AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
REGISTRATION NO. 333-20811
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONSECO, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
INDIANA 6719 35-1468632
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
</TABLE>
11825 N. PENNSYLVANIA ST., CARMEL, INDIANA 46032, (317) 817-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LAWRENCE W. INLOW
CONSECO, INC.
11825 N. PENNSYLVANIA ST.
CARMEL, INDIANA 46032
(317) 817-6163
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
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BILLY B. HILL, JR. STANLEY H. MEADOWS, P.C.
PIONEER FINANCIAL SERVICES, INC. MCDERMOTT, WILL & EMERY
1750 EAST GOLF ROAD 227 WEST MONROE STREET
SCHAUMBURG, ILLINOIS 60173 CHICAGO, ILLINOIS 60606
(847) 413-7077 (312) 984-7570
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective and all other conditions to the merger of Rock Acquisition Company, a
wholly owned subsidiary of Conseco, Inc. ("Conseco"), with and into Pioneer
Financial Services, Inc. ("PFS") pursuant to an Agreement and Plan of Merger
described in the enclosed Proxy Statement/Prospectus have been satisfied or
waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CONSECO HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL CONSECO SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of proxy
statement/prospectus: one to be used in connection with the solicitation of
proxies pursuant to the Merger (the "Proxy Statement/Prospectus"), and one to be
used in connection with the resale of Conseco Common Stock by affiliates of PFS
(the "Resale Prospectus"). Each of the pages included herein for use in the
Resale Prospectus is labeled "Alternate Page for Resale Prospectus."
<PAGE>
PIONEER FINANCIAL SERVICES, INC.
1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
Dear Stockholder:
You are cordially invited to attend a special meeting (the "Special
Meeting") of stockholders of Pioneer Financial Services, Inc. ("PFS"), to be
held on May ___, 1997 at__________ at 10:00 a.m., local time.
At the Special Meeting, stockholders of record of PFS at the close of
business on March 31, 1997 will be asked to consider and vote upon a proposal to
authorize and adopt an Agreement and Plan of Merger, dated as of December 15,
1996 (the "Merger Agreement"), by and among PFS, Conseco, Inc., an Indiana
corporation ("Conseco"), and Rock Acquisition Company, a Delaware corporation
and wholly owned subsidiary of Conseco ("RAC"), and the transactions
contemplated thereby. Pursuant to the terms of the Merger Agreement, among other
things, (1) RAC will be merged with and into PFS (the "Merger"), with PFS
surviving the Merger as a wholly owned subsidiary of Conseco, and (2) each
outstanding share of Common Stock, $1.00 par value per share ("PFS Common
Stock"), of PFS (other than shares of PFS Common Stock held as treasury shares
by PFS) will be converted into the right to receive the Merger Consideration (as
defined in the Merger Agreement).
Details of the proposed Merger, including the terms of the Merger
Consideration and other important information concerning PFS and Conseco, appear
in the accompanying Proxy Statement/Prospectus. Please give this material your
careful attention. Details regarding the background of and reasons for the
proposed Merger, among other things, may be found in the section of the Proxy
Statement/Prospectus entitled "The Merger."
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF PFS AND THE STOCKHOLDERS OF PFS, AND HAS APPROVED AND AUTHORIZED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD OF
DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF PFS VOTE FOR THE AUTHORIZATION AND
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
The Board of Directors has received a written opinion of Donaldson, Lufkin
& Jenrette Securities Corporation, which has acted as financial advisor to PFS
in connection with the Merger, as to the fairness to PFS's stockholders, from a
financial point of view, of the Merger Consideration to be received by PFS's
stockholders pursuant to the terms of the Merger Agreement. Details regarding
such opinion may be found in the section of the Proxy Statement/Prospectus
entitled "The Merger -- Opinion of Financial Advisor to PFS," and a copy of such
opinion is attached as an annex thereto.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy and return it in the enclosed postage prepaid
envelope as soon as possible so that your shares will be represented at the
Special Meeting. If you attend the Special Meeting, you may vote in person even
if you have previously returned your proxy. If you have any questions regarding
the proposed transaction, please call Georgeson & Company, Inc., our proxy
solicitation agent, toll free at (800) 223-2064.
Sincerely,
Peter W. Nauert
Chairman of the Board of Directors
_________, 1997
<PAGE>
PIONEER FINANCIAL SERVICES, INC.
1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
To the Stockholders of Pioneer Financial Services, Inc.:
Notice is hereby given that a special meeting (the "Special Meeting") of
the stockholders of Pioneer Financial Services, Inc. ("PFS") will be held on May
__, 1997 at__________, at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to authorize and adopt the
Agreement and Plan of Merger, dated as of December 15, 1996 (the "Merger
Agreement"), by and among PFS, Conseco, Inc., an Indiana corporation
("Conseco"), and Rock Acquisition Company, a Delaware corporation and
wholly owned subsidiary of Conseco ("RAC"), and the transactions
contemplated thereby, pursuant to which, among other things, (1) RAC will
be merged with and into PFS(the "Merger"), with PFS surviving the Merger as
a wholly owned subsidiary of Conseco, and (2) each outstanding share of
Common Stock, $1.00 par value per share (the "PFS Common Stock"), of PFS
(other than shares of PFS Common Stock held as treasury shares by PFS) will
be converted into the right to receive the Merger Consideration (as defined
in the Merger Agreement).
2. To transact any and all other business that may properly come
before the meeting or any adjournments or postponements thereof.
The Merger is more completely described in the accompanying Proxy
Statement/Prospectus, and a copy of the Merger Agreement is attached as Annex A
thereto.
THE PFS BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF PFS AND THE STOCKHOLDERS OF PFS, AND HAS APPROVED AND AUTHORIZED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE PFS BOARD OF
DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF PFS VOTE FOR THE AUTHORIZATION AND
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
The PFS Board of Directors has fixed the close of business on March 31,
1997, as the record date (the "Record Date") for determination of stockholders
entitled to notice of, and to vote at, the Special Meeting and any adjournments
and postponements thereof. Only stockholders of record at the close of business
on the Record Date are entitled to notice of, and to vote at, such meeting. A
complete list of stockholders entitled to vote at the Special Meeting will be
available for examination at the offices of PFS at 1750 East Golf Road,
Schaumburg, Illinois for ten days prior to such meeting. Questions regarding the
proposed transaction should be directed to Georgeson & Company, Inc., our proxy
solicitation agent, toll free at (800) 223-2064.
By Order of the Board of Directors
A. Clark Waid III
Secretary
____________, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. HOWEVER, WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE URGED TO
PROMPTLY MARK, SIGN, DATE AND RETURN THE ACCOMPANYING FORM OF PROXY IN THE
ENCLOSED SELF-ADDRESSED, STAMPED ENVELOPE SO THAT YOUR SHARES OF STOCK MAY BE
REPRESENTED AND VOTED IN ACCORDANCE WITH YOUR WISHES AND IN ORDER THAT THE
PRESENCE OF A QUORUM MAY BE ASSURED AT THE SPECIAL MEETING. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU HAVE PREVIOUSLY RETURNED
YOUR PROXY.
IMPORTANT
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES REPRESENTING PFS COMMON STOCK AT
THIS TIME. IF THE MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING
THE SURRENDER OF YOUR STOCK CERTIFICATES.
<PAGE>
PIONEER FINANCIAL SERVICES, INC.
PROXY STATEMENT
------------------------
CONSECO, INC.
PROSPECTUS
SHARES OF COMMON STOCK
This Proxy Statement/Prospectus is being furnished to holders of shares of
Common Stock, $1.00 par value per share ("PFS Common Stock"), of Pioneer
Financial Services, Inc., a Delaware corporation ("PFS"), in connection with the
solicitation of proxies by the PFS Board of Directors for use at a special
meeting (the "Special Meeting") of PFS stockholders to be held on May __ , 1997
at _____ commencing at 10:00 a.m., local time. The Special Meeting has been
called to consider and vote on a proposal to authorize and adopt an Agreement
and Plan of Merger, dated as of December 15, 1996 (the "Merger Agreement"), by
and among PFS, Conseco, Inc., an Indiana corporation ("Conseco"), and Rock
Acquisition Company, a Delaware corporation and wholly owned subsidiary of
Conseco ("RAC"), pursuant to which RAC will be merged with and into PFS (the
"Merger"), with PFS surviving the Merger as a wholly owned subsidiary of
Conseco.
This Proxy Statement/Prospectus also constitutes the Prospectus of Conseco
filed as part of a Registration Statement on Form S-4 (together with all
amendments, supplements, exhibits and schedules thereto, the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of Common Stock, no par value per share ("Conseco Common Stock"), of
Conseco issuable in connection with the Merger. All information concerning
Conseco and all companies other than PFS contained in this Proxy
Statement/Prospectus has been furnished by Conseco. All information concerning
PFS contained in this Proxy Statement/Prospectus has been furnished by PFS.
Upon the consummation of the Merger, each share of PFS Common Stock issued
and outstanding immediately prior to the Effective Time (as defined below)
(other than shares of PFS Common Stock held as treasury shares by PFS) will be
converted into the right to receive (i) if the Conseco Share Price (as defined
below) is greater than or equal to $28.00 per share and less than or equal to
$31.36 per share, .8928 of a validly issued, fully paid and nonassessable share
of Conseco Common Stock, (ii) if the the Conseco Share Price is less than $28.00
per share, the fraction (rounded to the nearest ten-thousandth) of a share of
Conseco Common Stock determined by dividing $25.00 by the Conseco Share Price or
(iii) if the Conseco Share Price is greater than $31.36 per share, the fraction
(rounded to the nearest ten-thousandth) of a share of Conseco Common Stock
determined by dividing $28.00 by the Conseco Share Price (such fraction as set
forth in clauses (i) through (iii) above, the "Exchange Ratio"). The "Conseco
Share Price" shall be equal to the average of the closing prices of the Conseco
Common Stock on the NYSE Composite Transactions Reporting System for the ten
consecutive trading days immediately preceding the second trading day prior to
the Effective Time. Assuming that the Effective Time for the Merger were to
occur on _____, 1997, the date of this Proxy Statement/Prospectus, the Conseco
Share Price would have been $__.
The Merger will become effective on the date that a Certificate of Merger
is filed with the Secretary of State of Delaware or at such time thereafter as
is provided in the Cerificate of Merger (the "Effective Time"). On the date of
the Special Meeting, PFS stockholders will not know the exact number of shares
of Conseco Common Stock to be received upon consummation of the Merger. The
pricing formula used to compute the Merger Consideration was decided upon by
Conseco and PFS to provide PFS stockholders with Conseco Common Stock having a
value of between $25.00 and $28.00 per share of PFS Common Stock.
The Conseco Common Stock is listed on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "CNC". On _______, 1997, the closing price of the
Conseco Common Stock as reported on the NYSE was $_____.
The PFS Common Stock is listed on the NYSE under the symbol "PFS". On
______, 1997, the closing price of the PFS Common Stock as reported on the NYSE
was $____.
This Proxy Statement/Prospectus and the related form of proxy are first
being mailed to stockholders of PFS on or about April __, 1997.
------------------------
THE SHARES OF CONSECO COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS APRIL __, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
AVAILABLE INFORMATION
Conseco and PFS are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file periodic reports, proxy statements and other
information with the Commission. The periodic reports, proxy statements and
other information filed by Conseco and PFS with the Commission may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material also can be obtained, at prescribed
rates, from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Commission maintains a Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants, including Conseco and PFS, that
file electronically with the Commission. The Conseco Common Stock and PFS Common
Stock are listed on the NYSE and such reports and other information may also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Conseco has filed the Registration Statement with the Commission with
respect to the Conseco Common Stock to be issued pursuant to or as contemplated
by the Merger Agreement. This Proxy Statement/Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED
BY REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON
WRITTEN OR ORAL REQUEST. WRITTEN REQUESTS FOR SUCH DOCUMENTS RELATING TO
CONSECO SHOULD BE DIRECTED TO JAMES W. ROSENSTEELE, VICE PRESIDENT, INVESTOR
RELATIONS, CONSECO, INC., 11825 NORTH PENNSYLVANIA STREET, CARMEL, INDIANA
46032, AND TELEPHONE REQUESTS MAY BE DIRECTED TO MR. ROSENSTEELE AT (317)
817-2893. WRITTEN REQUESTS FOR SUCH DOCUMENTS RELATING TO PFS SHOULD BE DIRECTED
TO DIRECTOR OF INVESTOR RELATIONS, PIONEER FINANCIAL SERVICES, INC., 1750 EAST
GOLF ROAD, SCHAUMBURG, ILLINOIS 60173 AND TELEPHONE REQUESTS MAY BE DIRECTED TO
DIRECTOR OF INVESTOR RELATIONS AT (847) 995-0400. IN ORDER TO ENSURE TIMELY
DELIVERY OF SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE ____________,
1997.
The following documents previously filed with the Commission pursuant to
the Exchange Act are incorporated herein by this reference:
1. Conseco's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (including those portions of Conseco's proxy statement
for its 1996 annual meeting of shareholders incorporated by reference
therein) ("Conseco's Annual Report"); Conseco's Current Report on Form 8-K
dated August 2, 1996 (which includes the historical financial statements of
Life Partners Group, Inc. ("LPG")); and the description of Conseco Common
Stock in Conseco's Registration Statements filed pursuant to Section 12 of
the Exchange Act, and any amendment or report filed for the purpose of
updating any such description.
2. PFS's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and the description of PFS Common Stock in PFS's Registration
Statement filed pursuant to Section 12 of the Exchange Act, and any
amendment or report filed for the purpose of updating such description.
iii
<PAGE>
In addition, the Merger Agreement, a copy of which is attached hereto as
Annex A, is incorporated herein by reference.
All documents filed by Conseco or PFS pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date
of the Special Meeting shall be deemed to be incorporated by reference herein
and to be a part hereof from the date any such document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that also is incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall be deemed, except as so modified or superseded, to constitute a part
hereof. All information appearing in this Proxy Statement/Prospectus is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference,
except to the extent set forth in the immediately preceding statement.
State insurance holding company laws and regulations applicable to Conseco
and PFS generally provide that no person may acquire control of Conseco or PFS,
and thus indirect control of their respective insurance subsidiaries, unless
such person has provided certain required information to, and such acquisition
is approved (or not disapproved) by, the appropriate insurance regulatory
authorities. Generally, any person acquiring beneficial ownership of ten percent
or more of the total outstanding shares of Conseco Common Stock or PFS Common
Stock, as the case may be, would be presumed to have acquired such control,
unless the appropriate insurance regulatory authorities upon advance application
determine otherwise. Appropriate applications with respect to the Merger have
been, or will be, made and it is anticipated, although there can be no
assurance, that the necessary approvals will be obtained.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CONSECO OR PFS. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CONSECO
OR PFS SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS SUCH COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT.
iv
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AVAILABLE INFORMATION................................................................. ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... iii
TABLE OF CONTENTS..................................................................... v
SUMMARY............................................................................... 1
General............................................................................. 1
The Companies....................................................................... 1
The Special Meeting................................................................. 2
The Merger; The Merger Agreement.................................................... 4
Selected Historical Financial Information of Conseco................................ 10
Selected Historical Financial Information of LPG.................................... 12
Selected Historical Financial Information of PFS.................................... 14
Summary Unaudited Pro Forma Consolidated Financial Information of Conseco........... 16
Comparative Unaudited Per Share Data of Conseco and PFS............................. 19
Market Price Information............................................................ 20
INFORMATION CONCERNING CONSECO AND RAC................................................ 21
Background.......................................................................... 21
Operating Segments.................................................................. 22
General Information Concerning Conseco and RAC...................................... 24
INFORMATION CONCERNING PFS............................................................ 25
THE SPECIAL MEETING................................................................... 26
General............................................................................. 26
Matters to be Considered at the Special Meeting..................................... 26
Voting at the Special Meeting; Record Date; Quorum.................................. 26
Proxies; Revocation of Proxies...................................................... 29
THE MERGER............................................................................ 30
Background of the Merger............................................................ 30
Conseco's Reasons for the Merger.................................................... 33
PFS's Reasons for the Merger; Recommendation of the PFS Board of Directors......... 34
Opinion of Financial Advisor to PFS................................................. 35
Certain Consequences of the Merger.................................................. 40
Conduct of the Business of Conseco and PFS after the Merger......................... 40
Interests of Certain Persons in the Merger.......................................... 40
Accounting Treatment................................................................ 42
Certain Federal Income Tax Consequences............................................. 42
Regulatory Approvals................................................................ 43
</TABLE>
v
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NYSE Listing of Conseco Common Stock................................................ 44
Absence of Appraisal Rights......................................................... 44
THE MERGER AGREEMENT.................................................................. 44
The Merger.......................................................................... 44
Effective Time...................................................................... 45
Conversion of Shares; Exchange of Stock Certificates; No Fractional Amounts......... 45
Treatment of PFS Stock Options...................................................... 46
Treatment of PFS Convertible Subordinated Notes..................................... 46
PFS Employee Matters................................................................ 47
Representations and Warranties...................................................... 47
Certain Covenants................................................................... 47
Conditions to the Merger............................................................ 49
Termination......................................................................... 50
Right of PFS Board of Directors to Withdraw Its Recommendation...................... 50
Breakup Fee......................................................................... 50
Expenses............................................................................ 51
Modification or Amendment........................................................... 51
PFS Affiliate Registration Rights................................................... 51
Stockholder Litigation.............................................................. 51
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CONSECO...................... 52
COMPARISON OF SHAREHOLDERS' RIGHTS.................................................... 79
Amendment of By-laws................................................................ 79
Certain Provisions Relating to Acquisitions......................................... 79
Right to Bring Business Before a Special Meeting of Shareholders.................... 80
Shareholder Action by Written Consent............................................... 81
Removal of Directors................................................................ 81
Director Liability.................................................................. 81
Indemnification..................................................................... 81
Dividends and Repurchases........................................................... 82
Dissenters' Rights.................................................................. 82
Director and Officer Discretion..................................................... 83
MANAGEMENT OF CONSECO AND PFS UPON CONSUMMATION OF THE MERGER......................... 83
LEGAL MATTERS......................................................................... 84
EXPERTS............................................................................... 84
INDEPENDENT AUDITORS.................................................................. 84
OTHER MATTERS......................................................................... 84
Annex A -- Agreement and Plan of Merger............................................... A-1
Annex B -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation............. B-1
</TABLE>
vi
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. This summary is not intended to be complete and
is qualified in its entirety by reference to the more detailed information and
financial statements, including the notes thereto, contained elsewhere, or
incorporated by reference, in this Proxy Statement/Prospectus and the Annexes
hereto. All share and per share information in this Proxy Statement/Prospectus
concerning Conseco has been adjusted to reflect a two-for-one stock split of the
Conseco Common Stock effected February 11, 1997, unless otherwise stated. Except
as otherwise indicated, all financial information in this Proxy
Statement/Prospectus is presented in accordance with generally accepted
accounting principles ("GAAP"). Stockholders are urged to read this Proxy
Statement/Prospectus, the Annexes hereto and the documents incorporated herein
by reference in their entirety. Unless otherwise defined herein, capitalized
terms used in this summary have the respective meanings ascribed to them
elsewhere in this Proxy Statement/Prospectus.
GENERAL
This Proxy Statement/Prospectus relates to the proposed Merger of RAC with
and into PFS pursuant to the Merger Agreement. See "The Merger."
THE COMPANIES
CONSECO, INC. ................ Conseco is a financial services holding company.
Conseco develops, markets and administers
annuity, individual health insurance and
individual life insurance products. Conseco's
operating strategy is to grow the insurance
business within its subsidiaries by focusing its
resources on the development and expansion of
profitable products and strong distribution
channels. Conseco has supplemented such growth
by acquiring companies that have profitable
niche products, strong distribution systems and
progressive management teams who can work with
Conseco to implement Conseco's operating and
growth strategies. Once a company has been
acquired, Conseco's operating strategy has been
to consolidate and streamline management and
administrative functions, to realize superior
investment returns through active asset
management, to eliminate unprofitable products
and distribution channels, and to expand and
develop the profitable distribution channels and
products.
Consistent with its strategy of supplementing
its growth by acquiring companies that have
profitable niche products, strong distribution
systems and progressive management teams,
Conseco recently completed a series of
acquisitions. On August 2, 1996, Conseco
completed its acquisition of LPG. On September
30, 1996, Conseco acquired the shares of
American Life Holdings, Inc. ("ALH")(of which
Conseco previously owned 37 percent) that
Conseco or its affiliates did not previously
own. On December 17, 1996, Conseco completed its
acquisition (the "ATC Merger") of American
Travellers Corporation ("ATC"). On December 23,
1996, Conseco completed its acquistion (the "THI
Merger") of Transport Holdings Inc. ("THI"). On
December 31, 1996, Conseco acquired the shares
of Bankers Life Holding Corporation ("BLH")
which Conseco did not previously own. On March
4, 1997, Conseco completed its acquisition (the
"CAF Merger") of Capitol American Financial
Corporation ("CAF").
1
<PAGE>
See "Incorporation of Certain Documents by
Reference," "-- Selected Historical Financial
Information of Conseco," "-- Selected Historical
Financial Information of LPG," "Information
Concerning Conseco" and "Unaudited Pro Forma
Consolidated Financial Statements of Conseco"
for additional information concerning Conseco,
LPG, ATC, THI, BLH and CAF. Conseco's executive
offices are located at 11825 North Pennsylvania
Street, Carmel, Indiana 46032 and the telephone
number for Conseco is (317) 817-6100.
ROCK ACQUISITION COMPANY...... RAC, a wholly owned subsidiary of Conseco, was
formed for the purpose of effecting the Merger.
To date, RAC has not engaged in any activities
other than those incident to its organization
and the consummation of the Merger. See
"Information Concerning Conseco and RAC."
PIONEER FINANCIAL SERVICES,
INC........................... PFS, through its insurance subsidiaries,
underwrites life insurance and annuities and
health insurance in selected niche markets
throughout the United States. See "Information
Concerning PFS" and "-- Selected Historical
Financial Information of PFS" for additional
information concerning PFS. PFS's executive
offices are located at 1750 East Golf Road,
Schaumburg, Illinois 60173 and its telephone
number is (847) 995-0400.
THE SPECIAL MEETING
TIME, DATE AND PLACE.......... The Special Meeting will be held at 10:00 a.m.,
local time, on May __, 1997, at __.
PURPOSE OF THE MEETING........ The purpose of the Special Meeting is to
consider and vote upon (1) a proposal to
authorize and adopt the Merger Agreement and the
transactions contemplated thereby and (2) such
other business as may properly come before the
Special Meeting or any adjournments or
postponements thereof. See "The Special Meeting
-- Matters to be Considered at the Special
Meeting."
RECORD DATE, SHARES ENTITLED
TO VOTE, QUORUM............... Holders of record of shares of PFS Common Stock
at the close of business on March 31, 1997
(the "Record Date") are entitled to notice of
and to vote at the Special Meeting. As of the
Record Date, there were ______ shares of PFS
Common Stock outstanding and entitled to vote.
2
<PAGE>
Each holder of record of shares of PFS Common
Stock on the Record Date is entitled to cast,
either in person or by properly executed proxy,
one vote per share on the Merger Agreement and
the other matters, if any, properly submitted
for the vote of the PFS stockholders at the
Special Meeting. Each of the PFS directors has
agreed to vote his shares in favor of the
Merger, except in certain limited circumstances.
As of the Record Date, PFS's directors and
executive officers as a group beneficially owned
____ shares (___ percent) of the outstanding
shares of PFS Common Stock entitled to vote at
the Special Meeting.
Each PFS director has agreed to vote his
shares of PFS Common Stock in favor of approval
of the Merger unless, as permitted under the
Merger Agreement, the Board of Directors of PFS
withdraws or modifies its approval or
recommendation of the Merger Agreement or the
Merger or enters into an agreement with respect
to an "Acquisition Proposal" (as hereinafter
defined) or the Merger Agreement is otherwise
terminated under certain circumstances. The PFS
directors collectively own an aggregate of
1,543,280 shares of PFS Common Stock,
representing 13.1 percent of all PFS Common
Stock outstanding. See "Right of PFS Board of
Directors to Withdraw its Recommendation; Fees"
and "The Merger Agreement - Termination."
The presence, in person or by properly executed
proxy, of the holders of a majority of the
shares of PFS Common Stock outstanding and
entitled to vote at the Special Meeting will
constitute a quorum. See "The Special Meeting --
Voting at the Special Meeting; Record Date;
Quorum."
VOTE REQUIRED................. The authorization and adoption by PFS of the
Merger Agreement will require the affirmative
vote of the holders of a majority of the voting
power of the outstanding capital stock entitled
to vote thereon. Thus, the affirmative vote of
shares of PFS capital stock representing at
least _________ votes will be required to
authorize and adopt the Merger Agreement and the
Merger. See "The Special Meeting -- Voting at
the Special Meeting; Record Date; Quorum."
3
<PAGE>
PROXIES; REVOCATION OF
PROXIES....................... The enclosed proxy card permits each PFS
stockholder to specify that shares held by such
PFS stockholder be voted "FOR" or "AGAINST" (or
"ABSTAIN" from) the authorization and adoption
of the Merger Agreement and the Merger. If
properly executed and returned, such proxy will
be voted in accordance with the choice
specified. Where a signed proxy card is
returned, but no choice is specified, the shares
held by such PFS stockholder will be voted for
authorization and adoption of the Merger
Agreement and the Merger. Abstentions will have
the same practical effect as a vote against the
authorization and adoption of the Merger
Agreement and the Merger. See "The Special
Meeting -- Voting at the Special Meeting; Record
Date; Quorum."
A stockholder may revoke a proxy at any time
prior to the vote on the Merger Agreement and
the Merger by submitting a later-dated proxy
with respect to the same shares, delivering
written notice of revocation to the Secretary of
PFS at any time prior to such vote or attending
the Special Meeting and voting in person. Mere
attendance at the Special Meeting will not
itself have the effect of revoking the proxy.
See "The Special Meeting -- Proxies; Revocation
of Proxies."
THE MERGER; THE MERGER AGREEMENT
REASONS FOR THE MERGER;
RECOMMENDATION OF THE PFS
BOARD OF DIRECTORS.......... Conseco. The Conseco Board of Directors approved
the Merger Agreement and the Merger based on a
number of factors, including its belief that:
(1) the addition of PFS's agents and
distribution channels would increase the number
of licensed agents to 150,000 and would further
diversify Conseco's current distribution system
and provide Conseco additional opportunities to
cross-market its current products; (2) the
Merger offers Conseco and PFS the opportunity to
improve their profitability through the
achievements of economies of scale due to the
similar nature of their businesses and the
elimination of redundancies such as public
reporting obligations and similar holding
company costs and the costs associated with
maintaining multiple operating locations; and
(3) the Merger and other recently completed and
pending acquisitions would further strengthen
Conseco's position in its targeted markets. See
"The Merger -- Conseco's Reasons for the
Merger."
PFS. After careful consideration by the members
of the PFS Board of Directors of the terms of
the Merger Agreement and consultation with its
advisors, the PFS Board of Directors voted
unanimously to approve the Merger Agreement in
the form presented to it at the PFS Board of
Directors meeting on December 15, 1996, with
such changes thereto as management of PFS may
approve. In voting to approve the Merger
Agreement and the Merger, the PFS Board of
Directors considered many different factors,
including: (1) the return to PFS stockholders
represented by the premium over the then current
market price of the PFS Common Stock offered by
Conseco as compared to the time that would be
required if the Merger were not consummated to
achieve an equivalent stockholder value (on
December 13, 1996, the last trading day prior to
the public announcement of the Merger, the
Merger Consideration represented a premium of
$7.90 over the PFS Common Stock price); (2) the
increased security for PFS's policyholders and
the potential additional opportunities for PFS's
employees and agents expected to result from
Conseco's financial strength and competitive
position; (3) the financial condition and
results of operations of Conseco and the PFS
Board of Directors' perception of the more
favorable overall business prospects of Conseco
and PFS on a combined basis as compared to PFS's
prospects as an independent entity; (4) the tax
deferred nature of the transaction; (5) the
potential increase in value in the Conseco
Common Stock after the Merger based on Conseco's
financial strength and competitive position; (6)
the highly competitive nature of the life and
health insurance business; (7) the importance in
the industry of maintaining certain financial
and claims-paying ratings issued by rating
agencies and the fact that PFS, as an
independent entity, may have difficulties
satisfying the capital requirements necessary to
achieve such ratings; (8) the current trend of
consolidation within the insurance industry; (9)
the broader, more active trading market for
Conseco Common Stock; and (10) the opinion
rendered to the PFS Board of Directors by
Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), financial advisor to PFS,
with regard to the fairness to the holders of
PFS Common Stock from a financial point of view,
of the Exchange Ratio (as defined below under
"Merger Consideration"). The PFS Board of
Directors also considered the following
additional factors: (1) the risk of owning
Conseco Common Stock rather than PFS Common
Stock and the possible negative impact based
upon potentially different business plans and
the fact that Conseco's other operations may
weigh down PFS operating gains; (2) the
uncertainty of the impact of the Merger on PFS's
employees; (3) the volatility of the Conseco
Common Stock in the past and the impact such
volatility may have on the Merger Consideration;
(4) the $1.0 million of Conseco expenses to be
paid by PFS if the requisite approval of the PFS
stockholders is not obtained and the other
conditions have been satisified or waived,
unless Conseco is materially in breach of the
Merger Agreement, and the $8.0 million break-up
fee to be paid by PFS to Conseco in the event
that the PFS Board of Directors withdraws or
modifies its approval of the Merger or enters
into any agreement with respect to any
acquisition proposal; and (5) the interest of
members of PFS management in deciding to approve
the transaction, including the facts that Mr.
Nauert will be entitled to receive $4.5 million
and will enter into an employment agreement with
Conseco and Messrs. Scheper and Brophy will be
entitled to receive amounts equal to the present
value, discounted at an annual rate of 8
percent, of an amount equal to the salary which
would have been payable to such officer during
the period from the Effective Time through
August 31, 1998 based on rates of annual base
salary payable to Messrs. Scheper and Brophy of
$425,000 and $325,000. No factor reviewed by the
Board was considered more relevant than any
other.
4
<PAGE>
The PFS Board of Directors recommends that
stockholders of PFS authorize and adopt the
Merger Agreement and the transactions
contemplated thereby. In evaluating the
recommendation of the PFS Board of Directors,
stockholders of PFS should carefully consider,
among other things, the matters described under
"The Merger -- PFS's Reasons for the Merger;
Recommendation of the PFS Board of Directors"
and "-- Interests of Certain Persons in the
Merger."
OPINION OF FINANCIAL
ADVISOR TO PFS................ DLJ has delivered its written opinion to the PFS
Board of Directors that, as of December 15,
1996, and based upon and subject to the
assumptions, limitations and qualifications set
forth in such opinion, the Exchange Ratio is
fair, from a financial point of view, to the
holders of PFS Common Stock.
The full text of the written opinion of DLJ,
which sets forth assumptions made, procedures
followed, other matters considered and limits of
the review undertaken in connection with the
opinion, is attached hereto as Annex B and is
incorporated herein by reference. Holders of PFS
Common Stock should read such opinion in its
entirety. See "The Merger -- Opinion of
Financial Advisor to PFS."
EFFECT OF MERGER ON PFS COMMON
STOCK....................... Upon consummation of the Merger: (1) RAC will be
merged with and into PFS, with PFS surviving the
Merger as a wholly owned subsidiary of Conseco;
and (2) each outstanding share of PFS Common
Stock (other than shares of PFS Common Stock
held as treasury shares by PFS) will be
converted into the right to receive the Merger
Consideration (as defined below). Fractional
shares of Conseco Common Stock will not be
issuable in connection with the Merger. PFS
stockholders otherwise entitled to fractional
shares of Conseco Common Stock will receive the
value of such fractional shares in cash,
determined as described herein under "The Merger
Agreement -- Conversion of Shares; Exchange of
Stock Certificates; No Fractional Amounts."
A copy of the Merger Agreement is attached as
Annex A to this Proxy Statement/Prospectus and
is incorporated by reference herein. See "The
Merger Agreement."
MERGER CONSIDERATION.......... Upon the consummation of the Merger, each share
of PFS Common Stock issued and outstanding
immediately prior to the Effective Time (as
defined below) (other than shares of PFS
5
<PAGE>
Common Stock held as treasury shares by PFS)
will be converted into the right to receive (i)
if the Conseco Share Price is greater than or
equal to $28.00 per share and less than or equal
to $31.36 per share, .8928 of a validly issued,
fully paid and nonassessable share of Conseco
Common Stock, (ii) if the the Conseco Share
Price is less than $28.00 per share, the
fraction (rounded to the nearest ten-thousandth)
of a share of Conseco Common Stock determined by
dividing $25.00 by the Conseco Share Price or
(iii) if the Conseco Share Price is greater than
$31.36 per share, the fraction (rounded to the
nearest ten-thousandth) of a share of Conseco
Common Stock determined by dividing $28.00 by
the Conseco Share Price. Assuming that the
Effective Time for the Merger were to occur on
April _____, 1997, the date of this Proxy
Statement/Prospectus, the Conseco Share Price
would have been $__. The following table shows,
for a range of assumed Conseco Share Prices, the
fraction of a share of Conseco Common Stock
which would be issued in the Merger for each
share of PFS Common Stock and the percentage of
Conseco Common Stock which PFS stockholders
would own in the aggregate after consummation of
the Merger (based on the number of shares of
Conseco Common Stock and PFS Common Stock
outstanding on March 14 and March 18, 1997,
respectively):
Conseco
Share Exchange Post-Merger
Price Ratio Ownership
----- ----- ---------
$44.00 .6364 3.9%
42.00 .6667 4.1
40.00 .7000 4.3
38.00 .7368 4.5
36.00 .7778 4.8
34.00 .8235 5.0
32.00 .8750 5.3
31.36 .8928 5.4
30.00 .8928 5.4
28.00 .8928 5.4
26.00 .9615 5.8
The Conseco Common Stock to be issued to holders
shares of PFS Common Stock in accordance with
the Merger Agreement and any cash to be paid in
lieu of fractional shares of Conseco Common
Stock are referred to collectively as the
"Merger Consideration." No fractional shares of
Conseco Common Stock will be issued in the
Merger. Each PFS stockholder who otherwise would
have been entitled to a fraction of a share of
Conseco Common Stock will receive in lieu
thereof cash in accordance with the terms of the
Merger Agreement. Conseco will apply to have the
additional shares of Conseco Common Stock issued
pursuant to the Merger Agreement listed on the
NYSE.
See "The Merger Agreement -- Conversion of
Shares; Exchange of Stock Certificates; No
Fractional Amounts."
Promptly after consummation of the Merger, a
letter of transmittal from First Union National
Bank of North Carolina (the "Exchange Agent")
(including instructions setting forth the
procedures for exchanging such holder's
certificates representing PFS Common Stock
("Certificates") for the Merger Consideration
payable to such holder pursuant to the Merger
Agreement) will be sent to each holder of
record, as of the Effective Time, of shares of
PFS Common Stock. Upon surrender to the Exchange
Agent of such Certificates, together with a duly
completed and executed letter of transmittal,
such holder will promptly receive the Merger
Consideration for each share of PFS Common Stock
previously represented by the Certificates so
surrendered. See "The Merger Agreement --
Conversion of Shares; Exchange of Stock
Certificates; No Fractional Amounts."
EFFECTIVE TIME OF THE
MERGER........................ The Effective Time of the Merger will be the
date that a Certificate of Merger is filed with
the Secretary of State of Delaware (the
"Certificate of Merger") or at such time
thereafter as is provided in the Certificate of
Merger. See "The Merger Agreement -- Effective
Time." Assuming that the remaining conditions to
the Merger, including the required regulatory
approvals, have been satisfied, the Merger will
be consummated two business days following
approval by the PFS stockholders.
6
<PAGE>
TREATMENT OF PFS STOCK OPTIONS
.............................. From and after the Effective Time, each
outstanding unexpired option to purchase shares
of PFS Common Stock (a "PFS Stock Option") which
has been granted pursuant to PFS's Nonqualified
Stock Option Plan, as amended to December 15,
1996, or PFS's 1994 Omnibus Stock Incentive
Program, as amended to December 15, 1996
(collectively, the "Stock Plans"), shall be
fully vested and shall be exercisable, for the
same aggregate consideration payable to exercise
such PFS Stock Option immediately prior to the
Effective Time, for the number of shares of
Conseco Common Stock which the holder would have
been entitled to receive at the Effective Time
if such PFS Stock Option had been fully vested
and exercised for PFS Common Stock immediately
prior to the Effective Time and otherwise on the
same terms and conditions as were applicable
under the Stock Plans and the underlying stock
option agreement. See "The Merger Agreement --
Treatment of PFS Stock Options."
TREATMENT OF PFS CONVERTIBLE
SUBORDINATED NOTES......... Each of the 6 1/2% Convertible Subordinated
Notes due 2003 of PFS (the "PFS Convertible
Notes") outstanding at the Effective Time shall
automatically become convertible into the number
of shares of Conseco Common Stock which the
holder of such PFS Convertible Note would have
been entitled to receive in the Merger if the
holder had converted the PFS Convertible Note
into shares of PFS Common Stock immediately
before the Effective Time. See "The Merger
Agreement - Treatment of PFS Convertible
Subordinated Notes."
CERTAIN CONSEQUENCES OF THE
MERGER........................ Upon consummation of the Merger, holders of PFS
Common Stock will become shareholders of
Conseco, and each share of PFS Common Stock
issued and outstanding immediately prior to the
consummation of the Merger will be converted
into the right to receive the Merger
Consideration. In addition, holders of PFS Stock
Options will be entitled to receive, upon the
exercise of their PFS Stock Options, a number of
shares of Conseco Common Stock determined as
described under "The Merger Agreement --
Conversion of Shares; Exchange of Stock
Certificates; No Fractional Amounts" and "--
Treatment of PFS Stock Options."
After consummation of the Merger, the current
Conseco shareholders would own approximately __
percent of the shares of Conseco Common Stock
then outstanding, and the current holders of PFS
Common Stock would own approximately __ percent
of such shares. See "The Merger -- Certain
Consequences of the Merger."
CONDITIONS TO THE MERGER;
REGULATORY APPROVALS;
TERMINATION OF THE MERGER
AGREEMENT................... The obligations of Conseco and PFS to consummate
the Merger are subject to the satisfaction of
certain conditions, including the receipt of
requisite PFS stockholder approval and of
certain governmental consents and approvals
which may include, without limitation, the
approval of the Insurance Commissioners of
Illinois, Oklahoma, and Wisconsin (the
jurisdictions in which the insurance companies
owned by PFS are domiciled), and the expiration
(or earlier
7
<PAGE>
termination) of the relevant waiting period
under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR
Act"). The waiting period terminated on February
24, 1997. See "The Merger -- Regulatory
Approvals" and "The Merger Agreement --
Conditions to the Merger."
The Merger Agreement is subject to termination
by Conseco or PFS (provided that such party is
not in breach of the Merger Agreement) if the
Merger is not consummated by March 31, 1997 (or
May 31, 1997 under certain circumstances), and
prior to such time upon the occurrence of
certain events, including the failure to obtain
approval of the Merger by the stockholders of
PFS at the Special Meeting. See "The Merger
Agreement -- Termination."
RIGHT OF PFS BOARD OF
DIRECTORS TO WITHDRAW ITS
RECOMMENDATION; FEES........ Under the Merger Agreement, the PFS Board of
Directors shall not (1) withdraw or modify, in a
manner materially adverse to Conseco, the
approval or recommendation by the Board of
Directors of the Merger Agreement or the Merger
or (2) enter into any agreement (other than a
confidentiality agreement as contemplated by the
Merger Agreement) with respect to any
Acquisition Proposal (as hereinafter defined),
unless PFS receives an Acquisition Proposal and
the PFS Board of Directors determines in good
faith, following consultation with outside
counsel, that in order to comply with its
fiduciary duties to its stockholders under
applicable law it is necessary for the PFS Board
of Directors to withdraw or modify, in a manner
materially adverse to Conseco, its approval or
recommendation of the Merger Agreement or the
Merger, enter into an agreement with respect to
such Acquisition Proposal or terminate the
Merger Agreement. An "Acquisition Proposal" is
defined in the Merger Agreement as any bona fide
proposal with respect to a merger,
consolidation, share exchange or similar
transaction involving PFS or any subsidiary of
PFS, or any purchase of all or a significant
portion of the assets of PFS or any subsidiary
of PFS, or any equity interest in PFS or any
subsidiary of PFS, other than transactions
contemplated by the Merger Agreement. In the
event the PFS Board of Directors takes any of
the foregoing actions, PFS is required to,
concurrently with the taking of any such action,
pay to Conseco upon demand $8.0 million. See
"The Merger Agreement -- Certain Covenants -- No
Solicitation," "-- Right of PFS Board of
Directors to Withdraw its Recommendation" and
"-- Breakup Fee." In addition, PFS has agreed
that, subject to the exercise of its fiduciary
duties, it shall not, nor shall it permit any of
its subsidiaries to, nor shall it authorize or
permit any officer, director or employee of, or
any investment banker, attorney or other advisor
or representative of, PFS or any of its
subsidiaries to, directly or indirectly, (i)
solicit, initiate or encourage the submission of
any Acquisition Proposal or (ii) participate in
any discussions or negotiations regarding, or
furnish to any person any information with
respect to, or take any other action to
facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal.
The Merger Agreement also provides for PFS to
pay Conseco an amount, not to exceed $1.0
million, to reimburse Conseco for its reasonable
out-of-pocket fees and expenses in connection
with the Merger if the approval of the Merger
Agreement by the PFS stockholders is not
obtained, unless Conseco is materially in breach
of the Merger Agreement. See "The Merger
Agreement -- Certain Covenants -- No
Solicitation."
CONDUCT OF THE BUSINESS OF
CONSECO AND PFS AFTER
THE MERGER.................. The Board of Directors and the officers of
Conseco immediately prior to
8
<PAGE>
the consummation of the Merger will continue as
the directors and officers of Conseco following
the consummation of the Merger and the directors
and officers of RAC immediately prior to the
consummation of the Merger will become the
directors and officers of PFS following the
consummation of the Merger. See "Management of
Conseco and PFS Upon Consummation of the
Merger." In addition, Peter W. Nauert, Chairman
of the Board of PFS, has entered into an
employment agreement with Conseco, such
agreement to be effective upon consummation of
the Merger. See "The Merger -- Interests of
Certain Persons in the Merger -- Employment
Arrangements." Conseco plans to consolidate
certain operations of PFS with Conseco's
operations after consummation of the Merger. See
"The Merger -- Conduct of the Business of
Conseco and PFS After the Merger."
INTERESTS OF CERTAIN PERSONS
IN THE MERGER................. Certain directors and officers of PFS and its
subsidiaries will receive benefits from the
Merger in the form of an enhanced severance
program, acceleration of stock options and other
benefits. In addition, Peter W. Nauert, Chairman
of the Board of PFS, has, among other things,
entered into an employment agreement with
Conseco, such agreement to be effective upon
consummation of the Merger. See "The Merger --
Interests of Certain Persons in the Merger."
INDEMNIFICATION OF DIRECTORS
AND OFFICERS.................. Conseco has agreed to maintain the existing
indemnification provisions in the certificates
of incorporation and bylaws of PFS and the
subsidiaries of PFS and to enter into
indemnification agreements with existing
directors and officers of PFS. See "The Merger
-- Interests of Certain Persons in the Merger --
Indemnification" and "The Merger Agreement --
Certain Covenants -- Indemnification of Officers
and Directors."
ABSENCE OF APPRAISAL RIGHTS... Holders of PFS Common Stock will not be entitled
to appraisal rights under the Delaware General
Corporation Law (the "DGCL"). See "The Merger --
Absence of Appraisal Rights" and "Comparison of
Shareholders' Rights -- Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................ The Merger is expected to qualify as a
reorganization within the meaning of Section
368(a)(2)(E) of the Internal Revenue Code of
1986, as amended (the "Code"). The obligation of
PFS to consummate the Merger is subject to the
condition that it shall have received an opinion
of counsel, based upon certain representations
and assumptions, that the Merger will be treated
for tax purposes as a reorganization within the
meaning of Section 368(a)(2)(E) of the Code.
Assuming the Merger qualifies as a
reorganization within the meaning of Section
368(a)(2)(E) of the Code, no gain or loss will
be recognized by PFS stockholders upon their
exchange of PFS Common Stock for Conseco Common
Stock, except that any PFS stockholder who
receives cash proceeds in lieu of a fractional
share interest in Conseco Common Stock will
recognize gain or loss equal to the difference
between such cash proceeds and the tax basis in
the fractional share interest, and such gain or
loss will constitute capital gain or loss if
such stockholder's PFS Common Stock is held as a
capital asset at the Effective Time. See "The
Merger -- Certain Federal Income Tax
Consequences."
<PAGE>
ACCOUNTING TREATMENT.......... The Merger will be accounted for as a "purchase"
under GAAP. See "The Merger -- Accounting
Treatment."
COMPARISON OF SHAREHOLDERS'
RIGHTS........................ Upon consummation of the Merger, the holders of
PFS Common Stock will become shareholders of
Conseco. See "Comparison of Shareholders'
Rights" for a summary of the material
differences between the rights of holders of
Conseco Common Stock and PFS Common Stock. These
differences arise from the distinctions between
the laws of the jurisdictions in which Conseco
and PFS are incorporated (Indiana and Delaware,
respectively) and the distinctions between the
respective charters and bylaws of Conseco and
PFS.
9
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF CONSECO
The selected historical financial information set forth below was derived
from the consolidated financial statements of Conseco. Conseco's consolidated
balance sheets at December 31, 1995 and 1996, and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1994, 1995 and 1996 and notes thereto were audited by Coopers & Lybrand L.L.P.,
independent accountants, and are included in Conseco's Annual Report which is
incorporated by reference herein. The selected historical financial information
is qualified in its entirety by, and should be read in conjunction with,
Conseco's Annual Report.
The comparison of selected historical financial information in the table
below is significantly affected by: (i) the acquisitions consummated by Conseco
Capital Partners, L.P. ("Partnership I") and Conseco Capital Partners II, L.P.
("Partnership II"); (ii) the sale of Western National Corporation ("WNC"); (iii)
the transactions affecting Conseco's ownership interest in BLH and CCP
Insurance, Inc. ("CCP"); (iv) the LPG Merger; (v) the ATC Merger; and (vi) the
THI Merger. For periods beginning with their acquisitions by Partnership I and
ending June 30, 1992, Partnership I and its subsidiaries were consolidated with
the financial statements of Conseco. Following the completion of the initial
public offering by CCP in July 1992, Conseco did not have unilateral control to
direct all of CCP's activities and, therefore, did not consolidate the financial
statements of CCP with the financial statements of Conseco. As a result of the
purchase by Conseco of all the shares of common stock of CCP it did not already
own on August 31, 1995 (the "CCP Merger"), the financial statements of CCP's
subsidiaries are consolidated with the financial statements of Conseco,
effective January 1, 1995. Conseco has included BLH in its financial statements
since November 1, 1992. Through December 31, 1993, the financial statements of
WNC were consolidated with the financial statements of Conseco. Following the
completion of the initial public offering of WNC (and subsequent disposition of
Conseco's remaining equity interest in WNC), the financial statements of WNC
were no longer consolidated with the financial statements of Conseco. As of
September 29, 1994, Conseco began to include in its financial statements the
newly acquired Partnership II subsidiary, ALH. As of July 1, 1996, Conseco began
to include in its financial statements its newly acquired subsidiary, LPG.
Effective December 31, 1996, Conseco began to include in its balance sheet the
subsidiaries acquired in the ATC Merger and the THI Merger. Such business
combinations are described in the notes to the consolidated financial statements
included in Conseco's Annual Report which is incorporated by reference herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income................................... $ 378.7 $ 1,293.8 $ 1,285.6 $ 1,465.0 $ 1,654.2
Net investment income..................................... 888.6 896.2 385.7 1,142.6 1,302.5
Net investment gains (losses)............................. 160.2 242.6 (30.5) 188.9 30.4
Total revenues............................................ 1,523.9 2,636.0 1,862.0 2,855.3 3,067.3
Interest expense on notes payable......................... 46.2 58.0 59.3 119.4 108.1
Total benefits and expenses............................... 1,193.9 2,025.8 1,537.6 2,436.8 2,573.7
Income before income taxes, minority interest
and extraordinary charge................................ 330.0 610.2 324.4 418.5 493.6
Extraordinary charge on extinguishment of debt,
net of tax.............................................. 5.3 11.9 4.0 2.1 26.5
Net income................................................ 169.5 297.0 150.4 220.4 252.4
Preferred dividends....................................... 5.5 20.6 18.6 18.4 27.4
Net income applicable to common stock..................... 164.0 276.4 131.8 202.0 225.0
PER SHARE DATA(a)
Net income, primary....................................... $ 1.36 $ 2.36 $ 1.25 $ 2.35 $ 1.91
Net income, fully diluted................................. 1.35 2.19 1.22 2.11 1.77
Dividends declared per common share....................... .021 .075 .125 .046 .083
Book value per common share outstanding at
period end.............................................. 5.46 8.45 5.22 10.22 16.86
Shares outstanding at period end.......................... 99.6 101.2 88.7 81.0 167.1
Average fully diluted shares outstanding.................. 118.4 134.0 123.4 104.5 142.5
BALANCE SHEET DATA -- PERIOD END
Total assets.............................................. $11,772.7 $13,749.3 $10,811.9 $17,297.5 $25,612.7
Notes payable for which Conseco is directly
liable.................................................. 163.2 413.0 191.8 871.4 1,094.9
Notes payable of affiliates, not direct
obligations of Conseco.................................. 392.0 290.3 611.1 584.7 --
Total liabilities......................................... 11,154.4 12,382.9 9,743.2 15,782.5 21,829.7
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts............. -- -- -- -- 600.0
Preferred stock......................................... -- -- 130.1 110.7 97.0
Common stock............................................ 24.0 223.8 191.6 292.6 .7
Shareholders' equity...................................... 594.3 1,142.6 747.0 1,111.7 3,085.3
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA(b)
Premiums collected(c)..................................... $ 1,464.9 $ 2,140.1 $ 1,879.1 $ 3,106.4 $ 3,210.4
Operating earnings(d)..................................... 114.8 162.0 151.7 131.3 267.7
Operating earnings per fully diluted common
share(a)(d)............................................. .90 1.19 1.23 1.26 1.89
Shareholders' equity excluding unrealized
appreciation (depreciation) of fixed maturity
securities(e)........................................... 560.3 1,055.2 884.7 999.1 3,045.5
Book value per common share outstanding,
excluding unrealized appreciation
(depreciation) of fixed maturity
securities(a)(e)........................................ 5.12 7.58 6.77 8.83 16.62
Ratio of debt to total capital (f):
As reported........................................... .49X .34X .43X .49X .22X
Excluding unrealized appreciation
(depreciation)(e)................................... .50X .36X .39X .53X .23X
Ratio of debt and Company-obligated mandatorily
redeemable preferred securities of subsidiary
trusts to total capital (f):
As reported........................................... .49X .34X .43X .49X .35X
Excluding unrealized appreciation
(depreciation)(e)................................... .50X .36X .39X .53X .35X
Adjusted statutory capital (at period end)(g)............. $ 603.1 $ 1,135.5 $ 791.6 $ 1,298.7 $ 1,775.1
</TABLE>
- -------------------------
(a) All share and per share amounts have been restated to reflect two-for-
one stock splits paid on April 1, 1996 and February 11, 1997.
(b) Amounts under this heading are included to assist the reader in analyzing
Conseco's financial position and results of operations. Such amounts are
not intended to, and do not, represent insurance policy income, net income,
net income per share, shareholders' equity or book value per share prepared
in accordance with GAAP.
(c) Includes premiums received from universal life and products without
mortality or morbidity risk. Such premiums are not reported as revenues
under GAAP and were $1,131.8 million in 1992; $891.9 million in 1993;
$634.6 million in 1994; $1,757.4 million in 1995; and $1,811.5 million in
1996.
(d) Represents income before extraordinary charge, excluding net investment
gains (losses)(less that portion of change in future policy benefits,
amortization of cost of policies purchased and cost of policies produced
and income taxes relating to such gains (losses)) and restructuring
activities (net of income taxes).
(e) Excludes the effect of reporting fixed maturities at fair value and
recording the unrealized gain or loss on such securities as a component of
shareholders' equity, net of tax and other adjustments. Such adjustments,
which Conseco began to do in 1992, are in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"), as described in the notes to
the consolidated financial statements included in Conseco's Annual Report
which is incorporated herein by reference.
(f) For periods prior to 1996, debt includes obligations for which Conseco was
not directly liable.
(g) Includes: (1) statutory capital and surplus; (2) asset valuation reserve
("AVR") and interest maintenance reserve ("IMR"); and (3) the portion of
surplus debentures carried by the life companies as a liability to Conseco.
Such statutory data reflect the combined data derived from the annual
statements of Conseco's consolidated life insurance companies as filed with
insurance regulatory agencies and prepared in accordance with statutory
accounting practices.
11
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF LPG (a)
The selected historical financial information set forth below was derived
from the audited consolidated financial statements of LPG. LPG's consolidated
balance sheets at December 31, 1994 and 1995, and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1993, 1994 and 1995 and notes thereto were audited by Coopers & Lybrand L.L.P.,
independent accountants, and are included Conseco's Current Report on Form 8-K
dated August 2, 1996, which is incorporated by reference herein. The
consolidated financial information should be read in conjunction with Conseco's
Current Report on Form 8-K dated August 2, 1996. The consolidated financial
information set forth for the six months ended June 30, 1995 and 1996, is
unaudited; however, in the opinion of LPG's management, the accompanying
financial information contains all adjustments, consisting only of normal
recurring items, necessary to present fairly the financial information for such
periods. The results of operations for the six months ended June 30, 1996, may
not be indicative of the results of operations to be expected for a full year.
<TABLE>
<CAPTION>
Six months
ended
Years ended December 31, June 30,
------------------------------------- --------------
1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income........................................... $187.3 $210.8 $217.9 $280.1 $129.4 $155.7
Investment activity:
Net investment income.......................................... 218.6 221.1 225.4 277.1 134.9 146.2
Net realized gains (losses) ................................... 23.1 18.4 (19.7) 15.8 2.4 2.3
Total revenues.................................................... 436.5 455.7 428.2 576.1 268.6 306.9
Interest expense.................................................. 35.3 26.0 20.7 27.9 12.0 11.8
Total benefits and expenses....................................... 374.8 373.8 369.9 592.8 251.0 279.4
Income (loss) before income taxes, minority interest and
extraordinary charge........................................... 61.7 81.9 58.5 (16.7) 17.6 27.5
Extraordinary charge, net of tax.................................. 5.6 4.8 2.6 - - -
Net income (loss)................................................. 32.1 47.2 34.6 (13.4) 11.3 15.9
Dividends in kind on preferred stock.............................. 15.4 4.0 - - - -
Net income (loss) applicable to common stock...................... 16.7 43.2 34.6 (13.4) 11.3 15.9
PER SHARE DATA
Income (loss) before extraordinary charge, primary
and fully diluted............................................... $ 1.08 $ 2.05 $ 1.43 $(0.49) $.42 $.56
Net income (loss), primary and fully diluted....................... 0.62 1.85 1.33 (0.49) .42 .56
Dividends declared per common share................................ - 0.0375 .08 .11 .05 .06
Book value per common share outstanding at
period end...................................................... 15.98 12.25 11.50 14.35 14.20 12.47
Shares outstanding at period end................................... 14.4 25.4 25.5 27.9 27.8 28.2
Average fully diluted shares outstanding........................... 12.1 23.4 26.1 27.1 26.8 28.4
BALANCE SHEET DATA - PERIOD END
Total assets...................................................... $3,292.7 $3,589.4 $3,748.8 $4,980.9 $5,035.7 $4,974.7
Notes payable..................................................... 314.3 210.1 210.5 246.1 239.3 238.9
Total liabilities................................................. 3,062.8 3,278.2 3,455.2 4,580.4 4,640.5 4,623.1
Minority interest................................................. - - - - - -
Shareholders' equity ............................................. 229.9 311.2 293.6 400.5 395.2 351.6
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Six months
ended
Years ended December 31, June 30,
------------------------------------- -------------
1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (b)
Premiums collected (c)............................................ $465.5 $470.2 $411.8 $497.3 $248.2 $280.1
Operating earnings (loss) (d)..................................... 31.9 44.1 50.0 (28.9) 9.4 20.5
Operating earnings (loss) per primary and fully diluted
common share (d)............................................... 2.63 1.88 1.91 (1.06) .35 .72
Shareholders' equity excluding unrealized appreciation
(depreciation) of fixed maturity securities (e)................ 229.9 291.7 325.0 344.3 376.8 361.8
Book value per common share outstanding, excluding
unrealized appreciation (depreciation) of fixed
maturity securities (e)........................................ 15.98 11.48 12.73 12.34 13.54 12.83
Ratio of debt to total capital (f):
As reported.................................................... .58X .40X .42X .38X .38X .40X
Excluding unrealized appreciation (depreciation) (e)........... .58X .42X .39X .42X .39X .40X
Adjusted statutory capital (at period end) (g).................... $191.3 $169.8 $174.3 $209.8 $174.7 $219.3
<FN>
(a) Comparison of consolidated financial information in the above table is
significantly affected by the acquisition of Lamar Financial Group,
Inc. ("Lamar") on April 28, 1995. Such acquisition was accounted for
using the purchase method, and the results of operations at Lamar are
included in the consolidated financial data from the date of
acquisition. Refer to the notes to the consolidated financial
statements included in Conseco's Current Report on Form 8-K dated
August 2, 1996, incorporated by reference herein for a description of
the acquisition.
(b) Amounts under this heading are included to assist the reader in
analyzing LPG's financial position and results of operations. Such
amounts are not intended to, and do not, represent insurance policy
income, net income, net income per share, shareholders' equity or book
value per share prepared in accordance with GAAP.
(c) Includes premiums received from annuities and universal life policies,
which are not reported as revenues under GAAP and were $426.2 million
in 1992; $422.4 million in 1993; $384.7 million in 1994; $458.7 million
in 1995; $226.5 million for the six months ended June 30, 1995; and
$265.2 million for the six months ended June 30, 1996.
(d) Represents income before extraordinary charge, excluding net realized
gains (losses) (less that portion of amortization of cost of policies
purchased and the cost of policies produced and income taxes relating
to such gains (losses)).
(e) Excludes the effects of reporting available-for-sale fixed maturities
at fair value and recording the unrealized gain or loss on such
securities as a component of shareholders' equity, net of tax and other
adjustments, which LPG began to do with respect to a portion of its
portfolio effective December 31, 1993. Such adjustments are in
accordance with SFAS 115, as described in the notes to the consolidated
financial statements included in Conseco's Current Report on Form
8-K dated August 2, 1996, which is incorporated herein by reference.
(f) Represents the ratio of notes payable to the sum of shareholders'
equity and notes payable.
(g) Includes: (1) statutory capital and surplus; and (2) AVR and IMR.
Such statutory data reflect the combined data derived from the annual
and interim statements of LPG's consolidated insurance subsidiaries as
filed with insurance regulatory agencies and prepared in accordance
with statutory accounting practices.
</FN>
</TABLE>
13
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF PFS
The selected historical financial information set forth below was derived from
the consolidated financial statements of PFS. The consolidated balance sheets of
PFS at December 31, 1995 and 1996, and the consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1994, 1995
and 1996 and notes thereto were audited by Ernst & Young LLP, independent
auditors, and are included in PFS's Annual Report which is incorporated by
reference herein. The consolidated financial information should be read in
conjunction with PFS's Annual Report.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income................................... $595.1 $641.0 $704.1 $687.0 $770.9
Net investment income..................................... 43.6 40.2 42.8 71.0 74.8
Net investment gains (losses)............................. - (1.3) (.4) 4.0 4.2
Total revenues............................................ 656.0 699.1 774.2 800.1 887.9
Interest expense.......................................... 2.2 3.3 5.1 5.0 6.5
Total benefits and expenses............................... 681.4 680.4 748.1 768.4 841.8
Income (loss) before income taxes......................... (25.4) 18.8 26.0 31.7 46.1
Net income (loss)......................................... (17.0) 12.1 17.1 21.0 30.5
Preferred dividends....................................... 2.0 2.0 1.9 1.8 .6
Net income (loss) applicable to common stock.............. (19.0) 10.1 15.2 19.2 29.9
PER SHARE DATA
Net income (loss), primary................................ $(2.85) $1.51 $2.36 $2.44 $2.69
Net income (loss), fully diluted.......................... (2.85) 1.26 1.58 1.85 2.16
Dividends declared per common share....................... - - .15 .18 .22
Book value per common share outstanding
at period end (a)...................................... 9.21 10.86 11.55 14.35 16.06
Shares outstanding at period end (a)...................... 6.8 6.3 5.9 10.1 11.8
Average fully diluted shares outstanding.................. 8.2 10.7 12.7 12.6 15.7
BALANCE SHEET DATA - PERIOD END
Total assets.............................................. $978.7 $1,108.3 $1,075.7 $1,558.9 $1,823.7
Notes payable (including convertible
subordinated debentures and notes) .................... 38.1 64.2 80.0 44.7 114.0
Total liabilities......................................... 892.0 1,015.7 985.7 1,393.1 1,634.9
Redeemable preferred stock................................ 24.0 23.7 21.7 21.2 -
Shareholders' equity...................................... 62.7 68.9 68.3 144.6 188.8
OTHER FINANCIAL DATA (b)
Premiums collected (c).................................... $610.6 $654.4 $732.0 $700.4 $794.2
Operating earnings (loss) (d)............................. (16.9) 13.0 17.4 21.7 28.0
Operating earnings (loss) per fully diluted
common share (a), (d).................................. (2.85) 1.34 1.60 1.91 2.01
Shareholders' equity excluding unrealized
appreciation (depreciation) of fixed maturity
securities (e)......................................... 62.7 68.9 77.4 140.6 189.8
Book value per common share outstanding
excluding unrealized appreciation
(depreciation)of fixed maturity
securities (a), (e).................................... 9.21 10.86 13.09 13.96 16.14
Ratio of debt and preferred stock to
total capital (f):
As reported......................................... .50X .56X .60X .31X .38X
Excluding unrealized appreciation
(depreciation) (e)................................ .50X .56X .57X .32X .38X
Adjusted statutory capital (at period end) (g)............ $90.4 $111.2 $128.8 $120.1 $172.7
(see footnotes on following page)
14
<PAGE>
<FN>
(a) Common shares outstanding excludes shares owned by subsidiaries of PFS and
classified as treasury shares. The number of shares held as treasury shares
amounted to .5 million, 1.1 million, 1.1 million and $1.1 million at
December 31, 1993, 1994, 1995 and 1996, respectively.
(b) Amounts under this heading are included to assist the reader in analyzing
PFS's financial position and results of operations. Such amounts are not
intended to, and do not, represent net income, net income per share,
shareholders' equity or book value per share prepared in accordance with
GAAP.
(c) Includes premiums received from universal life policies and products
without mortality or morbidity risk. Such premiums are not reported as
revenues under GAAP and were $11.1 million in 1992; $13.4 million in 1993;
$27.7 million in 1994; $23.8 million in 1995; and $16.7 million in 1996.
(d) Represents income or loss excluding the effects of realized investment
gains and losses. The 1995 amounts exclude $3.4 million (net of tax) in
payments made to converting bondholders and other expenses relating to the
conversion of the 8% Convertible Subordinated Debentures. The 1996 amount
also excludes approximately $.3 million (net of tax) in payments to
redeeming stockholders relating to the redemption of PFS preferred stock.
(e) Excludes the effect of reporting fixed maturities at fair value and
recording the unrealized gain or loss on such securities as a component of
shareholders' equity, net of tax and other adjustments, which PFS began to
do in 1994. Such adjustments are in accordance with SFAS 115, as described
in the notes to the consolidated financial statements included in PFS's
Annual Report.
(f) Debt represents the aggregate of long-term notes payable, short-term notes
payable, the 8% Convertible Subordinated Debentures, and the PFS
Convertible Notes. Total capitalization represents debt, preferred stock
and shareholders' equity.
(g) Includes: (1) statutory capital and surplus; and (2) AVR and IMR.
</FN>
</TABLE>
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION OF CONSECO
The summary unaudited pro forma consolidated financial information of
Conseco set forth below was derived from the unaudited pro forma consolidated
financial statements of Conseco included elsewhere in this Statement. See
"Unaudited Pro Forma Consolidated Financial Statements of Conseco." The summary
unaudited pro forma consolidated financial information is based upon the
historical and pro forma consolidated financial statements and related notes
thereto of Conseco, LPG and PFS incorporated by reference in this Proxy
Statement/Prospectus. The summary unaudited pro forma consolidated financial
information set forth below is qualified in its entirety by, and should be read
in conjunction with, such materials and the unaudited pro forma consolidated
financial statements appearing elsewhere in this Proxy Statement/Prospectus.
The summary unaudited pro forma consolidated statement of operations
information for the year ended December 31, 1996, in the column headed "Pro
forma Conseco before the Merger" reflects the following transactions, all of
which have already occurred, as if such transactions had occurred on January 1,
1996: (1) the issuance of 4.37 million shares of Conseco PRIDES in January 1996;
(2) 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"); (3) the acquisition and merger of LPG
completed effective July 1, 1996 (the "LPG Merger"); (4) the call for redemption
of Conseco's Series D Convertible Preferred Stock (the "Series D Call")
completed September 26, 1996; (5) the acquisition of all of the outstanding
common stock of ALH, not previously owned by Conseco or its affiliates, and
related transactions (the "ALH Stock Purchase") completed September 30, 1996;
(6) 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; (7) 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; (8) the ATC Merger; (9) the
THI Merger; (10) the acquisition of all of the outstanding common stock of BLH,
not previously owned by Conseco or its affiliates (the "BLH Merger"); and (11)
the CAF Merger. The summary unaudited pro forma consolidated statement of
operations information for the year ended December 31, 1996, in the column
headed "Pro forma for the Merger" reflects further adjustments to the
consolidated operating results of Conseco as if the Merger had occurred on
January 1, 1996.
The summary unaudited pro forma consolidated balance sheet information at
December 31, 1996, in the column headed "Pro forma Conseco before the Merger"
reflects the application of certain pro forma adjustments for the CAF Merger,
which has already occurred, as if the CAF Merger had occurred on December 31,
1996. The summary unaudited pro forma consolidated balance sheet information at
December 31, 1996, in the column headed "Pro forma for the Merger" reflects
further adjustments to the financial position of Conseco as if the Merger had
occurred on December 31, 1996.
The summary unaudited pro forma consolidated financial information as of
and for the year ended December 31, 1996, is provided for informational purposes
only and is not necessarily indicative of the results of operations or financial
condition that would have been achieved had the transactions set forth above
actually occurred as of the dates indicated or of future results of operations
or financial condition of Conseco. Conseco anticipates cost savings and
additional benefits as a result of completing the transactions set forth above.
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 information. The Merger will be accounted for under the
purchase method of accounting.
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
PRO FORMA
CONSECO PRO FORMA
CONSECO BEFORE THE FOR THE
HISTORICAL MERGER MERGER
---------- --------- -------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income................................................. $ 1,654.2 $ 2,599.8 $ 3,370.7
Net investment income................................................... 1,302.5 1,598.0 1,678.5
Net investment gains.................................................... 30.4 36.4 40.6
Total revenues.......................................................... 3,067.3 4,320.1 5,213.6
Interest expense on notes payable....................................... 108.1 138.7 142.5
Total benefits and expenses............................................. 2,573.7 3,666.5 4,508.6
Income before income taxes, minority interest and
extraordinary charge.................................................. 493.6 653.6 705.0
Income before extraordinary charge...................................... 278.9 367.1 399.1
PER SHARE DATA (a)
Income before extraordinary charge, primary............................. $ 2.12 $ 1.90 $ 1.98
Income before extraordinary charge, fully
diluted............................................................... 1.96 1.80 1.86
Book value per common share outstanding at period
end................................................................... 16.86 17.26 18.39
Shares outstanding at period end........................................ 167.1 170.0 178.7
Average fully diluted shares outstanding................................ 142.5 204.3 216.0
BALANCE SHEET DATA -- PERIOD END
Total assets............................................................ $25,612.7 $27,213.1 $29,304.3
Notes payable........................................................... 1,094.9 1,696.4 1,825.4
Total liabilities....................................................... 21,829.7 23,314.4 25,053.2
Minority interest in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts........................... 600.0 600.0 600.0
Preferred stock....................................................... 97.0 97.0 97.0
Common stock.......................................................... .7 .7 .7
Shareholders' equity.................................................... 3,085.3 3,201.0 3,553.4
OTHER FINANCIAL DATA(b)
Premiums collected(c)................................................... $ 3,210.4 $4,277.1 $5,071.3
Operating earnings(d)................................................... 267.7 353.4 382.7
Operating earnings per fully diluted common
share(d).............................................................. 1.89 1.74 1.78
Shareholders' equity excluding unrealized
appreciation (depreciation) of fixed maturity
securities(e)......................................................... 3,045.5 3,161.2 3,513.6
Book value per common share outstanding, excluding
unrealized appreciation (depreciation) of fixed
maturity securities(e)................................................ 16.62 17.02 18.17
Ratio of debt to total capital(f):
As reported........................................................... .22X .30X .30X
Excluding unrealized appreciation
(depreciation)(e)................................................... .23X .31X .30X
Excluding unrealized appreciation (depreciation)
and assuming conversion of ATC's Convertible
Subordinated Debentures and PFS's Convertible
Subordinated Notes into Conseco Common
Stock(e), (g)....................................................... .20X .28X .26X
Ratio of debt and Company--obligated mandatorily
redeemable preferred securities of subsidiary
trusts to total capital(h):
As reported........................................................... .35X .41X .40X
Excluding unrealized appreciation
depreciation)(e).................................................... .35X .41X .40X
Excluding unrealized appreciation (depreciation)
and assuming conversion of ATC's Convertible
Subordinated Debentures and PFS's Convertible
Subordinated Notes into Conseco Common
Stock(e), (g)....................................................... .32X .38X .36X
Adjusted statutory capital (at period end)(i)........................... $1,775.1 $1,870.3 $2,043.0
</TABLE>
(see footnotes on following page)
17
<PAGE>
- -------------------------
(a) All share and per share amounts reflect: (i) Conseco's April 1, 1996 two-for
-one stock split; and (ii) Conseco's February 11, 1997 two-for-one stock
split.
(b) Amounts under this heading are included to assist the reader in analyzing
Conseco's pro forma financial position and pro forma results of operations.
Such amounts are not intended to, and do not, represent pro forma insurance
policy income, pro forma net income, pro forma net income per share, pro
forma shareholders' equity or pro forma book value per share prepared in
accordance with GAAP.
(c) Includes premiums received from annuities and universal life policies, which
are not reported as revenues under GAAP.
(d) Represents pro forma income before extraordinary charge, excluding net
investment gains (less that portion of change in future policy benefits,
amortization of cost of policies purchased and cost of policies produced
and income taxes relating to such gains) and restructuring activities (net
of income taxes).
(e) Excludes the effect of reporting fixed maturities at fair value and
recording the unrealized gain or loss on such securities as a component of
shareholders' equity, net of tax and other adjustments, which Conseco began
to do in 1992. Such adjustments are in accordance with SFAS 115, as
described in the notes to the consolidated financial statements included in
Conseco's Annual Report which is incorporated herein by reference.
(f) Represents the ratio of pro forma notes payable to the sum of pro forma
shareholders' equity, pro forma notes payable, minority interest related
to preferred stock issued by a subsidiary of ALH and Company-
obligated mandatorily redeemable preferred securities of subsidiary trusts.
(g) Assumes ATC's Convertible Subordinated Debentures, which are convertible
into 7.9 million shares of Conseco Common Stock with a value of $248.3
million, are converted. ATC's Convertible Subordinated Debentures are
callable on October 1, 1998. It also assumes the PFS Convertible Notes,
which will be convertible into an assumed 3.0 million shares of Conseco
Common Stock with a value of $120.7 million, are converted. The PFS
Convertible Notes are callable on April 6, 1999.
(h) Represents the ratio of pro forma notes payable and the Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts to the
sum of pro forma shareholders' equity, pro forma notes payable, minority
interest related to preferred stock issued by a subsidiary of ALH and the
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
(i) Includes: (1) statutory capital and surplus; (2) AVR and IMR; and (3) the
portion of surplus debentures carried by the life companies as a liability
to Conseco. Such statutory data reflect the combined data derived from the
annual statements of Conseco's pro forma life insurance subsidiaries as
filed with insurance regulatory agencies and prepared in accordance with
statutory accounting practices.
18
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA OF CONSECO AND PFS
The following table sets forth selected historical per share data of
Conseco and PFS and corresponding pro forma and pro forma equivalent per share
amounts as of and for the year ended December 31, 1996, giving effect to: (1)
the issuance of 4.37 million shares of Conseco PRIDES; (2) the BLH Tender Offer;
(3) the LPG Merger; (4) the Series D Call; (5) the ALH Stock Purchase; (6) the
TOPrS Offering; (7) the TruPS Offering; (8) the ATC Merger; (9) the THI Merger;
(10) the BLH Merger; (11) the CAF Merger; and (12) the Merger. Pro forma
equivalent amounts are presented assuming that the Conseco Share Price will be
$40.5875, so that each share of PFS Common Stock is exchanged for .6899 shares
of Conseco Common Stock in the Merger. Assuming that the Effective Time for the
Merger were to occur on _______ __, 1997, the date of this Proxy
Statement/Prospectus, the Conseco Share Price would be $_____, and ___ shares of
Conseco Common Stock would be issuable in the Merger with respect to each share
of PFS Common Stock. The information presented is derived from the consolidated
financial statements and related notes thereto included in Conseco's Annual
Report, PFS's Annual Report, (both of which are incorporated by reference
herein) and the unaudited pro forma consolidated financial statements of Conseco
included elsewhere in this Statement. The information is qualified in its
entirety by, and should be read in conjunction with, such materials. See
"Unaudited Pro Forma Consolidated Financial Statements of Conseco." The pro
forma financial information is provided for informational purposes only and is
not necessarily indicative of the actual results that would have been achieved
had the above transactions been consummated at the beginning of the periods
presented, or of future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
NET INCOME BEFORE EXTRAORDINARY CHARGE PER FULLY DILUTED COMMON
SHARE:
Historical:
Conseco................................................................. $ 1.96
PFS..................................................................... 2.16
Pro forma:
Conseco before the Merger............................................... $ 1.80
Adjusted for the Merger................................................. 1.86
Equivalent for one share of PFS Common Stock............................ 1.28
DIVIDENDS PER COMMON SHARE:
Historical:
Conseco................................................................. $ .083
PFS..................................................................... .220
Pro forma:
Conseco before the Merger............................................... $ .083
Adjusted for the Merger................................................. .083
Equivalent for one share of PFS Common Stock............................ .057
BOOK VALUE PER COMMON SHARE:
Historical:
Conseco................................................................. $16.86
PFS..................................................................... 16.06
Pro forma:
Conseco before the Merger............................................... 17.26
Adjusted for the Merger................................................. 18.39
Equivalent for one share of PFS Common Stock............................ 12.69
</TABLE>
19
<PAGE>
MARKET PRICE INFORMATION
Market prices for the shares of Conseco Common Stock and PFS Common Stock
are reported on the NYSE. The table below sets forth for the periods indicated
the high and low sale prices and the dividends paid per share of Conseco Common
Stock and PFS Common Stock. For current price information with respect to the
Conseco Common Stock and PFS Common Stock, stockholders are urged to consult
publicly available sources.
<TABLE>
<CAPTION>
CONSECO COMMON STOCK PFS COMMON STOCK
--------------------------------------- --------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
-------- --------- --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter..................................... $16 1/16 $13 9/32 $0.03125 $14 3/4 $11 1/8 .0375
Second Quarter.................................... 14 17/32 11 19/32 0.03125 12 10 .0375
Third Quarter..................................... 13 3/32 10 13/16 0.03125 10 1/2 8 3/4 .0375
Fourth Quarter.................................... 11 9/16 8 31/32 0.03125 10 8 3/4 .0375
1995
First Quarter..................................... 12 5/32 8 1/8 0.03125 11 1/4 8 7/8 .045
Second Quarter.................................... 11 21/32 9 25/32 0.03125 15 1/2 10 3/4 .045
Third Quarter..................................... 13 5/16 11 3/8 0.005 15 3/8 13 1/8 .045
Fourth Quarter.................................... 15 25/32 12 23/32 0.005 18 1/2 13 7/8 .045
1996
First Quarter..................................... 18 5/32 14 15/16 0.005 18 3/8 15 1/8 .055
Second Quarter.................................... 20 3/8 17 3/8 0.01 17 1/4 15 3/8 .055
Third Quarter..................................... 24 11/16 17 5/8 0.01 16 5/8 14 1/8 .055
Fourth Quarter.................................... 33 1/8 24 7/16 0.03125 25 1/8 16 1/4 .055
1997
First Quarter (through March 24, 1997)............ 43 7/8 30 3/4 0.03125 26 5/8 24 3/4 .055
</TABLE>
The information set forth in the table below presents: (1) the closing
price for shares of Conseco Common Stock and PFS Common Stock on December 13,
1996, the last day on which trading occurred prior to the public announcement of
the Merger Agreement, and on _______, 1997, the last full trading day for which
information was available prior to the mailing of the Proxy Statement/Prospectus
and (2) the "Equivalent Per Share Price" (as hereinafter defined) of PFS Common
Stock on December 13, 1996 and ______, 1997. The "Equivalent Per Share Price" of
PFS Common Stock represents the closing price per share of Conseco Common Stock
reported on the NYSE, multiplied by .8928 and ___, assuming consummation of the
Merger had occurred on December 13, 1996 and ______, 1997,respectively. The
Equivalent Per Share Price is not the same as the Merger Consideration. The
amount and value of the Merger Consideration to be received by holders of the
PFS Common Stock can be determined only at the date the Merger is consummated.
See "The Merger Agreement -- Conversion of Shares; Exchange of Stock
Certificates; No Fractional Amounts."
<TABLE>
<CAPTION>
PFS
COMMON STOCK
CONSECO PFS EQUIVALENT
COMMON COMMON PER
PER SHARE PRICE STOCK STOCK SHARE PRICE
- ------------------------------------------------------------- ------ ------ ------------
<S> <C> <C> <C>
December 13, 1996............................................ $30.125 $19.00 $26.90
________ , 1997.............................................
</TABLE>
Listing on the NYSE of the shares of Conseco Common Stock issuable in
connection with the Merger is a condition to consummation of the Merger. See
"The Merger Agreement -- Conditions to the Merger."
HOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE CONSECO
COMMON STOCK AND THE PFS COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE
FUTURE PRICES OF, OR MARKETS FOR, CONSECO COMMON STOCK OR PFS COMMON STOCK.
20
<PAGE>
INFORMATION CONCERNING CONSECO AND RAC
BACKGROUND
Conseco is a financial services holding company. Conseco develops,
markets and administers annuity, individual health insurance and individual life
insurance products. Conseco's operating strategy is to grow the insurance
business within its subsidiaries by focusing its resources on the development
and expansion of profitable products and strong distribution channels. Conseco
has supplemented such growth by acquiring companies that have profitable niche
products, strong distribution systems and progressive management teams who can
work with Conseco to implement Conseco's operating and growth strategies. Once a
company has been acquired, Conseco's operating strategy has been to consolidate
and streamline management and administrative functions, to realize superior
investment returns through active asset management, to eliminate unprofitable
products and distribution channels, and to expand and develop the profitable
distribution channels and products.
Since 1982, Conseco has acquired 15 insurance groups and related
businesses; 10 as wholly owned subsidiaries and five through its acquisition
partnerships. Conseco's first acquisition partnership, Partnership I, was
dissolved in 1993 after distributing to its partners the securities of the
companies it had acquired. Partnership II, Conseco's second acquisition
partnership, was liquidated in 1996 after Conseco purchased from the other
partners all of the common shares of ALH not already owned by Conseco. Conseco
terminated its partnership activity in 1996 because changes in the regulatory
and rating agency environment had made it difficult to structure leveraged
acquisitions of life insurance companies.
On August 2, 1996, Conseco completed the LPG Merger and LPG became a
wholly owned subsidiary of Conseco. In the LPG Merger, Conseco issued a
total of 32.6 million shares of Conseco Common Stock (or common stock
equivalents) with a value of $586.8 million. Conseco also assumed LPG notes
payable of $253.1 million. LPG's subsidiaries sell a diverse portfolio of
universal life insurance and, to a lesser extent, annuity products to
individuals.
On September 30, 1996, Conseco acquired the remaining 62 percent of the
common shares of ALH not already owned by Conseco or its affiliates for
approximately $165 million in cash. ALH is a provider of retirement savings
annuities. ALH has been included in Conseco's consolidated financial statements
since September 1994, when it was acquired by Partnership II.
On December 17, 1996, Conseco completed the ATC Merger. ATC was merged
with and into Conseco, with Conseco being the surviving corporation. In
the ATC Merger, Conseco issued a total of 21.0 million shares of Conseco Common
Stock (or common stock equivalents) with a value of $630.9 million. In addition,
Conseco assumed $102.8 million of ATC's convertible subordinated debentures,
which became convertible into 7.9 million shares of Conseco Common Stock with a
value of $248.3 million. ATC is a leading marketer and underwriter of long-term
care insurance. ATC also markets and underwrites other supplemental accident and
health insurance policies, as well as life insurance. Effective December 31,
1996, ATC is included in Conseco's consolidated financial statements.
On December 23, 1996, Conseco completed the THI Merger. THI was merged with
and into Conseco, with Conseco being the surviving corporation. In the THI
Merger, Conseco issued a total of 4.9 million shares of Conseco Common Stock (or
common stock equivalents) with a value of $121.7 million. In addition, pursuant
to an exchange offer, all of THI's Subordinated Convertible Notes were exchanged
for 4.2 million shares of Conseco Common Stock with a value of $106.2 million,
plus a cash premium of $11.9 million. THI is principally engaged in the
underwriting and distribution of supplemental health insurance. Effective
December 31, 1996, THI is included in Conseco's consolidated financial
statements.
On December 31, 1996, Conseco completed the BLH Merger. In the BLH Merger,
Conseco acquired the 9.6 percent of the common shares of BLH not already owned
by Conseco or its affiliates. BLH was merged into a wholly owned subsidiary
of Conseco. In the BLH Merger, Conseco issued a total of 3.9 million shares of
Conseco Common Stock (or common stock equivalents) with a value of $123.0
million. BLH is one of the nation's largest writers of individual health
insurance products, based on collected premiums. BLH also markets a variety of
annuity, life and group insurance products. BLH has been included in Conseco's
consolidated financial statements since November 1992, when BLH was acquired by
Partnership I.
Conseco owned the following life insurance companies at December 31,
1996:
- Bankers Life and Casualty Company ("Bankers Life"), Bankers Life
Insurance Company of Illinois and Certified Life Insurance Company,
formerly subsidiaries of BLH;
21
<PAGE>
- Great American Reserve, Beneficial Standard and Jefferson National
Life Insurance Company of Texas, in which Conseco has had an ownership
interest since their acquisition by Partnership I in 1990 and 1991,
respectively, and which became wholly owned subsidiaries in August
1995;
- the subsidiaries of ALH, which are also subsidiaries of Conseco,
including American Life and Casualty Insurance Company ("American
Life and Casualty") and Vulcan Life Insurance Company;
- the subsidiaries of LPG, which are now subsidiaries of Conseco as
a result of the LPG Merger, including Philadelphia Life Insurance
Company ("Philadelphia Life") , Massachusetts General Life Insurance
Company ("Massachusetts General"), Lamar Life Insurance Company
("Lamar Life") and Wabash Life Insurance Company;
- the former subsidiaries of ATC, which are now subsidiaries of Conseco,
including American Travellers Life Insurance Company ("American
Travellers"), United General Life Insurance Company ("United General")
and American Travellers Insurance Company of New York;
- the former subsidiaries of THI, which are now subsidiaries of Conseco,
including TLIC Life Insurance Company ("TLIC Life"), Transport Life
Insurance Company ("Transport Life") and Continental Life Insurance
Company ("Continental Life"); and
- Bankers National Life Insurance Company, National Fidelity Life
Insurance Company and Lincoln American Life Insurance Company, which
have profitable blocks of in-force business, although they are
currently not pursuing new sales.
On March 4, 1997, Conseco completed the CAF Merger. CAF was merged with
and became a wholly owned subsidiary of Conseco. In the CAF Merger, each of the
approximately 17.7 million shares of CAF common stock and common stock
equivalents were converted into the right to receive $30.75 in cash plus 0.1647
of a share of Conseco Common Stock. Conseco paid $545 million in cash and issued
2.9 million shares of Conseco Common Stock with a value of approximately $115.7
million to acquire the CAF common stock. In addition, Conseco assumed a note
payable of CAF of $31.0 million. CAF, through its insurance subsidiaries,
underwrites, markets and distributes individual and group supplemental health
and accident insurance. CAF's principal insurance subsidiary is an
Arizona-domiciled company, Capitol American Life Insurance Company ("CALI"),
which accounted for more than 97 percent of CAF's earned premiums over the last
five years. CALI is licensed to sell its products in 47 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands, and markets its products
through a sales force consisting of independent agents, agent organizations and
brokers. CAF had total assets of $1.1 billion at December 31, 1996.
OPERATING SEGMENTS
Conseco conducts and manages its business through four segments,
reflecting the Company's major lines of insurance business and target markets:
(i) annuities; (ii) supplemental health insurance; (iii) life insurance; and
(iv) other.
ANNUITIES. This segment includes single-premium deferred annuities,
flexible-premium deferred annuities, single-premium immediate annuities and
variable annuities sold through both career agents and professional independent
producers. During 1996, this segment collected total premiums of $1,542.4
million, down 7.1 percent from 1995. When all currently consolidated companies
are included for all periods, including periods prior to their acquisition, this
segment collected total premiums of $1,612.7 million, down 8.7 percent from
1995.
22
<PAGE>
SUPPLEMENTAL HEALTH. This segment includes Medicare supplement and long-
term care insurance. During 1996, this segment collected Medicare supplement
premiums of $630.9 million and long-term care premiums of $194.2 million, up 5.7
percent and 22 percent, respectively, over 1995. When all currently consolidated
companies are included for all periods (including periods prior to their
acquisition), this segment collected Medicare supplement premiums of $651.6
million, long-term care premiums of $541.3 million and specified disease
premiums of $90.6 million, up 5.2 percent, up 37 percent and down 2.3 percent,
respectively, from premiums collected during 1995.
Beginning in 1997, this segment will include the specified disease
products of the former subsidiaries of THI and CAF and the long-term care
products of the former subsidiaries of ATC which are distributed through
professional independent producers. Upon completion of the PFS Merger, this
segment will also include various supplemental health products of PFS. These
products are also distributed through professional independent producers.
LIFE. This segment includes traditional, universal life and other
life insurance products. Beginning with the third quarter of 1996, the largest
single component of this segment is the universal life business of LPG. This
segment's products are currently sold through both career agents and
professional independent producers.
During 1996, this segment collected total premiums of $453.7 million, up
64 percent, over premiums collected during 1995. When all currently consolidated
companies are included for all periods, including periods prior to their
acquisition, this segment collected total premiums of $665.6 million, up 1.1
percent from 1995.
OTHER. This segment includes miscellaneous health products, including
Bankers Life's comprehensive and group products. Bankers Life markets its group
insurance products through a small field force of representatives and
independent insurance brokerage firms. In recent years, Bankers Life has not
emphasized group insurance sales, but does write new business when the potential
new contract carries a high likelihood of profitability and long-term
persistency. During 1996, this segment collected premiums of $389.2 million.
When all currently consolidated companies are included for all periods,
including periods prior to their acquisition, this segment collected premiums of
$420.6 million, down 21 percent from 1995.
This segment also includes fee revenue generated by Conseco's nonlife
subsidiaries, including the investment advisory fees earned by Conseco Capital
Management, Inc. and commissions earned for insurance product marketing and
distribution. Fee revenues from Conseco's consolidated subsidiaries are
excluded. Total fees earned from nonaffiliates during 1996 were $49.8 million,
up 14 percent over 1995.
23
<PAGE>
GENERAL INFORMATION CONCERNING CONSECO AND RAC
Conseco's and RAC's executive offices are located at 11825 North
Pennsylvania Street, Carmel, Indiana 46032 and the telephone number for Conseco
and RAC is (317) 817-6100.
RAC, a wholly owned subsidiary of Conseco, was formed for the purpose of
effecting the Merger. To date, RAC has not engaged in any activities other than
those incident to its organization and the consummation of the Merger.
For additional information concerning Conseco, see Conseco's Annual Report
and other documents filed with the Commission and listed under "Incorporation of
Certain Documents by Reference" and "Summary -- Selected Historical Financial
Information of Conseco." For additional information concerning LPG, see "Summary
- -- Selected Historical Financial Information of LPG."
24
<PAGE>
INFORMATION CONCERNING PFS
PFS, through its insurance subsidiaries, underwrites life insurance and
annuities and health insurance in selected niche markets throughout the United
States. PFS had total assets of approximately $1.8 billion at December 31,
1996. PFS's life insurance, annuity and health insurance premiums collected were
$700.4 million in 1995 and $794.2 million in 1996.
For additional information concerning PFS, see PFS's Annual Report and
other documents filed with the Commission and listed under "Incorporation of
Certain Documents by Reference" and "Summary -- Selected Historical Financial
Information of PFS."
PFS's executive offices are located at 1750 East Golf Road, Schaumburg,
Illinois 60173 and its telephone number is (847) 995-0400.
25
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of PFS Common
Stock in connection with the solicitation of proxies by the PFS Board of
Directors for use at the Special Meeting to be held on May ___, 1997, ______at
______, commencing at 10:00 a.m., local time, and at any adjournment or
postponement thereof.
This Proxy Statement/Prospectus also constitutes the Prospectus of Conseco
filed with the Commission as part of the Registration Statement under the
Securities Act relating to the shares of Conseco Common Stock issuable in
connection with the Merger. This Proxy Statement/Prospectus and the accompanying
form of proxy are first being mailed to stockholders of PFS on or about April
__, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, PFS stockholders will consider and vote upon (1) a
proposal to authorize and adopt the Merger Agreement and the transactions
contemplated thereby and (2) such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
THE PFS BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND RECOMMENDS THAT PFS STOCKHOLDERS VOTE FOR AUTHORIZATION AND ADOPTION OF THE
MERGER AGREEMENT. SEE "THE MERGER -- BACKGROUND OF THE MERGER" AND "-- PFS's
REASONS FOR THE MERGER; RECOMMENDATION OF THE PFS BOARD OF DIRECTORS."
VOTING AT THE SPECIAL MEETING; RECORD DATE; QUORUM
The PFS Board of Directors has fixed March 31, 1997 as the Record Date for
determination of stockholders entitled to notice of, and to vote at, the Special
Meeting and any adjournments or postponements thereof. Only stockholders of
record on the Record Date are entitled to notice of, and to vote at, the Special
Meeting. As of the Record Date, there were ___________ shares of PFS Common
Stock outstanding and entitled to vote. Each holder of record of shares of PFS
Common Stock on the Record Date is entitled to cast, either in person or by
properly executed proxy, one vote per share on the Merger Agreement and the
other matters, if any, properly submitted for the vote of the PFS stockholders
at the Special Meeting. The presence, in person or by properly executed proxy,
of the holders of shares of capital stock representing a majority of the voting
power of outstanding capital stock entitled to vote at the Special Meeting will
constitute a quorum. Shares of PFS Common Stock held by subsidiaries of PFS are
not treated as outstanding for voting purposes or in determining a quorum at the
Special Meeting.
26
<PAGE>
The authorization and adoption by PFS of the Merger Agreement will require
the affirmative vote of the holders of a majority of the voting power of the
outstanding capital stock entitled to vote thereon. Thus, the affirmative vote
of shares of PFS capital stock representing at least _______ votes will be
required to authorize and adopt the Merger Agreement and the transactions
contemplated thereby. Shares subject to abstentions will be treated as shares
that are present at the Special Meeting for purposes of determining the presence
of a quorum but as unvoted for purposes of determining the number of shares
voting on a particular proposal. If a broker or other nominee holder indicates
on the proxy card that it does not have discretionary authority to vote the
shares for which it is the holder of record on a particular proposal, those
shares will be treated as shares that are present at the Special Meeting for
purposes of determining the presence of a quorum but will not be considered as
voted for purposes of determining the number of PFS stockholders that have voted
for or against the proposal. Accordingly, abstentions and broker non-votes will
have the same practical effect as a vote against the
27
<PAGE>
authorization and adoption of the Merger Agreement and the Merger or on any
other matter submitted to the PFS stockholders which requires a percentage of
the total number of outstanding shares for approval.
As of the Record Date, the directors and executive officers of PFS (as a
group, ___ persons) and their affiliates were entitled to vote _____ shares (__
percent) of PFS Common Stock. Each of the PFS directors has agreed to vote his
shares in favor of the Merger, except in certain limited circumstances.
Information with respect to the beneficial ownership of shares of PFS Common
Stock by each of PFS's directors and all directors and officers of PFS as a
group, and each person known to PFS to be the beneficial owner of more than five
percent of the outstanding shares of PFS Common Stock is set forth below under
"-- Security Ownership of Certain Beneficial Owners and Management."
- -----
28
<PAGE>
PROXIES; REVOCATION OF PROXIES
Shares of PFS Common Stock represented by properly executed proxies
received at or prior to the Special Meeting that have not been properly revoked
will be voted at the Special Meeting in accordance with the instructions
contained therein. Shares of PFS Common Stock represented by properly executed
proxies for which no instruction is given will be voted FOR authorization and
adoption of the Merger Agreement and the Merger. PFS stockholders are requested
to mark, sign, date and return promptly the enclosed proxy card in the
postage-prepaid envelope provided for this purpose to ensure that their shares
are voted. A stockholder may revoke a proxy at any time prior to the vote on the
Merger Agreement and the Merger by submitting a later-dated proxy with respect
to the same shares, delivering written notice of revocation to the Secretary of
PFS at any time prior to such vote or attending the Special Meeting and voting
in person. Mere attendance at the Special Meeting will not itself revoke a
proxy.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for any proxies that have theretofore been properly
revoked or withdrawn), notwithstanding that they may have been effectively voted
on the same or any other matter at a previous meeting.
29
<PAGE>
At the date of this Proxy Statement/Prospectus, the PFS Board of Directors
does not know of any business to be presented at the Special Meeting other than
as set forth in the notice accompanying this Proxy Statement/Prospectus. If any
other matters are properly presented at the Special Meeting for consideration,
including among other things, consideration of a motion to adjourn the meeting
to another time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the enclosed form of proxy
and acting thereunder will have discretion to vote on such matters in accordance
with their best judgment.
PROXY SOLICITATION. PFS will bear the cost of soliciting proxies from its
stockholders. In addition to solicitation by mail, directors, officers and
employees of PFS, as well as Georgeson & Company, Inc., the proxy solicitation
agent retained by PFS (the "Proxy Solicitation Agent"), may solicit proxies by
telephone, special letter, telegram or otherwise. Such directors, officers and
employees of PFS will not be additionally compensated for such solicitation, but
may be reimbursed for out-of-pocket expenses incurred in connection therewith.
The Proxy Solicitation Agent will be paid a fee of $7,500 for its services and
will be entitled to reimbursement of its expenses. Brokerage firms, fiduciaries
and other custodians who forward soliciting material to the beneficial owners of
shares of PFS Common Stock held of record by them will be reimbursed for their
reasonable expenses incurred in forwarding such material.
PFS STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE MERGER
BACKGROUND OF THE MERGER
The terms and conditions of the Merger were determined through arm's-length
negotiations between the managements and Boards of Directors of PFS and Conseco.
In determining the form of the transaction and the form and amount of the Merger
Consideration, numerous factors were considered by the Boards of Directors of
PFS and Conseco. See "-Conseco's Reasons for the Merger" and "-PFS's Reasons for
the Merger; Recommendation of the PFS Board of Directors."
In October 1996, after a general conversation between Peter W. Nauert,
Chairman of the Board and Chief Executive Officer of PFS, and Mark Gormley of
DLJ regarding industry conditions and consolidations, Mr. Gormley indicated to
Mr. Nauert that based on Conseco's acquisition strategy, interest in
strengthening its position in the senior market and the overall complementary
nature of PFS's business, Conseco might be interested in purchasing PFS for a
purchase price at a premium over the current market price of the PFS Common
Stock which PFS's stockholders might find attractive. A few days later, DLJ
organized a meeting between Mr. Nauert and Stephen C. Hilbert, the Chairman of
the Board, President and Chief Executive Officer of Conseco. During such
meeting, Mr. Hilbert and Mr. Nauert discussed a potential transaction, including
the relative values of each of PFS and Conseco, exchange ratios and the form and
other general terms of a transaction. The parties discussed the proposal which
was eventually presented to the PFS Board of Directors pursuant to which Conseco
would acquire PFS by merger for consideration between $24 and $27 per share of
PFS Common Stock, payable in Conseco Common Stock, based on the value of the
Conseco Common Stock prior to the closing. The proposal also contemplated that
the outstanding PFS Notes would be convertible into the number of shares of
Conseco Common Stock which the holder of such note would have been entitled to
receive in the Merger if the holder had converted the note into shares of PFS
Common Stock immediately prior to the Merger. Based on such discussions, Conseco
and PFS entered into a confidentiality agreement, and PFS furnished Conseco with
certain non-public information requested by Conseco.
On November 15, 1996, the Board of Directors of PFS held a telephone
meeting in which the directors were advised of Conseco's interest in acquiring
PFS. The Board authorized PFS's management to pursue discussions with Conseco.
PFS retained DLJ to act as its financial advisor in connection with the possible
transaction. It also utilized its consulting actuaries to provide actuarial
advice and its usual outside counsel, McDermott, Will & Emery, to act as counsel
in connection with the potential transaction.
During November and December 1996, Conseco and PFS each conducted its
due diligence of the other. Conseco provided PFS with an initial draft of a form
of merger agreement on December 4, 1996 setting forth the terms of Conseco's
offer to acquire PFS by merger in exchange for Conseco Common Stock.
30
<PAGE>
During the course of these negotiations, the parties discussed a proposal
by Conseco to acquire PFS by merger for between $24 and $27 per share of PFS
Common Stock (payable in Conseco Common Stock), based upon the value of Conseco
Common Stock prior to the closing. The proposal also provided that the PFS Notes
would become convertible into the number of shares of Conseco Common Stock which
the holder of such Note would have been entitled to receive in the Merger if the
holder had converted the Note into shares of PFS Common Stock immediately prior
to the Merger.
The Conseco Board of Directors met on December 9, 1996 to consider the
proposed merger. At the meeting, Conseco management reported on the due
diligence review undertaken by Conseco and its advisors and on the results of
the discussions to date with representatives of PFS and its legal and financial
advisors. The Conseco Board discussed the potential benefits to Conseco of an
acquisition of PFS. Management outlined for the Conseco Board the proposed terms
and conditions of the Merger Agreement. After reviewing and discussing the
merger proposal, the Conseco Board of Directors authorized management of Conseco
to execute and deliver the Merger Agreement as outlined to the Directors at the
meeting, with such further changes as management approved. See " - Conseco's
Reasons for the Merger."
The PFS Board of Directors held a special meeting, recessed and continued
several times, beginning on December 12, 1996 and ending on December 15, 1996,
to consider the Conseco proposal. On December 12, 1996, PFS management described
to the Board in detail the terms of the Conseco proposal. PFS's legal advisors
reviewed with the Board the fiduciary duties of the Board with respect to its
consideration of the Conseco proposal. In addition, representatives of DLJ
described in detail DLJ's qualifications to evaluate the Conseco proposal, the
process utilized by DLJ in evaluating proposals such as the Conseco proposal
generally and the process utilized by DLJ to evaluate the fairness to the
holders of PFS Common Stock of the Exchange Ratio in the Conseco proposal
specifically. The Board discussed in detail and at length the Conseco proposal,
the information concerning Conseco provided to it by management and the results
of the due diligence of Conseco conducted by PFS, as well as the qualifications
of DLJ and the process they had described to evaluate the Conseco proposal. The
meeting was adjourned until December 13, 1996.
The meeting reconvened on December 13, 1996; and the Board continued its
consideration of the Conseco proposal. Mr. Hilbert, assisted by Rollin M. Dick,
Executive Vice President and Chief Financial Officer of Conseco, joined the
meeting and made a presentation to the Board with respect to Conseco, its
business plan, financial condition and operations, including its recent
acquisitions. Messrs. Hilbert and Dick responded to questions from the directors
as the meeting continued. The Board continued its discussion of the Conseco
proposal and requested an updated analysis from DLJ and also received the 1996
actuarial analysis of PFS's business.
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After analysis of the information provided and further discussion of the
overall financial condition and future prospects of PFS, taken as a whole, the
Board directed management and DLJ to conduct further negotiations with Conseco
with a view toward obtaining additional Merger Consideration.
Over the course of the day on December 15, 1996, representatives of DLJ and
PFS continued to consider the information provided by PFS's consulting
actuaries. The Board reconvened in the evening on December 15, 1996 and
discussed in detail the proposed merger. Representatives of PFS's consulting
actuaries responded to questions from the Board and provided detailed
information with respect to the actuarial analysis of PFS's business and other
related matters. Representatives of DLJ informed the Board that Conseco had
increased its offer by $1 per share and that, as a result, the revised Conseco
offer would provide PFS stockholders with a minimum purchase price equivalent to
$25 per share of PFS Common Stock and a maximum purchase price equivalent to $28
per share of PFS Common Stock. DLJ then provided the Board with the written
fairness opinion of DLJ relating to the Merger. See " - Opinion of Financial
Advisor to PFS."
PFS considered remaining independent as an alternative to a transaction
with Conseco. PFS did not actively solicit other offers in connection with the
proposal by Conseco due to the PFS Board of Directors' belief that such an
active solicitation of potential acquirors would have an adverse effect on PFS's
brokerage distribution system.
After careful consideration by the PFS Board of the terms of the Merger
Agreement and after consultation with its advisors, the PFS Board voted
unanimously to approve the Merger Agreement in the form presented to it at the
meeting with such changes thereto as management might approve. See " - PFS's
Reasons for the Merger; Recommendation of the PFS Board of Directors."
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CONSECO'S REASONS FOR THE MERGER
The Conseco Board of Directors approved the Merger Agreement by a unanimous
vote at its December 9, 1996, meeting. Material factors considered by the Board
of Conseco in its evaluation of the acquisition of PFS were as follows: (1) the
fact that PFS's business is focused on the senior consumer market, which is an
under-penetrated market with continuing excellent growth prospects and is
already the focus of Conseco companies; (2) the existing strong distribution
networks which PFS has, including 25,000 agents in the senior market, 10,000
agents in the small group market and 20,000 agents in the life market, which
would further strengthen Conseco's distribution capabilities and provide
additional cross-marketing opportunities for the products of other Conseco
companies; (3) the excellent growth in revenues achieved by PFS over the past
ten years while maintaining consistent growth and profitability in recent years;
(4) the integration of PFS's businesses with those of Conseco would provide an
opportunity to realize significant expense savings because of the overlap with
the long-term care businesses of American Travellers Life and Bankers Life &
Casualty and with the life and annuity businesses of American Life and Casualty
and the LPG companies; (5) the common stock of PFS has historically traded at a
discount to its peer group due to earnings volatility arising from write downs
of deferred acquisition costs in its group medical division and the lack of
meaningful research coverage from securities analysts; (6) the high quality
investment portfolio maintained by the PFS companies which would offer
opportunities to the Conseco investment department to increase investment yield;
(7) the potential long-term and short-term effect of the transaction on
Conseco's earnings per share, (8) the structure of the proposed transaction, (9)
the terms of the Merger Agreement and (10) the presentation and recommendation
made by the management of Conseco. In its consideration of the proposed
transaction, the Conseco Board did not assign relative weights to these factors
and did not conduct a detailed review of each factor, but relied on management's
analysis and recommendation regarding the overall effect of the proposed
transaction on Conseco's anticipated future results. Conseco's management did
not believe that there were any significant risks or negative factors associated
with the proposed acquisition of PFS and advised the Board accordingly.
A principal strategic objective of Conseco since it commenced operations in
1982 has been to acquire life and health insurance companies and to increase
their value by implementing management strategies to reduce costs and improve
administrative efficiency, centralize asset management, improve marketing and
distribution, eliminate unprofitable products and focus resources on the
development and expansion of profitable products. In furtherance of this
strategy, Conseco has completed 15 acquisitions of insurance companies and
related businesses since it commenced operations. Conseco believes that the
value and profitability of its existing insurance subsidiaries can be enhanced
as a result of the cross-marketing opportunities presented by a company which
complements Conseco's existing product lines and distribution channels.
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Conseco's operating strategy is to target selected markets which provide
significant growth potential and to focus its sales efforts on profitable
products which will provide predictable and diversified earnings regardless of
interest rate changes or other changes in the economic environment. Conseco also
seeks to be a major competitor in each of its targeted markets and to develop
strong, complementary distribution channels. Strategic acquisitions will be made
by Conseco which are consistent with this strategy and which enable Conseco to
maintain its targeted ratio of debt to total capital.
The Conseco Board of Directors believes that the insurance businesses of
Conseco and PFS complement each other. The Merger would provide Conseco an
opportunity to expand its product portfolio. Completion of the Merger would
enable Conseco to be a major competitor in its targeted markets, with
approximately 150,000 agents licensed to sell long term care insurance, Medicare
supplement insurance, cancer insurance, other supplemental health insurance,
universal life insurance and retirement annuity products. The addition of PFS's
distribution system would also provide Conseco additional opportunities to
cross-market its current products. The Conseco Board of Directors believes that
the Merger offers Conseco the opportunity to strengthen its capitalization
through the issuance of additional shares of Conseco Common Stock. The Conseco
Board also believes that the Merger provides Conseco and PFS the opportunity to
improve their profitability through the achievement of economies of scale due to
the similar nature of their business and the elimination of redundancies such as
public reporting obligations and similar holding company costs and the costs
associated with maintaining multiple operating locations. By consolidating
certain operations and eliminating expenses, Conseco expects to achieve, over
time, significant savings of operating costs. See "-- Conduct of the Business of
Conseco and PFS After the Merger."
PFS'S REASONS FOR THE MERGER; RECOMMENDATION OF THE PFS BOARD OF DIRECTORS
After careful consideration by the members of the PFS Board of Directors of
the terms of the Merger Agreement and consultation with its advisors, the PFS
Board of Directors believes that the Merger is fair to and in the best interests
of the PFS stockholders and voted unanimously to approve the Merger Agreement in
the form presented to it at the PFS Board of Directors meeting on December 15,
1996, with such changes thereto as management of PFS may approve. In voting to
approve the Merger Agreement and the Merger, the PFS Board of Directors
considered many different factors, including the following which favored the
Merger: (1) the return to PFS stockholders represented by the premium over the
then current market price of the PFS Common Stock offered by Conseco as compared
to the time that would be required if the Merger were not consummated to achieve
an equivalent stockholder value (on December 13, 1996, the last trading day
prior to the public annoucement of the Merger, the Merger Consideration
represented a premium of $7.90 over the PFS Common Stock price); (2) the
increased security for PFS's policyholders and the potential additional
opportunities for PFS's employees and agents expected to result from Conseco's
financial strength and competitive position; (3) the financial condition and
results of operations in Conseco and the PFS Board of Directors' perception of
the more favorable overall business prospects of Conseco and PFS on a combined
basis as compared to PFS's prospects as an independent entity; (4) the tax
deferred nature of the transaction; (5) the potential increase in value in the
Conseco Common Stock after the Merger based on Conseco's financial strength and
competitive position; (6) the highly competitive nature of the life and health
insurance business; (7) the importance in the industry of maintaining certain
financial and claims-paying ratings issued by rating agencies and the fact that
PFS, as an independent entity, may have difficulties satisfying the capital
requirements necessary to achieve such ratings;(8) the current trend of
consolidation within the insurance industry; (9) the broader, more active
trading market for Conseco Common Stock; and (10) the opinion rendered to the
PFS Board of Directors by DLJ with regard to the fairness to the holders of PFS
Common Stock, of the Exchange Ratio from a financial point of view. The PFS
Board of Directors also considered the following additional factors: (1) the
risk of owning Conseco Common Stock rather than PFS Common Stock and the
possible negative impact based upon potentially different business plans and the
fact that Conseco's other operations may weigh down PFS operating gains; (2) the
uncertainty of the impact of the Merger on PFS's employees; (3) the volatility
of the Conseco Common Stock in the past and the impact such volatility may have
on the Merger Consideration; (4) the $1.0 million of Conseco expenses to be paid
by PFS if the requisite approval of the PFS stockholders is not obtained and the
other conditions have been satisified or waived, unless Conseco is materially in
breach of the Merger Agreement, and the $8.0 million break-up fee to be paid by
PFS to Conseco in the event that the PFS Board of Directors withdraws or
modifies its approval of the Merger or enters into any agreement with respect to
any acquisition proposal; and (5) the interest of members of PFS management in
deciding to approve the transaction, including the facts that Mr. Nauert will be
entitled to receive $4.5 million and will enter into an employment agreement
with Conseco and Messrs. Scheper and Brophy will be entitled to receive amounts
equal to the present value, discounted at an annual rate of 8 percent, of an
amount equal to the salary which would have been payable to such officer during
the period from the Effective Time through August 31, 1998 based on rates of
annual base salary payable to Messrs. Scheper and Brophy of $425,000 and
$325,000. No factor reviewed by the Board was considered more relevant than any
other.
THE DIRECTORS OF PFS BELIEVE THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF THE PFS STOCKHOLDERS, AND HAVE UNANIMOUSLY APPROVED THE TERMS OF
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMEND
THAT THE STOCKHOLDERS OF PFS VOTE FOR THE PROPOSAL TO AUTHORIZE AND ADOPT THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, SET FORTH AS ITEM 1
ON THE PROXY CARD.
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OPINION OF FINANCIAL ADVISOR TO PFS
In its role as financial advisor to PFS, DLJ was asked by PFS to render its
opinion to the PFS Board of Directors, as to the fairness from a financial point
of view, of the consideration to be received by holders of PFS Common Stock
pursuant to the terms of the Merger Agreement. On December 15, 1996, DLJ
delivered its written opinion (the "DLJ Opinion") to the PFS Board of Directors
to the effect that as of the date of such opinion and based upon and subject to
the assumptions, limitations and qualifications set forth in such opinion, the
Exchange Ratio was fair, from a financial point of view, to the holders of PFS
Common Stock.
A copy of the DLJ Opinion is attached hereto as Annex B. Holders of PFS
Common Stock are urged to read the opinion in its entirety for assumptions made,
procedures followed, other matters considered and limits of the review by DLJ.
The DLJ Opinion was prepared for the PFS Board of Directors and is directed
only to the fairness, from a financial point of view, of the Exchange Ratio to
the holders of PFS Common Stock, and does not constitute a recommendation to any
member of the PFS Board of Directors or any stockholder as to how to vote at the
Special Meeting.
The DLJ Opinion does not constitute an opinion as to the price at which
Conseco Common Stock will actually trade at any time. The Exchange Ratio and
Merger Consideration were determined in arm's-length negotiations between PFS
and Conseco, in which negotiations DLJ advised PFS. No restrictions or
limitations were imposed by the PFS Board upon DLJ with respect to the
investigations made or the procedures followed by DLJ in rendering its opinion.
DLJ was not requested to, nor did it, solicit the interests of any other party
in acquiring PFS.
In arriving at its opinion, DLJ reviewed the Merger Agreement. DLJ also
reviewed financial and other information that was publicly available or
furnished to DLJ by PFS and Conseco, including information provided during
discussions with their respective managements. Included in the information
provided during discussions with the respective managements were certain
financial projections of PFS which were pro forma for certain pending
transactions of PFS for the years ending December 31, 1996 and December 31, 1997
prepared by the management of PFS, an actuarial analysis of the insurance
subsidiaries of PFS as of September 30, 1995 prepared for PFS by M&R, certain
pro forma financial statements of Conseco for the year ended December 31, 1995
and the nine months ended September 30, 1996 and certain financial projections
of Conseco which are pro forma for certain pending and recently completed
transactions of Conseco, for the years ending December 31, 1996 through December
31, 2005 prepared by the management of Conseco. In addition, DLJ compared
certain financial and securities data of PFS and Conseco with various other
companies whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of the PFS Common Stock and Conseco Common
Stock, reviewed prices and premiums paid in certain other business combinations
and conducted such other financial studies, analyses and investigations as were
deemed appropriate for purposes of rendering its opinion.
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In rendering its opinion, DLJ relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to DLJ from public sources, that was provided to DLJ by PFS and
Conseco or their representatives, or that was otherwise reviewed by DLJ. With
respect to the pro forma financial projections of PFS supplied to DLJ, DLJ has
assumed that they were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of PFS as to the
future operating and financial performance of PFS. With respect to the actuarial
analysis of the insurance subsidiaries of PFS supplied to DLJ, DLJ assumed that
it was reasonably prepared on a basis reflecting: (i) the best available
estimates and judgments of the management of PFS as to the future operating and
financial performance of the insurance subsidiaries of PFS as of September 30,
1995; and, (ii) the best judgment of M&R as to the proper analysis to be applied
based on the assumptions provided to it by the management of PFS as to the
future operating and financial performance of such insurance subsidiaries. In
addition, with respect to such actuarial analysis, DLJ assumed that except for
the then pending acquisitions of PFS, there were no material changes to the
business of PFS since such date that would materially affect such actuarial
analysis. With respect to the pro forma financial statements and pro forma
financial projections of Conseco supplied to DLJ, DLJ assumed that they were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of Conseco as to the historical pro forma
results of Conseco and the future operating and financial performance of PFS and
Conseco. DLJ did not assume any responsibility for making an independent
evaluation of PFS's and Conseco's assets or liabilities or for making any
independent verification of any of the information reviewed by DLJ. DLJ relied
as to all legal matters on advice of counsel to PFS.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of the DLJ Opinion. It should be understood that, although
subsequent developments may affect the DLJ Opinion, DLJ does not have any
obligation to update, revise or reaffirm this opinion.
The DLJ Opinion was based on receipt by the holders of PFS Common Stock of
Conseco Common Stock with a value of $25.00 per share of PFS Common Stock, based
on the collar provisions outlined in the Merger Agreement.
The following is a summary of the presentation made by DLJ to the PFS Board
of Directors in connection with rendering its opinion.
PFS Public Market Valuation Analysis. To provide contextual data and
comparative market information, DLJ compared selected share price and operating
and financial data and ratios for PFS to the corresponding data and ratios of
certain publicly traded accident and health insurance companies which DLJ deemed
relevant. Such comparable companies consisted of: Delphi Financial Group, Inc.,
Guarantee Life Companies, Inc., John Alden Financial Corporation, PennCorp
Financial Group, Inc. and Penn Treaty American Corp. (the "Publicly Traded
Companies"). Such ratios included, among others, the multiples of stock price to
GAAP operating earnings per share ("EPS") for the latest twelve months ("LTM")
ended September 30, 1996, estimated GAAP operating EPS for 1996 and 1997 (as
estimated by research analysts and compiled by Institutional Brokers Estimating
Service) and shareholders' equity per share as of September 30, 1996, as well as
the ratios of the aggregate equity market capitalization plus the amount of debt
and preferred stock outstanding ("Enterprise Value") to statutory earnings for
the LTM or the last fiscal year ("LFY") and Enterprise Value to statutory
capital and surplus as of the end of the last fiscal quarter ("LFQ") or the LFY.
Closing prices as of December 6, 1996 were used in this analysis. The range of
stock price as a multiple of LTM GAAP operating EPS for the Publicly Traded
Companies was 10.1x to 14.6x. The ranges of price as a multiple of estimated
GAAP operating earnings for 1996 and 1997 were 9.5x to 13.9x and 7.1x to 12.1x,
respectively. The range of stock price as a multiple of LTM shareholders' equity
per share for the Publicly Traded Companies was 0.97x to 1.68x. The ranges of
Enterprise Value as a multiple of LFY statutory earnings and Enterprise Value as
a multiple of LFY statutory capital and surplus were 26.3x to 41.5x and 1.66x to
5.48x, respectively. The average multiples of stock price to LTM GAAP operating
EPS and estimated GAAP operating EPS for 1996 and 1997 for the Publicly Traded
Companies were 12.9x, 11.9x and 10.1x, respectively. The average multiples of
stock price to shareholders' equity per share, Enterprise Value to statutory
earnings and Enterprise Value to statutory capital and surplus for the Publicly
Traded Companies were 1.38x, 33.9x and 2.91x, respectively. This analysis
indicated that the total consideration to be received by PFS would result in
multiples of stock price to LTM GAAP operating EPS, estimated GAAP operating EPS
for 1996 and 1997 and shareholders' equity per share and multiples of Enterprise
Value to statutory earnings and Enterprise Value to statutory capital and
surplus within or above the ranges detailed above. The $25.00 per share in
consideration which DLJ assumed would be paid by Conseco would result in
purchase price multiples to PFS's LTM GAAP operating EPS, estimated GAAP
operating EPS for 1996 and 1997 and shareholders' equity per share as of
September 30, 1996 of 11.4x, 12.3x, 10.6x and 1.56x, respectively. This same
consideration would result in Enterprise Value multiples to PFS's LFY statutory
earnings and LFY statutory capital and surplus of 45.2x and 3.35x, respectively.
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PFS Merger Market Valuation Analysis. DLJ reviewed publicly available
information for the following selected transactions involving the acquisition of
accident and health insurance companies since December 1992 (the "Selected
Transactions"): Conseco, Inc. - Transport Holdings; Conseco, Inc. - American
Travellers Corporation; Conseco, Inc. - Capitol American Financial Corp.; GE
Capital Corp. - Union Fidelity Life Insurance Co.; Trigon BCBS - Mid-South
Insurance Co.; Humana, Inc. - EMPHESYS Financial Group; Torchmark Corp. -
American Income Holdings, Inc.; GE Capital Corp. - Harcourt General, Inc.;
Veritus, Inc. - Group America Insurance Co.; Conseco, Inc. - Bankers Life
Holding Corp.; and UNUM Corp. - Colonial Companies, Inc. In reviewing these
transactions, several factors were considered, including: (i) the lack of
publicly available information for subsidiary and private company transactions
which represent a significant portion of merger and acquisition activity within
the accident and health insurance industry; and, (ii) the lack of directly
comparable transactions. The Selected Transactions were not intended to
represent the complete list of accident and health insurance company
transactions which have occurred over the period contemplated. Rather, such
transactions included only selected recent transactions involving accident and
health insurance companies. Such transactions were used in this analysis because
the companies involved were broadly deemed by DLJ to operate in similar
businesses or have similar financial characteristics to PFS.
DLJ reviewed the consideration paid in the Selected Transactions in terms
of the price paid for the common stock as a multiple of LTM GAAP operating EPS
and shareholders' equity per share as of September 30, 1996. DLJ also reviewed
the consideration paid in such transactions in terms of the price paid for the
common stock plus the amount of debt and preferred stock assumed, repaid or
redeemed in such transactions (the "Transaction Value") as a multiple of
statutory earnings for the LTM or LFY ended prior to the announcement of such
transactions and as a multiple of statutory capital and surplus as of the end of
the LFQ or LFY ended prior to the announcement of such transactions. In
analyzing acquisitions of accident and health insurance companies, the purchase
price paid may be expressed as a multiple of equity purchase price to GAAP
operating EPS and to shareholders' equity per share and of Transaction Value to
statutory earnings and to statutory capital and surplus. Variances in multiples
for different transactions may reflect such considerations as the consistency,
quality and growth of earnings and the company's capitalization, asset quality
and return on capital. Since statutory earnings and statutory capital and
surplus do not reflect the cost of a company's debt or preferred stock
financing, which are usually at the holding company level rather than the
insurance company level, multiples of statutory earnings and statutory capital
and surplus are appropriately based on a Transaction Value which includes the
cost of assuming, repaying or redeeming such debt or preferred stock financing.
Since GAAP operating EPS and shareholders' equity per share already reflect the
cost of a company's debt or preferred stock financing, analyses of multiples of
GAAP operating EPS or shareholders' equity are based on the price paid for the
company's common stock, which excludes the cost of assuming, repaying or
redeeming such debt or preferred stock financing. Comparing the multiples of
equity purchase price to the GAAP operating EPS and shareholders' equity per
share of PFS and the multiples of Transaction Value to the statutory earnings
and statutory capital and surplus of PFS with the multiples paid in other
transactions indicates whether the valuation being placed on PFS is within the
range of values paid for other accident and health insurance companies.
The range of price as a multiple of LTM GAAP operating EPS for the Selected
Transactions was 10.8x to 23.9x. The range of stock price as a multiple of LFQ
shareholders' equity per share for the Selected Transactions was 1.17x to 2.80x.
DLJ found ranges of Transaction Value as a multiple of LFY statutory earnings
and of LFY or LFQ statutory capital and surplus of 5.1x to 44.8x and 1.30x to
10.55x, respectively. The average multiple of stock price to LTM GAAP operating
EPS for the Selected Transactions was 13.8x. The average multiple of price to
LFQ shareholders' equity per share for the Selected Transactions was 2.19x. The
average multiples of Transaction Value to LFY statutory earnings and Transaction
Value to LFY or LFQ statutory capital and surplus were 17.5x and 3.05x,
respectively. The total consideration to be received by holders of PFS Common
Stock would result in multiples of equity purchase price to LTM GAAP operating
EPS and equity purchase price to LFQ shareholders' equity per share within or
above the ranges outlined above. This consideration would also result in
multiples of Transaction Value to LFY statutory earnings and Transaction Value
to LFY statutory capital and surplus within the applicable ranges outlined
above. Based on the consideration which DLJ assumed would be paid by Conseco,
the implied multiple of the price paid for PFS Common Stock to LTM GAAP
operating EPS was 11.4x. Based on the consideration which DLJ assumed would be
paid by Conseco, the implied multiple of the price assumed to be paid for PFS
Common Stock to PFS's shareholders' equity per share was 1.56x. Based on the
consideration which DLJ assumed would be paid by Conseco, the implied multiples
of Transaction Value to PFS's LFY statutory earnings and Transaction Value to
PFS's LFY statutory capital and surplus were 45.2x and 3.35x, respectively.
DLJ also determined the percentage premium of the offer prices (represented
by the purchase price per share in cash transactions and the price of the
constituent securities multiplied by the exchange ratio in the case of
stock-for-stock mergers) over the public market trading prices one day, one week
and one month prior to the announcement date of the Selected Transactions. The
ranges of premiums of offer prices to public market trading prices one day, one
week and one month prior to the announcement date for the Selected Transactions
were (10.4%) to 54.8%, 1.0% to 56.7% and (6.0%) to 71.9% respectively. The
average premiums of offer prices to public market trading prices one day, one
week and one month prior to the announcement date for the Selected Transactions
were 23.8%, 28.8% and 32.7%, respectively. The consideration which DLJ assumed
would be received by holders of PFS Common Stock represented premiums to the
trading prices of PFS Common Stock one day, one week and one month prior to
December 6, 1996 of 35.1%, 35.1% and 49.3%, respectively. These premiums lie
within the ranges outlined above.
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Analysis of PFS Common Stock Trading History. DLJ also examined the history
of the trading prices for PFS Common Stock and the historical multiple of price
to estimated GAAP operating EPS as represented by the historical values of PFS
Common Stock. Since December 6, 1995, the multiple of price to GAAP operating
EPS of PFS Common Stock has moved in a range from 5.5x to 10.7x, with an average
of 7.3x. The consideration which DLJ assumed would be paid by Conseco to holders
of PFS Common Stock represents a multiple of estimated 1997 GAAP operating EPS
of 10.6x, which lies at the upper end of this range.
Effect of the Acquisition on Conseco's Historical and Projected Financial
Position and Earnings. DLJ analyzed certain pro forma financial effects
resulting from the Merger. DLJ analyzed the pro forma effect of the Merger on
Conseco's operating EPS and on Conseco's leverage ratios. DLJ has incorporated
estimates of $20 million of expense savings (the specific components of which
were not identified) as provided by the managements of both PFS and Conseco for
the years 1997 and 1998 in its analysis although DLJ does not express an opinion
as to the likelihood of such expense savings being realized. The results of the
pro forma merger analysis are not necessarily indicative of future operating
results or financial position. Based on this analysis, Conseco's shareholders'
would realize EPS accretion of 5.1% and 5.2% in 1997 and 1998, respectively,
versus PFS's projected results on a stand-alone basis. Pro forma for the Merger,
Conseco's ratios of debt to total capitalization and debt and preferred stock to
total capitalization as of September 30, 1996 would have been 33.0% and 35.9%,
respectively.
Because the Merger Consideration will be in the form of Conseco Common
Stock, to provide comparative market information, DLJ compared selected
historical and projected operating and financial ratios of Conseco to the
corresponding data and ratios of certain selected publicly traded annuity
companies and accident and health insurance companies which DLJ deemed relevant.
Such comparable companies consisted of: Equitable of Iowa Cos., Liberty
Financial Companies, Inc., Presidential Life Corp., SunAmerica Inc., and Western
National Corp. (the "Selected Annuity Companies") and of AFLAC, Inc., PennCorp
Financial Group, Inc., Provident Companies and UNUM Corp. (the "Selected
Accident and Health Companies").
Such analysis included, among other things, the multiples of stock price to
GAAP operating EPS for 1996 and 1997 (as estimated by research analysts and
compiled by Institutional Brokers Estimating Service for the Selected Annuity
Companies and the Selected Accident and Health Companies and management's
projections for Conseco) and shareholders' equity per share as of September 30,
1996. Comparing the multiples of Conseco's stock price to estimated GAAP
operating EPS and shareholders' equity per share with the multiples at which the
Selected Annuity Companies and the Selected Accident and Health Companies trade
indicates whether Conseco's stock price is within the range of values at which
the Selected Annuity Companies and the Selected Accident and Health Companies
trade. Conseco's estimated GAAP operating EPS and shareholders' equity per share
used in this analysis were adjusted to give pro forma effect to: (1) the TOPrS
Offering completed November 19, 1996; (2) the TruPS Offering completed November
27, 1996; (3) the ATC Merger completed December 17, 1996; (4) the Series D Call
completed September 26, 1996; (5) the ALH Transaction completed September 30,
1996; (6) the LPG Merger completed effective July 1, 1996; (7) the acquisition
of all of the outstanding common stock of CCP not previously owned by Conseco
and related transactions (including the repayment of borrowings under Conseco's
existing $250.0 million revolving credit agreement) completed August 31, 1995;
(8) the increase of Conseco's ownership in BLH to 90.4%, as a result of
purchases of common shares of BLH by Conseco and BLH completed during 1995 and
the first three months of 1996; (9) the issuance of 4.37 million shares of
Conseco preferred redeemable increased dividend equity securities on January 23,
1996; (10) the BLH Tender Offer completed on February 28, 1996; (11) the debt
restructuring of ALH completed during the fourth quarter of 1995; (12) the CAF
Merger completed on March 4, 1997; (13) the THI Merger completed December 23,
1996; and, (14) the BLH Transaction completed on December 31, 1996.
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The low, average and high multiples of public stock price to estimated 1996
GAAP operating EPS were 11.2x, 13.4x and 19.3x, respectively, for the Selected
Annuity Companies and 13.1x, 15.7x and 17.2x, respectively, for the Selected
Accident and Health Companies. The multiple of public stock price to Conseco's
estimated 1996 GAAP operating EPS was 17.0x. This multiple is greater than the
average multiple of the Selected Annuity Companies and the average multiple of
the Selected Accident and Health Companies. The low, average and high multiples
of public stock price to estimated 1997 GAAP operating EPS were 10.1x, 11.9x and
16.5x, respectively, for the Selected Annuity Companies and 10.9x, 13.3x and
14.8x, respectively, for the Selected Accident and Health Companies. The
multiples of public stock price to Conseco's estimated 1997 GAAP operating EPS
was 12.0x. This multiple is greater than the average multiple of the Selected
Annuity Companies and less than the average multiple of the Selected Accident
and Health Companies. The low, average and high multiples of public stock price
to shareholders' equity per share as of September 30, 1996 were 1.00x, 1.56x and
2.12x, respectively, for the Selected Annuity Companies and 1.41x, 2.04x and
2.82x, respectively, for the Selected Accident and Health Companies. The
multiple of public stock price to Conseco's shareholders' equity per share as of
September 30, 1996 was 1.93x. This multiple is greater than the average
multiple of the Selected Annuity Companies and less than the average multiple
of the Selected Accident and Health Companies.
Limitations of Opinion. The summary set forth above does not purport to be
a complete description of the analyses performed by DLJ. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such opinions are not readily
susceptible to summary description. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the Merger and to add
to the total mix of information available. DLJ did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed to
support an opinion as to fairness. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of all analyses take as a whole. DLJ
did not place particular reliance or weight on any individual analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, may create an incomplete view of the
evaluation process underlying its opinion. In performing its analyses, DLJ made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses.
Engagement and Fees Payable to DLJ. PFS selected DLJ as its financial
advisor because it is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the Merger and is familiar
with PFS, its business and the insurance industry. Pursuant to the terms of an
engagement letter dated November, 26 1996, PFS has paid DLJ $350,000 for its
services to date, including the delivery of the DLJ Opinion. In addition, PFS
has agreed to pay DLJ 0.75% of the aggregate amount of consideration received by
PFS shareholders and including in such consideration the amount of any debt of
PFS assumed or repaid or preferred stock redeemed or remaining outstanding in
connection with the Merger, less $350,000. PFS also agreed to reimburse DLJ for
all out-of-pocket expenses (including the reasonable fees and out-of-pocket
expenses of counsel) incurred by DLJ in connection with its engagement and to
indemnify DLJ and certain related persons against certain liabilities in
connection with its engagement, including liabilities under the federal
securities laws. The terms of the fee arrangement with DLJ, which DLJ and PFS
believe are customary in transactions of this nature, were negotiated at arm's
length between PFS and DLJ and the PFS Board of Directors was aware of such
arrangement, including the fact that a significant portion of the aggregate fee
payable to DLJ is contingent upon consummation of the Merger.
DLJ has performed investment banking and other services for the Conseco in
the past, including co-managing the TOPrS Offering completed November 19, 1996,
and has received usual and customary compensation for such services.
Additionally, DLJ has delivered: (i) an opinion as to the fairness, from a
financial point of view to the shareholders of CAF of the consideration to be
received by such shareholders in connection with the CAF Merger, (ii) an opinion
as to the fairness, from a financial point of view to the shareholders of ATC of
the exchange ratio applicable in connection with the ATC Merger, (iii) an
opinion as to the fairness, from a financial point of view to the shareholders
of THI of the exchange ratio applicable in connection with the THI Merger and
(iv) an opinion as to the fairness, from a financial point of view to the
shareholders of LPG of the consideration to be received by such shareholders in
connection with the LPG Merger.
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CERTAIN CONSEQUENCES OF THE MERGER
As a result of the Merger, the holders of PFS Common Stock will become
shareholders of Conseco. See "Comparison of Shareholders' Rights." Upon the
consummation of the Merger, each outstanding share of PFS Common Stock (other
than shares of PFS Common Stock held as treasury stock by PFS) will be converted
into the right to receive the Merger Consideration. Conseco will apply to have
the additional shares of Conseco Common Stock issued pursuant to the Merger
listed on the NYSE, and the approval of such shares for listing on the NYSE
(subject to official notice of issuance) is a condition to the obligation of
Conseco and PFS to effect the Merger. See "The Merger Agreement -- Conditions to
the Merger." After consummation of the Merger and without giving effect to the
proposed acquisition of CAF, the current Conseco shareholders would own
approximately __ percent of the shares of Conseco Common Stock then outstanding,
and the current holders of PFS Common Stock would own approximately ___ percent
of such shares.
See "The Merger Agreement -- Treatment of PFS Stock Options" for a
description of the treatment of PFS Stock Options in the Merger. Conseco has
agreed to take all corporate action necessary to reserve for issuance a
sufficient number of shares of Conseco Common Stock for delivery upon exercise
of PFS Stock Options assumed in accordance with the Merger Agreement.
CONDUCT OF THE BUSINESS OF CONSECO AND PFS AFTER THE MERGER
Conseco's Board of Directors and management will not be affected by the
Merger. See "Management of Conseco and PFS Upon Consummation of the Merger."
Following the Merger, Conseco expects to achieve operating cost savings as
a result of consolidation of certain Conseco and PFS operations through the
elimination of redundant expenses, reductions in staff and the achievement of
certain economies of scale. There can be no assurance that such cost savings
will be realized as anticipated by Conseco.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
SEVERANCE BENEFITS. Pursuant to the Merger Agreement, if, after the
Effective Time, the employment of employees of PFS is terminated, the Employee
Severance Pay Plan of Conseco shall be applicable to such employees giving
credit for service to PFS or its subsidiaries as service to Conseco; provided,
however, that employees of PFS or its subsidiaries who as of December 15, 1996
either (i) had a contract with PFS or one of its subsidiaries which provides for
a greater payment upon termination of employment or (ii) were covered by the PFS
severance policy for officers described below shall be entitled to the payments
specified by such contract or policy in lieu of any amounts under the Employee
Severance Pay Plan of Conseco. In addition, an aggregate of up to $5 million of
additional payments may be paid within 12 months after the Effective Time to
employees of PFS in such manner and proportions as shall be determined from time
to time by the current chief executive officer of PFS after consultation with
the Chief Operations Officer of Conseco or his designee.
PFS has adopted a severance policy for officers of PFS and its subsidiaries
which provides generally for severance payments equal to six months of base
salary to officers of PFS and for payments of one month base salary for each
year of service to officers of PFS's subsidiaries; provided that such severance
payable to officers of PFS's subsidiaries shall be equal to not less than three
months, and not more than six months, of base salary. In addition, the Merger
Agreement provides for the termination of the existing employment agreements of
Messrs. Nauert, Scheper and Brophy, executive officers of PFS, at the Effective
Time. In connection therewith, at the Effective Time (x) Mr. Nauert will be
entitled to receive $4.5 million and (y) Messrs. Scheper and Brophy will each be
entitled to receive amounts equal to the present value, discounted at an annual
rate of 8%, of an amount equal to the salary which would have been payable to
such officer during the period from the Effective Time through August 31, 1998
based on rates of annual base salary payable to Messrs. Scheper and Brophy of
$425,000 and $325,000, respectively. The agreements also provide for the payment
under certain circumstances of certain health insurance benefits to Messrs.
Scheper and Brophy until the employee reaches the age of 65.
In addition to other agreements between PFS or its subsidiaries and certain
of their officers, Billy B. Hill, Jr., an executive officer of PFS, will, in
addition to the severance pay to which he is entitled under the severance policy
for officers described above, be engaged under a retainer for legal services of
$15,000 per month for the two years following termination of his employment.
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VESTING OF PFS STOCK OPTIONS. In accordance with the terms of the Merger
Agreement and the Stock Plans, all outstanding PFS Stock Options will become
immediately exercisable in full at the Effective Time. As a result of such
acceleration, the following executive officers and directors of PFS will be
able, at and after the Effective Time, to exercise their PFS Stock Options
relating to the following number of additional shares of PFS Common Stock that
would not yet otherwise be exercisable but for the Merger: Mr. Peter Nauert,
393,479 shares; Mr. Van Vleet, 2,154 shares; Mr. Robert Nauert, 1,274 shares;
Mr. Scheper, 80,556 shares; Mr. Brophy, 105,416 shares; Mr. Fischer, 36,698
shares; Mr. Fiskow, 38,536 shares; and Mr. Vickers, 61,131 shares. See "The
Special Meeting -- Security Ownership of Certain Beneficial Owners and
Management." The outstanding PFS Stock Options will be exercisable for the same
aggregate consideration as would have been payable to exercise them immediately
prior to the Effective Time and for the number of shares of Conseco Common Stock
which the holder would have been entitled to receive at the Effective Time if
such PFS Stock Option had been fully vested and exercised for PFS Common Stock
immediately prior to the Effective Time and otherwise under the Stock Plans and
the underlying stock option agreement.
EMPLOYMENT ARRANGEMENTS. Conseco has entered into an Employment
Agreement with Peter W. Nauert which provides for an employment term of one year
commencing at the Effective Time. The Employment Agreement provides that Mr.
Nauert will provide advice concerning the operation and management of PFS and
its integration into the business of Conseco and such other executive services
as the chief executive officer of Conseco or its marketing subsidiary may
reasonably request. Mr. Nauert will be entitled to an annual salary of $1
million plus such cash bonuses or other incentive compensation as the Board of
Directors of Conseco may approve in its sole discretion. He will also be
entitled to participate in employee benefit plans and insurance programs
currently offered by Conseco, or which it may adopt from time to time, for its
executive management or supervisory personnel. As an inducement to Mr. Nauert to
enter into the Employment Agreement, Conseco has agreed to grant Mr. Nauert at
the Effective Time an option to purchase 100,000 shares of Conseco Common Stock
at a purchase price of $30.125 per share, a price equal to the closing price of
the Conseco Common Stock on December 13, 1996, the trading day immediately prior
to the signing of the Merger Agreement. Such option, whether or not Mr. Nauert
is then an employee of Conseco, shall vest automatically on December 15, 1997
and may be exercised at any time prior to the third anniversary of the Effective
Time (unless Conseco and Mr. Nauert shall have extended the term of his
employment beyond one year, in which event the option may be exercised at any
time prior to the tenth anniversary of the Effective Time). The Employment
Agreement may be extended by mutual agreement on the first anniversary of the
Effective Time, at a salary and on such other terms as are mutually acceptable
to Conseco and Mr. Nauert, which items shall include a grant to Mr. Nauert of an
option to purchase a minimum of 200,000 shares of Conseco Common Stock at a
purchase price of $30.125. Such option will vest in three equal annual
installments beginning on the first anniversary of the Effective Time (if Mr.
Nauert is an employee on such dates) and generally will expire at the earlier of
(i) ten years after the date of grant or (ii) termination of employment. Upon
consummation of the Merger, Mr. Nauert's existing employment agreement with PFS
will be terminated. Conseco has agreed to pay Mr. Nauert the sum of $4.5 million
in consideration of the termination of the existing employment agreement, and he
has agreed to pay to PFS the principal balance (currently $650,000) and accrued
interest on the Non-Negotiable Promissory Note from Mr. Nauert to PFS.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS; INSURANCE. The Merger Agreement
provides that the certificate of incorporation and by-laws of each of PFS and
PFS's subsidiaries shall contain the provisions with respect to indemnification
PFS and set forth therein on the date of the Merger Agreement, and such
provisions shall not be amended, repealed or otherwise modified for a period of
six years after the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who at any time prior to the Effective Time
were directors or officers of PFS or any of its subsidiaries (the "Indemnified
Parties") in respect of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
the Merger Agreement), unless such modification is required by law. In addition,
Conseco has agreed to enter into indemnification agreements covering the
Indemnified Parties with respect to claims arising out of facts or events that
occurred prior to the Effective Time. The foregoing provisions are intended to
be for the benefit of, and shall be enforceable by, each Indemnified Party and
the heirs and personal representatives of such Indemnified Party and shall be
binding on all successors and assigns of Conseco.
ACCOUNTING TREATMENT
Conseco intends to account for the Merger under the purchase method of
accounting in accordance with APB Opinion No. 16, "Business Combinations." Under
this method of accounting, the cost of acquiring all outstanding shares of PFS
Common Stock and the assumption of all outstanding PFS Stock Options will be
determined by the value at the Effective Time of the Merger Consideration and
the Conseco Common Stock (or cash) to be issued to holders of PFS Stock Options,
plus the direct costs associated with the Merger. Conseco will allocate such
cost in establishing new accounting and reporting bases for the underlying
acquired assets and liabilities based on their estimated fair values at the
Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material United States
federal income tax consequences of the Merger to PFS and the PFS stockholders.
This summary is not a complete description of all of the tax consequences of the
Merger and, in particular, does not address tax considerations which may affect
the treatment of certain special status taxpayers such as financial
institutions, broker-dealers, life insurance companies, tax-exempt
organizations, investment companies and foreign taxpayers. In addition, no
information is provided herein with respect to the tax consequences of the
Merger either under applicable foreign, state or local laws or to persons who
acquire PFS Common Stock pursuant to employee stock options or otherwise as
compensation.
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The following discussion is based on the Code, as in effect on the date of
this Proxy Statement/Prospectus, without consideration of the particular facts
or circumstances of any particular holder of PFS Common Stock. PFS and Conseco
have not sought and will not seek any rulings from the Internal Revenue Service
with respect to any of the matters discussed herein.
The obligation of PFS to effect the Merger is conditioned on delivery to
PFS of an opinion dated the date the Merger is closed (the "Closing Date") from
McDermott, Will & Emery, counsel to PFS, or other legal counsel reasonably
acceptable to PFS and Conseco, based on certain representations to be made by
PFS and Conseco and on assumptions set forth in the opinion, that for federal
income tax purposes the Merger will constitute a reorganization within the
meaning of Sections 368(a)(1)(A) and 368 (a)(2)(E) of the Code and, as a result,
the stockholders of PFS will not be subject to federal income tax on their
receipt, pursuant to the Merger, of shares of Conseco Common Stock in exchange
for PFS Common Stock. Such opinion, however, will not be binding on the Internal
Revenue Service.
Based on such opinion, assuming that the Merger qualifies for federal
income tax purposes as a reorganization within the meaning of Sections
368(a)(1)(A) and 368 (a)(2)(E) of the Code, the material federal income tax
consequences of the Merger for the PFS stockholders and PFS will be as follows:
(i) No gain or loss will be recognized by PFS stockholders upon their
exchange of PFS Common Stock for Conseco Common Stock, except that any PFS
stockholder who receives cash proceeds in lieu of a fractional share
interest in Conseco Common Stock will recognize gain or loss equal to the
difference between such cash proceeds and the stockholder's tax basis in
the fractional share interest, determined as provided below, and such gain
or loss will constitute a capital gain or loss if such stockholder's PFS
Common Stock is held as a capital asset at the Effective Time;
(ii) The tax basis in the Conseco Common Stock (including any
fractional share interest deemed received and exchanged for a cash payment)
received by a PFS stockholder in exchange for PFS Common Stock will be the
same as such stockholder's tax basis in the PFS Common Stock surrendered in
exchange therefor; and
(iii) The holding period of the Conseco Common Stock (including any
fractional share interest deemed received and exchanged for a cash payment)
received by a PFS stockholder will include the period during which the PFS
Common Stock surrendered in exchange therefor was held (provided that such
PFS Common Stock was held by such PFS stockholder as a capital asset at the
Effective Time).
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER FOR PFS AND PFS STOCKHOLDERS AND IS INCLUDED FOR
GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT
THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH PFS STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. ACCORDINGLY, EACH PFS STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN SUCH TAX LAWS.
REGULATORY APPROVALS
ANTITRUST. Under the HSR Act and the rules promulgated thereunder by the
Federal Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specified waiting period requirements have been satisfied.
Conseco and PFS filed notification and report forms under the HSR Act with the
FTC and the Antitrust Division on February 18, 1997. The FTC confirmed early
termination of the required waiting period on February 24, 1997. At any
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time before or after the consummation of the Merger, and notwithstanding that
the HSR Act waiting period has been terminated, the Antitrust Division of the
FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Conseco and PFS.
At any time before or after the consummation of the Merger, and notwithstanding
that the HSR Act waiting period has been terminated, any state could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of PFS or businesses of Conseco or PFS. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
Conseco and PFS believe that the Merger can be effected in compliance with
federal and state antitrust laws. However, there can be no assurance that a
challenge to the consummation of the Merger, on antitrust grounds will not be
made or that, if such a challenge were made, Conseco and PFS would prevail or
would not be required to accept certain conditions, possibly including certain
divestitures, in order to consummate the Merger.
INSURANCE. The consummation of the Merger may require the approval of the
Commissioners of the Departments of Insurance of Illinois, Oklahoma, and
Wisconsin (the jurisdictions in which the insurance companies owned by PFS are
domiciled). The Insurance Codes of such jurisdictions contain provisions
applicable to the acquisition of control of a domiciled insurer, including a
presumption of control that arises from the ownership of ten percent or more of
the voting securities of a domiciled insurer or a person that controls a
domiciled insurer. Appropriate filings with the Insurance Commissioners have
been or will be made and it is anticipated, although there can be no assurance,
that the approval of each of the Insurance Commissioners will be obtained.
NYSE LISTING OF CONSECO COMMON STOCK
Pursuant to the Merger Agreement, Conseco is required to use commercially
reasonable efforts to obtain listing on the NYSE of the shares of Conseco Common
Stock to be issued in connection with the Merger. Approval of the listing on the
NYSE of the shares of Conseco Common Stock to be issued in the Merger is a
condition to the respective obligations of PFS and Conseco to consummate the
Merger.
ABSENCE OF APPRAISAL RIGHTS
Holders of PFS Common Stock will not be entitled to appraisal rights under
the DGCL in connection with the Merger. Holders of Conseco Common Stock will not
be entitled to appraisal rights under the Indiana Business Corporation Law (the
"IBCL") in connection with the Merger. See "Comparison of Shareholders'
Rights -- Dissenters' Rights."
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, which is attached as Annex A to this Proxy Statement/Prospectus and
is incorporated herein by reference. This summary is qualified in its entirety
by reference to the Merger Agreement. All stockholders are urged to read the
Merger Agreement in its entirety.
THE MERGER
The Merger Agreement provides that, subject to satisfaction or waiver of
the terms and conditions contained in the Merger Agreement, including the
approval of the Merger Agreement and the Merger by the stockholders of PFS and
the obtaining of required regulatory approvals, RAC will be merged with and into
PFS, with PFS being the surviving corporation. As a result of the Merger, PFS
would become a wholly owned subsidiary of Conseco. See "-- Conditions to the
Merger" and "-- Termination."
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EFFECTIVE TIME
The Merger Agreement provides that, subject to the satisfaction or waiver
of certain conditions and the requisite approval of the stockholders of PFS, the
Merger will be consummated by, and will become effective on the date of,the
filing of the Certificate of Merger with the Secretary of State of Delaware or
at such time thereafter as is provided in the Certificate of Merger. The Merger
Agreement may be terminated by either Conseco or PFS if, among other reasons,
the Merger has not been consummated on or before March 31, 1997 (or May 31, 1997
under certain circumstances). See "-- Conditions to the Merger" and "--
Termination."
CONVERSION OF SHARES; EXCHANGE OF STOCK CERTIFICATES; NO FRACTIONAL AMOUNTS
At the Effective Time, pursuant to the Merger Agreement, each share of PFS
Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares held as treasury shares by PFS) will, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into the
right to receive (i) if the Conseco Share Price is greater than or equal to
$28.00 per share and less than or equal to $31.36 per share, .8928 of a share of
Conseco Common Stock, (ii) if the Conseco Share Price is less than $28.00 per
share, the fraction (rounded to the nearest ten-thousandth) of a share of
Conseco Common Stock determined by dividing $25.00 by the Conseco Share Price or
(iii) if the Conseco Share Price is greater than $31.36 per share, the fraction
(rounded to the nearest ten-thousandth) of a share of Conseco Common Stock
determined by dividing $28.00 by the Conseco Share Price. The Conseco Common
Stock to be issued to holders of shares of PFS Common Stock in accordance with
the Merger and any cash to be paid in lieu of fractional shares of Conseco
Common Stock are referred to collectively as the "Merger Consideration."
In the event of any change in Conseco Common Stock between the date of the
Merger Agreement and the Effective Time of the Merger by reason of any stock
split, dividend, subdivision, reclassification, recapitalization, combination,
exchange of shares or the like, the number and class of shares of Conseco Common
Stock to be issued and delivered in the Merger in exchange for each outstanding
share of PFS Common Stock as provided in the Merger Agreement and the
calculation of all share prices provided for in the Merger Agreement shall be
proportionately adjusted.
On ________ , 1997, the last full trading day for which information was
available prior to the mailing of this Proxy Statement/Prospectus, the closing
prices reported for shares of Conseco Common Stock and PFS Common Stock on the
NYSE were $____ and $_____ per share, respectively. There can be no assurance or
prediction, and neither Conseco nor PFS hereby make any assurance or prediction,
as to the future prices of shares of Conseco Common Stock or PFS Common Stock.
No fractional shares of Conseco Common Stock will be issued in connection
with the Merger. Each PFS stockholder who otherwise would have been entitled to
receive a fraction of a share of Conseco Common Stock (after taking into account
all Certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
Conseco Common Stock multiplied by the Conseco Share Price.
Promptly after the Effective Time, the Exchange Agent will mail to each
record holder of Certificates, which prior thereto represented PFS Common Stock,
a form of letter of transmittal and instructions for use in surrendering such
Certificates and receiving the consideration to which such holder shall be
entitled pursuant to the Merger Agreement. After receipt of such transmittal
form, each holder of Certificates should surrender such Certificates to the
Exchange Agent together with the letter of transmittal duly executed and
completed in accordance with the instructions thereto, and each such holder will
be entitled to receive in exchange therefor
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certificates for shares of Conseco Common Stock and a check for any cash which
may be payable in lieu of a fractional share of Conseco Common Stock.
PFS STOCKHOLDERS SHOULD NOT FORWARD THEIR CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED A LETTER OF TRANSMITTAL AND INSTRUCTIONS.
After the Effective Time, each outstanding Certificate (other than
Certificates evidencing shares of PFS Common Stock held as treasury shares by
PFS), which prior thereto represented PFS Common Stock, until so surrendered and
exchanged, will be deemed, for all purposes, to evidence only the right to
receive the Merger Consideration that the holder of such Certificate is entitled
to receive pursuant to the terms of the Merger Agreement.
TREATMENT OF PFS STOCK OPTIONS
From and after the Effective Time, each PFS Stock Option shall be
exercisable, for the same aggregate consideration payable to exercise such PFS
Stock Option immediately prior to the Effective Time, for the number of shares
of Conseco Common Stock which the holder would have been entitled to receive at
the Effective Time if such PFS Stock Option had been fully vested and exercised
for shares of PFS Common Stock immediately prior to the Effective Time, and
otherwise on the same terms and conditions as were applicable under the Stock
Plans and the underlying stock option agreement; provided, that each PFS Stock
Option, if not then vested, will vest in full at the Effective Time in
accordance with the Stock Plans.
Conseco has agreed to take all corporate action necessary to reserve for
issuance a sufficient number of shares of Conseco Common Stock for delivery upon
exercise of PFS Stock Options assumed in accordance with the Merger Agreement
and to register such shares of Conseco Common Stock with the Commission pursuant
to a Registration Statement on Form S-8.
TREATMENT OF PFS CONVERTIBLE SUBORDINATED NOTES
At the Effective Time, each PFS Convertible Note shall automatically be
convertible into the number of shares of Conseco Common Stock which the holder
of such PFS Convertible Note would have been entitled to receive in the Merger
if the holder had converted the PFS Convertible Note into shares of PFS Common
Stock immediately before the Effective Time.
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PFS EMPLOYEE MATTERS
Pursuant to the Merger Agreement, Conseco will provide severance benefits
for certain persons who are eligible employees of PFS or any of PFS's
subsidiaries immediately prior to the Effective Time. See "The Merger -
Interests of Certain Persons in the Merger - Severance Benefits."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary representations and
warranties relating to, among other things, (1) each of Conseco's, RAC's and
PFS's organization and similar corporate matters; (2) each of Conseco's, RAC's
and PFS's capital structure; (3) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement with respect to Conseco,
RAC and PFS and related matters; (4) documents filed by each of Conseco and PFS
with the Commission and the accuracy of information contained therein; (5) the
absence of material changes with respect to the business of Conseco and PFS; and
(6) compliance with applicable laws.
CERTAIN COVENANTS
The Merger Agreement contains certain customary covenants and agreements,
including, without limitation, the following:
CONDUCT OF BUSINESS. Pursuant to the Merger Agreement, Conseco has agreed
that during the period from the date of the Merger Agreement until the Effective
Time, Conseco shall, and shall cause its subsidiaries to, use all reasonable
efforts to preserve intact their current business organizations, keep available
the services of their current officers and employees and preserve their
relationships with customers, suppliers, licensors, licensees, distributors and
others having business dealings with them to the end that their goodwill and
ongoing businesses shall be unimpaired at the Effective Time.
Pursuant to the Merger Agreement, PFS has agreed that, during the period
from the date of the Merger Agreement until the Effective Time, except as
permitted by the Merger Agreement, as set forth on the Disclosure Schedules
thereto or as otherwise consented to in writing by Conseco, PFS will, and will
cause its subsidiaries to, act and carry on their respective businesses in the
ordinary course of business and not (without
47
<PAGE>
the prior consent of Conseco), among other things (1)(A) declare, set aside or
pay any dividends on, or make any other distributions (whether in cash, stock or
property) in respect of, any of PFS's outstanding capital stock (other than
regular quarterly cash dividends not in excess of $0.055 per share of PFS Common
Stock, with usual record and payment dates and in accordance with PFS's dividend
policy); (B) split, combine or reclassify any of PFS's outstanding capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of PFS's outstanding capital stock; or
(C) purchase, redeem or otherwise acquire any shares of PFS's outstanding
capital stock or any rights, warrants or options to acquire such shares; (2)
issue, sell, grant, pledge or otherwise encumber any shares of its capital
stock, any other voting securities, or any securities convertible into, or any
rights, warrants, or options to acquire, any such shares other than upon the
exercise of PFS Stock Options outstanding on the date of the Merger Agreement;
(3) amend its Certificate of Incorporation or By-laws; (4) acquire, form, or
commence operations of any business; (5) sell, mortgage or otherwise encumber or
otherwise dispose of any of its properties or assets that are material to PFS
and its subsidiaries taken as a whole, except in the ordinary course of
business; (6) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, other than indebtedness under existing credit
agreements or indebtedness owing to or guarantees of indebtedness owing to PFS
or any subsidiary of PFS, or make any loans or advances to any other person
(other than PFS or any subsidiary of PFS) other than routine advances to agents
and employees; (7) make any tax election or settle or compromise any income tax
liability that would reasonably be expected to be material to PFS and its
subsidiaries taken as a whole; (8) pay, discharge, settle or satisfy any
material claims, liabilities or obligations other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past practice
or in accordance with their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated financial statements of PFS
filed with the Commission or incurred since the date of such financial
statements in the ordinary course of business consistent with past practice; (9)
invest its future cash flow, any cash from matured and maturing investments, any
cash proceeds from the sale of its assets and properties, and any cash funds
currently held by it, in any investments other than cash equivalent assets or in
short-term investments, except (A) as otherwise required by law, (B) as required
to provide cash (in the ordinary course of business and consistent with past
practice) to meet its actual or anticipated obligations or (C) in publicly
traded corporate bonds that are rated investment grade by at least two
nationally recognized statistical rating organizations; (10) except as may be
required by law, (A) make any representation or promise to any employee or
former director, officer, or employee of PFS or its subsidiaries that is
inconsistent with the terms of any PFS benefit plan, (B) make any change to the
contracts, salaries, wages, or other compensation of any employee or any agent
or consultant of PFS or any subsidiary other than (i) changes that are required
under existing contracts, (ii) with respect to employees, changes which are
routine, in the ordinary course of business, consistent with past practices and
not in excess of 6%, and (iii) with respect to agents or consultants, changes
which are in the ordinary course of business and consistent with past practices,
(C) adopt, enter into, amend, alter or terminate any existing PFS benefit plan
or any election made pursuant to the provisions of any existing PFS benefit
plan, to accelerate any payments, obligations or vesting schedules under any
existing PFS benefit plan, or (D) approve any general or company-wide pay
increases for employees; (11) except in the ordinary course of business,
materially modify, amend or terminate any material agreement, permit,
concession, franchise, license or similar instrument to which PFS or any
subsidiary is a party or waive, release or assign any material rights or claims
thereunder; or (12) hold any meeting of the PFS Board of Directors or the board
of directors of any subsidiary or any committee of any such board, or take any
action by written consent of any such board or committee, without providing to
Conseco (A) notice of any such meeting no later than the date notice is given to
the board of directors or in advance of the date of any proposed action by
written consent and (B) with such notice, except as provided in the Merger
Agreement, an agenda of the specific matters to be considered at such meeting or
a copy of the proposed written consent.
NO SOLICITATION. Pursuant to the Merger Agreement, PFS shall not, nor shall
it permit any of its subsidiaries to, nor shall it authorize or permit any
officer, director or employee of, or any investment banker, attorney or other
advisor or representative of, PFS or any of its subsidiaries to, directly or
indirectly, (1) solicit, initiate or encourage the submission of any bona fide
proposal with respect to a merger, consolidation, share exchange or similar
transaction involving PFS or any subsidiary of PFS, or any purchase of all or
any significant portion of the assets of PFS or any subsidiary of PFS, or any
equity interest in PFS or any subsidiary of PFS, other than the transactions
contemplated by the Merger Agreement (each an "Acquisition Proposal"), or (2)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Acquisition Proposal. The foregoing shall not
prohibit the PFS Board of Directors from furnishing information to, or entering
into discussions or
48
<PAGE>
negotiations with, any person or entity that makes an unsolicited Acquisition
Proposal if, and only to the extent that (1) the PFS Board of Directors,
after consultation with and based upon the advice of outside counsel,
determines in good faith that in order for the PFS Board of Directors to comply
with its fiduciary duties to PFS stockholders under applicable law it should
take such action and (2) prior to taking such action, PFS (A) provides
reasonable notice to Conseco to the effect that it is taking such action and (B)
receives from such person or entity an executed confidentiality agreement in
reasonably customary form. The Merger Agreement provides that PFS shall (i)
promptly advise Conseco orally and in writing of (A) the receipt by it (or any
of the other entities or persons referred to above) after the date of the Merger
Agreement of any Acquisition Proposal, or any inquiry which could lead to any
Acquisition Proposal, (B) the material terms and conditions of such Acquisition
Proposal or inquiry, and (C) the identity of the person making any such
Acquisition Proposal or inquiry, and (ii) keep Conseco fully informed of the
status and details of any such Acquisition Proposal or inquiry. Notwithstanding
the immediately preceding sentence, PFS may delay providing any of the
information described in clause (i)(B), (i)(C) or (ii) of such sentence if, and
for so long as, the Board of Directors of PFS, after consultation with outside
counsel, determines and continues to believe in good faith that in order to
comply with its fiduciary duties to stockholders under applicable law it should
not provide such information.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. Pursuant to the Merger
Agreement, Conseco has agreed that the certificate of incorporation and by-laws
of PFS and each of PFS's subsidiaries shall contain the provisions with respect
to indemnification set forth therein on the date of the Merger Agreement, and
such provisions shall not be amended, repealed or otherwise modified for a
period of six years after the Effective Time in any manner that would adversely
affect the Indemnified Parties in respect of actions or omissions occurring at
or prior to the Effective Time unless such modification is required by law. In
addition, Conseco has agreed to enter into indemnification agreements with the
Indemnified Parties.
CONDITIONS TO THE MERGER
The respective obligations of Conseco and PFS to effect the Merger are
subject to the following conditions, among others: (1) the Merger Agreement and
the Merger shall have been approved and adopted by the stockholders of PFS; (2)
all required consents, approvals, permits and authorizations to the consummation
of the transactions contemplated hereby by PFS and Conseco shall be obtained, if
necessary, from (A) the Commissioner of the Illinois, Oklahoma, and Wisconsin
Departments of Insurance and (B) any other governmental entity whose consent,
approval, permission or authorization is required by reason of a change in law
after the date of the Merger Agreement, unless the failure to obtain such
consent, approval, permission or authorization would not reasonably be expected
to have a material adverse effect on the business, financial condition or
results of operations of PFS and its subsidiaries, taken as a whole, or on the
validity or enforceability of the Merger Agreement; (3) the waiting period (and
any extension thereof) applicable to the Merger under the HSR Act shall have
been terminated or shall have otherwise expired; (4) no temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; (5) the shares of Conseco Common
Stock issuable to PFS's stockholders pursuant to the Merger Agreement shall have
been approved for listing on the NYSE, subject to official notice of issuance;
and (6) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order. If all governmental and regulatory consents have been
obtained except for insurance regulatory approval for any life insurance
subsidiary which does not constitute a "significant subsidiary" (as defined in
the Merger Agreement), then Conseco has the option to cause certain actions
specified in the Merger Agreement to be taken in order to consummate the Merger.
The obligation of Conseco to effect the Merger is subject to, among other
things, the following additional conditions: (1) the representations and
warranties of PFS contained in the Merger Agreement shall have been true and
correct on the date of the Merger Agreement and on the Closing Date (except to
the extent that they expressly relate only to an earlier time, in which case
they shall have been true and correct as of such earlier time), other than such
breaches of representations and warranties which in the aggregate would not
reasonably be expected to have a material adverse effect on the business,
financial condition or results of operations of PFS and its subsidiaries taken
as a whole; and (2) PFS shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Closing Date.
The obligation of PFS to effect the Merger is subject to, among other
things, the following additional conditions: (1) the representations and
warranties of Conseco and RAC contained in the Merger Agreement shall have been
true and correct on the date of the Merger Agreement and on the Closing Date
(except to the extent that they expressly relate only to an earlier time, in
which case they shall have been true and correct as of such earlier time), other
than such breaches of representations and warranties which in the aggregate
would not reasonably be expected to have a material adverse effect on the
business, financial condition or results of operations of Conseco and its
subsidiaries taken as a whole; (2) Conseco and RAC shall have performed in all
49
<PAGE>
material respects all obligations required to be performed by them under the
Merger Agreement at or prior to the Effective Time; and (3) PFS shall have
received the opinion dated the Closing Date of McDermott, Will & Emery, counsel
to PFS, or such other legal counsel reasonably acceptable to PFS and Conseco, to
the effect that the Merger will be treated as a reorganization under Section
368(a)(2)(E) of the Code as a result of which the stockholders of PFS will not
be subject to federal income tax on the receipt of shares of Conseco Common
Stock in exchange for shares of PFS Common Stock pursuant to the Merger.
The Merger Agreement provides that each party may waive any inaccuracies in
the representations and warranties of the other party in the Merger Agreement or
any document delivered pursuant to the Merger Agreement. The Merger Agreement
also provides that each party may waive compliance with any of the agreements or
conditions of the other party, provided that no such waiver may be made after
approval by the PFS stockholders which reduces the consideration payable in the
Merger or adversely affects the rights of the PFS stockholders.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval of the Merger
Agreement and the Merger by PFS's stockholders at the Special Meeting: (1) by
the mutual written consent of Conseco and PFS ; or (2) by Conseco or PFS (A) if,
upon a vote at a duly held meeting of the stockholders of PFS or any adjournment
thereof, any required approval of the stockholders of PFS shall not be obtained;
(B) at any time after March 31, 1997, if the Merger shall not have been
consummated by such date, unless the failure to consummate the Merger is the
result of a willful and material breach of the Merger Agreement by the party
seeking to terminate the Merger Agreement; provided, however, that either party
may by notice to the other party extend such date to May 31, 1997 unless there
is then in effect a temporary restraining order, preliminary or permanent
injunction or other order issued by a court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Merger; (C) if
any governmental entity shall have issued an order, decree or ruling or taken
any other action permanently enjoining, restraining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable; or (D) if the PFS Board of Directors shall have exercised its
rights set forth in Section 4.9 of the Merger Agreement (summarized below under
"-- Right of PFS Board of Directors to Withdraw its Recommendation").
If the Merger Agreement is validly terminated as described above, the
Merger Agreement shall become void and have no effect, except for certain
covenants regarding brokers, confidentiality and, as described below under "--
Expenses," payment of expenses, and except that no party thereto will be
relieved of any liability for damages that such party may have to the other
party by reason of such party's breach of the Merger Agreement.
RIGHT OF PFS BOARD OF DIRECTORS TO WITHDRAW ITS RECOMMENDATION
Under the Merger Agreement, the PFS Board of Directors shall not (1)
withdraw or modify, in a manner materially adverse to Conseco, the approval or
recommendation by the PFS Board of Directors of the Merger Agreement or the
Merger or (2) enter into any agreement with respect to any Acquisition Proposal,
unless PFS receives an Acquisition Proposal and the PFS Board of Directors
determines in good faith, following consultation with outside counsel, that in
order to comply with its fiduciary duties to stockholders under applicable law
the PFS Board of Directors should withdraw or modify, in a manner materially
adverse to Conseco, its approval or recommendation of the Merger Agreement or
the Merger, or enter into an agreement with respect to such Acquisition Proposal
or terminate the Merger Agreement. In the event the PFS Board of Directors takes
any of the foregoing actions, PFS shall, concurrently with the taking of any
such action, pay to Conseco the fee described in "-- Breakup Fee."
BREAKUP FEE
PFS has agreed to pay to Conseco upon demand $8.0 million (a "Breakup
Fee"), payable in same-day funds, if a bona fide Acquisition Proposal is
commenced, publicly proposed, publicly disclosed or communicated to PFS (or the
willingness of any person to make such an Acquisition Proposal is publicly
disclosed or
50
<PAGE>
communicated to PFS) and the PFS Board of Directors, in accordance with Section
4.9 of the Merger Agreement (summarized above under "-- Right of PFS Board of
Directors to Withdraw its Recommendation"), withdraws or modifies in a manner
materially adverse to Conseco its approval or recommendation of the Merger
Agreement or the Merger, or enters into an agreement with respect to such
Acquisition Proposal (other than a confidentiality agreement as contemplated by
the Merger Agreement), or terminates the Merger Agreement; provided, however
that no Breakup Fee shall be payable if the Merger Agreement shall have been
terminated in accordance with certain provisions of the Merger Agreement.
EXPENSES
In the absence of a requirement to pay a Breakup Fee and except as provided
in the following paragraph, whether or not the Merger is consummated, each of
PFS and Conseco will pay its own costs and expenses incident to preparing for,
entering into and carrying out the Merger Agreement and the consummation of the
transactions contemplated thereby.
Unless Conseco is materially in breach of the Merger Agreement or is unable
to satisfy certain closing conditions in the Merger Agreement, PFS has agreed to
pay to Conseco upon demand an amount not to exceed $1 million to reimburse
Conseco for its reasonable out-of-pocket fees and expenses in connection with
the Merger or the consummation of the transactions contemplated by the Merger
Agreement, payable in same-day funds, if the requisite approval of PFS's
stockholders for the Merger is not obtained and all other closing conditions
contained in the Merger Agreement have been satisfied or waived or, with respect
to any condition not then satisfied, it is substantially likely that such
condition will be satisfied on or before May 31, 1997 through the exercise of
commercially reasonable efforts to procure the satisfaction thereof. See "--
Termination."
MODIFICATION OR AMENDMENT
Subject to the applicable provisions of the DGCL, at any time prior to the
Effective Time, PFS and Conseco may modify or amend the Merger Agreement, by
written agreement executed and delivered by their duly authorized officers;
provided, however, that after approval of the Merger by the stockholders of PFS,
no amendment may be made which reduces the consideration payable in the Merger
or adversely affects the rights of the PFS's stockholders under the Merger
Agreement without the approval of such stockholders.
PFS AFFILIATE REGISTRATION RIGHTS
Conseco has agreed to maintain the effectiveness of the Registration
Statement subsequent to the consummation of the Merger for the purpose of
resales of Conseco Common Stock by persons who, at the time the Merger is
submitted to the shareholders of PFS for approval, were "affiliates" of PFS for
purposes of Rule 145 under the Securities Act, but shall not thereafter be
required to file any post-effective amendment thereto. Conseco shall not
otherwise be required to maintain the effectiveness of the Registration
Statement or any other registration statement under the Securities Act for the
purposes of resale of Conseco Common Stock by such affiliates.
Conseco has agreed to indemnify such affiliates, each of their officers and
directors and partners, and each person controlling such affiliates within the
meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in such registration statement or prospectus, or any
amendment or supplement thereto, incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of
circumstances in which they were made, not misleading, or any violation by
Conseco of the Securities Act or any rule or regulation in connection with such
registration, and reimburse each such person for any legal and any other
expenses reasonably incurred (as they are incurred) in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action.
STOCKHOLDER LITIGATION
The Merger Agreement provides that PFS shall give Conseco the opportunity
to participate in the defense or settlement of any stockholder litigation
against PFS and its directors relating to the transactions contemplated by the
Merger Agreement; provided, however, that no such settlement shall be agreed to
without Conseco's consent, which consent shall not be unreasonably withheld.
51
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CONSECO
The unaudited pro forma consolidated statement of operations data for
Conseco for the year ended December 31, 1996, reflects certain pro forma
adjustments for the following transactions, all of which have already occurred,
as if such transactions had occurred on January 1, 1996: (i) the issuance of
4.37 million shares of Conseco PRIDES in January 1996; (ii) the BLH Tender
Offer; (iii) the LPG Merger; (iv) the Series D Call; (v) the ALH Stock Purchase;
(vi) the TOPrS Offering; (vii) the TruPS Offering; (viii) the ATC Merger; (ix)
the THI Merger; (x) the BLH Merger; and (xi) the CAF Merger. The unaudited pro
forma consolidated statement of operations data for the year ended December 31,
1996, also reflects pro forma adjustments for the Merger, as if the Merger had
occurred on January 1, 1996.
The unaudited pro forma consolidated balance sheet of Conseco as of
December 31, 1996, gives effect to the following transactions as if each had
occurred on December 31, 1996: (i) the CAF Merger (which has already occurred);
and (ii) the Merger.
The pro forma consolidated financial statements are based on the historical
financial statements of Conseco and PFS 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, 1996, 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 Stock Purchase, the ATC Merger, the THI
Merger, the BLH Merger, the CAF Merger and the Merger using estimated values of
the assets and liabilities of LPG, ALH, ATC, THI, BLH, CAF and PFS 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 Stock Purchase, the ATC Merger, the
THI Merger, the BLH Merger, the CAF Merger and the Merger had occurred on the
assumed merger dates.
52
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Dollars in millions)
(unaudited)
Pro forma
adjustments LPG Pro forma
reflecting historical adjustments
various Pro forma at reflecting Pro forma
Conseco other Conseco June 30, the LPG Conseco
as reported transactions subtotals 1996 Merger subtotals(a)
----------- ------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,654.2 $ - $1,654.2 $155.8 $ - $1,810.0
Net investment income 1,302.5 1,302.5 148.3 7.4 (6) 1,459.6
(.2)(7)
2.2 (8)
(.6)(9)
Net investment gains 30.4 30.4 2.3 1.9 (6) 34.6
Fee revenue and other income 49.8 49.8 2.6 52.4
Restructuring income 30.4 30.4 30.4
-------- ------- -------- -------- ------- --------
Total revenues 3,067.3 3,067.3 309.0 10.7 3,387.0
-------- ------- -------- -------- ------- --------
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 1,195.0 1,195.0 69.5 1,264.5
Interest expense on annuities and financial
products 668.6 668.6 88.6 757.2
Interest expense on notes payable 108.1 (1.2)(1) 105.3 11.8 (.6)(9) 116.1
(1.6)(2) (.4)(10)
Interest expense on investment borrowings 22.0 22.0 2.1 24.1
Amortization related to operations 240.0 240.0 65.6 (2.4)(11) 310.3
7.1 (12)
Amortization related to realized gains 36.0 36.0 0.1 1.8 (13) 37.9
Acquisition and merger expenses - 7.9 (7.9)(14) -
Other operating costs and expenses 304.0 304.0 35.9 339.9
-------- ------- -------- -------- ------- --------
Total benefits and expenses 2,573.7 (2.8) 2,570.9 281.5 (2.4) 2,850.0
-------- ------- -------- -------- ------- --------
Income before income taxes, minority
interest and extraordinary charge 493.6 2.8 496.4 27.5 13.1 537.0
Income tax expense 179.8 1.0 (3) 180.8 11.6 5.5 (15) 197.9
-------- ------- -------- -------- ------- --------
Income before minority interest
and extraordinary charge 313.8 1.8 315.6 15.9 7.6 339.1
Minority interest in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subisidiary trusts 3.6 3.6 3.6
Equity in earnings 22.4 .1 (4) 22.5 22.5
Dividends on preferred stock 8.9 8.9 8.9
-------- ------- -------- -------- ------- --------
Income before extraordinary charge $ 278.9 $ 1.7 $ 280.6 $ 15.9 $ 7.6 $ 304.1
======== ======= ======== ======== ======= ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 126.8 .9 (5) 127.7 16.1 (16) 143.8
======== ======= ======== ======= ========
Income before extraordinary charge $2.12 $2.12 $2.05
======== ======== ========
Fully diluted:
Weighted average shares outstanding 142.5 .9 (5) 143.4 16.1 (16) 159.5
======== ======= ======== ======= ========
Income before extraordinary charge $1.96 $1.96 $1.91
======== ======== ========
<FN>
(a) Amounts are carried forward to page 54
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma
Pro forma adjustments Pro forma adjustments Pro forma
Conseco reflecting the Conseco reflecting the Conseco
subtotals(a) Series D Call subtotals ALH Stock Purchase subtotals (b)
--------- ------------ ----------- --------------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,810.0 $1,810.0 $ - $1,810.0
Net investment income 1,459.6 1,459.6 0.9 (19) 1,460.2
(0.3)(20)
Net realized gains 34.6 34.6 2.5 (19) 37.1
Fee revenue and other income 52.4 52.4 52.4
Restructuring income 30.4 30.4 30.4
-------- -------- ----- --------
Total revenues 3,387.0 3,387.0 3.1 3,390.1
-------- -------- ----- --------
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 1,264.5 1,264.5 1,264.5
Interest expense on annuities and
financial products 757.2 757.2 757.2
Interest expense on notes payable 116.1 116.1 8.7 (20) 124.2
(.6)(21)
Interest expense on investment
borrowings 24.1 24.1 24.1
Amortization related to operations 310.3 310.3 (17.3)(19) 310.3
1.1 (19)
16.2 (19)
Amortization related to realized gains 37.9 37.9 4.8 (19) 42.7
Acquisition and merger expenses - -
Other operating costs and expenses 339.9 339.9 339.9
-------- -------- ------ --------
Total benefits and expenses 2,850.0 2,850.0 12.9 2,862.9
-------- -------- ------ --------
Income before income taxes,
minority interest and
extraordinary charge 537.0 537.0 (9.8) 527.2
Income tax expense 197.9 197.9 (1.3)(22) 193.6
(3.0)(22)
-------- -------- ------ --------
Income before minority interest
and extraordinary charge 339.1 339.1 (5.5) 333.6
Minority interest in consolidated
subsidiaries:
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trusts 3.6 3.6 3.6
Equity in earnings 22.5 22.5 (13.6)(23) 8.9
Dividends on preferred stock 8.9 8.9 (1.0)(23) 7.9
-------- ------ -------- --------
Income before extraordinary
charge $ 304.1 $ 304.1 $ 9.1 $ 313.2
======== ======== ====== ========
Earnings per common share and common
equivalent share:
Primary:
Weighted average shares outstanding 143.8 12.1 (17) 155.9 155.9
===== ==== ===== =====
Income before extraordinary charge $2.05 $1.95 (18) $2.01
===== ===== =====
Fully diluted:
Weighted average shares outstanding 159.5 159.5 159.5
===== ===== =====
Income before extraordinary charge $1.91 $1.91 $1.96
===== ===== =====
<FN>
(a) Amounts have been carried forward from page 53.
(b) Amounts are carried forward to page 55.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
adjustments Pro forma
relating adjustments
Pro forma to the Pro forma relating to Pro forma
Conseco TOPrS Conseco the TruPS Conseco
subtotals(a) Offering subtotals Offering subtotals(b)
--------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,810.0 $ - $1,810.0 $ - $1,810.0
Net investment income 1,460.2 1,460.2 1,460.2
Net realized gains 37.1 37.1 37.1
Fee revenue and other income 52.4 52.4 52.4
Restructuring income 30.4 30.4 30.4
-------- ------- -------- -------- --------
Total revenues 3,390.1 3,390.1 3,390.1
-------- ------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits 1,264.5 1,264.5 1,264.5
Interest expense on annuities and financial
products 757.2 757.2 757.2
Interest expense on notes payable 124.2 (15.6)(24) 108.6 (18.5)(27) 90.1
Interest expense on investment borrowings 24.1 24.1 24.1
Amortization related to operations 310.3 310.3 310.3
Amortization related to realized gains 42.7 42.7 42.7
Other operating costs and expenses 339.9 339.9 339.9
-------- ------- -------- -------- --------
Total benefits and expenses 2,862.9 (15.6) 2,847.3 (18.5) 2,828.8
-------- ------- -------- -------- --------
Income before income taxes, minority
interest and extraordinary charge 527.2 15.6 542.8 18.5 561.3
Income tax expense 193.6 5.5 (25) 199.1 6.5 (28) 205.6
-------- ------- -------- ------- --------
Income before minority interest
and extraordinary charge 333.6 10.1 343.7 12.0 355.7
Minority interest in consolidated subsidiaries:
Company - obligated mandatorily
redeemable preferred securities of subsidiary
trusts 3.6 14.5 (26) 18.1 16.6 (29) 34.7
Equity in earnings 8.9 8.9 8.9
Dividends on preferred stock 7.9 7.9 7.9
-------- ------- -------- -------- --------
Income before extraordinary charge $ 313.2 $ (4.4) $ 308.8 $ (4.6) $ 304.2
======== ======= ======== ======== ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 155.9 155.9 155.9
======== ======== =====
Income before extraordinary charge $2.01 $1.98 $1.95
======== ======== =====
Fully diluted:
Weighted average shares outstanding 159.5 159.5 159.5
======== ======= =====
Income before extraordinary charge $1.96 $1.94 $1.91
======== ======= =====
<FN>
(a) Amounts have been carried forward from page 54.
(b) Amounts are carried forward to page 56.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
adjustments
Pro forma relating Pro forma
Conseco ATC to the Conseco
subtotals(a) historical ATC Merger subtotals (b)
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,810.0 $ 385.6 $ - $2,195.6
Net investment income 1,460.2 46.0 1.4 (30) 1,507.6
Net investment gains 37.1 (.2) (.4)(30) 36.5
Fee revenue and other income 52.4 52.4
Restructuring income 30.4 30.4
--------- -------- -------- --------
Total revenues 3,390.1 431.4 1.0 3,822.5
--------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,264.5 262.5 1,527.0
Interest expense
on annuities and
financial products 757.2 757.2
Interest expense on
notes payable 90.1 7.5 2.0 (31) 94.4
(5.2)(32)
Interest expense on
investment borrowings 24.1 24.1
Amortization related
to operations 310.3 23.2 (23.2)(33) 351.7
28.1 (33)
13.3 (34)
Amortization related
to realized gains 42.7 42.7
Other operating
costs and expenses 339.9 85.7 425.6
--------- -------- -------- -------
Total benefits
and expenses 2,828.8 378.9 15.0 3,222.7
--------- -------- -------- -------
Income before income
taxes, minority interest
and extraordinary
charge 561.3 52.5 (14.0) 599.8
Income tax expense 205.6 17.7 (.2)(35) 223.1
--------- --------- -------- -------
Income before
minority interest
and extraordinary
charge 355.7 34.8 (13.8) 376.7
Minority interest in consolidated
subsidiaries:
Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 34.7 34.7
Equity in earnings 8.9 8.9
Dividends on preferred stock 7.9 7.9
-------- --------- -------- ------
Income before
extraordinary
charge $ 304.2 $ 34.8 $ (13.8) $325.2
======== ======== ======== =======
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 155.9 21.0 (36) 176.9
==== ====== =====
Income before
extraordinary charge $1.95 $1.84
===== =====
Fully diluted:
Weighted average shares
outstanding 159.5 28.9 (36) 188.4
==== ====== ====
Income before
extraordinary charge $1.91 $1.73
===== =====
<FN>
(a) Amounts have been carried forward from page 55.
(b) Amounts are carried forward to page 57.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
adjustments
Pro forma relating Pro forma
Conseco THI to the Conseco
subtotals(a) historical THI Merger subtotals (b)
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $2,195.6 $ 109.8 $ - $2,305.4
Net investment income 1,507.6 39.1 (2.0)(37) 1,544.7
Net investment gains 36.5 .3 (.3)(37) 36.5
Fee revenue and other income 52.4 3.1 55.5
Restructuring income 30.4 30.4
--------- -------- -------- --------
Total revenues 3,822.5 152.3 (2.3) 3,972.5
--------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,527.0 70.5 1,597.5
Interest expense
on annuities and
financial products 757.2 757.2
Interest expense on
notes payable 94.4 8.9 (8.9)(38) 100.8
6.4 (38)
Interest expense on
investment borrowings 24.1 24.1
Amortization related
to operations 351.7 8.5 (8.5)(39) 365.9
14.2 (39)
Amortization related
to realized gains 42.7 42.7
Loss on sale of long-term
care business - (1.0) 1.0 (40) -
Other operating
costs and expenses 425.6 29.7 455.3
--------- -------- -------- -------
Total benefits
and expenses 3,222.7 116.6 4.2 3,343.5
--------- -------- -------- -------
Income before income
taxes, minority interest
and extraordinary
charge 599.8 35.7 (6.5) 629.0
Income tax expense 223.1 12.5 (2.3)(41) 233.3
--------- --------- -------- -------
Income before
minority interest
and extraordinary
charge 376.7 23.2 (4.2) 395.7
Minority interest in consolidated
subsidiaries:
Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 34.7 34.7
Equity in earnings 8.9 8.9
Dividends on preferred stock 7.9 7.9
-------- --------- -------- -------
Income before
extraordinary
charge $ 325.2 $ 23.2 $ (4.2) $ 344.2
======== ======== ======== =======
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 176.9 9.1 (42) 186.0
===== ====== ====
Income before
extraordinary charge $1.84 $1.85
===== =====
Fully diluted:
Weighted average shares
outstanding 188.4 9.1 (42) 197.5
===== ====== ====
Income before
extraordinary charge $1.73 $1.75
===== =====
<FN>
(a) Amounts have been carried forward from page 56.
(b) Amounts are carried forward to page 58.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
adjustments
Pro forma relating Pro forma
Conseco to the Conseco
subtotals (a) BLH Merger subtotals (b)
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Insurance policy income $2,305.4 $ (.1)(43) $2,305.3
Net investment income 1,544.7 .1 (43) 1,544.8
Net investment gains 36.5 (.1)(43) 36.4
Fee revenue and other income 55.5 55.5
Restructuring income 30.4 30.4
--------- -------- --------
Total revenues 3,972.5 (.1) 3,972.4
--------- -------- --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,597.5 (1.8)(43) 1,595.7
Interest expense
on annuities and
financial products 757.2 757.2
Interest expense on
notes payable 100.8 100.8
Interest expense on
investment borrowings 24.1 24.1
Amortization related
to operations 365.9 1.0 (43) 366.9
Amortization related
to realized gains 42.7 42.7
Other operating
costs and expenses 455.3 2.0 (43) 457.3
--------- -------- -------
Total benefits
and expenses 3,343.5 1.2 3,344.7
--------- -------- -------
Income before income
taxes, minority interest
and extraordinary
charge 629.0 (1.3) 627.7
Income tax expense 233.3 (.2)(44) 233.1
--------- -------- -------
Income before
minority interest
and extraordinary
charge 395.7 (1.1) 394.6
Minority interest in consolidated
subsidiaries:
Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 34.7 34.7
Equity in earnings 8.9 (8.9)(45) -
Dividends on preferred stock 7.9 7.9
-------- -------- -------
Income before
extraordinary charge $ 344.2 $ 7.8 $ 352.0
======== ======== =======
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 186.0 3.9 (46) 189.9
==== ====== ====
Income before
extraordinary charge $1.85 $1.85
===== =====
Fully diluted:
Weighted average shares
outstanding 197.5 3.9 (46) 201.4
==== ====== ====
Income before
extraordinary charge $1.75 $1.75
===== =====
<FN>
(a) Amounts have been carried forward from page 57.
(b) Amounts are carried forward to page 59.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
adjustments Pro forma
Pro forma relating Conseco
Conseco CAF to the before the
subtotals(a) historical CAF Merger Merger (b)
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $2,305.3 $ 294.5 $ - $2,599.8
Net investment income 1,544.8 56.6 (3.4)(47) 1,598.0
Net investment gains 36.4 .2 (.2)(47) 36.4
Fee revenue and other income 55.5 55.5
Restructuring income 30.4 30.4
--------- -------- -------- --------
Total revenues 3,972.4 351.3 (3.6) 4,320.1
--------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,595.7 172.1 (3.0)(48) 1,764.8
Interest expense
on annuities and
financial products 757.2 757.2
Interest expense on
notes payable 100.8 2.2 (2.2)(49) 138.7
37.9 (50)
Interest expense on
investment borrowings 24.1 24.1
Amortization related
to operations 366.9 23.6 (23.6)(51) 403.1
31.1 (51)
5.1 (52)
Amortization related
to realized gains 42.7 42.7
Other operating
costs and expenses 457.3 78.6 535.9
--------- -------- -------- --------
Total benefits
and expenses 3,344.7 276.5 45.3 3,666.5
--------- -------- -------- --------
Income before income
taxes, minority interest
and extraordinary
charge 627.7 74.8 (48.9) 653.6
Income tax expense 233.1 26.1 (15.3)(53) 243.9
--------- --------- -------- --------
Income before
minority interest
and extraordinary
charge 394.6 48.7 (33.6) 409.7
Minority interest in consolidated
subsidiaries:
Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 34.7 34.7
Dividends on preferred stock 7.9 7.9
-------- --------- -------- -------
Income before
extraordinary
charge $ 352.0 $ 48.7 $ (33.6) $ 367.1
======== ======== ======== =======
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 189.9 2.9 (54) 192.8
===== ====== =====
Income before
extraordinary charge $1.85 $1.90
===== =====
Fully diluted:
Weighted average shares
outstanding 201.4 2.9 (54) 204.3
===== ====== =====
Income before
extraordinary charge $1.75 $1.80
===== =====
<FN>
(a) Amounts have been carried forward from page 58.
(b) Amounts are carried forward to page 60.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
Pro forma adjustments Pro forma
Conseco relating Conseco
before the PFS to the for the
Merger (a) historical Merger Merger
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $2,599.8 $770.9 $ - $3,370.7
Net investment income 1,598.0 74.9 5.6 (66) 1,678.5
Net investment gains 36.4 4.2 40.6
Fee revenue and other income 55.5 37.9 93.4
Restructuring income 30.4 30.4
-------- ------ ------ --------
Total revenues 4,320.1 887.9 5.6 5,213.6
-------- ----- ------ --------
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits 1,764.8 522.7 2,287.5
Interest expense on annuities and financial
products 757.2 34.7 791.9
Interest expense on notes payable 138.7 6.5 1.7 (67) 142.5
(4.4)(68)
Interest expense on investment borrowings 24.1 24.1
Amortization related to operations 403.1 66.1 (65.5)(69) 472.3
63.3 (69)
(.6)(70)
5.9 (70)
Amortization related to realized gains 42.7 42.7
Other operating costs and expenses 535.9 211.7 747.6
-------- ------ ------ --------
Total benefits and expenses 3,666.5 841.7 .4 4,508.6
-------- ------ ------ --------
Income before income taxes, minority
interest and extraordinary charge 653.6 46.2 5.2 705.0
Income tax expense 243.9 15.7 3.7 (71) 263.3
-------- ------- ------ --------
Income before minority interest
and extraordinary charge 409.7 30.5 1.5 441.7
Minority interest in consolidated subsidiaries:
Company - obligated mandatorily
redeemable preferred securities of subsidiary
trusts 34.7 34.7
Dividends on preferred stock 7.9 7.9
-------- ------ ------ --------
Income before extraordinary charge $ 367.1 $ 30.5 $ 1.5 $ 399.1
======== ======= ====== ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 192.8 8.7 (72) 201.5
===== === =====
Income before extraordinary charge $1.90 $1.98
===== =====
Fully diluted:
Weighted average shares outstanding 204.3 11.7 (72) 216.0
===== ==== =====
Income before extraordinary charge $1.80 $1.86
====== =====
<FN>
(a) Amounts have been carried forward from page 59.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1996
(Dollars in millions)
(unaudited)
Pro forma
adjustments Pro forma
relating Conseco
Conseco CAF to the CAF before the
historical historical Merger Merger (a)
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed maturity
securities at fair value $17,307.1 $344.1 $ 364.9 (55) $18,132.2
116.1 (56)
Held-to-maturity fixed maturity
securities - 364.9 (364.9)(55) -
Equity securities at fair value 99.7 9.3 109.0
Mortgage loans 356.0 356.0
Credit-tenant loans 447.1 447.1
Policy loans 542.4 542.4
Other invested assets 259.6 259.6
Short-term investments 281.6 27.2 (544.5)(57) 308.8
(26.0)(57)
(31.0)(57)
601.5 (58)
Assets held in separate accounts 337.6 337.6
--------- ------ ------- ---------
Total investments 19,631.1 745.5 116.1 20,492.7
Accrued investment income 296.9 8.6 305.5
Cost of policies purchased 2,015.0 500.0 (59) 2,515.0
Cost of policies produced 544.3 275.6 (275.6)(60) 544.3
Reinsurance receivables 504.2 504.2
Income taxes 8.8 (8.8)(61) -
Goodwill 2,200.8 205.4 (62) 2,406.2
Property and equipment 110.5 4.0 114.5
Securities segregated for future redemption
of redeemable preferred stock of a
subsidiary 45.6 45.6
Other assets 255.5 29.6 285.1
--------- -------- ------- ---------
Total assets $25,612.7 $1,063.3 $ 537.1 $27,213.1
========= ======== ======= =========
<FN>
(a) Amounts are carried forward to page 62.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma adjustments Pro forma
Conseco relating Conseco
before the PFS to the for the
Merger (a) historical Merger Merger
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed
maturity securities
at fair value $18,132.2 $ 758.2 $266.1 (73) $19,156.6
.1 (74)
Held-to-maturity
fixed maturity
securities - 266.1 (266.1)(73) -
Equity securities at
fair value 109.0 28.6 137.6
Mortgage loans 356.0 9.9 365.9
Credit-tenant loans 447.1 447.1
Policy loans 542.4 83.1 625.5
Other invested assets 259.6 15.0 274.6
Short-term investments 308.8 60.5 (42.8)(75) 369.3
42.8 (76)
Assets held in separate
accounts 337.6 337.6
-------- -------- ------ ---------
Total investments 20,492.7 1,221.4 .1 21,714.2
Accrued investment income 305.5 16.5 322.0
Cost of policies purchased 2,515.0 42.7 (42.7)(77) 2,824.0
309.0 (77)
Cost of policies produced 544.3 224.0 (224.0)(78) 544.3
Reinsurance receivables 504.2 226.6 730.8
Income taxes - -
Goodwill 2,406.2 5.8 (5.8)(80) 2,637.1
230.9 (80)
Property and equipment 114.5 27.0 141.5
Securities segregated for
future redemption of
redeemable preferred
stock of a
subsidiary 45.6 45.6
Other assets 285.1 59.7 344.8
--------- -------- --------- ---------
Total assets $27,213.1 $1,823.7 $ 267.5 $29,304.3
========= ======== ========= =========
<FN>
(a) Amounts have been carried forward from page 61.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma
adjustments Pro forma adjustments Pro forma
relating Conseco relating Conseco
Conseco CAF to the CAF before the PFS to the for the
historical historical Merger Merger historical Merger Merger
---------- ---------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $19,304.3 $ 637.0 $ 92.1 (63) $20,033.4 $1,388.9 $ - $21,422.3
Income tax liabilities - 57.0 86.9 (61) 135.1 15.0 (6.4)(79) 143.7
(8.8)(61)
Investment borrowings 383.4 383.4 383.4
Amounts due to reinsurers - 70.9 70.9
Other liabilities 709.5 19.0 728.5 46.1 49.5 (81) 869.9
34.5 (83)
11.3 (83)
Liabilities related
to separate accounts 337.6 337.6 337.6
Notes payable of Conseco 1,094.9 31.0 (31.0)(64) 1,696.4 114.0 (27.8)(82) 1,825.4
601.5 (58) 42.8 (76)
-------- -------- ------- --------- ------- ------- ---------
Total liabilities 21,829.7 744.0 740.7 23,314.4 1,634.9 103.9 25,053.2
-------- -------- ------- --------- ------- ------ ---------
Minority interest in consolidated
subsidiaries:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts 600.0 600.0 600.0
Preferred stock 97.0 97.0 97.0
Common stock .7 .7 .7
-------- -------- ------- --------- ------ ------ ---------
Shareholders' equity:
Preferred stock 267.1 267.1 267.1
Common stock and additional
paid-in capital 2,029.6 35.6 (35.6)(65) 2,145.3 94.3 (94.3)(84) 2,497.7
115.7 (65) 352.4 (84)
Unrealized appreciation
(depreciation) of securities 38.9 4.7 (4.7)(65) 38.9 .2 (.2)(84) 38.9
Retained earnings 749.7 279.0 (279.0)(65) 749.7 94.3 (94.3)(84) 749.7
------- -------- ------- --------- ------- ------- --------
Total shareholders' equity 3,085.3 319.3 (203.6) 3,201.0 188.8 163.6 3,553.4
------- -------- ------- --------- ------- ------- --------
Total liabilities and
shareholders' equity $25,612.7 $1,063.3 $ 537.1 $27,213.1 $1,823.7 $267.5 $29,304.3
========= ======== ======= ========= ======== ====== =========
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
63
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
Various Other Transactions
(1) On January 23, 1996, Conseco completed the offering of 4.37 million
shares of PRIDES. Proceeds from the offering of $257.7 million (after
underwriting and other associated costs) were used to repay amounts
outstanding under a senior credit facility (the "Conseco Credit
Facility").
Each share of PRIDES will pay dividends at the annual rate of 7
percent of the $61.125 liquidation preference per share (equivalent
to an annual amount of $4.279 per share), payable quarterly. On
February 1, 2000, unless either previously redeemed by Conseco or
converted at the option of the holder, each share of PRIDES will
mandatorily convert into four shares of Conseco common stock, subject
to adjustment in certain events. Shares of PRIDES are not redeemable
prior to February 1, 1999. During the period February 1, 1999 through
February 1, 2000, Conseco may redeem any or all of the outstanding
shares of PRIDES. Upon such redemption, each holder will receive, in
exchange for each share of PRIDES, the number of shares of Conseco
common stock equal to (A) the sum of (i) $62.195, declining after
February 1, 1999 to $61.125 , and (ii) accrued and unpaid dividends
divided by (B) the market price of Conseco common stock at such date,
but in no event less than 3.42 shares of Conseco Common Stock. The
following summarizes the sources and uses of funds related to this
transaction (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Gross proceeds from issuance of PRIDES................................................... $267.1
Underwriting and other transaction expenses (charged to paid-in capital)................. (9.4)
----
Net proceeds..................................................................... 257.7
Uses of funds:
Principal repaid on Conseco Credit Facility.............................................. (245.0)
Payment of accrued interest.............................................................. (2.6)
----
Funds available.................................................................. $ 10.1
======
</TABLE>
Interest expense is adjusted to reflect the repayment of a portion of
the Conseco Credit Facility using a portion of the proceeds from the
issuance of the PRIDES.
(2) In March 1996, BLH completed a tender offer pursuant to which it
repurchased $148.3 million principal amount of its 13 percent senior
subordinated notes for $173.2 million. The repurchase was made using
the proceeds from a revolving credit facility of BLH (the "BLH Credit
Facility") entered into in February 1996. Maximum principal amounts
which could be borrowed under the agreement totaled $400 million
(including a competitive bid facility in the aggregate principal
amount of up to $100 million). Amounts borrowed under the new
facility were due in 2001 and accrued interest at a rate of LIBOR
plus an applicable margin of between 50 and 75 basis points,
depending on BLH's ratio of consolidated net worth. Additional
proceeds were borrowed under the BLH Credit Facility to repay the
existing $110 million principal balance due under the bridge loan
facility and for other corporate purposes. The following summarizes
the sources and uses of funds related to the tender offer and related
financing transactions:
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Amounts borrowed under the BLH Credit Facility................................ $310.0
======
Uses of funds:
Related to 13 percent senior subordinated notes:
Principal tendered......................................................... $148.3
Premium paid in tender offer............................................... 24.8
Payment of accrued interest................................................ 6.6
Related to bridge loan facility:
Principal repaid .......................................................... 110.0
Payment of accrued interest................................................ .5
Debt issuance costs........................................................... 3.7
Other corporate purposes, including repayment
of amounts borrowed to purchase BLH common stock........................... 16.1
-------
Total uses........................................................ $310.0
======
</TABLE>
64
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Interest expense is adjusted to reflect reduced interest expense on
the $148.3 million principal balance of BLH's senior subordinated
notes which were tendered, offset by interest expense on amounts
borrowed under the BLH revolving credit facility.
(3) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
(4) The minority interests' share of the pro forma adjustments is
recognized.
(5) Primary and fully diluted weighted average shares outstanding are
adjusted to reflect the issuance of the PRIDES.
LPG Merger
The acquisition of LPG was accounted for under the purchase method of
accounting effective July 1, 1996. Under this method, the total cost to acquire
LPG was allocated to the assets and liabilities acquired based on their fair
values as of the date of the LPG 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 LPG Merger did not qualify to be
accounted for under the pooling of interests method in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations ("APB No.
16"), because of Conseco's significant common stock repurchases within the last
two years. In the LPG Merger, each outstanding share of LPG common stock was
converted into 1.1666 shares of Conseco common stock. A total of 32.6 million
shares of Conseco Common Stock (or equivalent shares) with a value of $586.8
million were issued to complete the LPG Merger. In connection with the LPG
Merger, Conseco assumed notes payable of $253.1 million.
Adjustments to the pro forma consolidated statement of operations to give
effect to the LPG Merger as of January 1, 1996, are summarized below:
(6) Net investment income and net realized gains of LPG are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities and mortgage loans to their estimated
fair value.
(7) Net investment income is reduced for the lost interest income on cash
used to pay expenses incurred to complete the LPG Merger.
(8) After the LPG Merger, a subsidiary of Conseco provides investment
advisory services to LPG. Investment advisory fees incurred by LPG
prior to the LPG Merger are eliminated. LPG's pro forma net
investment income is not reduced to reflect the advisory fees to be
paid under agreements with the subsidiary of Conseco since, in
accordance with generally accepted accounting principles, such
intercompany fees are eliminated in consolidation and the subsidiary
of Conseco will provide such services without incurring additional
costs.
(9) Net investment income and interest expense on notes payable are
adjusted to reflect the following items which were held on June 30,
1996, and which are eliminated in consolidation after the LPG Merger:
(i) actively managed fixed maturity securities of Conseco include
$6.3 million of LPG notes; and (ii) actively managed fixed maturity
securities of LPG include $25.1 million of Conseco notes and $4.5
million of notes of a subsidiary of Conseco.
(10) Interest expense on notes payable of LPG is adjusted as a result of
restating notes payable of LPG to their estimated fair value and the
repayment of LPG's bank debt, using additional borrowings from
the Conseco Credit Facility.
(11) Amortization of the cost of policies produced, the historical cost of
policies purchased and deferred revenues for policies sold by LPG
prior to January 1, 1996, are replaced with the amortization of the
cost of policies purchased (amortized in relation to estimated
profits on the policies purchased with interest equal to the contract
rates primarily ranging from 4.0 percent to 7.0 percent).
(12) LPG's historical amortization of goodwill is eliminated and replaced
with the amortization of goodwill recognized in the LPG Merger. Such
amortization is recognized over a 40-year period on a straight-line
basis.
(13) Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased. Amortization of the
cost of policies purchased is adjusted to reflect amortization
related to the pro forma net realized gains of LPG during 1996.
65
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(14) Acquisition and merger expenses are reduced to eliminate the merger
costs incurred by LPG during the six months ended June 30, 1996, in
connection with the LPG Merger.
(15) Reflects the tax adjustments for all applicable pro forma adjustments
at the appropriate rate for the specific item.
(16) Common shares outstanding are increased to reflect the shares issued
in the LPG Merger.
Transactions related to the Series D Call
On August 27, 1996, Conseco called for redemption all outstanding shares of
the Series D preferred stock at a redemption price plus accrued dividends of
$52.916. Holders of 5,381,437 Series D shares elected to convert their shares
into 16,882,390 shares of Conseco common stock. The remaining 6,358 Series D
shares were redeemed for $.3 million in cash.
Adjustments to give effect to the Series D Call are summarized below:
(17) Primary weighted average shares outstanding are adjusted to reflect
the issuance of common stock that each share of Series D preferred
stock was converted into based on the stock's conversion provisions
(3.1372 shares of Conseco's common stock for each share of Series D
preferred stock converted). Such issuance had no effect on fully
diluted average shares outstanding or fully diluted earnings per
share since the Series D preferred stock was considered to have been
converted for fully diluted calculations.
(18) Primary earnings per share are adjusted to reflect the elimination of
the Series D preferred stock dividends and the increase in the
Conseco common shares outstanding.
Transactions relating to the ALH Stock Purchase
On September 30, 1996, Conseco acquired all of the common stock of ALH, not
previously owned by Conseco or its affiliates, for a purchase price of
approximately $165 million. In addition, Conseco purchased all outstanding
payment-in-kind preferred stock of ALH, not owned by Conseco. These transactions
were financed using available cash and additional borrowings under the Conseco
Credit Facility and the BLH Credit Facility. Hereinafter ALH refers to ALH or
the former subsidiaries of ALH.
The sources and uses of the financing to complete the ALH Stock Purchase
are summarized below (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Available cash................................................................. $ 12.6
Conseco Credit Facility........................................................ 25.0
BLH Credit Facility............................................................ 140.0
-------
Total sources............................................................... $177.6
======
Uses of funds:
Purchase of all outstanding common stock of ALH, not owned by Conseco*......... $165.0
Purchase of all outstanding payment-in-kind preferred stock of ALH,
not owned by Conseco........................................................ 12.6
------
Total uses.................................................................. $177.6
======
</TABLE>
66
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------------
*Excludes approximately .9 million shares of ALH common stock which were
distributed to Conseco, the general partner of Conseco Capital Partners II, L.P
("Partnership II"), based on the returns earned by the limited partners on the
ALH investment as defined by Partnership II's Partnership Agreement.
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 ALH, 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 ALH included in Conseco's pro forma
consolidated financial statements represent the combination of the following
values: (1) the portion of ALH's net assets acquired by Conseco in the initial
acquisition made by Partnership II is valued as of its acquisition date,
September 29, 1994; and (2) the portion of ALH's net assets acquired in the ALH
Stock Purchase is valued as of the assumed date of acquisition.
Adjustments to give effect to the ALH Stock Purchase are summarized below:
(19) As described above, the ALH Stock Purchase is accounted for as a step
acquisition. The accounts of ALH are adjusted to reflect the step
acquisition method of accounting as if the ALH Stock Purchase was
completed on the assumed dates of acquisition. A 19 percent discount
rate was used to determine the value of the cost of policies
purchased acquired in the ALH Stock Purchase.
(20) Net investment income and interest expense are adjusted to reflect
the sources of the financing to complete the ALH Stock Purchase (net
investment income is reduced for the lost investment income on cash
used in the ALH Stock Purchase and interest expense is increased to
reflect the additional borrowings under the Conseco Credit Facility
and the BLH Credit Facility).
A change in interest rates of .5 percent on the additional borrowings
under the Conseco Credit Facility and the BLH Credit Facility used to
complete the ALH Stock Purchase would result in: (1) an increase (or
decrease) in pro forma interest expense of $.8 million for the year
ended December 31, 1996, and (2) a decrease (or increase) in pro
forma net income of $.5 million for the same period.
(21) Interest expense is adjusted to reflect the fair value of ALH's
subordinated debentures.
(22) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item. In addition, tax expense is adjusted to
reflect the reduction in tax expense as a result of Conseco's
increased ownership of ALH.
(23) Minority interest is reduced to eliminate the income attributable to
the former shareholders of ALH and the preferred dividends on the
payment-in-kind preferred stock of ALH, not owned by Conseco.
67
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
TRANSACTIONS RELATING TO THE TOPrS OFFERING
On November 19, 1996, a subsidiary trust of Conseco issued TOPrS having an
aggregate liquidation amount of $275 million and a distribution rate of 9.16
percent. The subsidiary used the proceeds from the sale of such securities to
purchase subordinated deferrable interest debentures of Conseco in an aggregate
principal amount equivalent to the aggregate liquidation amount of the TOPrS
that were issued. The subordinated deferrable interest debentures bear interest
at a rate of 9.16 percent. Conseco used the proceeds from the sale of the
subordinated deferrable interest debentures to reduce its notes payable.
(24) Interest expense is reduced to reflect the repayment of $265.5
million aggregate principal amount of Conseco's notes payable.
(25) The pro forma adjustment is tax affected, based on Conseco's
effective tax rate of 35 percent.
(26) Minority interest is adjusted to reflect the distribution (net of
the related tax benefit) on the TOPrS.
TRANSACTIONS RELATING TO THE TruPS OFFERING
On November 27, 1996, another subsidiary trust of Conseco issued TruPS
having an aggregate liquidation amount of $325 million and a distribution rate
of 8.70 percent. The subsidiary used the proceeds from the sale of such
securities to purchase Conseco subordinated deferrable interest debentures with
an aggregate principal amount equivalent to the aggregate liquidation amount of
the TruPS that were issued. The subordinated deferrable interest debentures of
Conseco bear interest at a rate of 8.70 percent. Conseco used the proceeds from
the sale of the subordinated deferrable interest debentures to reduce its notes
payable.
(27) Interest expense is reduced to reflect the repayment of $322.2
million aggregate principal amount of Conseco's notes payable.
(28) The pro forma adjustment is tax affected, based on Conseco's
effective tax rate of 35 percent.
(29) Minority interest is adjusted to reflect the distribution (net of the
related tax benefit) on the TruPS.
68
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Transactions relating to the ATC Merger
On December 17, 1996, Conseco completed the ATC Merger. Each outstanding
share of ATC common stock was exchanged for 1.1672 shares of Conseco common
stock. Conseco issued 21.0 million shares of common stock (including .9 million
common equivalent shares issued in exchange for ATC's outstanding options) with
a value of $630.9 million. Conseco also assumed ATC's convertible subordinated
debentures, which are convertible into 7.9 million shares of Conseco Common
Stock with a value of $248.3 million (of which $102.8 million, representing the
principal amount outstanding, is included in notes payable and $145.5 million,
representing the additional value attributable to the conversion feature, is
included in other liabilities).
The ATC Merger was accounted for under the purchase method of accounting
effective December 31, 1996. Under this method, the cost to acquire ATC was
allocated to the assets and liabilities acquired based on their fair values as
of the date of the ATC 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. The ATC Merger did not qualify to be accounted for
under the pooling of interests method in accordance with APB No. 16 because an
affiliate of ATC sold a portion of the Conseco Common Stock received in the ATC
Merger shortly after the consummation of the ATC Merger.
Adjustments to the pro forma consolidated statement of operations to give
effect to the ATC Merger as of January 1, 1996, are summarized below.
(30) 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.
(31) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to pay expenses of
approximately $30.4 million incurred 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 $.2 million for the year ended December 31, 1996;
and (2) a decrease ( or increase) in pro forma net income of $.1
million for the same period.
(32) Interest expense is reduced to reflect the amortization of the
liability established at the 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
the Conseco Common Stock that such debentures would be convertible
into during the same period.
69
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(33) 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).
(34) Amortization of goodwill acquired in the ATC Merger is recognized
over a 40-year period on a straight-line basis.
(35) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(36) 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.
70
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
TRANSACTIONS RELATING TO THE THI MERGER
On December 23, 1996, Conseco completed the THI Merger. Each outstanding
share of THI common stock was exchanged for 2.8 shares of Conseco Common Stock.
Conseco issued 4.9 million shares of common stock (including .4 million common
equivalent shares issued in exchange for THI's outstanding options and warrants)
with a value of $121.7 million. In additon, pursuant to an exchange offer (the
"Exchange Offer"), all of THI's Convertible Notes were exchanged for 4.2 million
shares of Conseco Common Stock with a value of $106.2 million plus a cash
premium of $11.9 million.
The THI Merger was accounted for under the purchase method of accounting
effective December 31, 1996. Under this method, the cost to acquire THI was
allocated to the assets and liabilities acquired based on their fair values as
of the date of the THI Merger. There was no goodwill acquired with the THI
Merger. The THI Merger did 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 transaction.
Adjustments to the pro forma consolidated statement of operations to give
effect to the THI Merger as of January 1, 1996, are summarized below.
(37) 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. Net
investment income is further reduced for the lost interest income on
cash used to repay a portion of THI's bank debt.
(38) 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
estimated costs of approximately $8.5 million to complete the THI
Merger; and (ii) pay the $11.9 million premium in conjunction with
the Exchange Offer.
(39) Amortization of the cost of policies produced and the cost of
policies purchased prior to the THI Merger is replaced with the
amoratization 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).
(40) Effective October 1, 1995, THI sold its long term care business
to ATC and recognized a pre-tax loss of $68.5 million in 1995. In
1996, $1.0 million related to this loss was reversed. A pro forma
adjustment is made to eliminate any effect of this transaction in the
pro forma consolidated statement of operations.
(41) Reflects the tax adjustment for the pro forma adjustments at the
approximate rate for the specific item.
(42) 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.
71
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
TRANSACTIONS RELATING TO THE BLH MERGER
On December 31, 1996, Conseco completed the BLH Merger. Each outstanding
share of BLH common stock not already owned by Conseco was exchanged for 0.7966
shares of Conseco Common Stock. Conseco issued 3.9 million shares of common
stock (including .1 million common equivalent shares in exchange for BLH's
outstanding options) with a value of $123.0 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 Partnership I 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 Merger is valued at the assumed dates of acquisition.
Adjustments to give effect to the BLH Merger are summarized below:
(43) As described above, the BLH Merger 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 Merger was completed on the
assumed date of acquisition. An 18 percent discount rate was used to
determine the value of the cost of policies purchased acquired in the
BLH Merger.
(44) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item.
(45) Minority interest is reduced to eliminate the ownership interest of
the former shareholders of BLH.
(46) Common shares outstanding are increased to reflect the shares of
Conseco common stock issued in the BLH Merger.
72
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Transactions relating to the CAF Merger
On March 4, 1997, Conseco completed the CAF Merger. CAF was merged with and
became a wholly owned subsidiary of Conseco. In the CAF Merger, each of the
approximately 17.7 million shares of CAF common stock and common stock
equivalents was converted into the right to receive $30.75 in cash plus 0.1647
of a share of Conseco Common Stock. Conseco paid $545 million in cash and issued
2.9 million shares of Conseco Common Stock with a value of approximately $115.7
million to acquire the CAF common stock. In addition, Conseco assumed a note
payable of CAF of $31.0 million. 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.
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 (December 31, 1996) ................................................... $319.3
Notes payable of CAF assumed by Conseco at the assumed date
of the CAF Merger.................................................................. 31.0
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...................................... 481.0
Held-to-maturity fixed maturity securities...................................... (364.9)
Cost of policies purchased (related to the CAF Merger).......................... 500.0
Cost of policies produced....................................................... (275.6)
Goodwill (related to the CAF Merger)............................................ 205.4
Insurance liabilities .......................................................... (92.1)
Income taxes.................................................................... (86.9)
------
Total estimated fair value adjustments..................................... 366.9
-------
Total cost to acquire CAF (including notes payable of CAF
assumed by Conseco)...................................................... $717.2
======
</TABLE>
73
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Adjustments to the pro forma consolidated statement of operations to give
effect to the CAF Merger as of January 1, 1996, are summarized below.
(47) 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.
(48) 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.
(49) Interest expense is reduced to reflect the repayment of notes payable
of CAF by Conseco at the assumed date of the CAF Merger.
(50) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to pay expenses of
approximately $26.0 million incurred 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 $3.0 million for the year ended December 31, 1996; and (2)
a decrease (or increase) in pro forma net income of $1.9 million
for the same period.
(51) Amortization of the cost of policies produced for policies sold by CAF
prior to January 1, 1996, 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).
(52) Amortization of goodwill acquired in the CAF Merger is recognized over
a 40-year period on a straight-line basis.
(53) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(54) 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 December 31, 1996, are summarized below.
(55) 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.
(56) CAF's fixed maturity securities are restated to estimated fair value.
(57) Cash is reduced for payments made to complete the CAF Merger.
(58) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the CAF Merger.
(59) 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.
74
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The 19 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 December 31, 2001, are as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
December 31, balance amortization of interest amortization balance
-------------- ------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 $500.0 $61.3 $27.5 $33.8 $466.2
1998 466.2 56.1 25.6 30.5 435.7
1999 435.7 53.1 24.0 29.1 406.6
2000 406.6 50.3 22.4 27.9 378.7
2001 378.7 47.7 20.8 26.9 351.8
</TABLE>
(60) CAF'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. In addition, deferred tax
liabilities of CAF are netted against deferred tax assets of Conseco.
(62) Goodwill acquired in the CAF Merger is recognized.
(63) 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.
(64) Notes payable are reduced to reflect the repayment of notes payable of
CAF by Conseco at the assumed date of the CAF Merger.
(65) 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.
75
<PAGE>
CONSECO, INC. 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 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. Conseco believes the Merger will not qualify to be accounted for under
the pooling of interests method in accordance with APB No. 16 because an
affiliate of PFS intends to sell a portion of the Conseco Common Stock it
receives in the Merger shortly after the Merger is consummated. In the Merger,
each outstanding share of PFS Common Stock is assumed to be exchanged for a
fraction of a share of Conseco Common Stock to be determined based on an average
price of Conseco Common Stock prior to its closing (it is assumed Conseco's
share price will be $40.5875, resulting in an exchange ratio of .6899 shares
valued at $28.00). Conseco will issue an assumed 8.7 million shares of Conseco
Common Stock with a value of approximately $352.4 million to acquire the PFS
Common Stock. In addition, Conseco will assume: (i) notes payable of PFS of
$27.8 million; and (ii) the PFS Convertible Notes, which will be convertible
into an assumed 3.0 million shares of Conseco Common Stock with a value of
approximately $120.7 million. In addition, Conseco is expected to incur costs
related to the Merger (including contract termination, relocation, legal,
accounting and other costs) of approximately $49.5 million.
The cost to acquire PFS is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
Merger (December 31, 1996) ................................................... $188.8
PFS Convertible Notes assumed by Conseco at the
assumed date of the Merger..................................................... 86.2
Notes payable assumed by Conseco at the assumed date of the Merger.................. 27.8
Increase (decrease) in PFS's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the Merger:
Actively managed fixed maturity securities.................................. 266.2
Held-to-maturity fixed maturity securities.................................. (266.1)
Cost of policies purchased (related to the Merger).......................... 309.0
Cost of policies produced and cost of policies purchased (historical)....... (266.7)
Goodwill (related to the Merger)............................................ 230.9
Goodwill (historical)....................................................... (5.8)
Income taxes................................................................ 6.4
Other liabilities........................................................... (60.8)
------
Total estimated fair value adjustments................................. 213.1
------
Total cost to acquire PFS(including notes payable assumed by Conseco).......... $515.9
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the Merger as of January 1, 1996, are summarized below.
(66) Net investment income of PFS is adjusted to include the effect of
adjustments to restate the amortized cost basis of fixed maturity
securities to their estimated fair value.
(67) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to complete the Merger and
the issuance of the PFS Convertible Notes in March 1996; partially
offset by the repayment of $27.8 million of notes payable of PFS by
Conseco at the assumed date of the Merger.
A change in interest rates of .5 percent on the additional borrowings
under Conseco's bank credit facilities used to complete the Merger
would result in: (1) an increase (or decrease) in pro forma interest
expense of $.2 million for the year ended December 31, 1996, and (2)
a decrease (or increase) in pro forma net income of $.1 million for
the same period.
(68) Interest expense is reduced to reflect the amortization of the
liability established at the assumed date of the Merger representing
the present value of the interest payable on the PFS Convertible
Notes to April 6, 1999 (the earliest call date), less the present
value of the dividends that would be paid on the Conseco Common
Stock that such notes would be convertible into during the same
period.
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(69) 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).
(70) Amortization of goodwill prior to the Merger is eliminated and
replaced with amortization of goodwill acquired in the Merger
which is recognized over a 40-year period on a straight-line basis.
(71) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(72) Common shares outstanding are increased to reflect the Conseco shares
issued in the Merger. Fully diluted shares also include Conseco
shares which will be issued when the PFS Convertible Notes are
converted.
Adjustments to the pro forma consolidated balance sheet to give effect to
the Merger as of December 31, 1996, are summarized below.
(73) After the Merger, all held-to-maturity securities are classified
as actively managed fixed maturity securities consistent with the
intention of the new management.
(74) PFS's fixed maturity securities are restated to estimated fair value.
(75) Cash is reduced for payments made to complete the Merger.
(76) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the Merger.
(77) PFS'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 PFS's
business in force and represents the portion of the cost to acquire
PFS that is allocated to the value of the right to receive future
cash flows from the acquired policies.
The 19 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 December 31, 2001, are as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
December 31, balance amortization of interest amortization balance
------------- ------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 $309.0 $63.6 $17.0 $46.6 $262.4
1998 262.4 57.1 14.5 42.6 219.8
1999 219.8 48.2 12.1 36.1 183.7
2000 183.7 37.5 10.1 27.4 156.3
2001 156.3 29.0 8.6 20.4 135.9
</TABLE>
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(78) PFS's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
(79) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate.
(80) PFS's historical goodwill is eliminated and replaced with the goodwill
recognized in the Merger.
(81) A liability is established for various expenses incurred and
liabilities assumed in conjunction with the Merger including: (i)
liabilities assumed related to unfavorable contracts and leases; (ii)
direct acquisition costs; (iii) involuntary termination costs; and
(iv) relocation costs.
(82) Notes payable are reduced to reflect the repayment of notes payable
of PFS by Conseco at the assumed date of the Merger.
(83) Other liabilities are increased to reflect the additional value
attributable to the conversion feature of the PFS Convertible Notes
at the date of the Merger. Such fair value represents the value of
the Conseco Common Stock which the PFS Convertible Notes will be
convertible into after the Merger. It is assumed that the holders of
such notes do not convert into Conseco Common Stock at the time of the
Merger.
In addition, a liability is established representing the present
value of the interest payable on such notes to April 6, 1999 (the
earliest call date), less the present value of the dividends that
would be paid on the Conseco Common Stock that such notes would be
convertible into during the same period.
(84) The prior shareholders' equity of PFS is eliminated in conjunction
with the Merger. Common stock and additional paid-in capital is
increased by the value of the Conseco Common Stock issued in the
Merger.
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COMPARISON OF SHAREHOLDERS' RIGHTS
The rights of Conseco shareholders are governed by Conseco's Amended and
Restated Articles of Incorporation (the "Conseco Articles of Incorporation"),
its Amended and Restated Code of By-laws (the "Conseco By-laws") and the IBCL.
The rights of PFS stockholders are governed by its Certificate of Incorporation
(the "PFS Certificate of Incorporation"), its By-Laws (the "PFS By-laws") and
the DGCL. After the Effective Time, the rights of PFS stockholders who become
Conseco shareholders will be governed by the Conseco Articles of Incorporation,
the Conseco By-laws and the IBCL. The following is a summary of the material
differences between the rights of Conseco shareholders and the rights of PFS
stockholders.
AMENDMENT OF BY-LAWS
Both the Conseco By-laws and the PFS By-laws may be amended by majority
vote of their respective boards of directors. The stockholders of PFS may amend
the By-laws of PFS by majority vote, and the stockholders may prescribe that any
By-law made by them may not be altered, amended or repealed by the PFS Board of
Directors.
CERTAIN PROVISIONS RELATING TO ACQUISITIONS
The IBCL and the DGCL contain certain provisions, including the ones
described below, which purport to apply to certain types of share acquisitions
or corporate transactions.
BUSINESS COMBINATIONS. The Conseco Articles of Incorporation provide that
Conseco may not enter into a "Special Business Combination Transaction" (defined
as a merger or other business combination transaction with or involving a
beneficial owner of more than ten percent of Conseco Common Stock (a "Related
Person")) unless (1) the consideration to be received per share by holders of
Conseco Common Stock in such transaction is at least equal to the highest per
share price paid in order to acquire any shares of Conseco Common Stock
beneficially owned by the Related Person or (2) the transaction shall have been
approved by two-thirds of the Continuing Directors (defined to include the
directors of Conseco in office prior to the date on which a Related Person
became such).
In 1990, PFS distributed one Right to Acquire Series A Junior Preferred
Stock (a "Right") to each holder of its Common Stock. In addition, each share of
PFS Common Stock subsequently issued automatically carries with it a Right.
Subject to certain exceptions, the Rights generally become exercisable and
separately tradeable if a person or group (an "Acquiring Person") acquires 20%
or more of PFS Common Stock. An Acquiring Person is not deemed to include any
stockholder who, on December 14, 1990, already owned 20% of the outstanding PFS
Common Stock. Upon such an event, each holder of Right will be entitled to
purchase one-tenth of a share of Series A Junior Preferred Stock at a purchase
price of $4.50, subject to certain adjustments. Such preferred shares, of which
2,000,000 are authorized, would be voting and would be entitled to distributions
that are ten times the distributions on the PFS Common Stock. Subject to
exercise of the Rights, in the event of certain business combinations involving
PFS, a holder of a Right would have the right to receive PFS Common Stock with a
value of ten times the exercise price of the Right. The terms of the plan
pursuant to which the Rights were issued was amended by the PFS Board of
Directors on December 13, 1996 to provide, among other things, that Conseco was
not an Acquiring Person pursuant to the plan. As a result, the Merger is not a
transaction which will result in the Rights becoming exercisable or a business
combination pursuant to which the holder of a Right would be entitled to receive
Common Stock.
PFS is governed by Section 203 of the DGCL. Section 203 of the DGCL
provides that a corporation shall not engage in any "business combination" with
any "interested stockholder" for a period of three years following the time that
such stockholder became an interested stockholder, unless (i) prior to such
time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85 percent of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (iii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
two-thirds (2/3) of the outstanding voting stock which is not owned by the
interested stockholder. A "business combination" under the DGCL is generally
defined as any of the following transactions involving the corporation and an
interested stockholder thereof: (i) a merger or consolidation, (ii) a sale,
lease, exchange, mortgage, pledge, transfer or other disposition of ten percent
or more of the corporation's assets, (iii) an issuance or transfer of the
corporation's stock, (iv) a transaction having the effect of directly or
indirectly increasing the proportionate share of the corporation's stock held by
such interested stockholder or (v) any receipt by such interested stockholder of
the benefit of any loans, guarantees, pledges or other financial benefits. An
"interested stockholder" under the DGCL is generally defined as any person
owning 15 percent or more of the corporation's outstanding voting stock.
Section 23-1-43-18 of the IBCL provides that a corporation may not engage
in any "business combination" with any "interested shareholder" for a period of
five years following the interested shareholder's share acquisition date unless
the business combination or the purchase of shares made by the interested
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<PAGE>
shareholder is approved by the board of directors of the corporation before the
interested shareholder's share acquisition date. A "business combination" under
the IBCL is generally defined as any of the following transactions involving the
corporation and an interested stockholder thereof: (i) a merger or
consolidation, (ii) a sale, lease, exchange, mortgage, pledge, transfer, or
other disposition of ten percent or more of corporation's assets or representing
10% or more of the earning power or net income of the corporation, (iii) an
issuance or transfer of shares of the corporation's stock representing 5% or
more of the aggregate market value of all of such corporation's outstanding
stock, (iv) the adoption of a plan of liquidation or dissolution proposed by or
under agreement with such interested shareholder, (v) a transaction having the
effect of directly or indirectly increasing the proportionate share of the
corporation's stock held by such interested stockholder, or (vi) any receipt by
such interested stockholder of the benefit of any loans, advances, guarantees,
pledges, or other financial assistance or any tax credits or other tax
advantages. An "interested shareholder" under the IBCL is generally defined as
any person owning 10 percent or more of the voting power of the outstanding
voting shares of the corporation.
CONTROL SHARE ACQUISITIONS. Chapter 23-1-42 of the IBCL requires that,
unless the articles or by-laws of a corporation exempt the corporation therefrom
(which Conseco's Articles of Incorporation and By-laws do not), any person who
proposes to acquire or has acquired (a "control share acquisition") ownership of
(or the power to direct the voting of) shares representing one-fifth, one-third,
or a majority of the voting power of an issuing public corporation in the
election of directors must provide the corporation with a statement describing
such acquisition (an "acquiring person statement"). If the acquiring person so
requests at the time of delivery of such statement (and undertakes to pay the
expenses relating thereto), the corporation shall cause a special meeting of its
shareholders to be called for the purpose of considering the voting rights to be
accorded the shares acquired in the control share acquisition. The shares so
acquired shall be accorded the same voting rights as were accorded such shares
before the control share acquisition only to the extent granted by resolution of
the shareholders of such corporation. Shares acquired in a control share
acquisition as to which no acquiring person statement has been filed may be
redeemed by the corporation at the fair value thereof under certain
circumstances. In the event that shares acquired in a control share acquisition
are accorded full voting rights and the acquiring person has acquired shares
representing a majority or more of all voting power, the other shareholders will
be entitled to appraisal rights. The DGCL does not contain a comparable
provision.
TAKEOVER OFFERS. Chapter 23-2-3.1 of the IBCL provides that a person shall
not make a takeover offer unless the following conditions are satisfied: (1) a
statement which consists of each document required to be filed with the
Commission is filed with the Indiana securities commissioner and delivered to
the president of the target company before making the takeover offer; (2) a
consent to service of process and the requisite filing fee accompanies the
statement filed with the Indiana securities commissioner; (3) the takeover offer
is made to all offerees holding the same class of equity securities on
substantially equivalent terms; (4) a hearing is held within 20 business days
after the statement described in clause (1) above is filed; and (5) the Indiana
securities commissioner shall have approved the takeover offer. In addition,
such section provides that no offeror may acquire any equity security of any
class of a target company within two years following the conclusion of a
takeover offer with respect to that class, unless the holder of such equity
security is afforded, at the time of that acquisition, a reasonable opportunity
to dispose of such securities to the offeror upon substantially equivalent
terms. A "takeover offer" means an offer to acquire or an acquisition of any
equity security of a target company pursuant to a tender offer or request or
invitation for tenders if, after the acquisition, the offeror is directly or
indirectly a record or beneficial owner of more than ten percent of any class of
the outstanding equity securities of the target company. A "target company"
means an issuer of securities which is organized under the laws of Indiana, has
its principal place of business in Indiana and has substantial assets in
Indiana. The DGCL does not contain a comparable provision.
RIGHT TO BRING BUSINESS BEFORE A SPECIAL MEETING OF SHAREHOLDERS
The Conseco Articles of Incorporation and the Conseco By-laws do not
contain any restriction on the ability of shareholders to bring business before
a special meeting of shareholders.
Holders of the PFS Common Stock representing a majority of the voting power
of all issued and outstanding shares of PFS Common Stock may call a special
meeting of stockholders. Notice of such meeting must be mailed or delivered to
each stockholder not less than 10 nor more than 60 days prior to such meeting.
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The notice must state the purpose or purposes for which the meeting is to be
held.
SHAREHOLDER ACTION BY WRITTEN CONSENT
The Conseco By-laws and PFS By-laws specifically authorize stockholder
action by written consent of all the stockholders entitled to vote on such
action.
REMOVAL OF DIRECTORS
The Conseco Articles of Incorporation provides for the board of directors
to be divided into three classes. Under the Conseco By-laws, a director may be
removed, either for or without cause, at any special meeting of shareholders
called for that purpose, by the affirmative vote of a majority in number of
shares of the shareholders present in person or by proxy and entitled to vote
for the election of such director. The PFS Certificate of Incorporation also
provides for the board of directors to be divided into three classes. Under the
DGCL, a director of PFS may be removed, only for cause, by the holders of a
majority of the outstanding PFS Common Stock.
DIRECTOR LIABILITY
The Conseco Articles of Incorporation and the Conseco By-laws do not
contain a specific exculpatory provision regarding director liability. The IBCL,
however, provides that a director is not liable for any action taken as a
director, or any failure to take any action, unless (1) the director has
breached or failed to perform the duties of the director's office in compliance
with Section 23-1-35-1 of the IBCL (which requires, among other things, that a
director discharge his or her duties as a director in good faith, with the care
an ordinarily prudent person in a like position would exercise under similar
circumstances and in a manner the director reasonably believes to be in the best
interests of the corporation), and (2) the breach or failure to perform
constitutes willful misconduct or recklessness.
The PFS Certificate of Incorporation provides that a director of PFS shall
not be personally liable to PFS or its stockholders for monetary damages for
breach of fiduciary duty as a director to the fullest extent permitted by the
DGCL. Under the DGCL, such provisions may not limit a directors liability (i)
for any breach of the director's duty of loyalty to PFS or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, (iii) under Section 174 of the DGCL
(unlawful payment of dividends), or (iv) for any transaction from which the
director derived an improper personal benefit.
INDEMNIFICATION
The IBCL grants authorization to Indiana corporations to indemnify officers
and directors made a party to a proceeding against liability incurred in the
proceeding if: (A) the individual's conduct was in good faith; (B) the
individual reasonably believed: (i) in the case of conduct in the individual's
official capacity with the corporation, that the individual's conduct was in the
corporation's best interests; and (ii) in all other cases, that the individual's
conduct was at least not opposed to the corporation's best interests; and (C) in
the case of any criminal proceeding, the individual either: (i) had reasonable
cause to believe that the individual's conduct was lawful; or (ii) had no
reasonable cause to believe that the individual's conduct was unlawful.
The Conseco By-laws provide for the indemnification of any person made a
party to any action, suit or proceeding by reason of the fact that he or she is
a director, officer or employee of Conseco, unless it is adjudged in such
action, suit or proceeding that such person is liable for negligence or
misconduct in the performance of his or her duties. Such indemnification shall
be against the reasonable expenses, including attorneys' fees, incurred by such
person in connection with the defense of such action, suit or proceeding. In
some circumstances, Conseco may reimburse any such person for the reasonable
costs of settlement of any such action, suit or proceeding if a majority of the
members of the Board of Directors not involved in the controversy shall
determine that it was in the interests of Conseco that such settlement be made
and that such person was not guilty of negligence or misconduct.
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<PAGE>
The PFS Certificate of Incorporation provides that PFS shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of PFS) by reason of the fact that he is or was a director, officer,
employee or agent of PFS, or is or was serving at the request of PFS as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of PFS and, with respect to any criminal action or
proceeding, had no reasonable cause to believe this conduct was unlawful. PFS
shall also indemnify any such person with respect to any threatened, pending or
completed action or suit by or in the right of PFS to procure a judgment in its
favor by reason of the fact of his status against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of PFS and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to PFS
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of Delaware
or such other court shall deem proper. To the extent that any such person has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to therein or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorney's fees)
actually and reasonably incurred by him in connection therewith. Any
indemnification to be made pursuant to the Certificate of Incorporation shall be
made by PFS only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
the Certificate of Incorporation. Such determination shall be made (i) by the
Board of Directors by a majority vote of a quorum consisting of the directors
who were not parties to such action, suit or proceeding, or (ii) if such quorum
is not obtainable, or, even if obtainable, a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by PFS in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by PFS as provided in
the Certificate of Incorporation. The indemnification and advancement of
expenses provided by, or granted pursuant to, the Certificate of Incorporation
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
and as to action in another capacity while holding such office. The
indemnification and advancement of expenses provided by, or granted pursuant to,
the Certificate of Incorporation shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. To the fullest extent permitted
by DGCL as the same exists or may hereafter be amended, a director of PFS shall
not be liable to PFS or its stockholders for monetary damages for breach of
fiduciary as a director.
PFS's Certificate of Incorporation provides that PFS may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of PFS, or is or was serving at the request of PFS as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not PFS would have the power to indemnify him against such liability
under the provisions of the Certificate of Incorporation.
The Conseco Articles of Incorporation and Conseco By-laws do not provide
for the advancement of expenses. However, under the IBCL a corporation may
advance expenses if (1) the director furnishes the corporation a written
affirmation of the director's good faith belief that the director has met the
standard of conduct called for by Section 23-1-37-8 of the IBCL (which states
that a corporation may indemnify an individual made a party to a proceeding
against liability incurred in the proceeding if: (A) the individual's conduct
was in good faith; and (B) the individual reasonably believed: (i) in the case
of conduct in the individual's official capacity with the corporation, that the
individual's conduct was in its best interests; and (ii) in all other cases,
that the individual's conduct was at least not opposed to its best interests;
and (C) in the case of any criminal proceeding, the individual either: (i) had
reasonable cause to believe the individual's conduct was lawful; or (ii) had no
reasonable cause to believe the individual's conduct was unlawful), (2) the
director furnishes a written undertaking to repay the advance if it is
ultimately determined that he or she did not meet such standard of conduct and
(3) a determination is made that the facts then known would not preclude
indemnification under Indiana laws.
DIVIDENDS AND REPURCHASES
Under the IBCL, a corporation may make distributions to its shareholders as
long as the corporation's debts may be paid as they come due, the corporation's
total assets exceed the sum of its liabilities plus the amount that would be
needed if the corporation were to be dissolved and the payment of these
distributions is consistent with the corporation's articles of incorporation.
Under the DGCL, a corporation may pay dividends and repurchase stock out of
surplus or, if there is no surplus, out of any net profits for the fiscal year
in which the dividend was declared and/or for the preceding fiscal year as long
as no payment reduces capital below the amount of capital represented by all
classes of shares having a preference upon the distribution of assets.
DISSENTERS' RIGHTS
The DGCL provides that a stockholder is entitled, under certain
circumstances, to receive payment of the fair value of the stockholder's common
stock if the stockholder dissents from a merger or consolidation. The DGCL also
permits a corporation to grant (by inclusion of a provision in its certificate
of incorporation)
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appraisal rights in connection with certain other corporate transactions. PFS's
Certificate of Incorporation currently contains no such provision.
Under the DGCL, dissenters' rights are not available if the shares of the
Delaware corporation are (i) listed on a national securities exchange (such as
the NYSE) or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. (e.g.,
quoted on the Nasdaq National Market) or (ii) held of record by more than 2,000
holders. Notwithstanding the foregoing, dissenters' rights under the DGCL are
available if the stockholders of the Delaware corporation are to receive in the
merger or consolidation anything other than (i) shares of stock of the surviving
or resulting corporation, (ii) shares of stock of any other corporation which
are listed on a national securities exchange or are designated as a national
market system security on an interdealer quotation system (as described above)
or held of record by more than 2,000 holders, and/or (iii) cash in lieu of
fractional shares. Based on the foregoing, dissenters' rights will not be
available to PFS stockholders in connection with the Merger.
The IBCL provides that a shareholder is entitled, under certain
circumstances, to receive payment of the fair value of the shareholder's common
stock if the shareholder dissents from a merger, share exchange, sale or
exchange of all or substantially all of the corporation's property and certain
control share acquisitions (as described under "-- Certain Provisions Relating
to Acquisitions -- Control Share Acquisitions"). The IBCL also permits a
corporation to grant (by inclusion of a provision in its articles of
incorporation, bylaws or resolution of the board of directors) appraisal rights
in connection with other corporate actions. Conseco's Articles of Incorporation,
By-laws and resolutions currently contain no such provision.
Under the IBCL, dissenters' rights are not available if the shares of the
Indiana corporation are (i) registered on a United States securities exchange
registered under the Exchange Act (such as the NYSE) or (ii) traded on the
National Association of Securities Dealers, Inc. Automated Quotations System
Over-the-Counter Markets -- National Market Issues (such as the Nasdaq National
Market) or a similar market.
DIRECTOR AND OFFICER DISCRETION
Under Sections 23-1-35-1(d), (f), and (g) of the IBCL, in discharging his
or her duties to the corporation and in determining what he or she believes to
be in the best interests of the corporation, a director or officer may, in
addition to considering the effects of any action on shareholders, consider the
effects of the action on employees, suppliers, customers, the communities in
which the corporation operates and any other factors that the director or
officer considers pertinent. The DGCL does not contain a comparable provision,
and, under Delaware law, the consideration that a board may give to
nonstockholder constituencies is less clear. In considering the best interests
of a corporation, under Delaware law, directors and officers can generally take
into consideration the interest of nonstockholders. However, the Delaware
Supreme Court has held that the consideration of nonstockholder constituencies
is inappropriate when an active "auction" is in process to sell a company.
The foregoing discussion of certain similarities and material differences
between the rights of Conseco shareholders and the rights of PFS stockholders is
only a summary of certain provisions and does not purport to be a complete
description of such similarities and differences, and is qualified in its
entirety by reference to the IBCL and the common law thereunder, the DGCL and
the common law thereunder, and the full text of the Conseco Articles of
Incorporation, the Conseco By-laws, the PFS Certificate of Incorporation and the
PFS By-laws.
MANAGEMENT OF CONSECO AND PFS
UPON CONSUMMATION OF THE MERGER
The directors and executive officers of RAC are Stephen C. Hilbert, Ngaire
E. Cuneo, Rollin M. Dick, Donald F. Gongaware and Lawrence W. Inlow, and such
individuals will be directors and executive officers of PFS upon consummation of
the Merger. Such individuals are also the executive officers of Conseco and will
have the same titles with PFS as they currently have with Conseco. The directors
and executive officers of Conseco will continue as the directors and executive
officers of Conseco upon consummation of the Merger. For information with
respect to the directors and executive officers of Conseco, see Conseco's Annual
Report, which is incorporated herein by reference.
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LEGAL MATTERS
The validity of the Conseco Common Stock to be issued in connection with
the Merger will be passed upon for Conseco by Lawrence W. Inlow, Executive Vice
President, General Counsel and Secretary of Conseco. Mr. Inlow is a full-time
employee and officer of Conseco and owns directly and indirectly 1,556,490
shares of Conseco Common Stock and holds options to purchase 2,813,800 shares of
Conseco Common Stock.
EXPERTS
The consolidated financial statements of Conseco at December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Proxy Statement/Prospectus, have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report thereon incorporated by reference herein, and are incorporated by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of LPG at December 31, 1995 and 1994,
and for each of the three years in the period ended December 31, 1995,
incorporated by reference in this Proxy Statement/Prospectus (and which are
included in the Form 8-K dated August 2, 1996 of the Company), have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report thereon incorporated by reference herein, and are incorporated by
reference in reliance upon such report, given upon authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of PFS at December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Proxy Statement/ Prospectus, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference herein, and are incorporated by reference in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP will be present at the Special Meeting
and will be available to respond to appropriate questions and have the
opportunity to make a statement if they desire.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the PFS Board of
Directors does not intend to present, and has not been informed that any other
person intends to present, any matter for action at the Special Meeting, other
than as discussed herein.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 15, 1996
By and Among
CONSECO, INC.,
ROCK ACQUISITION COMPANY
and
PIONEER FINANCIAL SERVICES, INC.
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
<S> <C> <C>
THE MERGER.................................................................................... 1
1.1 The Merger........................................................................... 1
1.2 Closing............................................................................... 1
1.3 Effective Time....................................................................... 2
1.4 Certificate of Incorporation......................................................... 2
1.5 By-Laws.............................................................................. 2
1.6 Directors............................................................................ 2
1.7 Officers............................................................................. 2
1.8 Conversion of RAC Shares............................................................. 2
1.9 Conversion of Shares ................................................................ 2
1.10 Exchange of Certificates............................................................. 3
1.11 Treatment of Convertible Subordinated Notes.......................................... 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................. 6
2.1 Organization, Standing and Corporate Power........................................... 6
2.2 Capital Structure.................................................................... 6
2.3 Authority; Noncontravention.......................................................... 7
2.4 SEC Documents........................................................................ 8
2.5 Absence of Certain Changes or Events................................................. 9
2.6 Absence of Changes in Benefit Plans.................................................. 10
2.7 Benefit Plans........................................................................ 10
2.8 Taxes................................................................................ 11
2.9 No Excess Parachute Payments; Section 162(m) of
the Code............................................................................. 12
2.10 Voting Requirements.................................................................. 12
2.11 Compliance with Applicable Laws...................................................... 12
2.12 Opinion of Financial Advisor......................................................... 14
2.13 Brokers.............................................................................. 14
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CONSECO AND RAC............................................. 14
3.1 Organization, Standing and Corporate Power........................................... 14
3.2 Conseco Capital Structure............................................................ 15
3.3 Authority; Noncontravention.......................................................... 15
3.4 SEC Documents........................................................................ 17
3.5 Absence of Certain Changes or Events................................................. 17
3.6 Compliance with Applicable Laws...................................................... 18
3.7 No Prior Activities.................................................................. 19
3.8 Brokers.............................................................................. 19
3.9 Voting Requirements.................................................................. 19
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ARTICLE IV
ADDITIONAL AGREEMENTS......................................................................... 20
4.1 Preparation of Form S-4 and the Proxy Statement;
Information Supplied................................................................. 20
4.2 Meeting of Stockholders.............................................................. 21
4.3 Letter of the Company's Accountants.................................................. 21
4.4 Letter of Conseco's Accountants...................................................... 21
4.5 Access to Information; Confidentiality............................................... 22
4.6 Commercially Reasonable Efforts...................................................... 22
4.7 Public Announcements................................................................. 22
4.8 Acquisition Proposals................................................................ 22
4.9 Fiduciary Duties..................................................................... 23
4.10 Consents, Approvals and Filings...................................................... 24
4.11 Certain Fees......................................................................... 24
4.12 Affiliates and Certain Stockholders.................................................. 25
4.13 NYSE Listing......................................................................... 26
4.14 Stockholder Litigation............................................................... 26
4.15 Indemnification...................................................................... 26
4.16 Stock Options ....................................................................... 27
4.17 Officers' Certificates Relating to Tax Treatment. ................................... 27
4.18 Severance and Other Payments ........................................................ 28
4.19 Employment Agreement................................................................. 28
4.20 Existing Employment Agreements....................................................... 28
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER..................................... 28
5.1 Conduct of Business by the Company................................................... 28
5.2 Conduct of Business by Conseco....................................................... 31
5.3 Other Actions ....................................................................... 31
5.4 Conduct of Business of RAC........................................................... 31
ARTICLE VI
CONDITIONS PRECEDENT.......................................................................... 32
6.1 Conditions to Each Party's Obligation To Effect
the Merger........................................................................... 32
6.2 Conditions to Obligations of Conseco and RAC......................................... 33
6.3 Conditions to Obligation of the Company.............................................. 34
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER............................................................. 35
7.1 Termination.......................................................................... 35
7.2 Effect of Termination................................................................ 35
7.3 Amendment............................................................................ 36
7.4 Extension; Waiver.................................................................... 36
7.5 Procedure for Termination, Amendment, Extension
or Waiver............................................................................ 36
ARTICLE VIII
SURVIVAL OF PROVISIONS........................................................................ 36
8.1 Survival............................................................................. 36
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ARTICLE IX
NOTICES....................................................................................... 36
9.1 Notices.............................................................................. 36
ARTICLE X
MISCELLANEOUS................................................................................. 37
10.1 Entire Agreement.................................................................... 37
10.2 Expenses............................................................................ 38
10.3 Counterparts ....................................................................... 38
10.4 No Third Party Beneficiary.......................................................... 38
10.5 Governing Law....................................................................... 38
10.6 Assignment; Binding Effect.......................................................... 38
10.7 Enforcement..........................................................................38
10.8 Headings, Gender, etc............................................................... 38
10.9 Invalid Provisions.................................................................. 39
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of December 15, 1996 by and among CONSECO, INC., an Indiana corporation
("Conseco"), ROCK ACQUISITION COMPANY, a Delaware corporation and wholly-owned
subsidiary of Conseco ("RAC"), and PIONEER FINANCIAL SERVICES, INC., a Delaware
corporation (the "Company").
PREAMBLE
WHEREAS, the respective Boards of Directors of Conseco, RAC and the
Company have approved the merger of RAC with and into the Company, upon the
terms and subject to the conditions set forth herein; and
WHEREAS, Conseco, RAC and the Company desire to make certain
representations, warranties, covenants and agreements in connection with such
merger and also to prescribe various conditions to such merger;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as such term is defined in Section 1.3 hereof), RAC shall
be merged with and into the Company (the "Merger"), in a transaction intended to
qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"), in accordance with the Delaware
General Corporation Law (the "DGCL"), and the separate corporate existence of
RAC shall cease and the Company shall continue as the surviving corporation
under the laws of the State of Delaware (the "Surviving Corporation") with all
the rights, privileges, immunities and powers, and subject to all the duties and
liabilities, of a corporation organized under the DGCL.
1.2 Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1, and subject to the satisfaction or waiver of the conditions set forth in
Article VI, the closing of the Merger (the "Closing") will take place at 9:00
a.m. on the second business day following the date on which the last to be
fulfilled or waived of the conditions set forth in Article VI shall be fulfilled
or waived in accordance with this Agreement (the "Closing Date"), at the office
of Conseco in Carmel, Indiana, unless another date, time or place is agreed to
in writing by the parties hereto.
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1.3 Effective Time. The parties hereto will file with the Secretary of
State of the State of Delaware (the "Delaware Secretary of State") on the
Closing Date (or on such other date as Conseco and the Company may agree) a
certificate of merger executed in accordance with the relevant provisions of the
DGCL and make all other filings or recordings required under the DGCL in
connection with the Merger. The Merger shall become effective upon the filing of
the certificate of merger with the Delaware Secretary of State, or at such later
time as is specified in the certificate of merger (the "Effective Time").
1.4 Certificate of Incorporation. The Certificate of Incorporation of
the Company, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law.
1.5 By-Laws. The By-Laws of the Company, as in effect immediately prior
to the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law.
1.6 Directors. The directors of RAC at the Effective Time
shall be the directors of the Surviving Corporation.
1.7 Officers. The officers of RAC at the Effective Time
shall be the officers of the Surviving Corporation.
1.8 Conversion of RAC Shares. Each share of common stock of RAC issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and become one validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation.
1.9 Conversion of Shares. (a) Outstanding Shares. Each of the shares of
common stock, $1.00 par value, of the Company (the "Shares") issued and
outstanding immediately prior to the Effective Time (other than Shares held as
treasury shares by the Company) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into a right to receive
(i) if the Conseco Share Price (as defined below) is greater than or equal to
$56.00 per share and less than or equal to $62.72 per share, 0.4464 of a validly
issued, fully paid and nonassessable share of common stock, without par value,
of Conseco ("Conseco Common Stock"), (ii) if the Conseco Share Price is less
than $56.00 per share, the fraction (rounded to the nearest ten- thousandth) of
a share of Conseco Common Stock determined by dividing $25.00 by the Conseco
Share Price or (iii) if the Conseco Share Price is greater than $62.72 per
share, the fraction (rounded to the nearest ten-thousandth) of a share of
Conseco Common Stock determined by dividing $28.00 by the Conseco Share Price.
The "Conseco Share Price" shall be equal to the average of the closing prices of
the Conseco Common Stock on the New York Stock Exchange ("NYSE") Composite
Transactions Reporting System,
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as reported in The Wall Street Journal, for the 10 trading days immediately
preceding the second trading day prior to the Effective Time. The Conseco Common
Stock to be issued to holders of Shares in accordance with this Section and any
cash to be paid in accordance with Section 1.10 in lieu of fractional shares of
Conseco Common Stock are referred to collectively as the "Merger Consideration".
(b) Treasury Shares. Each Share issued and outstanding immediately
prior to the Effective Time which is then held as a treasury share by the
Company immediately prior to the Effective Time shall, by virtue of the Merger
and without any action on the part of the Company, be canceled and retired and
cease to exist, without any conversion thereof.
(c) Impact of Stock Splits, etc. In the event of any change in Conseco
Common Stock between the date of this Agreement and the Effective Time of the
Merger by reason of any stock split, stock dividend, subdivision,
reclassification, recapitalization, combination, exchange of shares or the like,
the number and class of shares of Conseco Common Stock to be issued and
delivered in the Merger in exchange for each outstanding Share as provided in
this Agreement and the calculation of all share prices provided for in this
Agreement shall be proportionately adjusted.
(d) Treatment of Company Stock Options. From and after the Effective
Time, each outstanding unexpired stock option ("Company Stock Option") to
purchase Shares which has been granted pursuant to the Company's Nonqualified
Stock Option Plan, as amended to the date hereof, or the Company's 1994 Omnibus
Stock Incentive Program, as amended to the date hereof (collectively, the
"Company Stock Plans"), shall be fully vested and exercisable, for the same
aggregate consideration payable to exercise such Company Stock Option, for the
number of shares of Conseco Common Stock which the holder would have been
entitled to receive at the Effective Time if such Company Stock Option had been
fully vested and exercised for Shares prior to the Effective Time, and otherwise
on the same terms and conditions as were applicable under the Company Stock
Plans and the underlying stock option agreement.
1.10 Exchange of Certificates. (a) Exchange Agent. As of the Effective
Time, Conseco shall deposit with its transfer agent and registrar (the "Exchange
Agent"), for the benefit of the holders of Shares, certificates representing the
shares of Conseco Common Stock to be issued to holders of Shares pursuant to
Section 1.9(a) (such certificates, together with any dividends or distributions
with respect to such certificates, being hereinafter referred to as the "Payment
Fund").
(b) Exchange Procedures. As soon as practicable after the Effective
Time, each holder of an outstanding certificate or certificates which prior
thereto represented Shares shall, upon surrender to the Exchange Agent of such
certificate or certificates and acceptance thereof by the Exchange Agent, be
entitled to a certificate representing that number of whole shares
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of Conseco Common Stock (and cash in lieu of fractional shares of Conseco Common
Stock as contemplated by this Section 1.10) which the aggregate number of Shares
previously represented by such certificate or certificates surrendered shall
have been converted into the right to receive pursuant to Section 1.9(a) of this
Agreement. The Exchange Agent shall accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with normal exchange practices.
If the consideration to be paid in the Merger (or any portion thereof) is to be
delivered to any person other than the person in whose name the certificate
representing Shares surrendered in exchange therefor is registered, it shall be
a condition to such exchange that the certificate so surrendered shall be
properly endorsed or otherwise be in proper form for transfer and that the
person requesting such exchange shall pay to the Exchange Agent any transfer or
other taxes required by reason of the payment of such consideration to a person
other than the registered holder of the certificate surrendered, or shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable. After the Effective Time, there shall be no further
transfer on the records of the Company or its transfer agent of certificates
representing Shares and if such certificates are presented to the Company for
transfer, they shall be canceled against delivery of the Merger Consideration as
hereinabove provided. Until surrendered as contemplated by this Section 1.10(b),
each certificate representing Shares (other than certificates representing
Shares to be canceled in accordance with Section 1.9(b)), shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration payable with respect to such Shares, without
any interest thereon, as contemplated by Section 1.9. No interest will be paid
or will accrue on any cash payable as Merger Consideration.
(c) Letter of Transmittal. Promptly after the Effective Time (but in no
event more than five business days thereafter), the Surviving Corporation shall
require the Exchange Agent to mail to each record holder of certificates that
immediately prior to the Effective Time represented Shares which have been
converted pursuant to Section 1.9, a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving the
consideration to which such holder shall be entitled therefor pursuant to
Section 1.9.
(d) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions with respect to Conseco Common Stock with a
record date after the Effective Time shall be paid to the holder of any
certificate that immediately prior to the Effective Time represented Shares
which have been converted pursuant to Section 1.9, until the surrender for
exchange of such certificate in accordance with this Article I. Following
surrender for exchange of any such certificate, there shall be paid to the
holder of such certificate, without interest, (i) at the time of such surrender,
the amount of dividends or other
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distributions with a record date after the Effective Time theretofore paid with
respect to the number of whole shares of Conseco Common Stock into which the
Shares represented by such certificate immediately prior to the Effective Time
were converted pursuant to Section 1.9, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time, but prior to such surrender, and with a payment date
subsequent to such surrender, payable with respect to such whole shares of
Conseco Common Stock.
(e) No Further Ownership Rights in Shares. The Merger Consideration
paid upon the surrender for exchange of certificates representing Shares in
accordance with the terms of this Article I shall be deemed to have been issued
and paid in full satisfaction of all rights pertaining to the Shares theretofore
represented by such certificates, subject, however, to the Surviving
Corporation's obligation (if any) to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared by the Company on such Shares in accordance with the terms of this
Agreement or prior to the date of this Agreement and which remain unpaid at the
Effective Time.
(f) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Conseco Common Stock shall be issued upon the surrender for
exchange of certificates that immediately prior to the Effective Time
represented Shares which have been converted pursuant to Section 1.9, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a shareholder of Conseco.
(ii) Notwithstanding any other provisions of this Agreement, each
holder of Shares who would otherwise have been entitled to receive a fraction of
a share of Conseco Common Stock (after taking into account all certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional part of a share of Conseco
Common Stock multiplied by the Conseco Share Price.
(g) Termination of Payment Fund. Any portion of the Payment Fund which
remains undistributed to the holders of the certificates representing Shares for
120 days after the Effective Time shall be delivered to Conseco, upon demand,
and any holders of Shares who have not theretofore complied with this Article I
shall thereafter look only to Conseco and only as general creditors thereof for
payment of their claim for the cash portion of any Merger Consideration and any
dividends or distributions with respect to Conseco Common Stock.
(h) No Liability. Neither Conseco nor the Exchange Agent shall be
liable to any person in respect of any cash, shares, dividends or distributions
payable from the Payment Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any certificates
representing Shares shall not have been surrendered prior to five years after
the Effective Time (or immediately prior to such
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earlier date on which any Merger Consideration in respect of such certificate
would otherwise escheat to or become the property of any Governmental Entity (as
defined in Section 2.3)), any such cash, shares, dividends or distributions
payable in respect of such certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interest of any person previously entitled thereto.
1.11 Treatment of Convertible Subordinated Notes. In accordance with
Section 10.9 of the Indenture dated as of March 27, 1996 with respect to the
Company's 6-1/2% Convertible Subordinated Notes due 2003 (the "Convertible
Notes"), at the Effective Time each Convertible Note shall automatically become
convertible into the number of shares of Conseco Common Stock which the holder
of such Convertible Note would have been entitled to receive in the Merger if
the holder had converted the Convertible Note into Shares immediately before the
Effective Time.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Conseco and RAC as
follows:
2.1 Organization, Standing and Corporate Power. The Company and each
subsidiary of the Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is incorporated
and has the requisite corporate power and authority to carry on its business as
now being conducted. The Company and each subsidiary of the Company is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary. The Company has
delivered to Conseco complete and correct copies of its Certificate of
Incorporation and Bylaws, as amended to the date of this Agreement.
2.2 Capital Structure. The authorized capital stock of the Company
consists of (i) 30,000,000 Shares and (ii) 5,000,000 shares of preferred stock,
no par value (the "Preferred Stock"). At the close of business on December 13,
1996: (i) 12,733,467 Shares were issued and outstanding, 1,863,190 Shares were
reserved for issuance pursuant to outstanding Company Stock Options, and
4,312,500 Shares were reserved for issuance upon conversion of the outstanding
Convertible Notes and (ii) no shares of Preferred Stock were outstanding and
18,909,157 shares of Series A Junior Preferred Stock were reserved for issuance
under the Rights Agreement dated as of December 12, 1990 between the Company and
First Chicago Trust Company of New York (the "Rights Agreement"). Except as set
forth above, at the close of business on December 13, 1996, no shares of capital
stock or other equity securities of
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the Company were issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of the Company are, and all shares which may be issued
pursuant to the Company Stock Plan or any outstanding Company Stock Options will
be, when issued, duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. Except for $86,250,000 principal amount of
Convertible Notes, no bonds, debentures, notes or other indebtedness of the
Company or any subsidiary of the Company having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters on which the stockholders of the Company or any subsidiary of the
Company may vote are issued or outstanding. Except as disclosed in Section 2.2
of the Disclosure Schedule dated the date hereof and delivered by the Company to
Conseco concurrently herewith (the "Disclosure Schedule"), all the outstanding
shares of capital stock of each subsidiary of the Company have been validly
issued and are fully paid and nonassessable and are owned by the Company, by one
or more subsidiaries of the Company or by the Company and one or more such
subsidiaries, free and clear of all pledges, claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens") except as may be provided by law. Except as set forth
above or in Section 2.2 of the Disclosure Schedule, neither the Company nor any
subsidiary of the Company has any outstanding option, warrant, subscription or
other right, agreement or commitment which either (i) obligates the Company or
any subsidiary of the Company to issue, sell or transfer, repurchase, redeem or
otherwise acquire or vote any shares of the capital stock of the Company or any
subsidiary of the Company or (ii) restricts the transfer of Shares. Except as
disclosed in Section 2.2 of the Disclosure Schedule, no issued and outstanding
Shares are owned by the Company's subsidiaries.
2.3 Authority; Noncontravention. The Company has the requisite
corporate power and authority to enter into this Agreement and, subject to the
approval of its stockholders as set forth in Section 6.1(a) with respect to the
consummation of the Merger, to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of the Company,
subject, in the case of the Merger, to the approval of its stockholders as set
forth in Section 6.1(a). This Agreement has been duly executed and delivered by
the Company and, assuming that this Agreement constitutes the valid and binding
agreement of Conseco, constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except that the
enforcement thereof may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditor's rights generally and (b) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity).
Except as disclosed in Section 2.3 of the Disclosure Schedule, the execution and
delivery of this Agreement do not, and the
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consummation of the transactions contemplated by this Agreement and compliance
with the provisions hereof will not, (i) conflict with any of the provisions of
the Certificate of Incorporation or Bylaws of the Company or the comparable
documents of any subsidiary of the Company, (ii) subject to the governmental
filings and other matters referred to in the following sentence, conflict with,
result in a breach of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or require
the consent of any person under, any indenture or other agreement, permit,
concession, franchise, license or similar instrument or undertaking to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their assets is bound or affected, (iii) give rise to
any rights under the Rights Agreement or entitle any holder of rights under the
Rights Agreement to exercise such rights or (iv) subject to the governmental
filings and other matters referred to in the following sentence, contravene any
law, rule or regulation of any state or of the United States or any political
subdivision thereof or therein, or any order, writ, judgment, injunction,
decree, determination or award currently in effect. No consent, approval or
authorization of, or declaration or filing with, or notice to, any governmental
agency or regulatory authority (a "Governmental Entity") which has not been
received or made, is required to be made by the Company or with respect to the
Company or any of its subsidiaries in connection with the execution and delivery
of this Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for (i) the filing of premerger
notification and report forms under the Hart-Scott- Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), with respect to the
Merger, (ii) the filings and/or notices required under the insurance laws of the
jurisdictions set forth in Section 2.3 of the Disclosure Schedule, (iii) the
filing with the SEC of (x) a proxy statement relating to the approval by the
stockholders of the Company of the Merger (such proxy statement, as amended or
supplemented from time to time, the "Proxy Statement"), and (y) such reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
may be required in connection with this Agreement and the transactions
contemplated by this Agreement, (iv) the filing of the certificate of merger
with the Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(v) such other consents, approvals, authorizations, filings or notices as are
set forth in Section 2.3 of the Disclosure Schedule and (vi) any applicable
filings under state anti-takeover laws.
2.4 SEC Documents. (i) The Company has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1995 (such reports, schedules, forms, statements and other documents, including
the exhibits thereto and documents incorporated therein by reference, are
hereinafter referred to as the "SEC Documents"); (ii) as of their respective
dates, the SEC Documents complied with the requirements of the
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Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act,
as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such SEC Documents, and none of the SEC Documents as of
such dates contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and (iii) the consolidated financial statements of the Company
included in the SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Rule 10-01 of Regulation S-X) and fairly
present, in all material respects, the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited quarterly statements, to normal
year-end audit adjustments).
2.5 Absence of Certain Changes or Events. Except as disclosed in the
SEC Documents filed and publicly available prior to the date of this Agreement
(the "Filed SEC Documents") or in Section 2.5 of the Disclosure Schedule, since
the date of the most recent audited financial statements included in the Filed
SEC Documents, the Company and its subsidiaries have conducted their business
only in the ordinary course, and there has not been (i) any change which would
have a material adverse effect on the business, financial condition or results
of operations of the Company and its subsidiaries taken as a whole, (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Company's
outstanding capital stock, (iii) any split, combination or reclassification of
any of its outstanding capital stock or any issuance or the authorization of any
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its outstanding capital stock, (iv) (x) any granting by the
Company or any of its subsidiaries to any executive officer or other employee of
the Company or any of its subsidiaries of any increase in compensation, except
in the ordinary course of business consistent with prior practice or as was
required under employment agreements or employee, director or agent benefit
plans in effect as of the date of the most recent audited financial statements
included in the Filed SEC Documents, (y) any granting by the Company or any of
its subsidiaries to any such executive officer or other employee of any increase
in severance or termination pay, except in the ordinary course of business
consistent with prior practice or as was required under any employment,
severance or termination agreements in effect as of the date of the most recent
audited financial statements included in the Filed SEC Documents or (z) any
entry by the Company or any of its subsidiaries into any employment, severance
or termination
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agreement with any such executive officer or other employee or (v) any change in
accounting methods, principles or practices by the Company or any of its
subsidiaries materially affecting its assets, liability or business, except
insofar as may have been required by a change in generally accepted accounting
principles.
2.6 Absence of Changes in Benefit Plans. Except as disclosed in the
Filed SEC Documents or in Section 2.6 of the Disclosure Schedule, since the date
of the most recent audited financial statements included in the Filed SEC
Documents, there has not been any adoption or amendment in any material respect
by the Company or any of its subsidiaries of any collective bargaining agreement
or any Benefit Plan (as defined in Section 2.7). Except as disclosed in the
Filed SEC Documents or in Section 2.6 of the Disclosure Schedule, there exist no
employment, consulting, severance, termination or indemnification agreements
between the Company or any of its subsidiaries and any current or former
employee, officer or director of the Company or any of its subsidiaries.
2.7 Benefit Plans. (i) Each "employee pension benefit plan" (as defined
in Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) (hereinafter a "Pension Plan"), "employee welfare benefit
plan" (as defined in Section 3(1) of ERISA) (hereinafter a "Welfare Plan"), and
each other plan, arrangement or policy (written or oral) relating to stock
options, stock purchases, bonus or incentive compensation, deferred compensation
or severance, in each case maintained or contributed to, or required to be
maintained or contributed to, by the Company and its subsidiaries for the
benefit of any present or former officers, employees, agents, directors or
independent contractors of the Company or any of its subsidiaries (all the
foregoing being herein called "Benefit Plans") has been administered in all
material respects in accordance with its terms and all applicable laws and
regulations. All required contributions to the Benefit Plans have been made. The
Company, its subsidiaries and all the Benefit Plans are in compliance in all
material respects with the applicable provisions of ERISA, the Code, all other
applicable laws applicable to the Company's Benefit Plans and all applicable
collective bargaining agreements.
(ii) None of the Company or any other person or entity that together
with the Company is treated as a single employer under Section 414(b), (c), (m)
or (o) of the Code (each a "Commonly Controlled Entity") has incurred any
liability to a Pension Plan covered by Title IV of ERISA (other than for
contributions not yet due) or to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums not yet due) which liability has not been fully
paid as of the date hereof.
(iii) No Commonly Controlled Entity is required to contribute to any
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has
withdrawn from any multiemployer plan where such withdrawal has resulted or
would result in any "withdrawal liability" (within the meaning of Section 4201
of ERISA) that has not been fully paid.
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2.8 Taxes. Except as disclosed in Section 2.8 of the
Disclosure Schedule,
(i) Each of the Company and its subsidiaries has filed all tax returns
and reports required to be filed by it or requests for extensions to file such
returns or reports have been timely filed, granted and have not expired, except
to the extent that such failures to file or to have extensions granted that
remain in effect individually and in the aggregate would not have a material
adverse effect on the business, financial condition or results of operations of
the Company and its subsidiaries taken as a whole. All tax returns filed by the
Company and each of its subsidiaries are complete and accurate except to the
extent that such failure to be complete and accurate would not have a material
adverse effect on the business, financial condition or results of operations of
the Company and its subsidiaries taken as a whole. The Company and each of its
subsidiaries has paid (or the Company has paid on the subsidiaries' behalf) all
taxes shown as due on such returns, and the most recent financial statements
contained in the Filed SEC Documents reflect reserves which are adequate in all
material respects for all taxes payable by the Company and its subsidiaries for
all taxable periods and portions thereof accrued through the date of such
financial statements.
(ii) No deficiencies for any taxes have been proposed, asserted or
assessed against the Company or any of its subsidiaries that are not adequately
reserved for, except for deficiencies that individually or in the aggregate
would not have a material adverse effect on the business, financial condition or
results of operations of the Company and its subsidiaries taken as a whole, and,
except as set forth on Section 2.8 of the Disclosure Schedule, no requests for
waivers of the time to assess any such taxes have been granted or are pending.
The Federal income tax returns of the Company and each of its subsidiaries
consolidated in such returns have been examined by and settled with the United
States Internal Revenue Service, or the statute of limitations on assessment or
collection of any Federal income taxes due from the Company or any of its
subsidiaries has expired, through such taxable years as are set forth in Section
2.8 of the Disclosure Schedule.
(iii) As used in this Agreement, "taxes" shall include all Federal,
state, local and foreign income, property, premium, sales, excise, employment,
payroll, withholding and other taxes, tariffs or governmental charges of any
nature whatsoever and any interest, penalties and additions to taxes relating
thereto. As used in this Agreement, "tax returns" shall include any return,
report, information return, or other document (including any related or
supporting information) filed or required to be filed with any governmental
agency, department, commission, board, bureau, or instrumentality in connection
with the determination, assessment, collection, or administration of any taxes.
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2.9 No Excess Parachute Payments; Section 162(m) of the Code. (i)
Except as disclosed in Section 2.9 of the Disclosure Schedule, any amount that
could be received (whether in cash or property or the vesting of property) as a
result of any of the transactions contemplated by this Agreement by any
employee, officer or director of the Company or any of its affiliates who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or Benefit Plan currently in effect
would not be characterized as an "excess parachute payment" (as such term is
defined in Section 280G(b)(1) of the Code).
(ii) Except as disclosed in Section 2.9 of the Disclosure Schedule, the
disallowance of a deduction under Section 162(m) of the Code for employee
remuneration will not apply to any amount paid or payable by the Company or any
subsidiary of the Company under any contract, Benefit Plan, program, arrangement
or understanding currently in effect.
2.10 Voting Requirements. The affirmative vote of a majority of the
votes cast by the holders of the Shares and Preferred Shares entitled to vote
thereon at the Stockholders Meeting with respect to the approval of the Merger
is the only vote of the holders of any class or series of the Company's capital
stock necessary to approve this Agreement and the transactions contemplated by
this Agreement.
2.11 Compliance with Applicable Laws. (i) Each of the Company and its
subsidiaries has in effect all Federal, state, local and foreign governmental
approvals, authorizations, certificates, filings, franchises, licenses, notices,
permits and rights ("Permits") necessary for it to own, lease or operate its
properties and assets and to carry on its business as now conducted, and there
has occurred no default under any such Permit. Except as disclosed in the Filed
SEC Documents and except with respect to matters covered by Section 2.11(iii),
the Company and its subsidiaries are in compliance in all material respects with
all applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity. Except as disclosed in the Filed SEC Documents or Section
2.11 of the Disclosure Schedule and except for routine examinations by state
Governmental Entities charged with supervision of insurance companies
("Insurance Regulators") and except with respect to matters covered by Section
2.11(iii), as of the date of this Agreement, to the knowledge of the Company, no
investigation by any Governmental Entity with respect to the Company or any of
its subsidiaries is pending or threatened.
(ii) The Annual Statements (including without limitation the Annual
Statements of any separate accounts) for the year ended December 31, 1995,
together with all exhibits and schedules thereto, and financial statements
relating thereto, and any actuarial opinion, affirmation or certification filed
in connection therewith, and the Quarterly Statements for the periods
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ended after January 1, 1996, together with all exhibits and schedules thereto,
with respect to each subsidiary of the Company that is a regulated insurance
company (an "Insurance Company"), in each case as filed with the applicable
Insurance Regulator of its jurisdiction of domicile, were prepared in conformity
with statutory accounting practices prescribed or permitted by such Insurance
Regulator applied on a consistent basis ("SAP"), present fairly, in all material
respects, to the extent required by and in conformity with SAP, the statutory
financial condition of such Insurance Company at their respective dates and the
results of operations, changes in capital and surplus and cash flow of such
Insurance Company for each of the periods then ended, and were correct in all
material respects when filed and there were no material omissions therefrom when
filed. No deficiencies or violations material to the financial condition or
operations of any Insurance Company have been asserted in writing by any
Insurance Regulator which have not been cured or otherwise resolved to the
satisfaction of such Insurance Regulator and which have not been disclosed in
writing to Conseco prior to the date of this Agreement.
(iii) Except as set forth in Section 2.11(iii) of the Disclosure
Schedule, (a) the Company and its subsidiaries (exclusive of their agents) and,
to the knowledge of the Company (without independent inquiry), their agents have
marketed, sold and issued Company products in compliance, in all material
respects, with all statutes, laws, ordinances, rules, orders and regulations of
any Governmental Entity applicable to the business of the Company and its
subsidiaries ("Laws") in the respective jurisdictions in which such products
have been sold, except where the failure to do so, individually or in the
aggregate, has not had or would not reasonably be expected to have, a material
adverse effect on the business, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, (b) there are (x) to the
knowledge of the Company, no claims asserted, (y) no actions, suits,
investigations or proceedings by or before any court or other Governmental
Entity or (z) no investigations by or on behalf of the Company (other than
routine investigations in connection with the Company's hiring practices) ((x),
(y) and (z) being collectively referred to as "Actions") pending or, to the
knowledge of the Company, threatened, against or directly involving the Company,
any of its subsidiaries or, to the knowledge of the Company (without independent
inquiry), any of its agents that include allegations that the Company, any of
its subsidiaries or any of its agents were in violation of or failed to comply
with such Laws, and, to the knowledge of the Company, no facts exist which would
reasonably be expected to result in the filing or commencement of any such
Action, which Actions, individually or in the aggregate, would reasonably be
expected to have a material adverse effect on the business, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole,
and (c) the Company and its subsidiaries are in compliance, in all material
respects, with and have performed, in all material respects, all obligations
required to be performed by each of them under any cease-and-desist or
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other order issued by any Insurance Regulator or other Governmental Entity to
the Company or any of its subsidiaries or under any written agreement, consent
agreement, memorandum of understanding or commitment letter or similar
undertaking entered into between any Insurance Regulator or other Governmental
Entity and the Company or any of its subsidiaries ("Regulatory Agreement"),
which Regulatory Agreement remains in effect on the date hereof, except where
the failure to do so, individually or in the aggregate, has not had or would not
reasonably be expected to have, a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
2.12 Opinion of Financial Advisor. The Company has received
the opinion of Donaldson, Lufkin & Jenrette Securities Corp.
("DLJ"), dated the date hereof, to the effect that, as of such
date, the consideration to be received in the Merger by the
Company's stockholders is fair, from a financial point of view, to
the Company's stockholders.
2.13 Brokers. Except with respect to DLJ, all negotiations on behalf of
the Company relative to this Agreement and the transactions contemplated hereby
have been carried out by the Company directly with Conseco, without the
intervention of any person on behalf of the Company in such manner as to give
rise to any valid claim by any person against Conseco, the Company or any
subsidiary for a finder's fee, brokerage commission, transaction fee, investment
banking fee, or similar payment. The Company has provided Conseco with a true
and complete copy of the agreement between the Company and DLJ, and the Company
has no other agreements or understandings (written or oral) with respect to such
services.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CONSECO AND RAC
Conseco and RAC hereby represent and warrant to the Company as follows:
3.1 Organization, Standing and Corporate Power. Each of Conseco, RAC
and each Significant Subsidiary of Conseco (as hereinafter defined) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is incorporated and has the requisite corporate
power and authority to carry on its business as now being conducted. Each of
Conseco, RAC and each Significant Subsidiary of Conseco is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary. Conseco has delivered to the Company
complete and correct copies of its Articles of Incorporation and By-laws, as
amended to the date of this Agreement. For purposes of this Agreement, a
"Significant Subsidiary" of Conseco means any subsidiary of Conseco that would
constitute a Significant Subsidiary within the meaning of Rule 1-02 of
Regulation S-X promulgated under the Exchange Act.
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3.2 Conseco Capital Structure. The authorized capital stock of Conseco
consists of 500,000,000 shares of Conseco Common Stock and 20,000,000 shares of
preferred stock, without par value. At the close of business on December 13,
1996, (i) 67,001,181 shares of Conseco Common Stock and 4,369,700 shares of
Preferred Redeemable Increased Dividend Equity Securities of Conseco (the
"Conseco PRIDES") were issued and outstanding (net of treasury shares or shares
held by subsidiaries), (ii) 13,403,557 shares of Conseco Common Stock were
reserved for issuance pursuant to outstanding options to purchase shares of
Conseco Common Stock and other benefits granted under Conseco's benefit plans
(the "Conseco Stock Plans") and (iii) 8,739,400 shares of Conseco Common Stock
were reserved for issuance upon conversion of the Conseco PRIDES. Except (x) as
set forth above, (y) for outstanding options to purchase an aggregate of
1,039,690 shares of Bankers Life Holding Corporation under its Stock Option Plan
and with respect to stock units awarded under the Conseco Stock Plans, at the
close of business on December 13, 1996, and (z) as set forth in the Filed
Conseco SEC Documents (as defined in Section 3.5), no shares of capital stock or
other voting securities of Conseco were issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of Conseco are, and all
shares which may be issued pursuant to this Agreement will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. The authorized capital stock of RAC consists of 1,000 shares
of capital stock, $.001 par value, all of which have been validly issued, are
fully paid and nonassessable and are owned by Conseco free and clear of any
Lien. As of the date of this Agreement, no bonds, debentures, notes or other
indebtedness of Conseco or any Significant Subsidiary of Conseco having the
right to vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which the stockholders of Conseco or any
Significant Subsidiary of Conseco may vote are issued or outstanding. All the
outstanding shares of capital stock of each Significant Subsidiary of Conseco
have been validly issued and are fully paid and nonassessable and, except as set
forth in the Filed Conseco SEC Documents, are owned by Conseco, free and clear
of all Liens as of the date of this Agreement. Except as set forth above or in
the Filed Conseco SEC Documents, neither Conseco nor any Significant Subsidiary
of Conseco has any outstanding option, warrant, subscription or other right,
agreement or commitment which either (i) obligates Conseco or any Significant
Subsidiary of Conseco to issue, sell or transfer, repurchase, redeem or
otherwise acquire or vote any shares of the capital stock of Conseco or any
Significant Subsidiary of Conseco or (ii) restricts the transfer of Conseco
Common Stock.
3.3 Authority; Noncontravention. Conseco and RAC have all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Conseco and RAC and the consummation by Conseco and RAC of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of
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Conseco and RAC. This Agreement has been duly executed and delivered by and,
assuming this Agreement constitutes the valid and binding agreement of the
Company, constitutes a valid and binding obligation of Conseco and RAC,
enforceable against such party in accordance with its terms except that the
enforcement thereof may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditor's rights generally and (b) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity).
The execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not (i) conflict with any of the provisions of the
Articles of Incorporation or Bylaws of Conseco, the Certificate of Incorporation
or Bylaws of RAC, or the comparable documents of any Significant Subsidiary of
Conseco, (ii) subject to the governmental filings and other matters referred to
in the following sentence, conflict with, result in a breach of or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a
material benefit under, or require the consent of any person under, any
indenture, or other agreement, permit, concession, franchise, license or similar
instrument or undertaking to which Conseco or any of its subsidiaries is a party
or by which Conseco or any of its subsidiaries or any of their assets is bound
or affected, or (iii) subject to the governmental filings and other matters
referred to in the following sentence, contravene any law, rule or regulation of
any state or of the United States or any political subdivision thereof or
therein, or any order, writ, judgment, injunction, decree, determination or
award currently in effect. No consent, approval or authorization of, or
declaration or filing with, or notice to, any Governmental Entity which has not
been received or made is required by or with respect to Conseco or RAC in
connection with the execution and delivery of this Agreement by Conseco or RAC
or the consummation by Conseco or RAC, as the case may be, of any of the
transactions contemplated by this Agreement, except for (i) the filing of
premerger notification and report forms under the HSR Act with respect to the
Merger, (ii) the filings and/or notices required under the insurance laws of the
jurisdictions set forth in Section 2.3 of the Disclosure Schedule, (iii) the
filing with the SEC of the registration statement on Form S-4 to be filed with
the SEC by Conseco in connection with the issuance of Conseco Common Stock in
the Merger (the "Form S- 4") and such reports under the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated
hereby, (iv) the filing of the certificate of merger with the Delaware Secretary
of State, and appropriate documents with the relevant authorities of the other
states in which the Company is qualified to do business, (v) such other
consents, approvals, authorizations, filings or notices as are set forth in
Section 2.3 of the Disclosure Schedule and (vi) any applicable filings under
state anti-takeover laws.
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3.4 SEC Documents. Conseco and its subsidiaries have filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1995 (such documents and the exhibits thereto and documents
incorporated therein by reference are hereinafter referred to as the "Conseco
SEC Documents"). As of their respective dates, the Conseco SEC Documents
complied with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Conseco SEC Documents, and none of the Conseco SEC Documents
as of such dates contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of Conseco included in the
Conseco SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Rule 10-01 of Regulation S-X) and fairly present, in
all material respects, the consolidated financial statements of Conseco and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited quarterly statements, to normal year-end audit adjustments).
3.5 Absence of Certain Changes or Events. Except as disclosed in the
Conseco SEC Documents filed and publicly available prior to the date of this
Agreement (the "Filed Conseco SEC Documents"), since the date of the most recent
audited financial statements included in the Filed Conseco SEC Documents,
Conseco has conducted its business only in the ordinary course, and there has
not been (i) any change which would have a material adverse effect on the
business, financial condition or results of operations of Conseco and its
subsidiaries, taken as a whole, (ii) any declaration, setting aside or payment
of any dividend or distribution (whether in cash, stock or property) with
respect to any of Conseco's outstanding capital stock (other than the
declaration of a cash dividend payable January 2, 1997 of $.0625 per share on
Conseco Common Stock and regular cash dividends on the Conseco PRIDES, in
accordance with usual record and payment dates and in accordance with Conseco's
dividend policy and Articles of Incorporation at the date of such payment),
(iii) any split, combination or reclassification of any of its outstanding
capital stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (iv) any change in accounting methods, principles or practices
by Conseco materially affecting its assets, liabilities or business, except as
may have been required by a change in generally accepted accounting principles.
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3.6 Compliance with Applicable Laws. (i) Each of Conseco and its
subsidiaries has in effect all Permits necessary for it to own, lease or operate
its properties and assets and to carry on its business as now conducted, and
there has occurred no default under any such Permit. Except as disclosed in the
Filed Conseco SEC Documents and except with respect to matters covered by
Section 3.6(iii), Conseco and its subsidiaries are in compliance in all material
respects with all applicable statutes, laws, ordinances, rules, orders and
regulations of any Governmental Entity. Except as disclosed in the Filed Conseco
SEC Documents and except for routine examinations by Insurance Regulators and
except with respect to matters covered by Section 3.6(iii), as of the date of
this Agreement, to the knowledge of Conseco, no investigation by any
Governmental Entity with respect to Conseco or any of its subsidiaries is
pending or threatened.
(ii) The Annual Statements (including without limitation the Annual
Statements of any separate accounts) for the year ended December 31, 1995,
together with all exhibits and schedules thereto, and any actuarial opinion,
affirmation or certification filed in connection therewith, and the Quarterly
Statements for the periods ended after January 1, 1996, together with all
exhibits and schedules thereto, with respect to each subsidiary of Conseco that
is an Insurance Company, in each case as filed with the applicable Insurance
Regulator of its jurisdiction of domicile, were prepared in conformity with,
present fairly, in all material respects, to the extent required by and in
conformity with SAP, the statutory financial condition of such Insurance Company
at their respective dates and the results of operations, changes in capital and
surplus and cash flow of such Insurance Company for each of the periods then
ended, and were correct in all material respects when filed and there were no
material omissions therefrom when filed. No deficiencies or violations material
to the financial condition or operations of any Insurance Company have been
asserted in writing by any Insurance Regulator which have not been cured or
otherwise resolved to the satisfaction of such Insurance Regulator and which
have not been disclosed in writing to the Company prior to the date of this
Agreement.
(iii) Except as set forth in the Filed Conseco SEC Documents, (a)
Conseco and its subsidiaries (exclusive of their agents) and, to the knowledge
of Conseco (without independent inquiry), their agents have marketed, sold and
issued Conseco products in compliance, in all material respects, with all
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Entity applicable to the business of Conseco and its subsidiaries ("Conseco
Laws") in the respective jurisdictions in which such products have been sold,
except where the failure to do so, individually or in the aggregate, has not had
or would not reasonably be expected to have, a material adverse effect on the
business, financial condition or results of operations of Conseco and its
subsidiaries, taken as a whole, (b) there are (x) to the knowledge of Conseco,
no claims asserted, (y) no actions, suits, investigations or proceedings by or
before any court or other
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Governmental Entity or (z) no investigations by or on behalf of Conseco (other
than routine investigations in connection with Conseco's hiring practices) ((x),
(y) and (z) being collectively referred to as "Conseco Actions") pending or, to
the knowledge of Conseco, threatened, against or involving Conseco, any of its
subsidiaries or, to the knowledge of Conseco (without independent inquiry), any
of its agents that include allegations that Conseco, any of its subsidiaries or
any of its agents were in violation of or failed to comply with such Conseco
Laws, and, to the knowledge of Conseco, no facts exist which would reasonably be
expected to result in the filing or commencement of any such Conseco Action,
which Conseco Actions, individually or in the aggregate, would reasonably be
expected to have a material adverse effect on the business, financial condition
or results of operations of Conseco and its subsidiaries, taken as a whole, and
(c) Conseco and its subsidiaries are in compliance, in all material respects,
with and have performed, in all material respects, all obligations required to
be performed by each of them under any cease-and-desist or other order issued by
any Insurance Regulator or other Governmental Entity to Conseco or any of its
subsidiaries or under any written agreement, consent agreement, memorandum of
understanding or commitment letter or similar undertaking entered into between
any Insurance Regulator or other Governmental Entity and Conseco or any of its
subsidiaries ("Conseco Regulatory Agreement"), which Conseco Regulatory
Agreement remains in effect on the date hereof, except where the failure to do
so, individually or in the aggregate, has not had or would not reasonably be
expected to have, a material adverse effect on the business, financial condition
or results of operations of Conseco and its subsidiaries, taken as a whole.
3.7 No Prior Activities. RAC has not incurred, and will not incur,
directly or through any subsidiary, any liabilities or obligations for borrowed
money or otherwise, except incidental liabilities or obligations not for
borrowed money incurred in connection with its organization and except in
connection with obtaining financing in connection with the Merger. Except as
contemplated by this Agreement, RAC (i) has not engaged, directly or through any
subsidiary, in any business activities of any type or kind whatsoever, (ii) has
not entered into any agreements or arrangements with any person or entity, and
(iii) is not subject to or bound by any obligation or undertaking.
3.8 Brokers. All negotiations on behalf of Conseco relative to this
Agreement and the transactions contemplated hereby have been carried out by
Conseco directly with the Company, without the intervention of any person on
behalf of Conseco in such manner as to give rise to any valid claim by any
person against the Company or any of its subsidiaries for a finder's fee,
brokerage commission, transaction fee, investment banking fee, or similar
payment.
3.9 Voting Requirements. No authorization or approval by
the holders of any class or series of Conseco's capital stock is necessary to
approve this Agreement or the transactions contemplated by this Agreement.
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ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Preparation of Form S-4 and the Proxy Statement;
Information Supplied.
(a) As soon as practicable following the date of this Agreement, the
Company and Conseco shall prepare and file with the SEC the Proxy Statement and
Conseco shall prepare and file with the SEC the Form S-4, in which the Proxy
Statement will be included as a prospectus. Each of the Company and Conseco
shall use commercially reasonable efforts to have the Form S-4 declared
effective under the Securities Act as promptly as practicable after such filing.
The Company will use commercially reasonable efforts to cause the Proxy
Statement to be mailed to the Company's stockholders as promptly as practicable
after the Form S-4 is declared effective under the Securities Act. Conseco shall
also take any action (other than qualifying to do business in any jurisdiction
in which it is not now so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Conseco Common Stock in
the Merger and the Company shall furnish all information concerning the Company
and the holders of the Common Stock as may be reasonably requested in connection
with any such action.
(b) The Company agrees that none of the information supplied or to be
supplied by the Company specifically for inclusion or incorporation by reference
in (i) the Form S-4, as then amended or supplemented, will, at the time the Form
S-4 is filed with the SEC, at any time it is amended or supplemented or at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii) the
Proxy Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Stockholders Meeting (as defined in Section
4.2), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Company agrees that the Proxy Statement will comply as to form
in all material respects with the requirements of the Exchange Act and the rules
and regulations thereunder, except with respect to statements made or
incorporated by reference therein based on information supplied by Conseco or
RAC specifically for inclusion or incorporation by reference in the Proxy
Statement.
(c) Conseco agrees that none of the information supplied or to be
supplied by Conseco or RAC specifically for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time the Form S-4 is filed with the
SEC, at any time it is amended or supplemented or at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
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necessary to make the statements therein not misleading or (ii) the Proxy
Statement will, at the date it is first mailed to the Company's stockholders or
at the time of the Stockholders Meeting (as defined in Section 4.2), contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. Conseco
agrees that the Form S-4 will comply as to form in all material respects with
the requirements of the Securities Act and the rules and regulations promulgated
thereunder, except with respect to statements made or incorporated by reference
based on information supplied by the Company specifically for inclusion or
incorporation by reference therein.
4.2 Meeting of Stockholders. The Company will take all action necessary
in accordance with applicable law and its Certificate of Incorporation and
By-laws to convene a meeting of its stockholders (the "Stockholders Meeting") to
consider and vote upon the approval of the Merger. Subject to Section 4.9
hereof, the Company will, through its Board of Directors, recommend to its
stockholders approval of this Agreement and the Merger. Without limiting the
generality of the foregoing, the Company agrees that, subject to its right to
terminate this Agreement pursuant to Section 4.9, its obligations pursuant to
the first sentence of this Section 4.2 shall not be affected by (i) the
commencement, public proposal, public disclosure or communication to the Company
of any Acquisition Proposal (as defined in Section 4.8) or (ii) the withdrawal
or modification by the Board of Directors of the Company of its approval or
recommendation of this Agreement or the Merger. The Company will use
commercially reasonable efforts to hold the Stockholders Meeting and (subject to
Section 4.9 hereof) to obtain the favorable vote of its stockholders as soon as
practicable after the date hereof.
4.3 Letter of the Company's Accountants. The Company shall use
commercially reasonable efforts to cause to be delivered to Conseco a letter of
Ernst & Young LLP, the Company's independent public accountants, dated a date
within two business days before the date on which the Form S-4 shall become
effective and a letter of Ernst & Young LLP, dated a date within two business
days before the Closing Date, addressed to Conseco, in form and substance
reasonably satisfactory to Conseco and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4.
4.4 Letter of Conseco's Accountants. Conseco shall use commercially
reasonable efforts to cause to be delivered to the Company a letter of Coopers &
Lybrand L.L.P., Conseco's independent public accountants, dated a date within
two business days before the date on which the Form S-4 shall become effective
and a letter of Coopers & Lybrand L.L.P., dated a date within two business days
before the Closing Date, each addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4.
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4.5 Access to Information; Confidentiality. Upon reasonable notice,
each of the Company and Conseco shall, and shall cause each of its respective
subsidiaries to, afford to the other party and to the officers, employees,
counsel, financial advisors and other representatives of such other party
reasonable access during normal business hours during the period prior to the
Effective Time to all its properties, books, contracts, commitments, personnel
and records and, during such period, each of the Company and Conseco shall, and
shall cause each of its respective subsidiaries to, furnish as promptly as
practicable to the other party such information concerning its business,
properties, financial condition, operations and personnel as such other party
may from time to time reasonably request. Except as required by law, Conseco
will hold, and will cause its respective directors, officers, partners,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to hold, any nonpublic information obtained from the Company in
confidence to the extent required by, and in accordance with, the provisions of
the letter dated November 14, 1996, between Conseco and the Company (the
"Confidentiality Agreement"). Except as required by law, the Company will hold,
and will cause its directors, officers, partners, employees, accountants,
counsel, financial advisors and other representatives and affiliates to hold,
any nonpublic information obtained from Conseco in confidence to the extent
required by, and in accordance with, the Confidentiality Agreement.
4.6 Commercially Reasonable Efforts. Upon the terms and subject to the
conditions and other agreements set forth in this Agreement, each of the parties
agrees to use commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions contemplated by this Agreement.
4.7 Public Announcements. Conseco and the Company will consult and make
a good faith effort to agree with each other before issuing, and provide each
other the opportunity to review and comment upon, any press release or other
public statements with respect to the transactions contemplated by this
Agreement, including the Merger, and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange.
4.8 Acquisition Proposals. The Company shall not, nor shall it permit
any of its subsidiaries to, nor shall it authorize or permit any officer,
director or employee of, or any investment banker, attorney or other advisor or
representative of, the Company or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or encourage the submission of any Acquisition
Proposal (as hereinafter defined) or (ii) participate in any
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discussions or negotiations regarding, or furnish to any person any information
with respect to, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that nothing contained in this
Section 4.8 shall prohibit the Board of Directors of the Company from furnishing
information to, or entering into discussions or negotiations with, any person or
entity that makes an unsolicited Acquisition Proposal if, and only to the extent
that (A) the Board of Directors of the Company, after consultation with and
based upon the advice of outside counsel, determines in good faith that in order
for the Board of Directors of the Company to comply with its fiduciary duties to
stockholders under applicable law it should take such action and (B) prior to
taking such action, the Company (x) provides reasonable notice to Conseco to the
effect that it is taking such action and (y) receives from such person or entity
an executed confidentiality agreement in reasonably customary form.
Notwithstanding anything in this Agreement to the contrary, the Company shall
(i) promptly advise Conseco orally and in writing of (A) the receipt by it (or
any of the other entities or persons referred to above) after the date hereof of
any Acquisition Proposal, or any inquiry which could lead to any Acquisition
Proposal, (B) the material terms and conditions of such Acquisition Proposal or
inquiry, and (C) the identity of the person making any such Acquisition Proposal
or inquiry, and (ii) keep Conseco fully informed of the status and details of
any such Acquisition Proposal or inquiry. Notwithstanding the immediately
preceding sentence, the Company may delay providing any of the information
described in clause (i) (B), (i) (C) or (ii) of such sentence if, and for so
long as, the Board of Directors of the Company, after consultation with outside
counsel, determines and continues to believe in good faith that in order to
comply with its fiduciary duties to stockholders under applicable law it should
not provide such information. For purposes of this Agreement, "Acquisition
Proposal" means any bona fide proposal with respect to a merger, consolidation,
share exchange or similar transaction involving the Company or any subsidiary of
the Company, or any purchase of all or any significant portion of the assets of
the Company or any subsidiary of the Company, or any equity interest in the
Company or any subsidiary of the Company, other than the transactions
contemplated hereby.
4.9 Fiduciary Duties. The Board of Directors of the Company shall not
(i) withdraw or modify, in a manner materially adverse to Conseco or RAC, the
approval or recommendation by such Board of Directors of this Agreement or the
Merger, or (ii) enter into any agreement with respect to any Acquisition
Proposal, unless the Company receives an Acquisition Proposal and the Board of
Directors of the Company determines in good faith, following consultation with
outside counsel, that in order to comply with its fiduciary duties to
stockholders under applicable law the Board of Directors should withdraw or
modify, in a manner materially adverse to Conseco or RAC, its approval or
recommendation of this Agreement or the Merger, or enter into an
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agreement with respect to such Acquisition Proposal or terminate this Agreement.
In the event the Board of Directors of the Company takes any of the foregoing
actions, the Company shall, concurrently with the taking of any such action, pay
to Conseco the Section 4.11 Fee pursuant to Section 4.11. Subject to the
provisions of the first sentence of this Section 4.9, nothing contained in this
Section 4.9 shall prohibit the Company from taking and disclosing to its
stockholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act or from making any disclosure to the Company's stockholders which,
in the good faith reasonable judgment of the Board of Directors of the Company
after consultation with outside counsel, should be made under applicable law.
Notwithstanding anything contained in this Agreement to the contrary, (x) any
action by the Board of Directors permitted by this Section 4.9 shall not
constitute a breach of this Agreement by the Company and (y) a "stop-look-and-
listen" communication with respect to the Merger or this Agreement of the nature
contemplated in Rule 14d-9 under the Exchange Act made by the Company as a
result of an Acquisition Proposal shall in no event be deemed a withdrawal or
modification by the Board of Directors of the Company of its approval or
recommendation of this Agreement or the Merger.
4.10 Consents, Approvals and Filings. The Company and Conseco will make
and cause their respective subsidiaries to make all necessary filings, as soon
as practicable, including, without limitation, those required under the HSR Act,
the Securities Act, the Exchange Act, and applicable state insurance laws in
order to facilitate prompt consummation of the Merger and the other transactions
contemplated by this Agreement. In addition, the Company and Conseco will each
use commercially reasonable efforts, and will cooperate fully with each other
(i) to comply as promptly as practicable with all governmental requirements
applicable to the Merger and the other transactions contemplated by this
Agreement and (ii) to obtain as promptly as practicable all necessary permits,
orders or other consents of Governmental Entities and consents of all third
parties necessary for the consummation of the Merger and the other transactions
contemplated by this Agreement. Each of the Company and Conseco shall use
commercially reasonable efforts to promptly provide such information and
communications to Governmental Entities as such Governmental Entities may
reasonably request. Each of the parties shall provide to the other party copies
of all applications in advance of filing or submission of such applications to
Governmental Entities in connection with this Agreement and shall make such
revisions thereto as reasonably requested by such other party. Each party shall
provide to the other party the opportunity to attend all meetings and
participate in all material conversations with Governmental Entities.
4.11 Certain Fees. (a) The Company shall pay to Conseco upon demand
$8.0 million (the "Section 4.11 Fee"), payable in same-day funds, if a bona fide
Acquisition Proposal is commenced, publicly proposed, publicly disclosed or
communicated to the Company (or the willingness of any person to make such an
Acquisition Proposal
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is publicly disclosed or communicated to the Company) and the Board of Directors
of the Company, in accordance with Section 4.9, withdraws or modifies in a
manner materially adverse to Conseco its approval or recommendation of this
Agreement or the Merger or enters into an agreement with respect to such
Acquisition Proposal (other than a confidentiality agreement as contemplated by
Section 4.8), or terminates this Agreement; provided, however, that no such fee
shall be payable if this Agreement shall have been terminated in accordance with
any of the provisions of Section 7.1 (other than Section 7.1(b)(iv)).
(b) Unless Conseco is materially in breach of this Agreement or is
unable to satisfy the condition of Section 6.3(a) hereof, the Company shall pay
to Conseco upon demand an amount, not to exceed $1,000,000, to reimburse Conseco
for its Expenses (as such term is defined in subparagraph (c) of this Section
4.11), payable in same-day funds, if the requisite approval of the Company's
stockholders for the Merger is not obtained (other than the circumstances
specified in Section 4.11(a) hereof) and all other conditions contained in
Section 6.1 of this Agreement have been satisfied, waived or, with respect to
any condition not then satisfied, it is substantially likely that such condition
will be satisfied on or before May 31, 1997, through the exercise of
commercially reasonable efforts to procure the satisfaction thereof.
(c) For purposes of this Section 4.11, "Expenses" shall mean all
documented, reasonable out-of-pocket fees and expenses incurred or paid by or on
behalf of Conseco to third parties in connection with the Merger or the
consummation of any of the transactions contemplated by this Agreement,
including all printing costs and reasonable fees and expenses of counsel,
investment banking firms, accountants, experts and consultants.
4.12 Affiliates and Certain Stockholders. Prior to the Closing Date,
the Company shall deliver to Conseco a letter identifying all persons who are,
at the time the Merger is submitted for approval to the stockholders of the
Company, "affiliates" of the Company for purposes of Rule 145 under the
Securities Act. The Company shall use commercially reasonable efforts to cause
each such person to deliver to Conseco on or prior to the Closing Date a written
agreement substantially in the form attached as Exhibit A to the Disclosure
Schedule. Conseco shall maintain the effectiveness of the Form S-4 subsequent to
the Closing Date for the purpose of resales of Conseco Common Stock by such
affiliates, but shall not thereafter be required to file any post-effective
amendment thereto in accordance with Item 512(a) of Regulation S-K under the
Securities Act. Subject to the remainder of this Section 4.12, Conseco shall not
otherwise be required to maintain the effectiveness of the Form S-4 or any other
registration statement under the Securities Act for the purposes of resale of
Conseco Common Stock by such affiliates and the certificates representing
Conseco Common Stock received by such affiliates in the Merger shall bear a
customary legend regarding applicable Securities Act restrictions and the
provisions of this Section 4.12.
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In the case of the Form S-4 to be maintained effective following the
Closing Date with respect to affiliate resales in accordance with the third
sentence of this Section 4.12, Conseco shall (i) provide to such affiliate such
reasonable number of copies of the registration statement, the prospectus, and
such other documents as the affiliates may reasonably request in order to
facilitate the public offering of such securities; (ii) pay all expenses of such
registration other than underwriting or sales commissions; and (iii) indemnify
such affiliates, each of their officers and directors and partners, and each
person controlling such affiliates within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in such registration statement or prospectus, or any amendment or
supplement thereto, incident to any such registration, or based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of circumstances
in which they were made, not misleading, or any violation by Conseco of the
Securities Act or any rule or regulation in connection with such registration,
and reimburse each such person for any legal and any other expenses reasonably
incurred (as they are incurred) in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action.
4.13 NYSE Listing. Conseco shall use commercially reasonable efforts to
cause the shares of Conseco Common Stock to be issued in the Merger to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Closing Date.
4.14 Stockholder Litigation. The Company shall give Conseco the
opportunity to participate in the defense or settlement of any stockholder
litigation against the Company and its directors relating to the transactions
contemplated by this Agreement; provided, however, that no such settlement shall
be agreed to without Conseco's consent, which consent shall not be unreasonably
withheld.
4.15 Indemnification. (a) The certificate of incorporation and by-laws
of the Company and each of the Company's subsidiaries shall contain the
provisions with respect to indemnification set forth therein on the date of this
Agreement, and such provisions shall not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of the Company or any of
its subsidiaries (the "Indemnified Parties") in respect of actions or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement), unless such modification is
required by law.
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(b) On or before the Effective Time, Conseco shall enter into
indemnification agreements as set forth in Section 4.15 of the Disclosure
Schedule.
(c) The provisions of this Section 4.15 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and the heirs
and personal representatives of such Indemnified Party and shall be binding on
all successors and assigns of Conseco and the Company.
4.16 Stock Options. (a) As soon as practicable following the date of
this Agreement, the Board of Directors of the Company (or, if appropriate, any
committee administering a Company Stock Plan) shall adopt such resolutions or
take such actions as may be required to adjust the terms of all outstanding
Company Stock Options in accordance with Section 1.9(d) and shall make such
other changes to the Company Stock Plan as it deems appropriate to give effect
to the Merger (subject to the approval of Conseco, which shall not be
unreasonably withheld). The parties agree that after the date hereof, except for
the Company Stock Options outstanding on the date hereof and any changes thereto
described in or contemplated by this Agreement and except as set forth in
Section 4.16 of the Disclosure Schedule, no options, warrants or other rights of
any kind to purchase capital stock of the Company shall be granted or made,
under the Company Stock Plan or otherwise, and no amendment, repricing or other
change to the outstanding Company Stock Options shall be made, without the prior
written consent of Conseco, and any such grant, issuance, amendment, repricing
or other change without Conseco's consent shall be null, void and unenforceable
against Conseco.
(b) Conseco shall take all corporate action necessary to reserve and
maintain as reserved for issuance a sufficient number of shares of Conseco
Common Stock for delivery upon exercise of the Company Stock Options and
warrants. Prior to the Effective Time, Conseco shall have filed a registration
statement on Form S- 8 (or any successor form) or another appropriate form with
respect to the shares of Conseco Common Stock subject to the Company Stock
Options and shall use its best efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as
Company Stock Options remain outstanding.
4.17 Officers' Certificates Relating to Tax Treatment. Conseco shall
provide to the Tax Opinion Provider (as defined in Section 6.3(c) hereof), a
certificate in the form agreed to by Conseco, which agreement shall not be
unreasonably withheld, dated the Closing Date and signed on behalf of Conseco by
the chief executive officer and the chief financial officer of Conseco. The
Company shall provide to the Tax Opinion Provider a certificate in the form
agreed to by the Company, which agreement shall not be unreasonably withheld,
dated the Closing Date and signed on behalf of the Company by the chief
executive officer and the chief financial officer of the Company.
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4.18 Severance and Other Payments. If, after the Effective Time, the
employment of employees of the Company is terminated, the Employee Severance Pay
Plan of Conseco shall be applicable to such employees giving credit for service
to the Company as service to Conseco; provided, however, that employees who as
of the date of this Agreement either (i) have a contract with the Company or one
of its subsidiaries which provides for a greater payment upon termination of
employment or (ii) are covered by the Company's severance policy for officers
shall be entitled to the payments specified by such contract or policy in lieu
of any amounts under the Employee Severance Pay Plan of Conseco. Section 4.18 of
the Disclosure Schedule identifies all contracts and Benefit Plans of the
Company or any of its subsidiaries which obligate the Company to make payments
to any employee upon termination of employment. In addition, an aggregate of up
to $5 million of additional payments may be paid within twelve months after the
Closing Date to employees of the Company in such manner and in such proportions
as shall be determined from time to time by the Company's present chief
executive officer after consultation with the Chief Operations Officer of
Conseco or his designee.
4.19 Employment Agreement. The Company shall enter into the employment
agreement with Peter W. Nauert described in Section 4.19 of the Disclosure
Schedule. Such employment agreement shall be subject to the approval of Conseco,
which shall not be unreasonably withheld.
4.20 Existing Employment Agreements. The existing employment agreements
between the Company and Thomas J. Brophy and Charles R. Scheper, respectively,
will be terminated at the Effective Time and such individuals will be entitled
to receive from the Company on the Closing Date an amount equal to the aggregate
of the remaining amounts payable under such employment agreements. The
employment agreement between the Company and Peter W. Nauert will be terminated
at the Effective Time and Mr. Nauert will be entitled to receive $4.5 million
from the Company on the Closing Date.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO
MERGER
5.1 Conduct of Business by the Company. Except as contemplated by this
Agreement or as set forth in Section 5.1 of the Disclosure Schedule, during the
period from the date of this Agreement to the Effective Time, the Company shall,
and shall cause its subsidiaries to, act and carry on their respective
businesses in the ordinary course of business and, to the extent consistent
therewith, use reasonable efforts to preserve intact their current business
organizations, keep available the services of their current key officers and
employees and preserve the goodwill of those engaged in material business
relationships with them. In addition, the Company agrees to allow
representatives of Conseco to have access to the management and other personnel
of
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the Company so that Conseco can be fully informed at all times as to significant
executive, legal, financial, marketing and other operational matters involving
the Company, its subsidiaries or their businesses. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, the Company shall not, and shall not permit any of its
subsidiaries to, without the prior consent of Conseco:
(i) (x) declare, set aside or pay any dividends on, or make
any other distributions (whether in cash, stock or property) in respect
of, any of the Company's outstanding capital stock (other than regular
quarterly cash dividends not in excess of $0.055 per Share, with usual
record and payment dates and in accordance with the Company's present
dividend policy), (y) split, combine or reclassify any of its
outstanding capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for
shares of its outstanding capital stock, or (z) purchase, redeem or
otherwise acquire any shares of outstanding capital stock or any
rights, warrants or options to acquire any such shares;
(ii) issue, sell, grant, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any
securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities
other than upon the exercise of Company Stock Options outstanding on
the date of this Agreement or as set forth in Section 4.16 of the
Disclosure Schedule;
(iii) amend its certificate of incorporation, by-laws or
other comparable charter or organizational documents;
(iv) acquire, form or commence the operations of any business
or any corporation, partnership, joint venture, association or other
business organization or division thereof;
(v) sell, mortgage or otherwise encumber or subject to any
Lien or otherwise dispose of any of its properties or assets that are
material to the Company and its subsidiaries taken as a whole, except
in the ordinary course of business;
(vi)(x) incur any indebtedness for borrowed money or guarantee
any such indebtedness of another person, other than indebtedness under
any credit agreement in effect on the date of this Agreement or
indebtedness owing to or guarantees of indebtedness owing to the
Company or any direct or indirect wholly-owned subsidiary of the
Company or (y) make any loans or advances to any other person, other
than to the Company, or to any direct or indirect wholly-owned
subsidiary of the Company and other than routine advances to agents and
employees;
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(vii) make any tax election or settle or compromise any income
tax liability that would reasonably be expected to be material to the
Company and its subsidiaries taken as a whole;
(viii) pay, discharge, settle or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past
practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the Company included in
the Filed SEC Documents or incurred since the date of such financial
statements in the ordinary course of business consistent with past
practice;
(ix) invest its future cash flow, any cash from matured and
maturing investments, any cash proceeds from the sale of its assets and
properties, and any cash funds currently held by it, in any investments
other than cash equivalent assets or in short-term investments
(consisting of United States government issued or guaranteed
securities, or commercial paper rated A-1 or P-1), except (i) as
otherwise required by law, (ii) as required to provide cash (in the
ordinary course of business and consistent with past practice) to meet
its actual or anticipated obligations or (iii) publicly-traded
corporate bonds that are rated investment grade by at least two
nationally recognized statistical rating organizations;
(x) except as may be required by law,
(i) make any representation or promise, oral or
written, to any employee or former director, officer or
employee of the Company or any subsidiary which is
inconsistent with the terms of any Benefit Plan;
(ii) make any change to, or amend in any way, the
contracts, salaries, wages, or other compensation of any
employee or any agent or consultant of the Company or any
subsidiary other than (a) changes or amendments that are
required under existing contracts, (b) individual, routine
changes with respect to employees that are made in the
ordinary course of business and consistent with past practice
and do not exceed 6% or (c) changes with respect to agents or
consultants that are made in the ordinary course of business
and consistent with past practice;
(iii) adopt, enter into, amend, alter or terminate,
partially or completely, any Benefit Plan or any election made
pursuant to the provisions of any Benefit Plan, to accelerate
any payments, obligations or vesting schedules under any
Benefit Plan; or
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(iv) approve any general or company-wide pay
increases for employees;
(xi) except in the ordinary course of business, materially
modify, amend or terminate any material agreement, permit, concession,
franchise, license or similar instrument to which the Company or any
subsidiary is a party or waive, release or assign any material rights
or claims thereunder;
(xii) hold any meeting of the board of directors of the
Company or any subsidiary or any committee of any such board, or take
any action by written consent of any such board or committee, without
providing to Conseco (i) notice of any such meeting no later than the
date notice is given to the board of directors or in advance of the
date of any proposed action by written consent and (ii) with such
notice, an agenda of the specific matters intended to be considered at
such meeting or a copy of the proposed written consent, unless, in the
reasonable good faith judgment of the President or Chairman of the
Company, providing prior notice of any agenda item or any item of such
written consent will prejudice the ability of the board of directors or
any committee of the board of directors to discharge its duties, in
which case such item may be omitted from the agenda or written consent
provided to Conseco; or
(xiii) authorize any of, or commit or agree to take any
of, the foregoing actions.
5.2 Conduct of Business by Conseco. During the period from the date of
this Agreement to the Effective Time, Conseco shall, and shall cause its
subsidiaries to, use all reasonable efforts to preserve intact their current
business organizations, keep available the services of their current officers
and employees and preserve their relationships with customers, suppliers,
licensors, licensees, distributors and others having business dealings with them
to the end that their goodwill and ongoing businesses shall be unimpaired at the
Effective Time.
5.3 Other Actions. The Company and Conseco shall not, and shall not
permit any of their respective subsidiaries to, take any action that would, or
that could reasonably be expected to, result in (i) any of the representations
and warranties of such party set forth in this Agreement becoming untrue in any
material respect or (ii) any of the conditions of the Merger set forth in
Article VI not being satisfied.
5.4 Conduct of Business of RAC. During the period from the date of this
Agreement to the Effective Time, RAC shall not engage in any activities of any
nature except as provided in or contemplated by this Agreement.
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the affirmative vote of the
stockholders of the Company in the manner contemplated in Section 2.10
hereof.
(b) Governmental and Regulatory Consents. All required
consents, approvals, permits and authorizations to the consummation of
the transactions contemplated hereby by the Company, Conseco and RAC
shall be obtained, in each case without the material abrogation or
diminishment of the authority or license of any Insurance Company
subsidiary of the Company or the imposition of significant restrictions
upon the transactions contemplated hereby, from (i) the Insurance
Regulators in the jurisdictions set forth in Section 6.1(b) of the
Disclosure Schedule, and (ii) any other Governmental Entity whose
consent, approval, permission or authorization is required by reason of
a change in law after the date of this Agreement, unless the failure to
obtain such consent, approval, permission or authorization would not
reasonably be expected to have a material adverse effect on the
business, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole, or on the validity or
enforceability of this Agreement. Notwithstanding the foregoing, in the
event that all governmental and regulatory consents required hereunder
shall have been obtained except the approval of the Insurance Regulator
of any life insurance subsidiary of the Company which does not
constitute a "significant subsidiary" (within the meaning of Rule 1-02
of Regulation S-X of the SEC) of the Company (a "Non-Significant Life
Subsidiary") to the transfer of control of such Non-Significant Life
Subsidiary, then, subject to Article VII hereof, at any time thereafter
at the option of Conseco, the parties shall take one of the following
actions with respect to such Non-Significant Life Subsidiary and
otherwise proceed to consummate the Merger in accordance with this
Agreement: (a) place into escrow, pursuant to an escrow agreement
reasonably acceptable to the parties, the outstanding shares of capital
stock of such Non-Significant Life Subsidiary; such escrow agreement
shall contain customary provisions concerning duties and
responsibilities of the escrow agent and payment of the fees and
expenses of the escrow agent and shall provide that (i) pending
transfer of control of the Non-Significant Life Subsidiary to Conseco,
its current Board of Directors shall retain all power to vote its
shares of capital stock and to direct its business not inconsistent
with this Agreement, (ii) promptly following
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receipt of the approval of the Insurance Regulator, control of the
capital stock of such Non-Significant Life Subsidiary shall be
transferred to Conseco and (iii) at any time following June 30, 1997
and prior to receipt of the Insurance Regulator's approval, Conseco may
elect to terminate the escrow agreement, in which event such
Non-Significant Life Subsidiary shall be liquidated and dissolved and
the proceeds thereof shall be paid to Conseco; (b) cause such Non-
Significant Life Subsidiary to surrender its certificate of authority
to do business in its state of domicile; (c) cause such Non-Significant
Life Subsidiary to commence proceedings for its liquidation and
dissolution; (d) enter into an agreement for the sale and transfer of
the Non-significant Life Subsidiary to a third party; or (e) take such
other action as may be mutually agreeable to the Company and Conseco.
(c) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated
or shall have otherwise expired.
(d) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided,
however, that the parties invoking this condition shall use
commercially reasonable efforts to have any such order or injunction
vacated.
(e) NYSE Listing. The shares of Conseco Common Stock issuable
to the Company's stockholders pursuant to this Agreement shall have
been approved for listing on the NYSE, subject to official notice of
issuance.
(f) Form S-4. The Form S-4 shall have become effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
6.2 Conditions to Obligations of Conseco and RAC. The
obligations of Conseco and RAC to effect the Merger are further subject to the
following conditions:
(a) Representations and Warranties. The
representations and warranties of the Company contained in this
Agreement shall have been true and correct on the date of this
Agreement and as of the Closing Date (except to the extent that they
expressly relate only to an earlier time, in which case they shall have
been true and correct as of such earlier time and except for actions
contemplated by this Agreement), other than such breaches of
representations and warranties which in the aggregate would not
reasonably be expected to have a material adverse effect on the
business, financial condition or results of operations of the Company
and its subsidiaries taken as a whole. The Company shall
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have delivered to Conseco a certificate dated as of the Closing Date,
signed by its Chief Executive Officer and its Chief Financial Officer,
in their capacities as officers of the Company, to the effect set forth
in this Section 6.2(a).
(b) Performance of Obligations of the Company. The
Company shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Closing Date and shall not have willfully or intentionally (i) breached
any of its representations or warranties herein or (ii) failed to
perform or satisfy any of its obligations or covenants hereunder, and
Conseco shall have received a certificate dated as of the Closing Date
signed on behalf of the Company by its Chief Executive Officer and its
Chief Financial Officer to such effect.
6.3 Conditions to Obligation of the Company. The obligation
of the Company to effect the Merger is further subject to the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Conseco and RAC contained in this Agreement shall have
been true and correct on the date of this Agreement and as of the
Closing Date (except to the extent that they expressly relate only to
an earlier time, in which case they shall have been true and correct as
of such earlier time), other than such breaches of representations and
warranties which in the aggregate would not reasonably be expected to
have a material adverse effect on the business, financial condition or
results of operations of Conseco and its subsidiaries taken as a whole.
Conseco shall have delivered to the Company a certificate dated as of
the Closing Date, signed by its Chief Executive Officer and its Chief
Financial Officer, in their capacities as officers of Conseco, to the
effect set forth in this Section 6.3(a).
(b) Performance of Obligations of Conseco. Conseco and RAC
shall have performed in all material respects all obligations required
to be performed by them under this Agreement at or prior to the Closing
Date and shall not have willfully or intentionally (i) breached any of
their representations or warranties herein or (ii) failed to perform or
satisfy any of their obligations or covenants hereunder, and the
Company shall have received a certificate dated as of the Closing Date
signed on behalf of Conseco by its Chief Executive Officer and its
Chief Financial Officer to such effect.
(c) Opinion of Counsel. The Company shall have received the
opinion dated the Closing Date of McDermott, Will & Emery, counsel to
the Company, or such other legal counsel reasonably acceptable to the
Company and Conseco (the "Tax Opinion Provider") to the effect that the
Merger will be treated as a reorganization under Section 368(a)(2)(E)
of the
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Code as a result of which the stockholders of the Company will not be
subject to federal income tax on the receipt of shares of Conseco
Common Stock in exchange for Shares pursuant to the Merger.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated and abandoned at any
time prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the stockholders of the Company:
(a) by mutual written consent of Conseco and the
Company; or
(b) by either Conseco or the Company:
(i) if, upon a vote at a duly held Stockholders
Meeting or any adjournment thereof, any required approval of
the stockholders of the Company shall not have been obtained;
(ii) at any time after March 31, 1997, if the Merger
shall not have been consummated by such date, unless the
failure to consummate the Merger is the result of a willful
and material breach of this Agreement by the party seeking to
terminate this Agreement; provided, however, that either party
may by notice to the other extend such date to May 31, 1997
unless the condition to closing set forth in Section 6.1(d) is
not satisfied as of March 31, 1997;
(iii) if any Governmental Entity shall have issued an
order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become
final and nonappealable; or
(iv) if the Board of Directors of the Company shall
have exercised its rights set forth in Section 4.9 of this
Agreement.
7.2 Effect of Termination. In the event of termination of this
Agreement by either the Company or Conseco as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Conseco, RAC or the Company, other than the last
two sentences of Section 4.5 and Sections 2.13, 3.8, 4.11, 7.2 and 10.2. Nothing
contained in this Section shall relieve any party from any liability resulting
from any material breach of the representations, warranties, covenants or
agreements set forth in this Agreement.
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7.3 Amendment. Subject to the applicable provisions of the DGCL, at any
time prior to the Effective Time, the parties hereto may modify or amend this
Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties; provided, however, that after approval of
the Merger by the stockholders of the Company, no amendment shall be made which
reduces the consideration payable in the Merger or adversely affects the rights
of the Company's stockholders hereunder without the approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
7.4 Extension; Waiver. At any time prior to the Effective Time, each
party may (a) extend the time for the performance of any of the obligations or
other acts of the other party, (b) waive any inaccuracies in the representations
and warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to Section 7.3, waive
compliance with any of the agreements or conditions of the other party contained
in this Agreement. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver of
such rights.
7.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to Section
7.4 shall, in order to be effective, require in the case of Conseco, RAC or the
Company, action by its Board of Directors or the duly authorized designee of its
Board of Directors.
ARTICLE VIII
SURVIVAL OF PROVISIONS
8.1 Survival. The representations and warranties respectively required
to be made by the Company, Conseco and RAC in this Agreement, or in any
certificate, respectively, delivered by the Company or Conseco pursuant to
Section 6.2 or Section 6.3 hereof will not survive the Closing.
ARTICLE IX
NOTICES
9.1 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given if delivered,
telecopied or mailed, by certified mail, return receipt requested, first-class
postage prepaid, to the parties at the following addresses:
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If to the Company, to:
Pioneer Financial Services, Inc.
1750 East Golf Road
Schaumburg, Illinois 60173
Attention: Billy B. Hill, Jr.
Telephone: (847) 413-7077
Telecopy: (847) 413-7194
with a copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
Telephone: (312) 984-7570
Telecopy: (312) 984-3669
If to Conseco or RAC, to:
Conseco, Inc.
11825 N. Pennsylvania Street
Carmel, Indiana 46032
Attention: Lawrence W. Inlow
Telephone: (317) 817-6163
Telecopy: (317) 817-6327
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Article IX will, if delivered personally,
be deemed given upon delivery, will, if delivered by telecopy, be deemed
delivered when confirmed and will, if delivered by mail in the manner described
above, be deemed given on the third Business Day after the day it is deposited
in a regular depository of the United States mail. Any party from time to time
may change its address for the purpose of notices to that party by giving a
similar notice specifying a new address, but no such notice will be deemed to
have been given until it is actually received by the party sought to be charged
with the contents thereof.
ARTICLE X
MISCELLANEOUS
10.1 Entire Agreement. Except for documents executed by the Company,
Conseco and RAC pursuant hereto, this Agreement supersedes all prior discussions
and agreements between the parties with respect to the subject matter of this
Agreement, and this Agreement (including the exhibits hereto, the Disclosure
Schedule, the Conseco Disclosure Schedule and other documents delivered in
connection herewith) and the Confidentiality
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<PAGE>
Agreement contain the sole and entire agreement between the parties hereto with
respect to the subject matter hereof. The parties agree that any item disclosed
in any section of the Disclosure Schedule or the Conseco Disclosure Schedule
shall be deemed to be disclosed for all purposes of this Agreement,
notwithstanding the fact that such item was not disclosed in any other section
of the Disclosure Schedule or the Conseco Disclosure Schedule.
10.2 Expenses. Except as otherwise expressly provided in Section 4.11,
whether or not the Merger is consummated, each of the Company, Conseco and RAC
will pay its own costs and expenses incident to preparing for, entering into and
carrying out this Agreement and the consummation of the transactions
contemplated hereby.
10.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same instrument and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties.
10.4 No Third Party Beneficiary. Except as otherwise provided herein,
the terms and provisions of this Agreement are intended solely for the benefit
of the parties hereto, and their respective successors or assigns, and it is not
the intention of the parties to confer third-party beneficiary rights upon any
other person.
10.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
10.6 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties, and any such assignment that is
not consented to shall be null and void. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by,
the parties and their respective successors and assigns.
10.7 Enforcement. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law or in equity.
10.8 Headings, Gender, etc. The headings used in this Agreement have
been inserted for convenience and do not constitute
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matter to be construed or interpreted in connection with this Agreement. Unless
the context of this Agreement otherwise requires, (a) words of any gender are
deemed to include each other gender; (b) words using the singular or plural
number also include the plural or singular number, respectively; (c) the terms
"hereof," "herein," "hereby," "hereto," and derivative or similar words refer to
this entire Agreement; (d) the terms "Article" or "Section" refer to the
specified Article or Section of this Agreement; (e) all references to "dollars"
or "$" refer to currency of the United States of America; and (f) the term
"person" shall include any natural person, corporation, limited liability
company, general partnership, limited partnership, or other entity, enterprise,
authority or business organization.
10.9 Invalid Provisions. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under any present or future law, and if
the rights or obligations of the Company or Conseco under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable; (b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part hereof;
and (c) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid, or unenforceable
provision or by its severance herefrom.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of Conseco and the Company, effective as of the
date first written above.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
-----------------------
Stephen C. Hilbert,
Chairman of the Board
ROCK ACQUISITION COMPANY
By: /s/ STEPHEN C. HILBERT
-----------------------
Stephen C. Hilbert, President
PIONEER FINANCIAL SERVICES, INC.
By: /s/ PETER W. NAUERT
----------------------
Peter W. Nauert,
Chairman of the Board
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<PAGE>
ANNEX B
Donaldson, Lufkin & Jenrette
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172, (212) 892-3000
December 15, 1996
Board of Directors
Pioneer Financial Services, Inc.
1750 Golf Road
Schaumburg, IL 60173
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the shareholders of Pioneer Financial Services, Inc. (the "Company")
of the consideration to be received by such shareholders pursuant to the terms
of the Agreement and Plan of Merger, dated as of December 15, 1996 (the
"Agreement"), by and among Conseco, Inc. ("Conseco"), Rock Acquisition Company
("Acquisition Sub"), a wholly-owned subsidiary of Conseco, and the Company,
pursuant to which the Acquisition Sub will be merged (the "Merger") with and
into the Company, whereby the Company will become a wholly-owned subsidiary of
Conseco.
Pursuant to the Agreement, each share of common stock, par value $1.00
per share, of the Company ("Company Common Stock") will be converted into the
right to receive, subject to certain exceptions, shares of common stock, without
par value, of Conseco ("Conseco Common Stock"), as follows: (i) if the Conseco
Share Price (as defined below) is greater than or equal to $56.00 per share and
less than or equal to $62.72 per share, 0.4464 of a share of Conseco Common
Stock; (ii) if the Conseco Share Price is less than $56.00 per share, the
fraction of a share of Conseco Common Stock determined by dividing $25.00 by the
Conseco Share Price; or, (iii) if the Conseco Share Price is greater than $62.72
per share, the fraction of a share of Conseco Common Stock determined by
dividing $28.00 by the Conseco Share Price (such fraction as set forth in
clauses (i) through (iii) above, the "Exchange Ratio"). The Conseco Share Price
is defined as the average of the closing prices of Conseco Common Stock for the
ten trading days immediately preceding the second trading day prior to the
consummation of the Merger.
In arriving at our opinion, we have reviewed the Agreement dated December
15, 1996 and the exhibits thereto. We have also reviewed financial and other
information that was publicly available or furnished to us by the Company and
Conseco, including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of the Company which
were pro forma for certain pending transactions of the Company for the years
ending December 31, 1996 through December 31, 1997 prepared by the management of
the Company, an actuarial analysis of the insurance subsidiaries of the Company
as of September 30, 1995 prepared for the Company by a consulting actuarial firm
and certain pro forma financial statements of Conseco for the year ended
December
B-1
<PAGE>
Board of Directors
Pioneer Financial Services, Inc.
PAGE 2
December 15, 1996
31, 1995 and the nine months ended September 30, 1996 and certain financial
projections of Conseco which are pro forma for certain pending and recently
completed transactions of Conseco, for the years ending December 31, 1996
through December 31, 2005 prepared by the management of Conseco. In addition, we
have compared certain financial and securities data of the Company and Conseco
with various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the Company Common
Stock and Conseco Common Stock, reviewed prices and premiums paid in certain
other business combinations and conducted such other financial studies, analyses
and investigations as we deemed appropriate for purposes of this opinion. We
were not requested to, nor did we, solicit the interest of any other party in
acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company and
Conseco or their representatives, or that was otherwise reviewed by us. With
respect to the pro forma financial projections of the Company supplied to us, we
have assumed that they have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of the
Company as to the future operating and financial performance of the Company.
With respect to the actuarial analysis of the insurance subsidiaries of the
Company supplied to us, we have assumed that it was reasonably prepared on a
basis reflecting: (i) the best available estimates and judgments of the
management of the Company as to the future operating and financial performance
of the insurance subsidiaries of the Company as of September 30, 1995; and, (ii)
the best judgment of the consulting actuarial firm as to the proper analysis to
be applied based on the assumptions provided to it by the management of the
Company as to the future operating and financial performance of such insurance
subsidiaries. In addition, with respect to such actuarial analysis, we have
assumed that, except for the pending acquisitions of the Company, there have
been no material changes to the business of the Company since such date that
would materially affect such actuarial analysis. With respect to the pro forma
financial statements and pro forma financial projections of Conseco supplied to
us, we have assumed that they have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of Conseco as to the historical pro forma results of Conseco and the
future operating and financial performance of the Company and Conseco. We have
not assumed any responsibility for making an independent evaluation of the
Company's and Conseco's assets or liabilities or for making any independent
verification of any of the information reviewed by us. We have relied as to all
legal matters on advice of counsel to the Company.
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<PAGE>
Board of Directors
Pioneer Financial Services, Inc.
Page 3
December 15, 1996
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which Conseco Common Stock will actually trade at any time. Our
opinion does not constitute a recommendation to any member of the Board of
Directors of the Company or shareholder as to how such member or shareholder
should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. DLJ
has performed investment banking and other services for the Conseco in the past,
including co-managing Conseco's offering of tax-deductible preferred stock in
November 1996, and has received usual and customary compensation for such
services. Additionally, DLJ has delivered: (i) an opinion as to the fairness,
from a financial point of view to the shareholders of Capitol American Financial
Corporation ("Capitol American") of the consideration to be received by such
shareholders in connection with the merger of Capitol American with and into a
wholly-owned subsidiary of Conseco, (ii) an opinion as to the fairness, from a
financial point of view to the shareholders of American Travellers Corporation
("American Travellers") of the consideration to be received by such shareholders
in connection with the merger of American Travellers with and into Conseco,
(iii) an opinion as to the fairness, from a financial point of view to the
shareholders of Transport Holdings Inc. ("Transport") of the consideration to be
received by such shareholders in connection with the merger of Transport with
and into Conseco, and (iv) an opinion as to the fairness, from a financial point
of view to the shareholders of Life Partners Group, Inc. ("Life Partners") of
the consideration to be received by such shareholders in connection with the
merger of Life Partners with and into a wholly-owned subsidiary of Conseco.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the Exchange Ratio is fair to the holders of Company
Common Stock from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:/S/MARK K. GORMLEY
-----------------------
Mark K. Gormley
Managing Director
B-3
<PAGE>
(Alternative Page for Resale Prospectus)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION................................................................. ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... iii
TABLE OF CONTENTS..................................................................... v
SUMMARY............................................................................... 1
General............................................................................. 1
The Companies....................................................................... 1
The Special Meeting................................................................. 2
The Merger; The Merger Agreement.................................................... 4
Selected Historical Financial Information of Conseco................................ 10
Selected Historical Financial Information of LPG.................................... 12
Selected Historical Financial Information of PFS.................................... 14
Summary Unaudited Pro Forma Consolidated Financial Information of Conseco........... 16
Comparative Unaudited Per Share Data of Conseco and PFS............................. 19
Market Price Information............................................................ 20
INFORMATION CONCERNING CONSECO AND RAC................................................ 21
Background.......................................................................... 21
Operating Segments.................................................................. 22
General Information Concerning Conseco and RAC...................................... 24
INFORMATION CONCERNING PFS............................................................ 25
THE SPECIAL MEETING................................................................... 26
General............................................................................. 26
Matters to be Considered at the Special Meeting..................................... 26
Voting at the Special Meeting; Record Date; Quorum.................................. 26
Proxies; Revocation of Proxies...................................................... 29
THE MERGER............................................................................ 30
Background of the Merger............................................................ 30
Conseco's Reasons for the Merger.................................................... 33
PFS's Reasons for the Merger; Recommendation of the PFS Board of Directors......... 34
Opinion of Financial Advisor to PFS................................................. 35
Certain Consequences of the Merger.................................................. 40
Conduct of the Business of Conseco and PFS after the Merger......................... 40
Interests of Certain Persons in the Merger.......................................... 40
Accounting Treatment................................................................ 42
Certain Federal Income Tax Consequences............................................. 42
Regulatory Approvals................................................................ 43
</TABLE>
ALT - v
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
NYSE Listing of Conseco Common Stock................................................ 44
Absence of Appraisal Rights......................................................... 44
THE MERGER AGREEMENT.................................................................. 44
The Merger.......................................................................... 44
Effective Time...................................................................... 45
Conversion of Shares; Exchange of Stock Certificates; No Fractional Amounts......... 45
Treatment of PFS Stock Options...................................................... 46
Treatment of PFS Convertible Subordinated Notes..................................... 46
PFS Employee Matters................................................................ 47
Representations and Warranties...................................................... 47
Certain Covenants................................................................... 47
Conditions to the Merger............................................................ 49
Termination......................................................................... 50
Right of PFS Board of Directors to Withdraw Its Recommendation...................... 50
Breakup Fee......................................................................... 50
Expenses............................................................................ 51
Modification or Amendment........................................................... 51
PFS Affiliate Registration Rights................................................... 51
Stockholder Litigation.............................................................. 51
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CONSECO...................... 52
COMPARISON OF SHAREHOLDERS' RIGHTS.................................................... 79
Amendment of By-laws................................................................ 79
Certain Provisions Relating to Acquisitions......................................... 79
Right to Bring Business Before a Special Meeting of Shareholders.................... 80
Shareholder Action by Written Consent............................................... 81
Removal of Directors................................................................ 81
Director Liability.................................................................. 81
Indemnification..................................................................... 81
Dividends and Repurchases........................................................... 82
Dissenters' Rights.................................................................. 82
Director and Officer Discretion..................................................... 83
MANAGEMENT OF CONSECO AND PFS UPON CONSUMMATION OF THE MERGER......................... 83
LEGAL MATTERS......................................................................... 84
EXPERTS............................................................................... 84
INDEPENDENT AUDITORS.................................................................. 84
OTHER MATTERS......................................................................... 84
SELLING STOCKHOLDERS.................................................................. 85
PLAN OF DISTRIBUTION.................................................................. 86
Annex A -- Agreement and Plan of Merger............................................... A-1
Annex B -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation............. B-1
</TABLE>
ALT - vi
<PAGE>
[Alternate Page for Resale Prospectus]
SELLING STOCKHOLDERS
The following table sets forth the names of persons who, at the time
the Merger is submitted to the stockholders of PFS for approval, were
"affiliates" of PFS for purposes of Rule 145 under the Securities Act (the
"Affiliates"), the aggregate number of shares of PFS Common Stock beneficially
owned by each Affiliate as of the date hereof, and the aggregate number of
shares of Conseco Common Stock that each Affiliate may (following the
consummation of the Merger) offer and sell pursuant to this Proxy
Statement/Prospectus.
Number of Shares Number of
Name of Affiliate Beneficially Owned Shares Registered
- ----------------- ------------------ -----------------
85
<PAGE>
[Alternate Page for Resale Prospectus]
PLAN OF DISTRIBUTION
Following consummation of the Merger, the shares of Conseco Common
Stock received by the Affiliates in the Merger may be sold from time to time to
purchasers directly by any of the Affiliates. Alternatively, the Affiliates may
sell the shares of Conseco Common Stock in one or more transactions (which may
involve one or more block transactions) on the NYSE, in separately negotiated
transactions, or in a combination of such transactions. Each sale may be made
either at market prices prevailing at the time of such sale or at negotiated
prices; some or all of the shares of Conseco Common Stock may be sold through
brokers acting on behalf of the Affiliates or to dealers for resale by such
dealers; and in connection with such sales, such brokers or dealers may receive
compensation in the form of discounts or commissions from Affiliates and/or the
purchasers of such shares for whom they may act as broker or agent (which
discounts or commissions are not anticipated to exceed those customary in the
types of transactions involved). However, any securities covered by this Proxy
Statement/Prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than pursuant to this Proxy
Statement/Prospectus. All expenses of registration incurred in connection with
this offering are being borne by Conseco, but all brokerage commissions and
other expenses incurred by an individual Affiliate will be borne by each such
Affiliate. Conseco will not receive any of the proceeds from such sales.
The Affiliates and any dealer participating in the distribution of any
of the shares of Conseco Common Stock or any broker executing selling orders on
behalf of the Affiliates may be deemed to be "underwriters" within the meaning
of the Securities Act, in which event any profit on the sale of any or all of
the shares of Conseco Common Stock by them and any discounts or commissions
received by any such brokers or dealers may be deemed to be underwriting
discounts and commissions under the Securities Act.
Any broker or dealer participating in any distribution of shares of
Conseco Common Stock in connection with this offering may be deemed to be an
"underwriter" within the meaning of the Securities Act and will be required to
deliver a copy of this Proxy Statement/Prospectus to any person who purchases
any of the shares of Conseco Common Stock from or through such broker or dealer.
In order to comply with the securities laws of certain states, if
applicable, the shares of Conseco Common Stock will be sold only through
registered or licensed brokers or dealers. In addition, in certain states, the
shares of Conseco Common Stock may not be sold unless they have been registered
or qualified for sale in such state or an exemption from such registration or
qualification requirement is available and is complied with.
86
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Indiana Corporation Law grants authorization to Indiana corporations to
indemnify officers and directors for their conduct if such conduct was in good
faith and was in the corporation's best interests or, in the case of directors,
was not opposed to such best interests, and permits the purchase of insurance in
this regard. In addition, the shareholders of a corporation may approve the
inclusion of other or additional indemnification provisions in the articles of
incorporation and by-laws.
The By-laws of Conseco provides for the indemnification of any person made
a party to any action, suit or proceeding by reason of the fact that he is a
director, officer or employee of Conseco, unless it is adjudged in such action,
suit or proceeding that such person is liable for negligence or misconduct in
the performance of his duties. Such indemnification shall be against the
reasonable expenses, including attorneys' fees, incurred by such person in
connection with the defense of such action, suit or proceeding. In some
circumstances, Conseco may reimburse any such person for the reasonable costs of
settlement of any such action, suit or proceeding if a majority of the members
of the Board of Directors not involved in the controversy shall determine that
it was in the interests of Conseco that such settlement be made and that such
person was not guilty of negligence or misconduct.
The above discussion of Conseco's By-laws and the Indiana Corporation Law
is not intended to be exhaustive and is qualified in its entirety by such
By-laws and the Indiana Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person thereof in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C> <C>
2(a) -- Agreement and Plan of Merger dated as of December 15, 1996 by and among
Conseco, Inc., Rock Acquisition Company and Pioneer Financial Services,
Inc. (included as Annex A to the Proxy Statement/Prospectus (schedules
omitted -- the Registrant agrees to furnish a copy of any schedule to
the Securities and Exchange Commission (the "Commission") upon request)).*
5 -- Opinion of Lawrence W. Inlow, General Counsel to Conseco, Inc., as to the
validity of the issuance of the securities registered hereby.**
8 -- Opinion of McDermott, Will & Emery as to certain tax matters.***
23(a) -- Consent of Lawrence W. Inlow, General Counsel to Conseco, Inc. (included in
the opinion filed as Exhibit 5 to the Registration Statement).*
23(b) -- Consent of Coopers & Lybrand L.L.P. with respect to the financial statements
of the Registrant.*
23(c) -- Consent of Coopers & Lybrand L.L.P. with respect to the financial statements
of Life Partners Group, Inc.*
23(d) -- Consent of Ernst & Young LLP with respect to the financial statements of Pioneer
Financial Services, Inc.*
23(e) -- Consent of Donaldson, Lufkin & Jenrette Securities Corporation.**
23(f) -- Consent of McDermott, Will & Emery (included in the opinion filed as Exhibit 8
to the Registration Statement).***
24(a) -- Powers of Attorney of Stephen C. Hilbert, Rollin M. Dick,
Donald F. Gongaware, Dennis E. Murray, Sr., Ngaire E. Cuneo, David R. Decatur,
M. Phil Hathaway and James D. Massey.**
99(a) -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation (included as
Annex B to the Proxy Statement/Prospectus).**
99(b) -- Form of proxy card for PFS.*
</TABLE>
- -------------------------
* Filed herewith.
** Filed previously.
*** To be filed by amendment.
(b) Financial Statement Schedules -- Inapplicable.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes as follows:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by
II-2
<PAGE>
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment, shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(f) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(g) See Part II -- Item 20.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Carmel
and the State of Indiana, on the 24th day of March, 1997.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
------------------------------------
Stephen C. Hilbert, Chairman of the
Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------------- -----------------
<S> <C> <C>
* Director, Chairman of the Board, March 24, 1997
- ------------------------------ President and Chief Executive Officer
Stephen C. Hilbert (Principal Executive Officer of the
Registrant)
* Director, Executive Vice President and March 24, 1997
- ------------------------------ Chief Financial Officer (Principal
Rollin M. Dick Financial and Accounting Officer of the
Registrant)
* Director March 24, 1997
- ------------------------------
Ngaire E. Cuneo
* Director March 24, 1997
- ------------------------------
David R. Decatur
* Director March 24, 1997
- ------------------------------
M. Phil Hathaway
* Director March 24, 1997
- ------------------------------
Donald F. Gongaware
* Director March 24, 1997
- ------------------------------
James D. Massey
* Director March 24, 1997
- ------------------------------
Dennis E. Murray, Sr.
- ------------------------------ Director
John M. Mutz
*By: /s/ KARL W. KINDIG
-------------------------
Karl W. Kindig,
Attorney-in-Fact
</TABLE>
II-4
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Conseco, Inc. on Form S-4 (File No. 333-20811), of our reports dated March
14, 1997 on our audits of the consolidated financial statements and financial
statement schedules of Conseco, Inc. and subsidiaries as of December 31, 1996
and 1995, and for the years ended December 31, 1996, 1995 and 1994, included in
the Annual Report on Form 10-K. We also consent to the reference to our firm
under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 25, 1997
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Conseco, Inc. on Form S-4 (File No. 333-20811), of our reports dated March
27, 1996 on our audits of the consolidated financial statements and financial
statement schedules of Life Partners Group, Inc. and subsidiaries as of December
31, 1995 and 1994, and for the years ended December 31, 1995, 1994 and 1993
included in the Current Report on Form 8-K of Conseco, Inc. dated August 2,
1996. We also consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Denver, Colorado
March 25, 1997
EXHIBIT 23(d)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the headings "Selected
Historical Financial Information of PFS" and "Experts" in the Proxy
Statement/Prospectus that is made part of Amendment No. 1 to the Registration
Statement on Form S-4 (No. 333-20811) of Conseco, Inc. for the registration of
shares of its common stock and to the incorporation by reference therein of our
report dated March 21, 1997, with respect to the consolidated financial
statements and financial statement schedules of Pioneer Financial Services, Inc.
and subsidiaries included in the Annual Report on Form 10-K for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
March 21, 1997
PIONEER FINANCIAL SERVICES, INC.
P Proxy Solicited on Behalf of the Board of Directors of
Pioneer Financial Services, Inc. for a Special Meeting
R of Stockholders to be held on May ___, 1997
at 10:00 a.m. local time
O
The undersigned Stockholder of Pioneer Financial Services, Inc. ("PFS")
X hereby appoints ________ and __________, and each of them, the
lawful attorneys and proxies of the undersigned, with full powers of
Y substitution, to vote all shares of Common Stock, $1.00 par value
per share, of PFS (the "PFS Common Stock") which the undersigned
is entitled to vote at the Special Meeting of Stockholders to be held
on May __, and any adjournments thereof.
______________
| SEE REVERSE |
CONTINUED AND TO BE SIGNED ON REVERSE SIDE | SIDE |
|_____________|
Please mark
/X/ votes as in
this example.
<TABLE>
<S><C>
The PFS Board of Directors recommends that the stockholders of PFS vote FOR the authorization and adoption of the
Merger Agreement (as defined below) and the transactions contemplated thereby (including, without limitation,
the Merger (as defined below)). In the absence of specific instructions, proxies will be voted for the
authorization and adoption of the Merger Agreement and the transactions contemplated thereby (including without
limitation, the Merger) and in the discretion of the proxy holders as to any other matters.
FOR AGAINST ABSTAIN
1. Approval of the Agreement and Plan of Merger, dated as of December 15, 1996
(the "Merger Agreement"), by and between PFS, Rock Acquisition Company and Conseco,
Inc., an Indiana corporation ("Conseco"), and the transactions contemplated thereby
(including, without limitation, the Merger) pursuant to which, among other things,
(i) PFS will be merged with and into Rock Acquisition Company (the "Merger"), with
PFS surviving the Merger as a wholly owned subsidiary of Conseco, and (ii) each
outstanding share of PFS Common Stock (other than shares of PFS Common Stock held
as treasury shares by PFS) shall be converted into the right to receive the Merger
Consideration (as defined in the Merger Agreement).
2. To transact such other business as may properly come before the meeting or any adjournment or postponement
thereof.
MARK HERE
FOR ADDRESS / /
CHANGE AND
NOTE AT LEFT
Note: Please sign exactly as name appears hereon. Joint
owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian, please give
full title as such.
Signature: Date: Signature: Date:
</TABLE>
