATC Merger; (iv) the Series D Call; (v) the ALH
Transaction; (vi) the LPG Merger; (vii) the issuance of 4.37 million shares of
Conseco PRIDES in January 1996; and (viii) the BLH Tender Offer. Such pro forma
adjustments are set forth in: (i) Conseco's Current Report on Form 8-K dated
December 17, 1996; and (ii) Exhibit 99.1 included in Conseco's Form 10-Q for the
quarterly period ended September 30, 1996.
The unaudited pro forma consolidated balance sheet of Conseco as of
September 30, 1996, gives effect to the Merger as if it had occurred on
September 30, 1996.
The unaudited pro forma consolidated balance sheet data as of September 30,
1996, set forth in the unaudited pro forma balance sheet 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 September 30, 1996: (i) the
TOPrS Offering; (ii) the TruPS Offering; and (iii) the ATC Merger. Such pro
forma adjustments are set forth in Conseco's Current Report on Form 8-K dated
December 17, 1996.
The pro forma consolidated financial statements are based on the historical
financial statements of Conseco, LPG, ATC and THI and are qualified in their
entirety by, and should be read in conjunction with, these financial statements
and the notes thereto. 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.
34
<PAGE>
The unaudited pro forma consolidated financial statements reflect cost
allocations for the LPG Merger, the ALH Transaction, the ATC Merger and the
Merger using estimated values of the assets and liabilities of LPG, ALH and ATC
as of the assumed merger dates based on appraisals and other studies, which are
not yet complete. Accordingly, the final allocations will be different than 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 LPG Merger, the ALH Transaction,
the ATC Merger and the Merger had occurred on the assumed merger dates.
35
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
Pro forma adjustments
Conseco relating Pro forma
before the THI to the Conseco
Merger historical Merger totals
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,632.3 $ 82.4 $ - $1,714.7
Investment activity:
Net investment income 1,118.7 29.6 (5.0)(1) 1,143.3
Net trading losses (6.5) (6.5)
Net realized gains 26.6 .3 (.3)(1) 26.6
Fee revenue 29.7 29.7
Restructuring income 30.4 30.4
Other income 11.4 1.4 12.8
--------- -------- -------- --------
Total revenues 2,842.6 113.7 (5.3) 2,951.0
--------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,149.4 54.1 1,203.5
Interest expense
on annuities and
financial products 549.5 549.5
Interest expense on
notes payable 75.8 6.8 (6.8)(2) 76.7
.9 (2)
Interest expense on
investment borrowings 17.2 17.2
Amortization related
to operations 273.6 6.2 (6.2)(3) 283.9
10.3 (3)
Amortization related
to realized gains 22.3 22.3
Other operating
costs and expenses 307.9 24.4 332.3
--------- -------- -------- -------
Total benefits
and expenses 2,395.7 91.5 (1.8) 2,485.4
--------- -------- -------- -------
Income before income
taxes, minority interest
and extraordinary
charge 446.9 22.2 (3.5) 465.6
Income tax expense 171.5 7.8 (1.2)(4) 178.1
--------- --------- -------- -------
Income before
minority interest
and extraordinary
charge 275.4 14.4 (2.3) 287.5
Minority interest in consolidated
subsidiaries:
Dividends on Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 26.1 26.1
Dividends on preferred stock 6.4 6.4
Equity in earnings 13.9 13.9
-------- --------- -------- -------
Income before
extraordinary
charge $ 229.0 $ 14.4 $ (2.3) $ 241.1
======== ======== ======== =======
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 87.6 4.5 (5) 92.1
==== ====== ====
Income before
extraordinary charge $2.61 $2.62
===== =====
Fully diluted:
Weighted average shares
outstanding 93.1 4.5 (5) 97.6
==== ====== ====
Income before
extraordinary charge $2.47 $2.48
===== =====
The accompanying notes are an integral part of the pro forma consolidated financial statements.
36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1995
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
Pro forma adjustments
Conseco relating Pro forma
before the THI to the Conseco
Merger historical Merger totals
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $2,026.7 $ 190.2 $ - $2,216.9
Investment activity:
Net investment income 1,486.1 49.7 (6.9)(1) 1,528.9
Net trading income 2.5 2.5
Net realized gains 222.5 6.7 (6.7)(1) 222.5
Fee revenue 33.9 33.9
Restructuring income 15.2 15.2
Other income 12.6 12.6
--------- -------- -------- --------
Total revenues 3,799.5 246.6 (13.6) 4,032.5
--------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,434.3 131.9 1,566.2
Interest expense
on annuities and
financial products 758.5 758.5
Interest expense on
notes payable 107.3 2.3 (2.3)(2) 108.5
1.2 (2)
Interest expense on
investment borrowings 30.2 30.2
Amortization related
to operations 345.2 24.5 (24.5)(3) 361.1
15.9 (3)
Amortization related
to realized gains 144.4 144.4
Loss on sale of long-
term care business - 68.5 (68.5)(6) -
Expenses of spin-off and
related transactions - 2.2 (2.2)(6) -
Other operating
costs and expenses 420.1 58.3 478.4
--------- -------- -------- -------
Total benefits
and expenses 3,240.0 287.7 (80.4) 3,447.3
--------- -------- -------- -------
Income before income
taxes, minority interest
and extraordinary
charge 559.5 (41.1) 66.8 585.2
Income tax expense 218.2 (14.3) 22.7 (4) 226.6
--------- --------- -------- -------
Income before
minority interest
and extraordinary
charge 341.3 (26.8) 44.1 358.6
Minority interest in consolidated
subsidiaries:
Dividends on Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 34.8 34.8
Dividends on preferred stock 8.7 8.7
Equity in earnings 12.6 12.6
-------- --------- -------- -------
Income before
extraordinary
charge $ 285.2 $ (26.8) $ 44.1 $ 302.5
======== ======== ======== =======
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 86.1 4.5 (5) 90.6
==== ====== ====
Income before
extraordinary charge $3.31 $3.34
===== =====
Fully diluted:
Weighted average shares
outstanding 90.4 4.5 (5) 94.9
==== ====== ====
Income before
extraordinary charge $3.15 $3.19
===== =====
The accompanying notes are an integral part of the pro forma consolidated financial statements.
37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma adjustments
Conseco relating Pro forma
before the THI to the Conseco
Merger historical Merger totals
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed
maturity securities
at fair value $16,649.5 $ 483.0 $ (83.9)(7) $17,048.6
Equity securities at
fair value 104.2 1.1 105.3
Mortgage loans 372.9 8.3 381.2
Credit-tenant loans 393.8 393.8
Policy loans 526.0 16.9 542.9
Other invested assets 211.0 6.5 217.5
Short-term investments 224.5 34.6 83.9 (7) 259.1
18.5 (8)
(102.4)(8)
Assets held in separate
accounts 300.4 300.4
-------- -------- --------- ---------
Total investments 18,782.3 550.4 (83.9) 19,248.8
Accrued investment income 284.4 5.7 290.1
Cost of policies purchased 2,115.9 10.8 112.8 (9) 2,228.7
(10.8)(9)
Cost of policies produced 541.0 28.4 (28.4)(10) 541.0
Reinsurance receivables 400.6 328.6 (260.0)(12) 469.2
Income taxes 85.6 (25.8)(11) 42.3
(17.5)(11)
Goodwill 2,087.5 2,087.5
Property and equipment 109.8 .7 110.5
Securities segregated for
future redemption of
redeemable preferred
stock of a
subsidiary 45.0 45.0
Other assets 230.2 17.3 247.5
--------- -------- --------- ---------
Total assets $24,682.3 $ 941.9 $ (313.6) $25,310.6
========= ======== ========= =========
The accompanying notes are an integral part of the pro forma consolidated financial statements.
38
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma adjustments
Conseco relating Pro forma
for the THI to the Conseco
Merger historical Merger totals
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $18,737.0 $ 623.4 $ (260.0)(12) $19,100.4
Income tax liabilities - 17.5 (17.5)(11) -
Investment borrowings 539.4 539.4
Other liabilities 504.2 18.5 522.7
Liabilities related
to separate accounts 300.1 300.1
Notes payable of Conseco 851.2 108.3 (58.3)(13) 869.7
(50.0)(13)
18.5 (13)
Notes payable of
Bankers Life Holding
Corporation, not
direct obligations
of Conseco 418.1 418.1
Notes payable of American
Life Holdings, Inc., not
direct obligations of
Conseco 13.0 13.0
--------- ------ ------- --------
Total liabilities 21,363.0 767.7 (367.3) 21,763.4
--------- ------ ------- --------
Minority interest in consolidated
subsidiaries:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts 600.0 600.0
Preferred stock 92.5 92.5
Common stock 55.3 55.3
--------- ------ ------- ---------
Shareholders' equity:
Preferred stock 267.1 22.8 (22.8)(14) 267.1
Common stock and additional
paid-in capital 1,670.1 169.7 (169.7)(14) 1,898.0
121.7 (14)
106.2 (14)
Unrealized appreciation
(depreciation) of securities (47.0) 4.7 (4.7)(14) (47.0)
Retained earnings 681.3 (23.0) 23.0 (14) 681.3
--------- ------ ------- ---------
Total shareholders' equity 2,571.5 174.2 53.7 2,799.4
--------- ------ ------- ---------
Total liabilities and
shareholders' equity $24,682.3 $941.9 $(313.6) $25,310.6
========= ====== ======= =========
The accompanying notes are an integral part of the pro forma consolidated financial statements.
39
</TABLE>
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
TRANSACTIONS RELATING TO THE MERGER
The Merger will be accounted for under the purchase method of accounting.
Under this method, the total cost to acquire THI 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. The Merger will not qualify to be accounted for under the pooling of
interests method in accordance with APB No. 16 because THI was a subsidiary of
another corporation within two years of the contemplated transaction. In the
Merger, each outstanding share of THI common stock was exchanged for 1.4 shares
of Conseco's common stock. Conseco issued approximately 2.4 million shares of
Conseco common stock and common stock equivalents with a value of approximately
$121.7 million to acquire THI's common stock (or equivalents). In addition,
pursuant to an exchange offer (the "Exchange Offer"), all of THI's Subordinated
Convertible Notes (the "THI Convertible Notes") were exchanged for shares of
Conseco common stock on an equivalent basis as the shares issued in the Merger
plus a cash premium. Such THI Convertible Notes were converted into 2.1 million
shares of Conseco common stock with a value of approximately $106.2 million.
Conseco also paid a premium of approximately $10.0 million to the holders of the
THI Convertible Notes in conjunction with the Exchange Offer. Conseco estimates
that it will incur costs related to the Merger (including contract termination,
relocation, legal, accounting and other costs) of approximately $8.5 million.
The cost to acquire THI is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
Merger (September 30, 1996) ................................................... $174.2
THI Convertible Notes converted to Conseco common stock pursuant to the
Exchange Offer ................................................... ........... 50.0
Less book value of THI preferred stock ............................................. (22.8)
Increase (decrease) in THI's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the Merger:
Cost of policies purchased (related to the Merger).......................... 112.8
Cost of policies produced and cost of policies purchased (historical)....... (39.2)
Income taxes................................................................ (25.8)
Premium paid in conjunction with the Exchange Offer ........................ (10.0)
Premium incurred to retire THI preferred stock ............................. (2.8)
------
Total estimated fair value adjustments................................. 35.0
-------
Total cost to acquire THI.............................................. $236.4
======
</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 THI are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities to their estimated fair value and
the effect of the assumed sale of $83.9 million fixed maturity
investments investments, with the proceeds used to repay $58.3
million of bank debt and redeem preferred stock with a redemption
value of $25.6 million.
(2) Interest expense is reduced to reflect the repayment of bank debt of
$58.3 million and the conversion of the THI Convertible Notes into
Conseco common stock pursuant to the Exchange Offer. Interest expense
is increased to reflect borrowings by Conseco to: (i) pay the
estimated cost of the Merger; and (ii) pay the $10.0 million premium
in conjunction with the Exchange Offer.
(3) Amortization of the cost of policies produced and the cost of policies
purchased prior to the Merger is replaced with the amortization of the
cost of policies purchased (amortized in relation to estimated
premiums on the policies purchased with interest equal to the
liability rate which averages 5.5 percent).
(4) Reflects the tax adjustment for the pro forma adjustments at the
approximate rate for the specific item.
(5) Common shares outstanding are increased to reflect the Conseco shares
issued in the Merger and the conversion of the THI Convertible Notes
in conjunction with the Exchange Offer.
40
<PAGE>
(6) Effective October 1, 1995, THI sold its long term care business to
ATC. An adjustment is made to remove the loss on the sale of the
long term care business. However, the revenues, benefits and expenses
related to this business prior to its sale are not eliminated, since
the business is retained within the Conseco consolidated group after
the ATC Merger (and pro forma adjustments for the ATC Merger do not
include adjustments related to THI's long term care business prior to
its purchase by ATC). In addition, expenses related to THI's spin-off
from its parent are eliminated. Such costs include certain legal,
accounting, actuarial and advisory fees.
Adjustments to the pro forma consolidated balance sheet to give effect to
the Merger as of September 30, 1996, are summarized below.
(7) Actively managed fixed maturity securities with a carrying value of
$83.9 million are assumed to be sold at the date of the Merger.
(8) Short-term investments are reduced for: (i) payments made to complete
the Merger; (ii) the repayment of bank debt with a balance of $58.3
million; (iii) the redemption of preferred stock with a redemption
value of $25.6 million; and (iv) the payment of the $10.0 million
premium in conjunction with the Exchange Offer. Short-term
investments are increased by additional borrowings by Conseco of
$18.5 million to complete the Merger and related transactions.
(9) THI'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 THI's business in force and represents the portion of the cost to
acquire THI that is allocated to the value of the right to receive
future cash flows from the acquired policies.
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 valuations)
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 rate (such rate averages 5.5
percent) for each of the years in the five-year period ending September
30, 2001, are as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
September 30, balance amortization of interest amortization balance
- ------------- ------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 $112.8 $19.2 $ 6.3 $12.9 $99.9
1998 99.9 15.9 5.6 10.3 89.6
1999 89.6 14.5 5.0 9.5 80.1
2000 80.1 13.3 4.4 8.9 71.2
2001 71.2 12.8 4.0 8.8 62.4
</TABLE>
(10) THI's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
41
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(11) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. Deferred tax assets are netted
against deferred tax liabilities.
(12) Reinsurance receivables and insurance liabilities related to business
of THI ceded to ATC are eliminated in consolidation.
(13) Notes payable are increased to reflect: (i) the repayment of bank
debt of $58.3 million; and (ii) the conversion of the THI Convertible
Notes into Conseco common stock in conjunction with the Exchange
Offer. In addition, notes payable are increased to reflect
additional borrowings by Conseco used to complete the Merger and
related transactions.
(14) The prior shareholders' equity of THI is eliminated in conjunction
with the Merger. Common stock and additional paid-in capital is
increased by the value of Conseco common stock issued in the Merger.
The value of the THI Convertible Notes represents the value of the
Conseco common stock which was issued in conjunction with the Exchange
Offer. Preferred stock of THI is eliminated to reflect its redemption.
42
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
_________________
ITEM 7(c). EXHIBITS.
(c) Exhibits
2.8 Agreement and Plan of Merger dated as of September 25,
1996, by and between Conseco, Inc. and Transport
Holdings Inc.*
2.8.1 First Amendment to Agreement and Plan of Merger dated
as of November 7, 1996, by and between Conseco, Inc.
and Transport Holdings Inc.**
* Previously filed with Form 8-K dated September 25,
1996, filed by Conseco, Inc.
** Previously filed as an exhibit to the Registration
Statement on Form S-4 (File No. 333-14377) filed by
Conseco, Inc.
43
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
_________________
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 23, 1996
CONSECO, INC.
By: /s/ ROLLIN M. DICK
-----------------------------
Rollin M. Dick
Executive Vice President
and Chief Financial Officer
44
