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: November 15, 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
S:\ACCTING\SECRPT\CNC8-K96.NOV
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 5. OTHER EVENTS.
The unaudited pro forma consolidated financial statements of Conseco, Inc.
and its consolidated subsidiaries ("Conseco") as of and for the nine months
ended September 30, 1996, attached as Exhibit 99.2, update Conseco's unaudited
pro forma consolidated financial statements filed as Exhibit 99.2 to Conseco's
quarterly report on Form 10-Q for the quarterly period ended September 30, 1996,
to reflect: (i) the increase in the aggregate liquidation amount of the planned
offering of trust originated preferred securities from $200 million to $275
million; and (ii) the increase in the aggregate liquidation amount of a planned
additional offering of trust originated preferred securities from $150 million
to $225 million. In addition, the assumed distribution rate and expenses
associated with both planned offerings were updated to reflect current market
conditions. Such transactions are described further in the notes accompanying
the pro forma consolidated financial statements.
The pro forma consolidated financial statements are not necessarily
indicative of what the financial position or results of operations actually
would have been if the transactions had occurred at the dates indicated.
Furthermore, the pro forma consolidated financial statements are not intended to
be indicative of Conseco's future financial position or future results of
operations and should be read in conjunction with the historical consolidated
financial statements and related notes thereto included in Conseco's Form 10-Q
for the quarterly period ended September 30, 1996.
2
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(c). EXHIBITS.
99.2 Pro Forma Consolidated Financial Statements of Conseco, Inc. and
Subsidiaries
3
<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: November 15, 1996
CONSECO, INC.
By: /s/ROLLIN M. DICK
----------------------
Rollin M. Dick
Executive Vice President
and Chief Financial Officer
S:\ACCTING\SECRPT\CNC8-K96.NOV
4
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CONSECO, INC.
The unaudited pro forma consolidated statement of operations of Conseco,
Inc. ("Conseco") for the nine months ended September 30, 1996, presents the
consolidated operating results for Conseco as if the following planned
transactions had occurred on January 1, 1995: (1) the issuance of $275.0 million
of trust originated preferred securities having an assumed distribution rate of
9.16 percent (the "Offering"); (2) the issuance of an additional $225.0 million
of trust originated preferred securities having an assumed distribution rate of
9.16 percent (the "Additional Offering"); (3) the merger (the "ATC Merger") of
American Travellers Corporation ("ATC") with and into Conseco; (4) the
acquisition of all of the outstanding common stock of Bankers Life Holding
Corporation ("BLH") not previously owned by Conseco and related transactions
(the "BLH Transaction"); (5) the merger (the "CAF Merger") of a subsidiary of
Conseco with and into Capitol American Financial Corporation ("CAF"); and (6)
the merger (the "THI Merger") of Transport Holdings Inc. ("THI") with and into
Conseco.
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 Offering" 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: (1) the call for redemption of
Conseco's Series D Convertible Preferred Stock (the "Series D Call") completed
September 26, 1996; (2) the acquisition of all of the outstanding common stock
of American Life Holdings, Inc. ("ALH"), not previously owned by Conseco or its
affiliates, and related transactions (the "ALH Transaction") completed September
30, 1996; (3) the acquisition and merger of Life Partners Group, Inc. ("LPG")
completed effective June 30, 1996 (the "LPG Merger"); (4) the issuance of 4.37
million shares of Conseco PRIDES in January 1996; and (5) 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").
Such pro forma adjustments are set forth in 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 following planned transactions as if
each had occurred on September 30, 1996: (1) the Offering; (2) the Additional
Offering; (3) the ATC Merger; (4) the BLH Transaction; (5) the CAF Merger; and
(6) the THI Merger.
The pro forma consolidated financial statements are based on the historical
financial statements of Conseco, LPG, ATC, CAF 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.
The unaudited pro forma consolidated financial statements reflect cost
allocations for the LPG Merger, the ALH Transaction, the ATC Merger, the BLH
Transaction, the CAF Merger and the THI Merger using estimated values of the
assets and liabilities of LPG, ATC, ALH, BLH, CAF and THI 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, the BLH Transaction, the
CAF Merger and the THI Merger had occurred on the assumed merger dates.
1
<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
Pro forma adjustments adjustments
Conseco relating Pro forma relating to Pro forma
before the to the for the Additional Conseco
Offering Offering Offering Offering subtotal(a)
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,349.0 $ - $1,349.0 $ - $1,349.0
Investment activity:
Net investment income 1,084.4 1,084.4 1,084.4
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 23.0 23.0 23.0
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 11.4
-------- ------- -------- -------- --------
Total revenues 2,521.4 2,521.4 2,521.4
-------- ------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits 957.2 957.2 957.2
Interest expense on annuities and financial
products 549.5 549.5 549.5
Interest expense on notes payable 100.7 (12.9)(1) 87.8 (10.6)(6) 77.2
Interest expense on investment borrowings 17.2 17.2 17.2
Amortization related to operations 242.9 242.9 242.9
Amortization related to realized gains 22.3 22.3 22.3
Other operating costs and expenses 243.5 243.5 243.5
-------- ------- -------- -------- --------
Total benefits and expenses 2,133.3 (12.9) 2,120.4 (10.6) 2,109.8
-------- ------- -------- -------- --------
Income before income taxes, minority
interest and extraordinary charge 388.1 12.9 401.0 10.6 411.6
Income tax expense 147.9 4.5 (2) 152.4 3.7 (7) 156.1
-------- ------- -------- ------- --------
Income before minority interest
and extraordinary charge 240.2 8.4 248.6 6.9 255.5
Minority interest in consolidated subsidiaries:
Dividends on Company - obligated mandatorily
redeemable preferred securities of subsidiary
trusts - 12.3 (3) 12.3 10.0 (8) 22.3
Dividends on preferred stock 6.4 6.4 6.4
Equity in earnings 13.9 13.9 13.9
-------- ------- -------- -------- --------
Income before extraordinary charge $ 219.9 $ (3.9) $ 216.0 $ (3.1) $ 212.9
======== ======= ======== ======== ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 77.2 77.2 77.2
======== ======== =====
Income before extraordinary charge $2.85 $2.80 $2.76
======== ======== =====
Fully diluted:
Weighted average shares outstanding 78.7 78.7 78.7
======== ======= =====
Income before extraordinary charge $2.79 $2.74 $2.71
======== ======= =====
<FN>
(a) Amounts are carried forward to page 3.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
2
</TABLE>
<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 adjustments
Pro forma relating Pro forma relating to Pro forma
Conseco ATC to the Conseco the BLH Conseco
subtotal(a) historical ATC Merger subtotal Transaction subtotal(b)
--------- ------------ ---------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,349.0 $ 283.3 $ - $1,632.3 $ - $1,632.3
Investment activity:
Net investment income 1,084.4 33.2 1.1 (11) 1,118.7 1,118.7
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 23.0 1.3 2.3 (11) 26.6 (.2)(26) 26.4
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 11.4
--------- -------- -------- -------- ------ --------
Total revenues 2,521.4 317.8 3.4 2,842.6 (.2) 2,842.4
--------- -------- -------- -------- ------ --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 957.2 192.2 1,149.4 (1.5)(26) 1,147.9
Interest expense
on annuities and
financial products 549.5 549.5 549.5
Interest expense on
notes payable 77.2 5.8 1.5 (12) 80.8 80.8
(3.7)(13)
Interest expense on
investment borrowings 17.2 17.2 17.2
Amortization related
to operations 242.9 16.4 (16.4)(14) 273.6 .4 (26) 274.0
19.9 (14)
10.8 (15)
Amortization related
to realized gains 22.3 22.3 (.1)(26) 22.2
Other operating
costs and expenses 243.5 64.4 307.9 1.6 (26) 309.5
--------- -------- -------- ------- ------- --------
Total benefits
and expenses 2,109.8 278.8 12.1 2,400.7 .4 2,401.1
--------- -------- -------- ------- ------- --------
Income before income
taxes, minority interest
and extraordinary
charge 411.6 39.0 (8.7) 441.9 (.6) 441.3
Income tax expense 156.1 13.0 .7 (16) 169.8 (.1)(27) 169.7
--------- --------- -------- ------- ------- --------
Income before
minority interest
and extraordinary
charge 255.5 26.0 (9.4) 272.1 (.5) 271.6
Minority interest in consolidated
subsidiaries:
Dividends on Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 22.3 22.3 22.3
Dividends on preferred stock 6.4 6.4 6.4
Equity in earnings 13.9 13.9 (13.9)(28) -
-------- --------- -------- ------- ------- --------
Income before
extraordinary
charge $ 212.9 $ 26.0 $ (9.4) $ 229.5 $ 13.4 $ 242.9
======== ======== ======== ======= ======= ========
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 77.2 13.1 (17) 90.3 2.6 (29) 92.9
==== ====== ==== ===== ====
Income before
extraordinary charge $2.76 $2.54 $2.61
===== ===== =====
Fully diluted:
Weighted average shares
outstanding 78.7 18.1 (17) 96.8 2.6 (29) 99.4
==== ====== ==== ===== ====
Income before
extraordinary charge $2.71 $2.39 $2.46
===== ===== =====
<FN>
(a) Amounts have been carried forward from page 2.
(b) Amounts are carried forward to page 4.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
3
</TABLE>
<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 Pro forma for the
adjustments adjustments Offering
Pro forma relating to Pro forma relating to and other
Conseco CAF the CAF Conseco THI to the planned
subtotal(a) historical Merger subtotal historical THI Merger transactions
--------- ------------ ------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,632.3 $ 219.9 $ - $1,852.2 $ 82.4 $ $1,934.6
Investment activity:
Net investment income 1,118.7 41.7 (2.6)(32) 1,157.8 29.6 (5.0)(51) 1,182.4
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 26.4 .3 (.3)(32) 26.4 .3 (.3)(51) 26.4
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 1.4 12.8
-------- --------- ------- -------- ------- ------ --------
Total revenues 2,842.4 261.9 (2.9) 3,101.4 113.7 (5.3) 3,209.8
-------- --------- ------- -------- ------- ------ --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,147.9 124.4 (2.3)(33) 1,270.0 54.1 1,324.1
Interest expense
on annuities and
financial products 549.5 549.5 549.5
Interest expense on
notes payable 80.8 1.6 (1.6)(34) 108.7 6.8 (6.8)(52) 109.6
27.9 (35) .9 (52)
Interest expense on
investment borrowings 17.2 17.2 17.2
Amortization related
to operations 274.0 17.5 (17.5)(36) 301.4 6.2 (6.2)(53) 311.7
23.0 (36) 10.3 (53)
4.4 (37)
Amortization related
to realized gains 22.2 22.2 22.2
Other operating
costs and expenses 309.5 58.7 368.2 24.4 392.6
-------- --------- -------- -------- ------- ------ --------
Total benefits
and expenses 2,401.1 202.2 33.9 2,637.2 91.5 (1.8) 2,726.9
-------- --------- -------- -------- ------- ------ --------
Income before income
taxes, minority
interest and
extraordinary charge 441.3 59.7 (36.8) 464.2 22.2 (3.5) 482.9
Income tax expense 169.7 20.9 (11.4)(38) 179.2 7.8 (1.2)(54) 185.8
------- --------- ------- -------- ------- ------ --------
Income before minority
interest and
extraordinary charge 271.6 38.8 (25.4) 285.0 14.4 (2.3) 297.1
Minority interest in consolidated
subsidaires:
Dividends on Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 22.3 22.3 22.3
Dividends on preferred stock 6.4 6.4 6.4
Equity in earnings - - -
------- -------- ------- -------- ------ ------ --------
Income before
extraordinary charge $ 242.9 $ 38.8 $ (25.4) $ 256.3 $ 14.4 $(2.3) $ 268.4
======= ======== ======= ======== ======= ===== ========
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 92.9 2.4 (39) 95.3 4.7 (55) 100.0
==== ==== ===== ==== =====
Income before
extraordinary charge $2.61 $2.69 $2.68
===== ===== =====
Fully diluted:
Weighted average shares
outstanding 99.4 2.4 (39) 101.8 4.7 (55) 106.5
==== ==== ===== ==== =====
Income before
extraordinary charge $2.46 $2.53 $2.53
===== ===== =====
<FN>
(a) Amounts have been carried forward from page 3.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
4
</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
adjustments Pro forma relating to Pro forma
Conseco relating to for the Additional Conseco
as reported the Offering Offering Offering subtotal(a)
------------ ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed maturity
securities at fair value $15,959.8 $ - $15,959.8 $ - $15,959.8
Held-to-maturity fixed maturity
securities - - -
Equity securities at fair value 104.2 104.2 104.2
Mortgage loans 372.5 372.5 372.5
Credit-tenant loans 393.8 393.8 393.8
Policy loans 526.0 526.0 526.0
Other invested assets 211.0 211.0 211.0
Short-term investments 212.3 265.5 (4) 212.3 217.1 (9) 212.3
(265.5)(4) (217.1)(9)
Assets held in separate accounts 300.4 300.4 300.4
--------- ------ --------- --------- ---------
Total investments 18,080.0 - 18,080.0 - 18,080.0
Accrued investment income 276.7 276.7 276.7
Cost of policies purchased 1,847.1 1,847.1 1,847.1
Cost of policies produced 541.0 541.0 541.0
Reinsurance receivables 400.6 400.6 400.6
Income taxes 138.9 138.9 138.9
Goodwill 1,524.7 1,524.7 1,524.7
Property and equipment 105.9 105.9 105.9
Securities segregated for future redemption
of redeemable preferred stock of a
subsidiary 45.0 45.0 45.0
Other assets 216.1 216.1 216.1
--------- ------ --------- --------- ---------
Total assets $23,176.0 $ - $23,176.0 $ - $23,176.0
========= ====== ========= ========= =========
<FN>
(a) Amounts are carried forward to page 6.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
5
</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 adjustments
Pro forma relating Pro forma relating to Pro forma
Conseco ATC to the Conseco the BLH Conseco
subtotal(a) historical ATC Merger subtotal Transaction subtotal(b)
--------- ------------ ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed
maturity securities
at fair value $15,959.8 $ 689.7 $ - $16,649.5 $ - $16,649.5
Held-to-maturity
fixed maturity
securities - -
Equity securities at
fair value 104.2 104.2 104.2
Mortgage loans 372.5 .4 372.9 372.9
Credit-tenant loans 393.8 393.8 393.8
Policy loans 526.0 526.0 526.0
Other invested assets 211.0 211.0 211.0
Short-term investments 212.3 12.2 (30.4)(18) 224.5 224.5
30.4 (19)
Assets held in separate
accounts 300.4 300.4 300.4
-------- -------- --------- --------- ---------- ----------
Total investments 18,080.0 702.3 - 18,782.3 - 18,782.3
Accrued investment income 276.7 7.7 284.4 284.4
Cost of policies purchased 1,847.1 11.3 268.8 (20) 2,115.9 65.9 (26) 2,181.8
(11.3)(20)
Cost of policies produced 541.0 168.7 (168.7)(21) 541.0 (50.7)(26) 490.3
Reinsurance receivables 400.6 400.6 400.6
Income taxes 138.9 (27.1)(22) 85.6 (5.3)(27) 80.3
(26.2)(22)
Goodwill 1,524.7 563.2 (23) 2,087.9 57.3 (26) 2,145.2
Property and equipment 105.9 3.9 109.8 109.8
Securities segregated for
future redemption of
redeemable preferred
stock of a
subsidiary 45.0 45.0 45.0
Other assets 216.1 13.7 229.8 229.8
--------- -------- --------- --------- ---------- ---------
Total assets $23,176.0 $ 907.6 $ 598.7 $24,682.3 $ 67.2 $24,749.5
========= ======== ========= ========= ========= =========
<FN>
(a) Amounts have been carried forward from page 5.
(b) Amounts are carried forward to page 7.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma Pro forma for the
adjustments adjustments Offering
Pro forma relating Pro forma relating to and other
Conseco CAF to the Conseco THI the THI planned
subtotal(a) historical CAF Merger subtotal historical Merger transactions
--------- ------------ ----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed
maturity securities
at fair value $16,649.5 $ 308.5 $ 358.3 (40) $17,410.5 $ 483.0 $ (83.9)(57) $17,809.6
94.2 (41)
Held-to-maturity
fixed maturity
securities - 358.3 (358.3)(40) - -
Equity securities at
fair value 104.2 10.2 114.4 1.1 115.5
Mortgage loans 372.9 372.9 8.3 381.2
Credit-tenant loans 393.8 393.8 393.8
Policy loans 526.0 526.0 16.9 542.9
Other invested assets 211.0 211.0 6.5 217.5
Short-term investments 224.5 29.4 (534.0)(42) 253.9 34.6 83.9 (57) 288.5
(26.0)(42) 18.5 (58)
(29.0)(42) (18.5)(58)
589.0 (43) (58.3)(58)
(25.6)(58)
Assets held in separate
accounts 300.4 300.4 300.4
-------- -------- ------- --------- ------- -------- ---------
Total investments 18,782.3 706.4 94.2 19,582.9 550.4 (83.9) 20,049.4
Accrued investment income 284.4 6.9 291.3 5.7 297.0
Cost of policies purchased 2,181.8 492.2 (44) 2,674.0 10.8 112.8 (59) 2,786.8
(10.8)(59)
Cost of policies produced 490.3 271.3 (271.3)(45) 490.3 28.4 (28.4)(60) 490.3
Reinsurance receivables 400.6 400.6 328.6 (260.0)(62) 469.2
Income taxes 80.3 (79.3)(46) - -
(1.0)(46)
Goodwill 2,145.2 223.7 (47) 2,368.9 2,368.9
Property and equipment 109.8 4.4 114.2 .7 114.9
Securities segregated for
future redemption of
redeemable preferred
stock of a
subsidiary 45.0 45.0 45.0
Other assets 229.8 28.9 258.7 17.3 276.0
--------- -------- ------- --------- -------- -------- ---------
Total assets $24,749.5 $1,017.9 $ 458.5 $26,225.9 $ 941.9 $(270.3) $26,897.5
========= ======== ======= ========= ======== ======= =========
<FN>
(a) Amounts have been carried forward from page 6.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma Pro forma
adjustments adjustments adjustments
relating Pro forma relating to Pro forma relating Pro forma
Conseco to the for the Additional Conseco ATC to the Conseco
as reported Offering Offering Offering subtotal Historical ATC Merger subtotal(a)
--------- ---------- -------- --------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $18,150.7 $ - $18,150.7 $ - $18,150.7 $ 586.3 $ - $18,737.0
Income tax liabilities - - - 26.2 (26.2)(22) -
Investment borrowings 539.4 539.4 539.4 539.4
Other liabilities 482.0 482.0 482.0 10.9 11.3 (24) 504.2
Liabilities related
to separate accounts 300.1 300.1 300.1 300.1
Notes payable of Conseco 1,169.0 (265.5)(4) 903.5 (217.1)(9) 686.4 102.9 30.4 (19) 955.4
135.7 (24)
Notes payable of
Bankers Life Holding
Corporation, not
direct obligations
of Conseco 418.1 418.1 418.1 418.1
Notes payable of American
Life Holdings, Inc., not
direct obligations of
Conseco 13.0 13.0 13.0 13.0
-------- ------ --------- ------- --------- ------ ------- --------
Total liabilities 21,072.3 (265.5) 20,806.8 (217.1) 20,589.7 726.3 151.2 21,467.2
-------- ------ --------- ------- --------- ------ ------- --------
Minority interest in consolidated
subsidiaries:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts - 275.0 (5) 275.0 225.0 (10) 500.0 500.0
Preferred stock 92.5 92.5 92.5 92.5
Common stock 55.3 55.3 55.3 55.3
-------- ------ --------- ------- --------- ------ ------- ---------
Shareholders' equity:
Preferred stock 267.1 267.1 267.1 267.1
Common stock and additional
paid-in capital 1,054.5 (9.5)(5) 1,045.0 (7.9)(10) 1,037.1 64.4 (64.4)(25) 1,665.9
628.8 (25)
Unrealized appreciation
(depreciation) of securities (47.0) (47.0) (47.0) (10.3) 10.3 (25) (47.0)
Retained earnings 681.3 681.3 681.3 127.2 (127.2)(25) 681.3
------- ------ --------- ------- --------- ------ ------- ---------
Total shareholders' equity 1,955.9 (9.5) 1,946.4 (7.9) 1,938.5 181.3 447.5 2,567.3
------- ------ --------- ------- --------- ------ ------- ---------
Total liabilities and
shareholders' equity $23,176.0 $ - $23,176.0 $ - $23,176.0 $907.6 $ 598.7 $24,682.3
========= ====== ========= ====== ========= ====== ======= =========
<FN>
(a) Amounts are carried forward to page 9.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
8
</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 adjustments
Pro forma relating Pro forma relating to Pro forma
Conseco to the BLH Conseco CAF the CAF Conseco
subtotal(a) Transaction subtotal Historical Merger subtotal(b)
--------- ----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $18,737.0 $ - $18,737.0 $ 611.4 $ 88.4 (48) $19,436.8
Income tax liabilities - - 52.2 (1.0)(46) 51.2
Investment borrowings 539.4 539.4 539.4
Other liabilities 504.2 504.2 20.7 524.9
Liabilities related
to separate accounts 300.1 300.1 300.1
Notes payable of Conseco 955.4 418.1 (30) 1,373.5 29.0 (29.0)(49) 1,962.5
589.0 (43)
Notes payable of
Bankers Life Holding
Corporation, not
direct obligations
of Conseco 418.1 (418.1)(30) - -
Notes payable of American
Life Holdings, Inc., not
direct obligations of
Conseco 13.0 13.0 13.0
-------- ------ --------- -------- -------- ----------
Total liabilities 21,467.2 - 21,467.2 713.3 647.4 22,827.9
-------- ------ --------- -------- -------- ----------
Minority interest in consolidated
subsidiaries:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts 500.0 500.0 500.0
Preferred stock 92.5 92.5 92.5
Common stock 55.3 (55.3)(28) - -
-------- ------ --------- -------- -------- ----------
Shareholders' equity:
Preferred stock 267.1 267.1 267.1
Common stock and additional
paid-in capital 1,665.9 122.5 (31) 1,788.4 35.5 (35.5)(50) 1,904.1
115.7 (50)
Unrealized appreciation
(depreciation) of securities (47.0) (47.0) (1.8) 1.8 (50) (47.0)
Retained earnings 681.3 681.3 270.9 (270.9)(50) 681.3
------- ------ --------- -------- -------- ----------
Total shareholders' equity 2,567.3 122.5 2,689.8 304.6 (188.9) 2,805.5
------- ------ --------- -------- -------- ----------
Total liabilities and
shareholders' equity $24,682.3 $ 67.2 $24,749.5 $1,017.9 $ 458.5 $26,225.9
========= ====== ========= ======== ======== =========
<FN>
(a) Amounts have been carried forward from page 8.
(b) Amounts are carried forward to page 10.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma for the
adjustments Offering
Pro forma relating to and other
Conseco THI the THI planned
subtotal(a) historical Merger transactions
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $19,436.8 $ 623.4 $ (260.0)(62) $19,800.2
Income tax liabilities 51.2 17.5 25.8 (61) 94.5
Investment borrowings 539.4 539.4
Other liabilities 524.9 18.5 543.4
Liabilities related to separate accounts 300.1 300.1
Notes payable of Conseco 1,962.5 108.3 (58.3)(63) 1,981.0
(50.0)(63)
18.5 (63)
Notes payable of Bankers Life Holding
Corporation, not direct obligations of Conseco - -
Notes payable of American
Life Holdings, Inc., not
direct obligations of Conseco 13.0 13.0
--------- ------- -------- ---------
Total liabilities 22,827.9 767.7 (324.0) 23,271.6
--------- ------- -------- ---------
Minority interest in consolidated subsidiaries:
Company - obligated mandatorily redeemable preferred
securities of subsidiary trusts 500.0 500.0
Preferred stock 92.5 92.5
Common stock - -
--------- ------- -------- ---------
Shareholders' equity:
Preferred stock 267.1 22.8 (22.8)(64) 267.1
Common stock and additional paid-in capital 1,904.1 169.7 (169.7)(64) 2,132.0
121.7 (64)
106.2 (64)
Unrealized appreciation (depreciation) of securities (47.0) 4.7 (4.7)(64) (47.0)
Retained earnings 681.3 (23.0) 23.0 (64) 681.3
--------- ------- -------- ---------
Total shareholders' equity 2,805.5 174.2 53.7 3,033.4
--------- ------- -------- ---------
Total liabilities and shareholders' equity $26,225.9 $ 941.9 $ (270.3) $26,897.5
========= ======= ======== =========
<FN>
(a) Amounts have been carried forward from page 9.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
10
</TABLE>
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE OFFERING
Conseco Financing Trust I (the "Trust"), a wholly owned subsidiary of
Conseco, intends to issue preferred securities (the "Preferred Securities")
having an aggregate liquidation amount of $275 million and an assumed
distribution rate of 9.16 percent. The Trust will use the proceeds from the sale
of such securities to purchase subordinated debentures of Conseco in an
aggregate principal amount equivalent to the aggregate liquidation amount of the
Preferred Securities that are issued. The subordinated debentures are assumed to
bear interest at a rate of 9.16 percent. Conseco will use the proceeds to reduce
borrowings under its bank credit facilities.
(1) Interest expense is reduced to reflect the repayment of $265.5
million aggregate principal amount of borrowings under Conseco's bank
credit facilities.
A change in interest rates of .5 percent on the borrowings under
Conseco's bank credit facilities to be repaid from the Offering would
result in: (1) a decrease (or increase) in pro forma interest expense
of $1.0 million for the nine months ended September 30, 1996; and (2)
an increase (or decrease) in pro forma net income of $.6 million for
the same period.
(2) The pro forma adjustment is tax affected, based on Conseco's
effective tax rate of 35 percent.
(3) Minority interest is adjusted to reflect the dividends (net of the
related tax benefit) on the Preferred Securities.
(4) Notes payable are reduced to reflect the repayment of $265.5 million
aggregate principal amount of borrowings under Conseco's bank credit
facilities using the net proceeds from the Preferred Securities.
(5) The Company's minority interest in consolidated subsidiaries is
increased by the aggregate liquidation amount of the Preferred
Securities. Issuance and other transaction costs related to the
Preferred Securities are charged to paid-in capital.
OTHER PLANNED TRANSACTIONS
Transactions relating to the Additional Offering
In addition to the Preferred Securities offered above, a subsidiary trust
of Conseco intends to issue an additional $225 million of trust originated
preferred securities having an assumed distribution rate of 9.16 percent. The
subsidiary will use the proceeds from the sale of such securities to purchase
Conseco subordinated debentures with an aggregate principal amount equivalent to
the aggregate liquidation amount of the trust originated preferred securities
that are issued. The subordinated debentures of Conseco are assumed to bear
interest at a rate of 9.16 percent. Conseco will use the proceeds to reduce
borrowings under its bank credit facilities.
(6) Interest expense is reduced to reflect the repayment of $217.1
million aggregate principal amount of borrowings under Conseco's bank
credit facilities.
A change in interest rates of .5 percent on the borrowings under
Conseco's bank credit facilities to be repaid from the Additional
Offering would result in: (1) a decrease (or increase) in pro forma
interest expense of $.8 million for the nine months ended September
30, 1996; and (2) an increase (or decrease) in pro forma net income
of $.5 million for the same period.
(7) The pro forma adjustment is tax affected, based on Conseco's
effective tax rate of 35 percent.
(8) Minority interest is adjusted to reflect the dividends (net of the
related tax benefit) on the trust originated preferred securities.
(9) Notes payable are reduced to reflect the repayment of $217.1 million
aggregate principal amount of borrowings under Conseco's bank credit
facilities using the net proceeds from the trust originated preferred
securities.
(10) The Company's minority interest in consolidated subsidiaries is
increased by the aggregate liquidation amount of the trust originated
preferred securities. Issuance and other transaction costs related to
the trust originated preferred securities are charged to paid-in
capital.
11
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Transactions relating to the ATC Merger
The ATC Merger will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire ATC will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the ATC 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. Conseco believes the ATC Merger will not qualify to be
accounted for under the pooling of interests method in accordance with APB No.
16 because an affiliate of ATC intends to sell a portion of the Conseco common
stock it receives in the ATC Merger shortly after the consummation of the ATC
Merger. In the ATC Merger, each outstanding share of ATC common stock is assumed
to be exchanged for a fraction of a share of Conseco's common stock to be
determined based on an average price of Conseco's common stock prior to its
closing (it is assumed Conseco's share price will be $48.00, resulting in an
exchange ratio of .7298 shares valued at $35.03). Conseco will issue an assumed
13.1 million shares of Conseco common stock with a value of approximately $628.8
million to acquire ATC's common stock. In addition, Conseco will assume the ATC
convertible subordinated debentures, which will be convertible into an assumed
5.0 million shares of Conseco common stock with a value of approximately $238.6
million. In addition, Conseco is expected to incur costs related to the ATC
Merger (including contract termination, relocation, legal, accounting and other
costs) of approximately $30.4 million.
The cost to acquire ATC is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
ATC Merger (September 30, 1996) ................................................... $181.3
Convertible subordinated debentures assumed by Conseco at the
assumed date of the ATC Merger..................................................... 102.9
Increase (decrease) in ATC's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the ATC Merger:
Cost of policies purchased (related to the ATC Merger).......................... 268.8
Cost of policies produced and cost of policies purchased (historical)........... (180.0)
Goodwill (related to the ATC Merger)............................................ 563.2
Income taxes.................................................................... (27.1)
Other liabilities............................................................... (11.3)
------
Total estimated fair value adjustments..................................... 613.6
-------
Total cost to acquire ATC.......................................................... $897.8
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the ATC Merger as of January 1, 1995, are summarized below.
(11) Net investment income and net realized gains of ATC are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities to their estimated fair value.
(12) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to complete the ATC
Merger.
A change in interest rates of .5 percent on the additional borrowings
under Conseco's bank credit facilities used to complete the ATC
Merger would result in: (1) an increase (or decrease) in pro forma
interest expense of $.1 million for the nine months ended September
30, 1996; and (2) a decrease (or increase) in pro forma net income of
$.1 million for the same period.
(13) Interest expense is reduced to reflect the amortization of the
liability established at the assumed date of the ATC Merger
representing the present value of the interest payable on ATC's
convertible subordinated debentures to October 1, 1998 (the earliest
call date), less the present value of the dividends that would be
paid on Conseco's common stock that such debentures would be
convertible into during the same period.
12
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(14) Amortization of the cost of policies produced and the cost of
policies purchased prior to the ATC 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).
(15) Amortization of goodwill acquired in the ATC Merger is recognized
over a 40-year period on a straight-line basis.
(16) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(17) Common shares outstanding are increased to reflect the Conseco shares
issued in the ATC Merger. Fully diluted shares also include Conseco
shares which will be issued when ATC's convertible subordinated
debentures are converted.
Adjustments to the pro forma consolidated balance sheet to give effect to
the ATC Merger as of September 30, 1996, are summarized below.
(18) Cash is reduced for payments made to complete the ATC Merger.
(19) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the ATC Merger.
(20) ATC's historical cost of policies purchased is eliminated and
replaced with the cost of policies purchased recognized in the ATC
Merger. Cost of policies purchased reflects the estimated fair value
of ATC's business in force and represents the portion of the cost to
acquire ATC 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 $268.8 $35.4 $14.2 $21.2 $247.6
1998 247.6 32.3 12.9 19.4 228.2
1999 228.2 29.6 12.0 17.6 210.6
2000 210.6 27.3 10.9 16.4 194.2
2001 194.2 25.2 10.1 15.1 179.1
</TABLE>
(21) ATC's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
13
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(22) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. Deferred tax liabilities of ATC are
netted against deferred tax assets of Conseco.
(23) Goodwill acquired in the ATC Merger is recognized.
(24) Notes payable are increased to reflect the fair value of ATC's
convertible subordinated debentures at the date of the ATC Merger.
Such fair value represents the value of the Conseco common stock
which ATC's convertible subordinated debentures will be convertible
into after the ATC Merger. It is assumed that the holders of such
debentures do not convert into Conseco common stock at the time of
the ATC Merger.
In addition, a liability is established representing the present
value of the interest payable on such debentures to October 1, 1998
(the earliest call date), less the present value of the dividends
that would be paid on the Conseco common stock that such debentures
would be convertible into during the same period.
(25) The prior shareholders' equity of ATC is eliminated in conjunction
with the ATC Merger. Common stock and additional paid-in capital is
increased by the value of the Conseco common stock issued in the ATC
Merger.
Transactions relating to the BLH Transaction
Conseco has proposed to acquire all of the common stock of BLH, not owned
by Conseco. In the BLH Transaction, each share of BLH common stock would be
converted into the right to receive a fraction of a share of Conseco common
stock to be determined based on the average price of Conseco's common stock
prior to closing (it is assumed that such price per share of Conseco common
stock will be $48.00, resulting in an exchange ratio of .5208 shares valued at
$25.00). Conseco will issue an assumed 2.6 million shares of Conseco common
stock with a value of approximately $122.5 million.
The pro forma adjustments are applied to the historical consolidated
financial statements of Conseco using the step acquisition method of accounting.
Under this method, the total purchase cost of the common stock of BLH, not
already owned by Conseco, is allocated to the assets and liabilities acquired
based on their relative fair values as of the date of acquisition, 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 values
of the assets and liabilities of BLH included in Conseco's pro forma
consolidated financial statements represent the combination of the following
values: (1) the portion of BLH's net assets acquired by Conseco in the initial
acquisition made by Conseco Capital Partners, L.P. on October 31, 1992, is
valued as of that acquisition date; (2) the portion of BLH's net assets acquired
by Conseco on September 30, 1993, is valued as of that acquisition date; (3) the
portion of BLH's net assets acquired during 1995 and the first quarter of 1996
is valued as of its assumed date of acquisition; and (4) the portion of BLH's
net assets acquired in the BLH Transaction is valued at the assumed dates of
acquisition.
Adjustments to give effect to the BLH Transaction are summarized below:
(26) As described above, the BLH Transaction is accounted for as a step
acquisition. The accounts of BLH are adjusted to reflect the step
basis method of accounting as if the BLH Transaction was completed on
the assumed dates of acquisition.
(27) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item.
(28) Minority interest is reduced to eliminate the ownership interest of
the former shareholders of BLH.
(29) Common shares outstanding are increased to reflect the shares of
Conseco common stock issued in the acquisition of additional shares
of BLH common stock.
(30) Notes payable of BLH are reclassified as notes payable of Conseco,
since BLH would be merged into Conseco.
(31) Common stock and additional paid-in capital is increased by the value
of Conseco common stock issued in the acquisition of additional
shares of BLH common stock.
14
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Transactions relating to the CAF Merger
The CAF Merger will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire CAF will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the CAF Merger, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. In the CAF Merger, each outstanding share of CAF common
stock is assumed to be exchanged for $30 in cash and the right to receive a
fraction of a share of Conseco common stock to be determined based on the
average price of Conseco common stock prior to its closing (it is assumed that
such average price per share of Conseco common stock will be $48.00, resulting
in an exchange ratio of .1354). Conseco will pay approximately $534 million in
cash and issue an assumed 2.4 million shares of Conseco common stock with a
value of approximately $115.7 million to acquire the CAF common stock. In
addition, Conseco is expected to assume a note payable of CAF of $29.0 million
and incur costs related to the CAF Merger (including contract termination,
relocation, legal, accounting and other costs) of approximately $26 million.
The cost to acquire CAF is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
CAF Merger (September 30, 1996) ................................................... $304.6
Notes payable of CAF assumed by Conseco at the assumed date
of the CAF Merger.................................................................. 29.0
Increase (decrease) in CAF's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the CAF Merger:
Actively managed fixed maturity securities...................................... 452.5
Held-to-maturity fixed maturity securities...................................... (358.3)
Cost of policies purchased (related to the CAF Merger).......................... 492.2
Cost of policies produced....................................................... (271.3)
Goodwill (related to the CAF Merger)............................................ 223.7
Insurance liabilities .......................................................... (88.4)
Income taxes.................................................................... (79.3)
------
Total estimated fair value adjustments..................................... 371.1
-------
Total cost to acquire CAF.......................................................... $704.7
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the CAF Merger as of January 1, 1995, are summarized below.
(32) Net investment income and net realized gains of CAF are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities to their estimated fair value.
(33) Change in policy benefits is reduced to reflect the purchase
accounting adjustment made at the assumed date of the CAF Merger.
Such adjustment reflects the lower discount rate used to discount
amounts of expected future benefit payments to correspond to the
adjustments to restate the amortized cost of fixed maturity
investments to their estimated fair value.
(34) Interest expense is reduced to reflect the repayment of notes payable
of CAF by Conseco at the assumed date of the CAF Merger.
(35) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to complete the CAF
Merger.
A change in interest rates of .5 percent on the additional borrowings
under Conseco's bank credit facilities used to complete the CAF
Merger would result in: (1) an increase (or decrease) in pro forma
interest expense of $2.2 million for the nine months ended September
30, 1996; and (2) a decrease (or increase) in pro forma net income of
$1.4 million for the same period.
15
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(36) Amortization of the cost of policies produced for policies sold by
CAF prior to January 1, 1995, 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).
(37) Amortization of goodwill acquired in the CAF Merger is recognized
over a 40-year period on a straight-line basis.
(38) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(39) Common shares outstanding are increased to reflect the shares issued
in the CAF Merger.
Adjustments to the pro forma consolidated balance sheet to give effect to
the CAF Merger as of September 30, 1996, are summarized below.
(40) After the CAF Merger, all held-to-maturity securities are classified
as actively managed fixed maturity securities consistent with the
intention of the new management.
(41) CAF's fixed maturity securities are restated to estimated fair value.
(42) Cash is reduced for payments made to complete the CAF Merger.
(43) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the CAF Merger.
(44) Cost of policies purchased reflects the estimated fair value of CAF's
business in force and represents the portion of the cost to acquire
CAF 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 $492.2 $60.4 $27.1 $33.3 $458.9
1998 458.9 55.2 25.2 30.0 428.9
1999 428.9 52.2 23.6 28.6 400.3
2000 400.3 49.5 22.1 27.4 372.9
2001 372.9 46.9 20.5 26.4 346.5
</TABLE>
(45) CAF's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
(46) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. In addition, deferred tax
liabilities of CAF are netted against deferred tax assets of Conseco.
16
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(47) Goodwill acquired in the CAF Merger is recognized.
(48) Additional insurance liabilities are recognized to reflect the lower
discount rates used to determine the present value of future
obligations, consistent with the lower yields to be earned on
invested assets as a result of recognizing the fair value of fixed
maturity securities.
(49) Notes payable are reduced to reflect the repayment of notes payable
of CAF by Conseco at the assumed date of the CAF Merger.
(50) The prior shareholders' equity of CAF is eliminated in conjunction
with the CAF Merger. Common stock and additional paid-in capital is
increased by the value of Conseco common stock issued in the CAF
Merger.
Transactions relating to the THI Merger
The THI 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 THI 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. Conseco believes the THI 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 THI Merger, each outstanding share of THI
common stock (or its equivalent) is assumed to be exchanged for a fraction of a
share of Conseco common stock to be determined based on the price of Conseco
common stock prior to its closing (it is assumed such average price per share of
Conseco common stock will be $48.00, resulting in an exchange ratio of 1.4583
shares valued at $70.00). Conseco will issue an assumed 2.5 million shares of
Conseco common stock with a value of approximately $121.7 million to acquire the
THI common stock (or equivalents). Pursuant to an offer by Conseco (the
"Exchange Offer"), it is assumed all of THI's convertible subordinated notes
(the "THI Convertibles Notes") will be exchanged for shares of Conseco common
stock based on the price of Conseco common stock prior to the THI Merger (such
fully converted value being the same as the THI Convertible Notes) plus a cash
premium. Using the same assumption that each share of THI will be convertible
into 1.4583 shares of Conseco common stock with a value of $70.00, in aggregate,
the THI Convertible Notes will be convertible into 2.2 million shares of Conseco
common stock with a value of approximately $106.2 million. In addition, Conseco
will pay a premium of approximately $10.0 million in conjunction with the
Exchange Offer. Conseco estimates that it will incur costs related to the THI
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 assumed date of the
THI Merger (September 30, 1996) ................................................... $174.2
THI Convertible Notes converted to Conseco common stock................................. 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 THI Merger:
Cost of policies purchased (related to the THI 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 THI Merger as of January 1, 1995, are summarized below.
17
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(51) 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, with the proceeds used to repay $58.3
million of bank debt and redeem preferred stock with a
redemption value of $25.6 million.
(52) 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 THI Merger; and (ii) pay
the $10.0 million premium in conjunction with the Exchange
Offer.
(53) Amortization of the cost of policies produced and the cost of
policies purchased prior to the THI 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).
(54) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(55) Common shares outstanding are increased to reflect the Conseco
shares issued in the THI Merger and the conversion of the THI
Convertible Notes in conjunction with the Exchange Offer.
(56) 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 previous pro forma
adjustments for the ATC Merger did 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 THI Merger as of September 30, 1996, are summarized below.
(57) Actively managed fixed maturity securities with a carrying value
of $83.9 million are assumed to be sold at the date of the THI
Merger.
(58) Short-term investments are reduced for: (i) payments made to
complete the THI 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 THI Merger and related transactions.
(59) THI's historical cost of policies purchased is eliminated and
replaced with the cost of policies purchased recognized in the
THI 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.
18
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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>
(60) THI's cost of policies produced is eliminated since such amounts
are reflected in the determination of the cost of policies
purchased.
(61) 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.
(62) Reinsurance receivables and insurance liabilities related to
business of THI ceded to ATC are eliminated in consolidation.
(63) Notes payable are decreased 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
THI Merger and related transactions.
(64) The prior shareholders' equity of THI is eliminated in
conjunction with the THI Merger. Common stock and additional
paid-in capital is increased by the value of Conseco common
stock issued in the THI Merger. The value of the THI Convertible
Notes represents the value of the Conseco common stock which
will be issued in conjunction with the Exchange Offer. Preferred
stock of THI is eliminated to reflect its redemption.
S:\ACCTING\SECRPT\10Q-3-96.CNC\EXH99.2A
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