UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ________ to ________
Commission file number: 1-9250
Conseco, Inc.
Indiana No. 35-1468632
---------------------- -------------------------------
State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
------------------------------ --------------
Address of principal executive offices Telephone
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, No Par Value New York Stock Exchange, Inc.
8-1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
10-1/2% Senior Notes due 2004 New York Stock Exchange, Inc.
7% PRIDES Convertible Preferred Stock New York Stock Exchange, Inc.
9.16% Trust Originated Preferred Securities New York Stock Exchange, Inc.
7% FELINE PRIDES Stock Purchase Contracts New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of common stock held by nonaffiliates (computed as of
March 13, 1998): $9,615,452,117
Shares of common stock outstanding as of March 13, 1998: 185,805,838
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held May 14, 1998
are incorporated by reference into Part III of this Report.
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS OF CONSECO.
Conseco, Inc. is a financial services holding company. Conseco develops,
markets and administers supplemental health insurance, annuity, life insurance,
individual and group major medical insurance and other insurance products. As
used in this report, the terms "We," "Conseco" or the "Company" refer to
Conseco, Inc. and its consolidated subsidiaries, unless the context requires
otherwise. Since 1982, Conseco has acquired 19 insurance groups. See "Insurance
Subsidiaries and Recent Acquisitions" for a description of our insurance
subsidiaries and recent acquisitions. Our operating strategy is to grow the
insurance business within our subsidiaries by focusing our resources on the
development and expansion of profitable products and strong distribution
channels. We have supplemented such growth by acquiring companies that have
profitable niche products and strong distribution systems. Once a company has
been acquired, our operating strategy has been to consolidate and streamline
management and administrative functions where appropriate, 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.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Our executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and our telephone number is (317) 817-6100.
MARKETING AND DISTRIBUTION
Conseco seeks to retain the loyalty of its agency force by providing
marketing and sales support; electronic and automated access to account and
commission information; and marketing and training tools. We also have
introduced new products like equity-indexed annuities (1996), indexed universal
life (1997) and multi-year-guarantee annuities (1998). We are also looking for
ways to lighten our agents' administrative burden, increase their productive
sales time and get them the information they need faster and more reliably. In
1997, we introduced the Conseco Online Information System ("COINS"), which
enables agents to track policy and commission information and order materials at
their convenience. Many of our marketing companies and agents are already using
COINS; we expect it to be available to all agents by 1999.
In 1997, Conseco launched a comprehensive effort to transform its name
into a recognized brand. We believe that in a competitive marketplace like
financial services, companies that can differentiate themselves through a
familiar brand can obtain full value for their products; sell more efficiently
and command greater customer loyalty; recruit and retain talent more easily;
better withstand and weather inevitable business crises; and have better access
to the financial markets and the capital they need in order to grow. In 1998,
our advertising campaign is designed to introduce consumers to the Conseco
brand, to our product line and to the benefits of doing business with Conseco.
Our insurance subsidiaries are collectively licensed to market our
insurance products in all fifty states, the District of Columbia, and certain
protectorates of the United States. Sales to residents of the following states
accounted for at least 5 percent of our 1997 collected premiums: Florida (9.4
percent), Illinois (9.0 percent), California (8.4 percent) , Texas (8.1 percent)
and Michigan (5.0 percent).
We believe that people purchase most types of life insurance, accident
and health insurance and annuity products only after being contacted and
solicited by an insurance agent. Accordingly, the success of our distribution
system is largely dependent on our ability to attract and retain agents who are
experienced and highly motivated.
In order to encourage agents to place a high volume of life, accident and
health and annuity business with our subsidiaries, we offer commission rate
bonuses and compensation awards which increase with the volume of new business
written. We formed a subsidiary to focus on the coordination of the marketing,
distribution and cross marketing activities of our products.
A description of our primary distribution channels follows:
Career Agents. This agency force of approximately 4,100 agents working
from 185 branch offices, permits one-on-one contacts with potential
policyholders and promotes strong personal relationships with existing
policyholders. The career agents sell primarily Medicare supplement and
long-term care insurance policies. This distribution channel also includes group
major medical business marketed through a small field force of representatives.
Since December 1, 1997, this segment includes the career agents of WNIC who sell
specialty health insurance products for educators. In 1997, this distribution
channel accounted for $1,593.2 million, or 32 percent, of our total collected
premiums. Most of these agents sell only Conseco policies and typically visit
the prospective policyholder's home to conduct personalized "kitchen-table"
sales presentations. After the sale of an insurance policy, the agent serves as
a contact person for policyholder questions, claims assistance and additional
insurance needs. The personalized marketing and service efforts of the career
field agents, supported by home office persistency programs, have contributed to
a persistency rate of approximately 83 percent on Medicare supplement policies
sold through this channel.
2
<PAGE>
Professional Independent Producers. This distribution channel consists of
a general agency and insurance brokerage distribution system comprised of
approximately 190,000 independent licensed agents doing business in all fifty
states. In 1997, this channel accounted for $3,433.7 million, or 68 percent, of
our total collected premiums.
Professional independent producers are a diverse network of independent
agents, insurance brokers and marketing organizations. Marketing companies
typically recruit agents for Conseco by advertising our products and commission
structure through direct mail advertising or through seminars for insurance
agents and brokers. These organizations bear most of the costs incurred in
marketing our products. We compensate the marketing organizations by paying them
a percentage of the commissions earned on new sales generated by the agents
recruited by such organizations. Certain of these marketing organizations are
specialty organizations that have a marketing expertise or a distribution system
relating to a particular product, such as flexible-premium annuities for
educators.
A portion of our business is distributed through a "Client Company"
marketing system, whereby agents and other insurance companies have entered into
agreements to market Conseco's products through their professional independent
producer distribution systems. Under the agreements, such groups assume up to 50
percent of the business each writes (through agent owned reinsurance companies
or existing life insurance companies). We retain assets equal to the reserves of
each Client Company and provide substantially all administrative services for a
fee. Of the premiums collected by professional independent producers in 1997,
3.2 percent were collected by groups participating in the Client Company
program.
Direct marketing. This distribution channel was added on September 30,
1997 with the acquisition of Colonial Penn Life Insurance Company ("Colonial
Penn"), which is engaged primarily in the sale of "graded benefit life"
insurance policies through direct marketing. We intend to market other Conseco
products through this distribution channel. In 1997, this channel accounted for
$28.8 million, or less than 1 percent, of our total collected premiums.
OPERATING SEGMENTS
We conduct and manage our business through five segments, reflecting our
major lines of insurance business and target markets: (i) supplemental health
insurance; (ii) annuities; (iii) life insurance; (iv) individual and group major
medical insurance; and (v) other.
Supplemental Health
This segment includes Medicare supplement, long-term care and
specified-disease insurance. For periods prior to January 1, 1997, this segment
consists solely of the Medicare supplement and long-term care products
distributed through a career agency force. For periods after January 1, 1997,
this segment includes the specified-disease products of the former subsidiaries
of Transport Holdings Inc. ("THI") and Capitol American Financial Corporation
("CAF") and the long-term care products of the former subsidiaries of ATC which
are distributed through professional independent producers. For periods after
April 1, 1997, this segment also includes various supplemental health products
of Pioneer Financial Services, Inc. ("PFS") which are distributed through
professional independent producers. During 1997, we collected Medicare
supplement premiums of $796.4 million and long-term care premiums of $663.9
million, up 29 percent and 244 percent, respectively, over 1996. We collected
specified-disease premiums of $383.4 million in 1997.
The following describes the major products of this segment:
Medicare supplement. Medicare supplement products accounted for $796.4
million, or 16 percent, of our total collected premiums in 1997. Medicare is a
two-part federal health insurance program for disabled persons and senior
citizens (age 65 and older). Part A of the program provides protection against
the costs of hospitalization and related hospital and skilled nursing home care,
subject to an initial deductible, related coinsurance amounts and specified
maximum benefit levels. The deductible and coinsurance amounts are subject to
change each year by the federal government. Part B of Medicare covers doctors
bills and a number of other medical costs not covered by Part A, subject to
deductible and coinsurance amounts for "approved" charges.
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as deductibles,
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. Our Medicare supplement plans automatically adjust coverage to reflect
changes in Medicare benefits. In marketing these products, we concentrate on
individuals who have recently become eligible for Medicare by reaching the age
of 65. We offer a higher first-year commission for sales to these policyholders
and competitive premium pricing. Approximately one-half of new sales of Medicare
supplement policies are to individuals who are 65 years old.
3
<PAGE>
Long-term care. Long-term care products accounted for $663.9 million, or
13 percent, of our total collected premiums in 1997. Long-term care products
provide coverage, within prescribed limits, for nursing home, home healthcare,
or a combination of both nursing home and home health care expenses. The
long-term care plans are sold primarily to retirees, and to a lesser degree, to
older self-employed individuals and others in middle-income levels.
Current nursing home care policies cover incurred and daily fixed-dollar
benefits available with an elimination period (which, similar to a deductible,
requires the insured to pay for a certain number of days of nursing home care
before the insurance coverage begins), subject to a maximum benefit. Home
healthcare policies cover the usual and customary charges after a deductible and
are subject to a daily or weekly maximum dollar amount, and an overall benefit
maximum. We monitor the loss experience on our long-term care products and, when
necessary, apply for rate increases in the states in which we sell such
products.
Specified-disease products. Beginning in 1997, the supplemental health
segment includes specified-disease products such as cancer and heart/stroke
insurance. Specified-disease products accounted for $383.4 million, or 7.6
percent, of our total collected premiums in 1997. These policies generally
provide fixed or limited benefits. Cancer insurance and heart/stroke products
are guaranteed renewable individual accident and health insurance policies.
Payments under cancer insurance policies are generally made directly to, or at
the direction of, the policyholder following diagnosis of, or treatment for, a
covered type of cancer. Heart/stroke policies provide for payments directly to
the policyholder for treatment of a covered heart disease, heart attack or
stroke. The benefits provided under the specified-disease policies do not
necessarily reflect the actual cost incurred by the insured as a result of the
illness; benefits are not reduced by any other medical insurance payments made
to or on behalf of the insured.
Approximately 65 percent of our specified-disease policies in force
(based on a count of policies) are sold with return of premium or cash value
riders. The return of premium rider generally provides that after a policy has
been in force for a specified number of years or upon the policyholder reaching
a specified age, the Company will pay to the policyholder, or a beneficiary
under the policy, the aggregate amount of all premiums paid under the policy,
without interest, less the aggregate amount of all claims incurred under the
policy.
Annuities
This segment includes traditional fixed rate annuity products, market
value-adjusted annuity products, equity-indexed annuity products, and variable
annuity products sold through both career agents and professional independent
producers. During 1997, this segment collected total premiums of $1,689.6
million, up 1.2 percent from 1996.
The following describes the major products of this segment:
Traditional fixed rate annuity products. These products include
single-premium deferred annuities ("SPDAs"), flexible-premium deferred annuities
("FPDAs") and single-premium immediate annuities ("SPIAs"). SPDAs (excluding the
equity-indexed and market value-adjusted products described below) accounted for
$366.8 million, or 7.3 percent, of our total collected premiums in 1997. An SPDA
is a savings vehicle in which the policyholder, or annuitant, makes a
single-premium payment to the insurance company; the insurer guarantees the
principal and accrues a stated rate of interest. After a number of years, as
specified in the annuity contract, the annuitant may elect to take the proceeds
of the annuity either in a single payment or in a series of payments for life,
for a fixed number of years, or for a combination thereof. Our SPDAs typically
have an interest rate (the "crediting rate") that is guaranteed by the Company
for the first policy year, after which, we have the discretionary ability to
change the crediting rate to any rate not below a guaranteed minimum rate. The
guaranteed rate recently written on annuities is 3.0 percent, and the rate on
all policies in force ranges from 3.0 percent to 5.5 percent. The initial
crediting rate is largely a function of: (i) the interest rate we can earn on
invested assets acquired with the new annuity fund deposits; and (ii) the rates
offered on similar products by our competitors. For subsequent adjustments to
crediting rates, we take into account the yield on our investment portfolio,
annuity surrender assumptions, competitive industry pricing and the crediting
rate history for particular groups of annuity policies with similar
characteristics.
Approximately 80 percent of our new annuity sales have been "bonus"
products. The initial crediting rate on these products specifies a bonus
crediting rate ranging from 1 percent to 8 percent of the annuity deposit for
the first policy year only. After the first year, the bonus interest portion of
the initial crediting rate is automatically discontinued, and the renewal
crediting rate is established. Commissions to agents are generally reduced by an
amount comparable to the bonus interest to partially compensate the Company for
the higher initial crediting rate on these products. As of December 31, 1997,
crediting rates on our outstanding SPDAs generally ranged from 4.0 percent to
5.5 percent, excluding bonuses guaranteed for the first year of the annuity
contract. The average crediting rate including interest bonuses was 5.0 percent,
and the average rate excluding bonuses was 4.8 percent.
The policyholder is typically permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to his account (the
"accumulation value"), subject in virtually all cases to the assessment of a
surrender charge for withdrawals in excess of specified limits. Most of our
SPDAs provide for penalty-free withdrawals of up to 10 percent of the
accumulation value each year,
4
<PAGE>
subject to limitations. Withdrawals in excess of allowable penalty-free amounts
are assessed a surrender charge during a penalty period which generally ranges
from five to 12 years after the date a policy is issued. The surrender charge is
initially 6 percent to 12 percent of the accumulation value and generally
decreases by approximately 1 to 2 percentage points per year during the penalty
period. Surrender charges are set at levels to protect the Company from loss on
early terminations and to reduce the likelihood of policyholders terminating
their policies during periods of increasing interest rates. This practice
lengthens the effective duration of policy liabilities and enables the Company
to maintain profitability on such policies.
FPDAs (excluding the equity-indexed and market value-adjusted products
described below) accounted for $362.3 million, or 7.2 percent, of our total
collected premiums in 1997. FPDAs are similar to SPDAs in many respects, except
that FPDAs allow more than one premium payment. Our FPDAs have a crediting rate
that is guaranteed by the Company for the first year. After the first year, the
crediting rate may be changed at least annually, subject to a minimum annual
guaranteed rate. The policyholder is permitted to withdraw all or part of the
accumulation value, less a surrender charge for withdrawals during an initial
penalty period of up to 15 years. The initial surrender charges range from 5
percent to 22 percent of the first-year premium and decline over the penalty
period. Interest rates credited on our outstanding FPDAs at December 31, 1997,
generally ranged from 4.5 percent to 5.5 percent, excluding bonuses guaranteed
for the first year of the annuity contract. The average crediting rate including
interest bonuses was 5.0 percent, and the average rate excluding bonuses was 4.8
percent.
SPIAs accounted for $208.1 million, or 4.1 percent, of our total
collected premiums in 1997. SPIAs are designed to provide a series of periodic
payments for a fixed period of time or for life, according to the policyholder's
choice at the time of issue. Once the payments begin, the amount, frequency and
length of time for which they are payable are fixed. SPIAs often are purchased
by persons at or near retirement age who desire a steady stream of payments over
a future period of years. The single premium is often the payout from a
terminated annuity contract. The implicit interest rate on SPIAs is based on
market conditions when the policy is issued. The implicit interest rate on the
Company's outstanding SPIAs at December 31, 1997, averaged 6.0 percent.
Market value-adjusted annuity products. In September 1995, we began
offering a deferred annuity product with a "market value adjustment" feature.
This feature is designed to provide the Company with additional protection from
early terminations during a period of rising interest rates by reducing the
surrender value payable upon a full or partial surrender of the policy in excess
of the allowable penalty-free withdrawal amount. Conversely, during a period of
declining interest rates, the feature would increase the surrender value payable
to the policyholder. In 1997, we collected premiums of $41.4 million from SPDAs
with this feature. We also offer FPDAs with a "market value adjustment" feature.
In 1997, we collected premiums of $138.1 million from sales of FPDAs with this
feature.
Equity-indexed annuity products. In response to consumers' desire for
alternative investment products with returns linked to those of common stocks,
we introduced an equity-indexed SPDA product in June 1996 and an equity-indexed
FPDA product in January 1997. These products accounted for $387.7 million, or
7.7 percent, of our total premiums collected in 1997. The annuity's contract
value is equal to the premium paid increased for returns based upon a percentage
(the "participation rate") of the change in the S&P 500 Index during each year
of its term, subject to a minimum guaranteed value. The Company has the
discretionary ability to annually change the participation rate (which currently
ranges from 70 percent to 75 percent plus a first-year "bonus", similar to the
bonus previously described, of 25 percent), generally subject to a minimum of 50
percent. The minimum guaranteed values are equal to: (i) 90 percent of premiums
collected for SPDAs (75 percent of first year and 87.5 percent of renewal
premiums collected for FPDAs); plus (ii) interest credited at an annual rate of
3 percent. The annuity provides for penalty-free withdrawals of up to 10 percent
of premium in each year after the first year of the annuity's term. Other
withdrawals from SPDA products are subject to a surrender charge of 9 percent
over the eight year contract term at which time the contract must be renewed or
withdrawn. Other withdrawals from FPDA products are subject to a surrender
charge of 12 percent to 20 percent in the first year, declining 1.2 percent to
1.3 percent each year, to zero over a 10 to 15 year period, depending on issue
age. We purchase Standard & Poor's 500 Index Call Options (the "S&P 500 Call
Options") to hedge potential increases to policyholder benefits resulting from
increases in the S&P 500 Index to which the product's return is linked.
Variable annuity products. Variable annuities accounted for $185.2
million, or 3.7 percent, of our total premiums collected in 1997. Variable
annuities, sold on a single-premium or flexible-premium basis, differ from fixed
annuities in that the original principal value may fluctuate, depending on the
performance of assets allocated pursuant to various investment options chosen by
the contract owner. Variable annuities offer contract owners a fixed or variable
rate of return based upon the specific investment portfolios into which premiums
may be directed.
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 Life Partners Group,
Inc. ("LPG"). This segment's
5
<PAGE>
products are currently sold through career agents, professional independent
producers and direct response marketing. During 1997, this segment collected
total premiums of $709.0 million, up 76 percent, over premiums collected during
1996.
Interest-sensitive life products. These products include universal life
products that provide whole life insurance with adjustable rates of return
related to current interest rates. They accounted for $450.9 million, or 8.9
percent, of our total collected premiums in 1997 and are marketed through
professional independent producers and to a lesser extent, career agents. The
principal differences between universal life products and other
interest-sensitive life insurance products are policy provisions affecting the
amount and timing of premium payments. Universal life policyholders may vary the
frequency and size of their premium payments, and policy benefits may also
fluctuate according to such payments. Premium payments under other
interest-sensitive policies may not be varied by the policyholders, and as a
result, are designed to reduce the administrative costs typically associated
with monitoring universal life premium payments and policy benefits.
Traditional life. These products accounted for $258.1 million, or 5.1
percent, of our total collected premiums in 1997. Traditional life policies,
including whole life, graded benefit life and term life products, are marketed
through professional independent producers, career agents and direct response
marketing. Under whole life policies, the policyholder generally pays a level
premium over the policyholder's expected lifetime. The annual premium in a whole
life policy is generally higher than the premium for comparable term insurance
coverage in the early years of the policy's life, but is generally lower than
the premium for comparable term insurance coverage in the later years of the
policy's life. These policies, which continue to be marketed by the Company on a
limited basis, combine insurance protection with a savings component that
increases in amount gradually over the life of the policy. The policyholder may
borrow against the savings generally at a rate of interest lower than that
available from other lending sources. The policyholder may also choose to
surrender the policy and receive the accumulated cash value rather than
continuing the insurance protection. Term life products offer pure insurance
protection for a specified period of time -- typically 5, 10 or 20 years.
Beginning October 1, 1997, the life insurance segment includes the graded
benefit life insurance products of Colonial Penn. Graded benefit life products
accounted for $28.8 million or .6 percent of our total collected premiums in
1997. Graded benefit life insurance products are offered on an individual basis
primarily to persons age 50 to 80, principally in face amounts of $350 to
$10,000, without medical examination or evidence of insurability. Premiums are
paid as frequently as monthly. Benefits paid are less than the face amount of
the policy during the first two years, except in cases of accidental death.
Graded benefit life policies are marketed using direct response marketing
techniques. New policyholder leads are generated primarily from television and
print advertisements.
Individual and Group Major Medical Insurance
This segment includes individual and group major medical health insurance
products. The size of this segment increased significantly as a result of the
acquisition of PFS. This segment underwrites and markets group and individual
comprehensive major medical products targeted primarily to self-employed
individuals, small business owners and early retirees. Several deductible and
coinsurance options are available, and most policies require certain utilization
review procedures. The profitability of this business depends largely on the
overall persistency of the business in force, claim experience and expense
management. During 1997, this segment collected total premiums of $744.2
million, up 118 percent over premiums collected during 1996.
Insurance premium rates on these products may be adjusted subject to
applicable regulation by class, policy form and state in which the policy is
issued. We monitor the loss experience on these products, and when necessary,
apply for rate increases in the states in which we sell such products.
Other
This segment includes various other health insurance products. The
profitability of this business depends largely on the overall persistency of the
business in force, claim experience and expense management. During 1997, this
segment collected total premium of $69.2 million, up 27 percent over premiums
collected during 1996.
After December 1, 1997, the other segment includes the specialty health
insurance products for educators sold by a subsidiary of WNIC. These products
are sold by career agents and accounted for $9.1 million of Conseco's collected
premiums since the acquisition of WNIC.
This segment also includes fee revenue generated by Conseco's nonlife
subsidiaries, including the investment advisory fees earned by Conseco Capital
Management, Inc. ("CCM") and commissions earned for insurance product marketing
and distribution. Fee revenues and commissions from Conseco's consolidated
subsidiaries are excluded from segment results. CCM had approximately $5.1
billion of assets (at fair value) under management at December 31, 1997, for
unaffiliated parties. Total fees earned from nonaffiliates during 1997 were
$65.8 million, up 32 percent over 1996.
6
<PAGE>
INSURANCE SUBSIDIARIES AND RECENT ACQUISITIONS
Conseco owned the following life insurance companies at December 31,
1997:
- Bankers Life and Casualty Company ("Bankers Life"), Bankers Life
Insurance Company of Illinois and Certified Life Insurance Company,
formerly subsidiaries of Bankers Life Holding Corporation ("BLH");
- Great American Reserve Insurance Company ("Great American Reserve"),
Beneficial Standard Life Insurance Company ("Beneficial Standard") and
Jefferson National Life Insurance Company of Texas
("Jefferson-Texas"), in which Conseco has had an ownership interest
since 1990 and which became wholly owned subsidiaries in August 1995;
- the subsidiaries of American Life Holdings, Inc. ("ALH", formerly The
Statesman Group, Inc.), including American Life and Casualty Insurance
Company and Vulcan Life Insurance Company;
- the subsidiaries of LPG, including Philadelphia Life Insurance
Company, Conseco Life Insurance Company (formerly Massachusetts
General Life Insurance Company prior to its name change in 1997),
Lamar Life Insurance Company and Wabash Life Insurance Company;
- the former subsidiaries of ATC, including American Travellers Life
Insurance Company ("American Travellers"), United General Life
Insurance Company and Conseco Life Insurance Company of New York
(formerly American Travellers Insurance Company of New York prior to
its name change in 1997);
- the former subsidiaries of THI, including TLIC Life Insurance Company
(which was merged into Jefferson-Texas in 1997), Transport Life
Insurance Company (which was merged into American Travellers in 1997),
and Continental Life Insurance Company;
- the former subsidiaries of CAF, including Capitol American Life
Insurance Company, Capitol National Life Insurance Company and
Frontier National Life Insurance Company;
- the subsidiaries of PFS, including Continental Life and Accident
Insurance Company, Connecticut National Life Insurance Company, Health
and Life Insurance Company of America, Manhattan National Life
Insurance Company, Pioneer Life Insurance Company and National Group
Life Insurance Company;
- certain former subsidiaries of Leucadia National Corporation
("Leucadia"), including Colonial Penn and Providential Life Insurance
Company;
- the subsidiaries of Washington National Corporation ("WNIC"),
including Washington National Insurance Company and United
Presidential Life Insurance Company; and
- Bankers National Life Insurance Company, National Fidelity Life
Insurance Company and Lincoln American Life Insurance Company.
Since 1982, Conseco has acquired 19 insurance groups and related
businesses. We continue to regularly investigate acquisition opportunities in
the insurance industry and other industries in which we operate. We evaluate
potential acquisitions based on a variety of factors, including the operating
results and financial condition of the business to be acquired, its growth
potential, management and personnel and the potential return on such acquisition
in relation to other acquisition opportunities and the internal development of
our existing business operations. No assurances can be given as to when, if at
all, or upon what terms Conseco will make any such acquisition.
Our first acquisition partnership, Conseco Capital Partners, L.P.
("Partnership I"), was dissolved in 1993 after distributing to its partners the
securities of the companies it had acquired. Conseco Capital Partners II, L.P.
("Partnership II"), our 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. We terminated its partnership activity in 1996
because changes in the regulatory and rating agency environment made it
difficult to structure leveraged acquisitions of life insurance companies.
On August 31, 1995, we purchased (the "CCP Merger") all of the shares of
common stock of CCP Insurance, Inc. ("CCP") not previously owned (representing
51 percent of CCP's outstanding shares). In the transaction, CCP was merged into
Conseco, with Conseco being the surviving corporation. As a result of the CCP
Merger, CCP's subsidiaries, Great American Reserve and Beneficial
7
<PAGE>
Standard, became wholly owned subsidiaries of Conseco. The accounts of CCP's
subsidiaries are consolidated with Conseco's accounts effective January 1, 1995.
On August 2, 1996, we acquired LPG (the "LPG Merger"). LPG became a
wholly owned subsidiary of Conseco. In the LPG Merger, we issued a total of 32.6
million shares of Conseco common stock (or common stock equivalents) with a
value of $586.8 million. We also assumed $253.1 million of notes payable of LPG.
LPG's subsidiaries sell a diverse portfolio of universal life insurance and, to
a lesser extent, annuity products to individuals.
On September 30, 1996, we acquired the remaining 62 percent of the common
shares of ALH (the "ALH Stock Purchase") not already owned by Conseco or its
affiliates for approximately $166 million in cash. ALH is a provider of
retirement savings annuities. ALH has been included in our consolidated
financial statements since ALH's acquisition by Partnership II in September
1994.
On December 17, 1996, we acquired ATC (the "ATC Merger"). ATC was merged
with and into Conseco, with Conseco being the surviving corporation. In the ATC
Merger, we 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, we
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.
On December 23, 1996, we acquired THI (the "THI Merger"). THI was merged
with and into Conseco, with Conseco being the surviving corporation. In the THI
Merger, we 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.
On December 31, 1996, we acquired the 9.6 percent of the common shares of
BLH (the "BLH Merger") not already owned by Conseco or its affiliates. BLH was
merged into a wholly owned subsidiary of Conseco. In the BLH Merger, we 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 our consolidated financial statements since November 1992,
when BLH was acquired by Partnership I.
On March 4, 1997, we acquired CAF (the "CAF Merger"). CAF became a wholly
owned subsidiary of Conseco. In the CAF Merger, we paid $552.8 million in cash
and issued 3.0 million shares of Conseco common stock (or common stock
equivalents) with a value of $117.4 million. In addition, we assumed a $31.0
million note payable of CAF, which was repaid on the merger date. CAF, through
its insurance subsidiaries, underwrites, markets and distributes individual and
group supplemental health and accident insurance.
On May 30, 1997, we acquired PFS (the "PFS Merger"). PFS became a wholly
owned subsidiary of Conseco. In the PFS Merger, we issued 9.0 million shares of
Conseco common stock (or common stock equivalents) with a value of $354.1
million. In addition, we assumed PFS's convertible subordinated notes, which
became convertible into 3.1 million shares of Conseco common stock, with a value
of $130.6 million. We also assumed a $21.3 million note payable of PFS, which
was repaid on the merger date. PFS, through its insurance subsidiaries,
underwrites, markets and distributes life insurance, annuities and health
insurance in selected niche markets throughout the United States.
On September 30, 1997, we acquired Colonial Penn (the "Colonial Penn
Purchase") and certain other assets (collectively referred to as "Colonial
Penn") from Leucadia. Colonial Penn became a wholly owned subsidiary of Conseco.
In the Colonial Penn Purchase, we paid $60.0 million in cash and issued $400.0
million of notes payable to Leucadia. Colonial Penn is principally engaged in
the underwriting and sale of "graded benefit life" insurance policies through
direct marketing and Medicare supplement insurance through independent agents.
On December 5, 1997, we acquired WNIC (the "WNIC Merger"). WNIC became a
wholly owned subsidiary of Conseco. In the WNIC Merger, we paid $400.6 million
in cash, of which $73.7 million was funded through a dividend to Conseco from
WNIC. WNIC is principally engaged in marketing and underwriting life insurance
and annuities for individuals and specialty health insurance for educators.
8
<PAGE>
ADMINISTRATION
We minimize operating expenses by centralizing, standardizing and more
efficiently performing many functions common to most life insurance companies.
These functions include underwriting and policy administration, accounting and
financial reporting, marketing, regulatory compliance, actuarial services and
asset management.
The administration of our individual and group health insurance products
involves higher volumes of claims, contacts with policyholders and operational
costs, compared to the administration of life insurance or annuity policies. We
have developed an efficient and highly automated policyholder administration
operation to minimize the costs of such large volume processing and deliver a
high level of service to our policyholders, with special emphasis on the prompt
payment of claims. In many cases, we mail a check within a week of receiving a
claim from a policyholder.
INVESTMENTS
CCM, a registered investment adviser wholly owned by Conseco, manages the
investment portfolios of Conseco's subsidiaries. CCM had approximately $32.1
billion of assets (at fair value) under management at December 31, 1997, of
which $27.0 billion were assets of Conseco's subsidiaries and $5.1 billion were
assets of unaffiliated parties. CCM's investment philosophy is to maintain a
largely investment-grade fixed-income portfolio, provide adequate liquidity for
expected liability durations and other requirements and maximize total return
through active investment management.
Investment activities are an integral part of our business; investment
income is a significant component of our total revenues. Profitability of many
of our products is significantly affected by spreads between interest yields on
investments and rates credited on insurance liabilities. Although substantially
all credited rates on SPDAs and FPDAs may be changed annually, changes in
crediting rates may not be sufficient to maintain targeted investment spreads in
all economic and market environments. In addition, competition and other
factors, including the impact of the level of surrenders and withdrawals, may
limit our ability to adjust or to maintain crediting rates at levels necessary
to avoid narrowing of spreads under certain market conditions. As of December
31, 1997, the average yield, computed on the cost basis of our investment
portfolio, was 7.5 percent, and the average interest rate credited or accruing
to our total insurance liabilities, excluding interest bonuses guaranteed for
the first year of the annuity contract only, was 5.2 percent.
We seek to balance the duration of our invested assets with the expected
duration of benefit payments arising from our insurance liabilities. At December
31, 1997, the adjusted modified duration of fixed maturities and short-term
investments was approximately 5.8 years and the duration of our insurance
liabilities was approximately 6.7 years.
For information regarding the composition and diversification of the
investment portfolio of our subsidiaries, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations -
Investments" and note 3 to the consolidated financial statements.
COMPETITION
Our businesses operate in a highly competitive environment. The financial
services industry consists of a large number of companies, some of which are
larger and have greater financial resources, broader and more diversified
product lines and larger staffs than those of Conseco. An expanding number of
banks, securities brokerage firms and other financial intermediaries also market
insurance products or offer competing products, such as mutual fund products,
traditional bank investments and other investment and retirement funding
alternatives. We also compete with many of these companies and others in
providing services for fees. In most areas, competition is based on a number of
factors, including pricing, service provided to distributors and policyholders,
and ratings. Conseco's subsidiaries must also compete with other insurers to
attract and retain the allegiance of agents.
Marketing companies, agents who market insurance products, school
districts, financial institutions and policyholders use the financial strength
ratings assigned to an insurer by independent rating agencies as one factor in
determining which insurer's products to market or purchase. Substantially all of
our primary life insurance companies have received: (i) an "A" (Excellent)
insurance company rating by A.M. Best Company ("A.M. Best"); (ii) an "AA-"
claims-paying ability rating from Duff & Phelps' Credit Rating Company ("Duff &
Phelps"); and (iii) an "A+" claims-paying ability rating from Standard & Poor's
Corporation ("Standard & Poor's").
A.M. Best insurance company ratings for the industry currently range from
"A++ (Superior)" to "F (In Liquidation)". Publications of A.M. Best indicate
that the "A" and "A-" ratings are assigned to those companies that, in A.M.
Best's opinion, have demonstrated excellent overall performance when compared to
the standards established by A.M. Best and have demonstrated a strong
9
<PAGE>
ability to meet their obligations to policyholders over a long period of time.
A.M. Best's rating procedure includes quantitative and qualitative evaluations
of a company's financial condition and operating performance. Its quantitative
evaluation is based on an analysis of a company's financial performance in the
areas of profitability, leverage/capitalization and liquidity. A.M. Best's
review also includes a qualitative evaluation of a company's spread of risk,
quality and appropriateness of reinsurance programs, quality and diversification
of assets, adequacy of policy or loss reserves, management experience and
objectives, market presence and policyholders' confidence.
In recent years, A.M. Best upgraded the ratings of several of our
subsidiaries to "A" (Excellent) from "A-" (Excellent). Among the reasons A.M.
Best cited for the ratings upgrades and reaffirmations were the benefits Conseco
will derive as a result of recent acquisitions including: (i) improved unit
costs arising from the integration of administrative, financial, investment,
marketing and underwriting functions; (ii) expanded distribution capacity and
increased cross-selling opportunities; and (iii) a more diversified product
portfolio that should generate more balanced and predictable revenue and
earnings sources. A.M. Best also views favorably the continuing improvement in
Conseco's financial leverage and our target ratio of debt to total capital of
not more than 35 percent.
Duff & Phelps' claims-paying ability ratings range from "AAA (Highest
claims-paying ability)" to "DD (Company is under an order of liquidation)." An
"AA-" rating represents "Very high claims-paying ability." A plus or minus sign
attached to a Duff & Phelps claims paying rating shows relative standing within
a ratings category.
Standard & Poor's claims-paying ability ratings range from "AAA
(Superior)" to "R (Regulatory Action)". An "A" is assigned by Standard & Poor's
to those companies which, in its opinion, have a secure claims-paying ability
and whose financial capacity to meet policyholder obligations is viewed on
balance as sound, but their capacity to meet such policyholder obligations is
somewhat more susceptible to adverse changes in economic or underwriting
conditions than more highly rated insurers. According to Standard & Poor's, a
plus or minus sign attached to a Standard & Poor's claims-paying rating shows
relative standing within a ratings category. A "q" subscript indicates that the
rating is based solely on quantitative analysis of publicly available financial
data.
Generally, rating agencies base their ratings upon information furnished
to them by the insurer and upon their own investigations, studies and
assumptions. A.M. Best's ratings, Duff & Phelps' claims-paying ratings and
Standard & Poor's claims-paying ratings are principally based upon factors of
concern to policyholders, agents and intermediaries and are not directed toward
the protection of investors. Given the competitive nature of our business and
the increasing focus placed on the aforementioned ratings, we manage our
business with the objective of preserving existing ratings and, where possible,
achieving more favorable ratings. There can be no assurance that any particular
rating will continue for any given period of time, or that it will not be
changed or withdrawn entirely if, in the judgement of the rating agency,
circumstances so warrant. If our ratings were downgraded from their current
levels, sales of our products and the persistency of our in-force policies could
be adversely affected in a material way.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The provisions of the
Omnibus Budget Reconciliation Act of 1984 and the work of the National
Association of Insurance Commissioners ("NAIC") (an association of state
regulators and their staffs) have resulted in standardized policy features for
Medicare supplement products. This increases the comparability of such policies
and may intensify competition based on factors other than product features. See
"Underwriting" and "Governmental Regulation." In addition to the products of
other insurance companies, our health insurance products compete with health
maintenance organizations, preferred provider organizations and other health
care- related institutions which provide medical benefits based on contractual
agreements.
We believe that we are able to compete effectively because: (i) we
emphasize a number of specialized distribution channels, where the ability to
respond rapidly to changing customer needs yields a competitive edge; (ii) we
are experienced in establishing and cultivating relationships with the unique
distribution networks and the independent marketing companies operating in these
specialized markets; (iii) we can offer competitive rates as a result of our
lower-than-average operating costs and higher-than-average investment yields
achieved by applying active investment portfolio management techniques; and (iv)
we have reliable policyholder administrative services, supported by customized
information technology systems.
UNDERWRITING
Under regulations promulgated by the NAIC and adopted as a result of the
Omnibus Budget Reconciliation Act of 1990, we are prohibited from underwriting
our Medicare supplement policies for certain first-time purchasers. If a person
applies for insurance within six months after becoming eligible by reason of
age, or disability in certain limited circumstances, the application may not be
rejected due to medical conditions. Some states prohibit underwriting of all
Medicare supplement policies. For other prospective Medicare supplement
policyholders, such as senior citizens who are transferring to Conseco's
products, the underwriting procedures are relatively limited, except for
policies providing prescription drug coverage.
10
<PAGE>
Before issuing long-term care or comprehensive major medical products to
individuals and groups, we generally apply detailed underwriting procedures
designed to assess and quantify the insurance risks. We require medical
examinations of applicants (including blood and urine tests, where permitted)
for certain health insurance products and for life insurance products which
exceed prescribed policy amounts. These requirements are graduated according to
the applicant's age and may vary by type of policy or product. We also rely on
medical records and the potential policyholder's written application. In recent
years, there has been significant regulatory changes with respect to
underwriting individual and group major medical plans. An increasing number of
states prohibit underwriting and/or charging higher premiums for substandard
risks. We monitor changes in state regulation that affect our products, and
consider these regulatory developments in determining where we market our
products.
Most of our life insurance policies are underwritten individually,
although standardized underwriting procedures have been adopted for certain low
face-amount life insurance coverages. After initial processing, insurance
underwriters review each file and obtain the information needed to make an
underwriting decision (such as medical examinations, doctors' statements and
special medical tests). After collecting and reviewing the information, the
underwriter either: (i) approves the policy as applied for, or with an extra
premium charge because of unfavorable factors; or (ii) rejects the application.
We underwrite group insurance policies based on the characteristics of the group
and its past claim experience. Graded benefit life insurance policies are issued
without medical examination or evidence of insurability. There is minimal
underwriting on annuities.
REINSURANCE
Consistent with the general practice of the life insurance industry, our
subsidiaries enter into both facultative and treaty agreements of indemnity
reinsurance with other insurance companies in order to reinsure portions of the
coverage provided by our insurance products. Indemnity reinsurance agreements
are intended to limit a life insurer's maximum loss on a large or unusually
hazardous risk or to diversify its risk. Indemnity reinsurance does not
discharge the original insurer's primary liability to the insured. The Company's
reinsured business is ceded to numerous reinsurers. We believe the assuming
companies are able to honor all contractual commitments, based on our periodic
review of their financial statements, insurance industry reports and reports
filed with state insurance departments.
As of December 31, 1997, the policy risk retention limit was $.8 million
or less on all of the policies of our subsidiaries. Reinsurance ceded by Conseco
represented 27 percent of gross combined life insurance in force and reinsurance
assumed represented 4.0 percent of net combined life insurance in force. At
December 31,1997, the total ceded business in force of $36.7 billion included:
(i) $5.3 billion ceded to Client Companies for which we retain assets equal to
the reserves on the business ceded; and (ii) $25.8 billion ceded to insurance
companies rated "A- (Excellent)" or better by A.M. Best. Our principal
reinsurers at December 31, 1997 (which assume approximately 65 percent of the
total ceded business in force, excluding business ceded to the Client Companies)
were American Equity Investment Life Insurance Company, Cologne Life,
Connecticut General Life Insurance Company, Employers Re, Life Reassurance
Corporation of America, Lincoln National Life Insurance Company, RGA Reinsurance
Company, Security Life of Denver and Swiss Re Life and Health America. No other
single reinsurer assumes greater than 5 percent of the total ceded business in
force.
EMPLOYEES
At December 31, 1997, Conseco had approximately 6,800 employees,
including: (i) 3,000 home office employees; (ii) 1,400 employees in our Chicago
office (primarily involved with our supplemental health operations); (iii) 1,900
employees in various locations serving as administrative centers for its
insurance operations; and (iv) 500 employees in branch offices (primarily
supporting our career agency force). None of our employees is covered by a
collective bargaining agreement. We believe that we have excellent relations
with our employees.
GOVERNMENTAL REGULATION
General
Our insurance subsidiaries are subject to regulation and supervision by
the states in which they transact business. State laws generally establish
supervisory agencies with broad regulatory authority, including the power to:
(i) grant and revoke business licenses; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for some
lines of business; (vii) establish reserve requirements; (viii) prescribe the
form and content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; (x) perform
financial, market conduct and other examinations; (xi) define acceptable
accounting principles; (xii) regulate the type and amount of permitted
investments; and (xiii) limit the amount of dividends and surplus debenture
payments that can be paid without obtaining regulatory approval. Our insurance
subsidiaries are subject to periodic examinations by state regulatory
authorities. We do not expect the results of any ongoing examinations to have a
material effect on the Company's financial condition.
11
<PAGE>
Most states have also enacted regulations on the activities of insurance
holding company systems, including acquisitions, extraordinary dividends, the
terms of surplus debentures, the terms of affiliate transactions and other
related matters. Currently, the Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in the
domiciliary states of the insurance subsidiaries (Alabama, Arizona, Arkansas,
California, Illinois, Indiana, Kentucky, Mississippi, Missouri, New York, Ohio,
Pennsylvania, Tennessee and Texas), and they routinely report to other
jurisdictions. Recently, a number of state legislatures have considered or have
enacted legislative proposals that alter, and in many cases increase, the
authority of state agencies to regulate insurance companies and holding company
systems. For further information on state laws regulating the payment of
dividends by insurance company subsidiaries, see "Management's Discussion and
Analysis of Consolidated Financial Position and Results of Operations -
Consolidated Financial Condition" and note 12 to Conseco's consolidated
financial statements.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, do affect the insurance
business. In recent years, the Office of the Comptroller of the currency has
issued a number of rulings which have expanded the ability of banks to sell
certain insurance products. The United States House of Representatives is
currently considering the Financial Services Act (H.R.10), which would (among
other things) eliminate existing restrictions on affiliations between insurance
companies, banks and securities firms. This proposed legislation in its current
form would allow insurance companies and securities firms to directly own banks
and each other while banks could own insurance companies and securities firms
indirectly through a holding company. Other provisions of the act would define
insurance products and retain jurisdiction over their regulation in the states.
Such legislation, if enacted, could result in increased competition, as well as
new opportunities, for the Company. In addition, legislation has been introduced
from time to time in recent years which, if enacted, could result in the federal
government assuming a more direct role in the regulation of the insurance
industry.
The Securities and Exchange Commission has requested comments as to
whether equity-indexed annuities, such as those sold by the Company, should be
treated as securities under the Federal securities laws rather than as insurance
products. Treatment of these products as securities would likely require
additional registration and licensing of these products and the agents selling
them, as well as cause the Company to seek additional marketing relationships
for these products.
The Risk-Based Capital for Life and/or Health Insurers Model Act (the
"Model Act") adopted by the NAIC provides a tool for insurance regulators to
determine the levels of capital and surplus an insurer must maintain in relation
to its insurance and investment risks and whether there is a need for possible
regulatory attention. The Model Act (or similar legislation or regulation) has
been adopted in states where our insurance subsidiaries are domiciled.
The Model Act provides for four levels of regulatory attention, varying
with the ratio of the company's total adjusted capital (defined as the total of
its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its risk-based capital ("RBC"). If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan to the regulatory
authority proposing corrective actions aimed at improving its capital position.
If a company's total adjusted capital is less than 75 percent but greater than
or equal to 50 percent of its RBC (the "Regulatory Action Level") , the
regulatory authority will perform a special examination of the company and issue
an order specifying corrective actions that must be followed. If a company's
total adjusted capital is less than 50 percent but greater than or equal to 35
percent of its RBC (the "Authorized Control Level"), the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control. If a company's total adjusted capital is less than 35
percent of its RBC (the "Mandatory Control Level") the regulatory authority must
place the company under its control. At December 31, 1997, the average ratio of
total adjusted capital to RBC for our insurance subsidiaries was greater than
twice the levels at which regulatory attention is triggered.
The Texas Insurance Department has adopted its own RBC requirements, the
stated purpose of which is to require a minimum level of capital and surplus to
absorb the financial, underwriting, and investment risks assumed by an insurer.
Texas' RBC requirements differ from those adopted by the NAIC in two principal
respects: (i) they use different elements to determine minimum RBC levels in
their calculation formulas; and (ii) they do not stipulate "Action Levels" (like
those described in the previous paragraph) where corrective actions are
required. However, the Commissioner of the Texas Insurance Department does have
the power to take similar corrective actions if a company does not maintain the
required minimum level of capital and surplus. Under the Texas Regulations, an
insurer also meets RBC requirements if its admitted assets exceed its
liabilities by at least 6 percent. Five of our insurance subsidiaries are
domiciled in Texas and all of them were in compliance with Texas RBC
requirements at December 31, 1997.
Most states have either enacted legislation or adopted administrative
regulations which affect the acquisition of control of insurance companies as
well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations vary from state to
state. Most states, however, require administrative approval of: (i) the
acquisition
12
<PAGE>
of 10 percent or more of the outstanding shares of an insurance company
domiciled in the state; or (ii) the acquisition of 10 percent or more of the
outstanding stock of an insurance holding company whose insurance subsidiary is
domiciled in the state. The acquisition of 10 percent of such shares is
generally deemed to be the acquisition of control for the purpose of the holding
company statutes. These regulations require the acquirer to file detailed
information concerning the acquiring parties and the plan of acquisition, and to
obtain administrative approval prior to the acquisition. In many states,
however, an insurance authority may determine that control does not exist, even
in circumstances in which a person owns or controls 10 percent or a greater
amount of securities.
On the basis of statutory statements filed with state regulators
annually, the NAIC calculates eleven financial ratios to assist state regulators
in monitoring the financial condition of insurance companies. A "usual range" of
results for each ratio is used as a benchmark. In the past, variances in certain
ratios of our insurance subsidiaries have resulted in inquiries from insurance
departments to which we have responded. Such inquiries did not lead to any
restrictions affecting our operations.
Under the solvency or guaranty laws of most states in which we do
business, our insurance subsidiaries may be required to pay guaranty fund
assessments (up to certain prescribed limits). Guaranty funds are established by
various states to fund policyholder losses or the liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength.
In certain instances, the assessments may be offset against future premium
taxes. We establish a reserve to provide for assessments related to known
insolvencies. This reserve is based upon our current expectation of the
availability of the right of offset and state guaranty fund assessment bases.
However, changes in the basis whereby assessments are charged to individual
companies or changes to the availability of the right to offset assessments
against premium tax payments could materially affect our results of operations.
Our insurance subsidiaries' statutory financial statements for the year ended
December 31, 1997, include $7.2 million of expenses as a result of such
assessments.
Health Care
Most states mandate minimum benefit standards and loss ratios for
accident and health insurance policies. We are generally required to maintain,
with respect to our individual long-term care policies, minimum anticipated loss
ratios over the entire period of coverage of not less than 60 percent. With
respect to our Medicare supplement policies, we are generally required to attain
and maintain an actual loss ratio, after three years, of not less than 65
percent. We provide, to the insurance departments of all states in which we
conduct business, annual calculations that demonstrate compliance with required
minimum loss ratios for both long-term care and Medicare supplement insurance.
These calculations are prepared utilizing statutory lapse and interest rate
assumptions. In the event we have failed to maintain minimum mandated loss
ratios, our insurance subsidiaries could be required to provide retrospective
refunds and/or prospective rate reductions. We believe that our insurance
subsidiaries currently comply with all applicable mandated minimum loss ratios.
NAIC model regulations, adopted in substantially all states, created 10
standard Medicare supplement plans (Plans A through J). Plan A provides the
least extensive coverage, while Plan J provides the most extensive coverage.
Under NAIC regulations, Medicare insurers must offer Plan A, but may offer any
of the other plans at their option. Conseco currently offers nine of the model
plans. We have declined to offer Plan J, due in part to its high benefit levels
and, consequently, high costs to the consumer.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
was enacted in 1996. HIPAA sets forth minimum federal standards for group and
individual health insurance, including requirements relating to the
availability, portability and renewability of health coverage.
Numerous proposals to reform the current health care system have been
introduced in Congress and the state legislatures. Proposals have included,
among other things, modifications to the existing employer-based insurance
system, a quasi-regulated system of "managed competition" among health plans,
and a single-payer, public program. Changes in health care policy could
significantly affect our business. Federal comprehensive major medical or
long-term care programs, if proposed and implemented, could partially or fully
replace some of Conseco's current products, for example.
A number of states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge for health care
coverages between new business and renewal business for similar demographic
groups. State legislation has also been adopted or is being considered that
would make health insurance available to all small groups by requiring coverage
of all employees and their dependents, by limiting the applicability of
pre-existing conditions exclusions, by requiring insurers to offer a basic plan
exempt from certain benefits as well as a standard plan, or by establishing a
mechanism to spread the risk of high risk employees to all small group insurers.
The NAIC recently adopted model long-term care policy language providing
nonforfeiture benefits and has proposed a rate stabilization standard for
long-term care policies. Various bills proposed in the U.S. Congress would
provide for the implementation of certain minimum consumer protection standards
for inclusion in all long-term care policies, including guaranteed renewability,
13
<PAGE>
protection against inflation and limitations on waiting periods for pre-existing
conditions. Other recently adopted legislation permits premiums paid for
qualified long-term care insurance to be treated as tax-deductible medical
expenses and for benefits received on such policies to be excluded from taxable
income.
We cannot predict with certainty the effect that any proposals, if
adopted, or legislative developments could have on our business and operations.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by our
insurance subsidiaries generally provide the policyholder with an income tax
advantage, as compared to other savings investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until it is received by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits and life
insurance benefits, which accrue prior to the death of the policyholder, are
generally not taxable until paid. Life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably, as
opposed to the methods used for some other investments which tend to accelerate
taxable income into earlier years. The tax advantage for annuities and life
insurance is provided in the Internal Revenue Code (the "Code"), and is
generally followed in all states and other United States taxing jurisdictions.
Accordingly, the tax advantage is subject to change by Congress and by the
legislatures of the respective taxing jurisdictions.
In February of 1998, President Clinton released various revenue proposals
and tax changes to be considered in the current federal budget. Such proposals
contained numerous tax increases directed at the insurance industry, of which
the more significant ones were as follows: taxing asset reallocations within
variable annuities and exchanges of variable annuities, reducing the tax basis
of insurance and annuity contracts for mortality charges and modifying tax
reserving rules for annuity contracts. We have joined the insurance industry and
other groups opposing these taxes upon savings, and we expect that these
proposed changes will not be enacted into legislation.
Our insurance company subsidiaries are taxed under the life insurance
company provisions of the Code. Provisions in the Code require a portion of the
expenses incurred in selling insurance products to be deducted over a period of
years, as opposed to immediate deduction in the year incurred. This provision
increases the tax for statutory accounting purposes, which reduces statutory
surplus and, accordingly, decreases the amount of cash dividends that may be
paid by the life insurance subsidiaries. As of December 31, 1997, the cumulative
taxes paid by our insurance subsidiaries as a result of this provision were
$327.8 million.
The Company had tax loss carryforwards at December 31, 1997, of
approximately $737.1 million, portions of which begin expiring in 1999. However,
the amount of such loss that may be offset against current taxable income is
subject to the following limitations: (i) losses may be offset against income of
other corporate entities only if such entities are included in the same
consolidated tax return (insurance companies are currently not eligible for
inclusion in Conseco's consolidated tax return until five years after they are
acquired); (ii) losses incurred in non-life companies (which comprise most of
the loss carryforwards) may offset only a portion of income from life companies
in the same consolidated tax return; and (iii) some loss carryforwards may not
be used to offset taxable income of entities acquired after the loss was
incurred. We, however, believe we will be able to utilize all current loss
carryforwards before they expire.
ITEM 2. PROPERTIES.
Our principal operations are located on a 170-acre corporate campus in
Carmel, Indiana, immediately north of Indianapolis. The 11 buildings on the
campus (all but one of which are owned) contain approximately 810,000 square
feet of space and house Conseco's executive offices and certain administrative
operations of its subsidiaries. The campus has ample room for additional
buildings to support future growth.
Our supplemental health products are primarily administered from a single
facility of 300,000 square feet in downtown Chicago, Illinois, leased under an
agreement having a remaining life of 10 years. We also lease approximately
130,000 square feet of warehouse space in a second Chicago facility; this lease
has a remaining life of five years. Conseco owns an office building in Kokomo,
Indiana (100,000 square feet), and two office buildings in Rockford, Illinois
(total of 169,000 square feet), which serve as administrative centers for
portions of our insurance operations. Conseco owns one office building in
Philadelphia, Pennsylvania (127,000 square feet), which serves as the
administrative center for our direct response life insurance operations;
approximately 60 percent of this space is occupied by the Company, with the
remainder leased to tenants. Conseco leases 24,000 square feet of office space
in Bensalem, Pennsylvania, and 4,000 square feet of office space in Sarasota,
Florida, for use by our long-term care insurance marketing operations; these
leases expire in 2000 and 1998, respectively. Conseco leases 22,000 square feet
of office space in Schaumburg, Illinois, for use by our major medical marketing
and certain information technology operations. Conseco also leases
14
<PAGE>
210 sales offices in various states totaling approximately 363,000 square feet;
these leases are short-term in length, with remaining lease terms ranging from
one to five years.
ITEM 3. LEGAL PROCEEDINGS.
Conseco and its subsidiaries are involved in lawsuits primarily related
to their operations. Most of these lawsuits involve claims under insurance
policies or other contracts of the Company. None of the lawsuits currently
pending, either individually or in the aggregate, is expected to have a material
adverse effect on Conseco's consolidated financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
<PAGE>
<TABLE>
<CAPTION>
OPTIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Officer Positions with Conseco, principal
name and age (a) Since occupation and business experience (b)
------------ ----- ----------------------------------
<S> <C> <C>
Stephen C. Hilbert, 52......... 1979 Since 1979, Chairman of the Board and Chief Executive Officer and, since
1988, President of Conseco.
Ngaire E. Cuneo, 47 ........... 1992 Since 1992, Executive Vice President, Corporate Development and, since
1994, Director of Conseco; from 1986 to 1992, Senior Vice President and
Corporate Officer of General Electric Capital Corporation.
Rollin M. Dick, 66............. 1986 Since 1986, Executive Vice President, Chief Financial Officer and Director of
Conseco.
Donald F. Gongaware, 62........ 1985 Since 1985, Executive Vice President and Director of Conseco; since 1989,
Chief Operations Officer of Conseco; and, since 1996, President of Conseco
Marketing, LLC. Mr. Gongaware is resigning from these positions (other than
as director of Conseco) effective March 31, 1998.
John J. Sabl, 46............... 1997 Since 1997, Executive Vice President, General Counsel and Secretary of
Conseco; from 1983 to 1997 Partner in the law firm of Sidley & Austin.
James S. Adams, 38............. 1997 Since 1997, Senior Vice President, Chief Accounting Officer and Treasurer of
Conseco; from 1989 to present, Senior Vice President and Treasurer of various
Conseco subsidiaries.
Thomas J. Kilian, 47........... 1998 Effective March 31, 1998, Executive Vice President and Chief Operations Officer
of Conseco and President of Conseco Marketing, LLC; from 1996 to March 31,
1998, President of Conseco Services, LLC (responsible for insurance operations,
data processing, human resources and administrative services for various
Conseco subsidiaries); from 1989 to 1996, Senior Vice President of data
processing for various Conseco subsidiaries.
- -------------------
<FN>
(a) The executive officers serve as such at the discretion of the Board of
Directors and are elected annually.
(b) Business experience is given for at least the last five years.
</FN>
</TABLE>
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The common stock of Conseco (trading symbol "CNC") has been listed for
trading on the New York Stock Exchange (the "NYSE") since 1986. The following
table sets forth the quarterly dividends paid per share and the ranges of high
and low sales prices per share on the NYSE for the last two fiscal years, based
upon information supplied by the NYSE. All applicable per share data have been
adjusted for the two-for-one stock splits distributed April 1, 1996, and
February 11, 1997.
<TABLE>
<CAPTION>
Market price
Period ------------ Dividend
------ High Low paid
---- --- ----
1996:
<S> <C> <C> <C>
First Quarter.................................. $18-5/32 $14-15/16 $.00500
Second Quarter................................. 20-3/8 17-3/8 .01000
Third Quarter.................................. 24-11/16 17-5/8 .01000
Fourth Quarter................................. 33-1/8 24-7/16 .03125
1997:
First Quarter.................................. $43-7/8 $30-3/4 $.03125
Second Quarter................................. 42-7/8 34-1/4 .03125
Third Quarter.................................. 50 35-1/8 .03125
Fourth Quarter................................. 50-1/16 39-7/8 .12500
</TABLE>
As of March 13, 1998, there were approximately 74,000 holders of the
outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
Cash dividends are paid quarterly at an amount determined by our Board of
Directors. Our general policy is to retain most of our earnings. Retained
earnings have been used: (i) to finance the growth and development of the
Company's business through acquisitions or otherwise; (ii) to pay preferred
stock dividends; (iii) to pay distributions on the Company-obligated mandatorily
redeemable preferred stock of subsidiary trusts; (iv) to repurchase common stock
on those occasions when we have determined that our shares were undervalued in
the market and that the use of funds for stock repurchases would not interfere
with other cash needs; and (v) to pay dividends on common stock.
We have paid all cumulative dividends on our preferred stock and
distributions on our Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts when due. We are prohibited from paying common
stock dividends if such payments are not current. Certain Conseco financing
agreements require the Company to maintain financial ratios which could also
limit its ability to pay dividends.
Our ability to pay dividends depends primarily on the receipt of cash
dividends and other cash payments from our subsidiaries. The principal operating
subsidiaries of Conseco are life insurance companies organized under state laws
and subject to regulation by state insurance departments. These laws and
regulations limit the ability of insurance subsidiaries to make cash dividends,
loans or advances to a holding company such as Conseco. However, these laws
generally permit the payment, without prior approval, of annual dividends which
in the aggregate do not exceed the greater of (or in a few states, the lesser
of): (i) the subsidiary's prior year net gain from operations; or (ii) 10
percent of surplus attributable to policyholders at the prior year-end, both
computed on the statutory basis of accounting prescribed for insurance
companies. See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations -- Liquidity of Conseco (Parent Company)."
17
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
Years ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income..................................... $3,410.8 $1,654.2 $1,465.0 $1,285.6 $1,293.8
Net investment income....................................... 1,825.3 1,302.5 1,142.6 385.7 896.2
Net investment gains (losses) .............................. 266.5 60.8 204.1 (30.5) 242.6
Total revenues.............................................. 5,568.4 3,067.3 2,855.3 1,862.0 2,636.0
Interest expense on notes payable........................... 109.4 108.1 119.4 59.3 58.0
Total benefits and expenses................................. 4,565.3 2,573.7 2,436.8 1,537.6 2,025.8
Income before income taxes, minority interest and
extraordinary charge...................................... 1,003.1 493.6 418.5 324.4 610.2
Extraordinary charge on extinguishment of debt, net of tax.. 6.9 26.5 2.1 4.0 11.9
Net income.................................................. 567.3 252.4 220.4 150.4 297.0
Preferred stock dividends and charge related to induced
conversions of convertible preferred stock................ 21.9 27.4 18.4 18.6 20.6
Net income applicable to common stock....................... 545.4 225.0 202.0 131.8 276.4
PER SHARE DATA (b)
Net income, basic........................................... $2.94 $2.15 $ 2.48 $ 1.31 $ 2.74
Net income, diluted......................................... 2.64 1.82 2.12 1.22 2.20
Dividends declared per common share......................... .313 .083 .046 .125 .075
Book value per common share outstanding..................... 20.22 16.86 10.22 5.22 8.45
Shares outstanding at year-end.............................. 186.7 167.1 81.0 88.7 101.2
Weighted average shares outstanding for diluted earnings.... 210.2 138.9 103.9 123.4 133.8
BALANCE SHEET DATA - PERIOD END
Total assets................................................ $35,914.8 $25,612.7 $17,297.5 $10,811.9 $13,749.3
Notes payable for which Conseco is directly liable.......... 1,906.7 1,094.9 871.4 191.8 413.0
Notes payable of affiliates, not direct
obligations of Conseco.................................... - - 584.7 611.1 290.3
Commercial paper............................................ 448.2 - - - -
Total liabilities........................................... 30,640.1 21,829.7 15,782.5 9,743.2 12,382.9
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.............. 1,383.9 600.0 - - -
Preferred stock........................................... - 97.0 110.7 130.1 -
Common stock.............................................. .7 .7 292.6 191.6 223.8
Shareholders' equity ....................................... 3,890.1 3,085.3 1,111.7 747.0 1,142.6
OTHER FINANCIAL DATA (b) (c)
Premiums collected (d)...................................... $5,055.7 $3,280.2 $3,106.5 $1,879.1 $2,140.1
Operating earnings (e)...................................... 574.9 267.7 131.3 151.7 162.0
Operating earnings per diluted common share (e)............. 2.74 1.93 1.26 1.23 1.20
Shareholders' equity excluding unrealized appreciation
(depreciation) of fixed maturity securities (f)........... 3,712.9 3,045.5 999.1 884.7 1,055.2
Book value per common share outstanding, excluding
unrealized appreciation (depreciation) of fixed
maturity securities (f)................................... 19.27 16.62 8.83 6.77 7.58
<FN>
(a) Comparison of selected consolidated financial data in the table above is
significantly affected by: (i) the acquisitions consummated by
Partnership I and Partnership II; (ii) the sale of Western National Life
Insurance Company ("Western National") in 1994; (iii) the transactions
affecting Conseco's ownership interest in BLH and CCP during 1993 through
1996; (iv) the LPG Merger (completed effective July 1, 1996); (v) the ATC
Merger (December 31, 1996); (vi) the THI Merger (December 31, 1996);
(vii) the CAF Merger (January 1, 1997); (viii) the PFS Merger (April 1,
1997); (ix) the Colonial Penn Purchase (September 30, 1997); and (x) the
WNIC Merger (December 1, 1997). For periods beginning with their
acquisitions by
18
<PAGE>
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 CCP
Merger, the financial statements of CCP's subsidiaries were 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 Western
National were consolidated with the financial statements of Conseco.
Following the completion of the initial public offering of Western
National in early 1994 (and subsequent disposition of Conseco's remaining
equity interest in Western National), the financial statements of Western
National 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.
On September 30, 1996, Conseco acquired all of the common stock of ALH
which Conseco did not already own from Partnership II. Business
combinations completed in 1997 and 1996 are included in Conseco's
financial statements on the effective date of the acquisition and are
described in the notes to the consolidated financial statements.
(b) All share and per-share amounts have been restated to reflect the
two-for-one stock splits paid on February 11, 1997 and April 1, 1996.
Prior period earnings per share amounts have been restated to comply with
the new reporting standards as described in note 1 to the consolidated
financial statements.
(c) Amounts under this heading are included to assist the reader in analyzing
the Company'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 generally accepted accounting
principles ("GAAP").
(d) Includes premiums received from universal life products and products
without mortality or morbidity risk. Such premiums are not reported as
revenues under GAAP and were $2,099.4 million in 1997; $1,881.3 million
in 1996; $1,757.5 million in 1995; $634.6 million in 1994; and $891.9
million in 1993.
(e) 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 nonrecurring
charges (net of income taxes).
(f) Excludes the effects 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 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 note 1 to the consolidated
financial statements.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis reviews the consolidated financial
condition of Conseco at December 31, 1997 and 1996, the consolidated results of
operations for the three years ended December 31, 1997, and where appropriate,
factors that may affect future financial performance. This discussion should be
read in conjunction with the accompanying consolidated financial statements,
notes thereto and selected consolidated financial data.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in other filings by the Company with the
Securities and Exchange Commission, press releases, presentations by the Company
or its management or oral statements) relative to markets for the Company's
products and trends in the Company's operations or financial results, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) general economic conditions and other
factors, including prevailing interest rate levels, stock market performance and
health care inflation, which may affect the ability of the Company to sell its
products, the market value of the Company's investments and the lapse rate and
profitability of the Company's policies; (ii) the Company's ability to achieve
anticipated levels of operational efficiencies at recently acquired companies,
as well as through other cost-saving initiatives; (iii) customer response to new
products, distribution channels and marketing initiatives; (iv) mortality,
morbidity, use of health care services and other factors that may affect the
profitability of the Company's insurance products; (v) changes in the federal
income tax laws and regulations that may affect the relative tax advantages of
some of the Company's products; (vi) increasing competition in the sale of the
Company's products; (vii) regulatory changes or actions, including those
relating to regulation of financial services affecting (among other things) bank
sales and underwriting of insurance products, regulation of the sale,
underwriting and pricing of insurance products, and health care regulation
affecting the Company's health insurance products; (viii)
19
<PAGE>
the availability and terms of future acquisitions; and (ix) the risk factors or
uncertainties listed from time to time in the Company's other filings with the
Securities and Exchange Commission.
Consolidated results and analysis
Our 1997 operating earnings were $574.9 million, or $2.74 per diluted
share, up 115 percent and 42 percent, respectively, over 1996. Operating
earnings increased as a result of the LPG Merger (completed effective July 1,
1996), the ALH Stock Purchase (September 30, 1996), the ATC Merger (December 31,
1996), the THI Merger (December 31, 1996), the BLH Merger (December 31, 1996),
the CAF Merger (January 1, 1997), the PFS Merger (April 1, 1997), the Colonial
Penn Purchase (September 30, 1997) and the WNIC Merger (December 1, 1997) and as
a result of the increased business in force of these acquired companies and
companies previously owned. The percentage increase in operating earnings was
greater than the percentage increase in operating earnings per diluted share
primarily because of the 51 percent increase in weighted average diluted common
shares or equivalents outstanding during 1997. The increase in weighted average
diluted shares resulted from shares issued in certain 1997 and 1996 acquisitions
(the LPG Merger, the ATC Merger, the THI Merger, the BLH Merger, the CAF Merger
and the PFS Merger), partially offset by repurchases of Conseco common stock.
Our 1996 operating earnings were $267.7 million, or $1.93 per diluted
share, up 104 percent and 53 percent, respectively, over 1995. Operating
earnings increased as a result of the LPG Merger, the ALH Stock Purchase, the
effect of increased ownership of BLH as a result of purchases of BLH common
stock during 1995 and 1996, and profit improvements in each of our segments.
Operating earnings for 1996 were not affected by the ATC Merger, the THI Merger
or the BLH Merger, all of which were recorded as of December 31, 1996. The
percentage increase in operating earnings was greater than the increase in
operating earnings per diluted share primarily because of the additional common
shares or equivalents outstanding in 1996 resulting from: (i) the LPG Merger;
and (ii) the Company's January 1996 offering of Preferred Redeemable Increased
Dividend Equity Securities, 7% PRIDES Convertible Preferred Stock ("PRIDES"),
which are mandatorily convertible into shares of Conseco common stock.
Net income of $567.3 million in 1997, or $2.64 per diluted share,
included: (i) net investment gains (net of related costs, amortization and
taxes) of $44.1 million, or 21 cents per diluted share; (ii) an extraordinary
charge of $6.9 million, or 3 cents per share, related to early retirement of
debt; (iii) a charge of 7 cents per share related to the induced conversion of
preferred stock (treated as a preferred stock dividend); and (iv) nonrecurring
charges totaling $44.8 million, or 21 cents per share. Nonrecurring charges
include: (i) $40.5 million related to our Medicare supplement business in
Massachusetts; and (ii) $4.3 million related to the death of an executive
officer. Regulators in Massachusetts have not allowed premium increases for
Medicare supplement products necessary to avoid losses on the business. We are
currently seeking rate increases. We are no longer writing new Medicare
supplement business in Massachusetts. We have written off the cost of policies
purchased and produced and accrued additional claim reserves related to our
in-force Massachusetts Medicare supplement business due to the estimated premium
deficiencies.
Net income of $252.4 million in 1996, or $1.82 per diluted share,
included: (i) net investment gains (net of related costs, amortization and
taxes) of $11.2 million, or 8 cents per diluted share; and (ii) an extraordinary
charge of $26.5 million, or 19 cents per share, related to early retirement of
debt. Net income of $220.4 million in 1995, or $2.12 per diluted share,
included: (i) net investment gains (net of related costs, amortization and
taxes) of $16.3 million, or 16 cents per share; (ii) restructuring income of
$74.9 million, or 72 cents per share, arising from the release of deferred
income taxes previously accrued on income related to CCP and BLH (such deferred
tax was no longer required when Conseco's ownership of these companies exceeded
80 percent); and (iii) an extraordinary charge of $2.1 million, or 2 cents per
share, related to early retirement of debt.
Total revenues include net investment gains of $266.5 million in 1997,
$60.8 million in 1996 and $204.1 million in 1995. Excluding net investment
gains, total revenues were $5.3 billion in 1997, up 76 percent from $3.0 billion
in 1996. Total revenues in 1997 include a full year of activity for acquisitions
completed in 1996 and the revenues of CAF, PFS, Colonial Penn and WNIC in the
periods subsequent to their acquisitions. Total revenues in 1996 include LPG
revenues after July 1, 1996. Total revenues, excluding net investment gains,
were up 13 percent in 1996 from $2.7 billion in 1995.
20
<PAGE>
Results of operations by segment for the three years ended December 31,
1997:
The following tables and narratives summarize the results of our
operations by business segment. All amounts reported in these summaries relate
solely to periods after the companies were included in our consolidated
financial statements.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Income before income taxes, minority interest and extraordinary charge:
Supplemental health:
Operating income...........................................................$ 408.0 $ 136.6 $ 96.0
Net investment gains, net of related costs................................. 26.3 .1 1.1
Nonrecurring charges....................................................... (62.4) - -
--------- --------- --------
Income before income taxes, minority interest and extraordinary charge 371.9 136.7 97.1
--------- -------- --------
Annuities:
Operating income .......................................................... 305.1 255.0 244.1
Net investment gains (losses), net of related costs and amortization ...... 53.2 (.7) 72.0
--------- -------- --------
Income before income taxes, minority interest and extraordinary charge 358.3 254.3 316.1
--------- -------- --------
Life insurance:
Operating income........................................................... 304.7 126.8 74.8
Net investment gains (losses), net of related costs and amortization....... 2.4 (2.0) (4.6)
--------- -------- ---------
Income before income taxes, minority interest and extraordinary charge 307.1 124.8 70.2
--------- -------- --------
Individual and group major medical:
Operating income........................................................... 40.2 32.1 35.1
Net investment gains, net of related costs................................. .1 - .1
--------- -------- --------
Income before income taxes, minority interest and extraordinary charge 40.3 32.1 35.2
--------- -------- ---------
Other:
Operating income........................................................... 58.3 30.7 31.5
Net investment gains (losses), net of related costs........................ 3.3 27.4 (6.3)
--------- -------- --------
Income before income taxes, minority interest and extraordinary charge 61.6 58.1 25.2
--------- -------- --------
Corporate:
Interest and other corporate expenses...................................... (126.8) (112.4) (140.5)
Nonrecurring charges....................................................... (9.3) - -
Net investment gains, net of related costs................................. - - 15.2
--------- -------- --------
Net corporate expenses................................................. (136.1) (112.4) (125.3)
--------- -------- --------
Consolidated:
Operating income........................................................... 989.5 468.8 341.0
Net investment gains, net of related costs and amortization ............... 85.3 24.8 77.5
Nonrecurring charges....................................................... (71.7) - -
--------- -------- --------
Income before income taxes, minority interest and extraordinary charge 1,003.1 493.6 418.5
Income tax expense.............................................................. 376.6 179.8 87.0
--------- -------- --------
Income before minority interest and extraordinary charge............... 626.5 313.8 331.5
Minority interest in consolidated subsidiaries:
Distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts............................................ 49.0 3.6 -
Dividends on preferred stock of subsidiaries................................. 3.3 8.9 11.9
Equity in earnings of subsidiaries........................................... - 22.4 97.1
--------- -------- --------
Income before extraordinary charge.................................... 574.2 278.9 222.5
Extraordinary charge on extinguishment of debt, net of taxes and
minority interest............................................................ 6.9 26.5 2.1
--------- -------- --------
Net income.............................................................$ 567.3 $ 252.4 $ 220.4
========= ======== ========
</TABLE>
21
<PAGE>
Supplemental health:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Medicare supplement (first-year)............................. $ 101.9 $ 72.5 $ 81.1
Medicare supplement (renewal)................................ 694.5 545.4 515.6
--------- ------- -------
Subtotal - Medicare supplement........................... 796.4 617.9 596.7
--------- ------- -------
Long-term care (first-year).................................. 143.4 51.6 44.4
Long-term care (renewal)..................................... 520.5 141.3 97.7
--------- ------- -------
Subtotal - long-term care................................ 663.9 192.9 142.1
--------- ------- -------
Specified-disease (first-year)............................... 44.7 - -
Specified-disease (renewal).................................. 338.7 - -
--------- ------- --------
Subtotal - specified-disease............................. 383.4 - -
--------- ------- -------
Total supplemental health premiums collected............. $1,843.7 $ 810.8 $738.8
======== ======= ======
Insurance policy income......................................... $1,858.1 $ 805.9 $756.9
Net investment income........................................... 273.8 66.6 66.9
-------- ------- -------
Total revenues (a)......................................... 2,131.9 872.5 823.8
--------- ------- -------
Insurance policy benefits and change in future policy benefits.. 1,217.5 531.8 525.6
Amortization related to operations.............................. 232.1 87.8 81.6
Interest expense on investment borrowings....................... 6.3 1.1 1.4
Other operating costs and expenses.............................. 268.0 115.2 119.2
--------- ------- -------
Total benefits and expenses................................ 1,723.9 735.9 727.8
--------- ------- -------
Operating income before income taxes,
minority interest and extraordinary
charge................................................... 408.0 136.6 96.0
Net investment gains, net of related costs...................... 26.3 .1 1.1
Nonrecurring charges............................................ (62.4) - -
--------- ------- -------
Income before income taxes, minority
interest and extraordinary charge...................... $ 371.9 $136.7 $97.1
========= ====== =====
Loss ratios:
Medicare supplement products................................. 69.1% 68.2% 71.7%
Long-term care products...................................... 63.6 58.7 60.5
Specified-disease products................................... 61.6 - -
<FN>
(a) Revenues exclude net investment gains.
</FN>
</TABLE>
General: This segment includes Medicare supplement and long-term care
insurance products, primarily sold to senior citizens, and effective January 1,
1997 (as a result of the acquisitions of CAF and THI), specified-disease
products. Through December 31, 1996, the supplemental health operations consist
solely of Bankers Life's Medicare supplement and long-term care products,
distributed through a career agency force. The segment's 1997 results of
operations are significantly affected by recent acquisitions (ATC, THI and CAF,
effective January 1, 1997; PFS, effective April 1, 1997; and Colonial Penn,
effective September 30, 1997). The supplemental health products of THI, CAF,
ATC, PFS and Colonial Penn are all distributed through professional independent
producers. The profitability of this segment largely depends on the overall
level of sales, persistency of in-force business, claim experience and expense
management.
22
<PAGE>
Premiums collected by this segment in 1997 were $1,843.7 million, up 127
percent from 1996. Premiums collected in 1996 increased to $810.8 million, up
9.7 percent.
Medicare supplement policies accounted for 43 percent of this segment's
collected premiums in 1997, compared with more than 75 percent of this segment's
collected premiums in 1996 and 1995. The change in the mix of premiums collected
reflects the more diverse supplemental health lines sold by Conseco as a result
of the recent acquisitions. Collected premiums on Medicare supplement policies
increased 29 percent in 1997, to $796.4 million, and increased 3.6 percent in
1996, to $617.9 million. Such increases primarily reflect the recent
acquisitions and a larger base of premiums due to rate increases. The sales of
Medicare supplement policies have been affected by: (i) steps taken to improve
profitability by increasing premium rates and changing both the commission
structure and the underwriting criteria for these policies; and (ii) increased
competition from alternative providers, including HMOs.
Premiums collected on long-term care policies increased 244 percent in
1997, to $663.9 million, and 36 percent in 1996, to $192.9 million. First-year
collected premiums in 1997, 1996 and 1995 were $143.4 million, $51.6 million and
$44.4 million, respectively. The increase in long-term care premiums collected
primarily reflects the acquisition of recently acquired companies.
Premiums collected on specified-disease policies were $383.4 million in
1997, substantially all of which were collected by recently acquired companies.
Insurance policy income comprises premiums earned on the segment's
policies and has increased over the last three years consistent with the
explanations provided above for premiums collected.
Net investment income increased 311 percent in 1997, to $273.8 million,
and did not change materially in 1996 compared with 1995. Such investment income
fluctuates when changes occur in: (i) the amount of average invested assets
supporting insurance liabilities; and (ii) the yield earned on invested assets.
During 1997, the segment's average invested assets increased approximately 278
percent, to $3.4 billion, and the net yield on invested assets increased to 8.0
percent from 7.6 percent. During 1996, the segment's average invested assets
increased approximately 5.0 percent, to $.9 billion, and the net yield on
invested assets decreased from 8.0 percent to 7.6 percent. Invested assets grew
as a result of the growth in insurance liabilities related to the segment's
business.
Insurance policy benefits and change in future policy benefits increased
in 1997, reflecting recent acquisitions, the larger amount of business in force
on which benefits are incurred, and a higher incidence of claims. This account
increased in 1996 as a result of the larger amount of business in force on which
benefits are incurred, net of the lower incidence of claims. In 1997, the ratio
of policy benefits to insurance policy income for the Medicare supplement
policies increased to 69.1 percent from 68.2 percent, reflecting the different
characteristics of such policies in recently acquired companies as well as
fluctuations in claim experience. In 1996, the ratio of policy benefits to
insurance policy income for Medicare supplement policies fell 3.5 percentage
points to 68.2 percent, reflecting the premium rate increases implemented in
1996 and 1995.
Changes in the ratio of policy benefits to insurance policy income for
long-term care policies reflect different characteristics of such policies in
recently acquired companies as well as fluctuations in claim experience and
reserve development. In 1997, the long-term care loss ratio increased by 4.9
percentage points, to 63.6 percent. In 1996, the long-term care loss ratio fell
by 1.8 percentage points, to 58.7 percent.
The ratio of policy benefits to insurance policy income for
specified-disease policies was 61.6 percent in 1997. Such products were not sold
by Conseco prior to the acquisitions of THI and CAF.
Amortization related to operations includes amortization of: (i) the cost
of policies produced; (ii) the cost of policies purchased; and (iii) goodwill
related to this segment's business. The amount of amortization increased
primarily because of the increase in balances subject to amortization as a
result of recent acquisitions.
Interest expense on investment borrowings was affected by changes in
investment borrowing activities during the last three years and the changes in
interest rates paid on such borrowings.
Other operating costs and expenses increased in 1997 from the increased
business of recently acquired companies. Such expenses did not change materially
in 1996 compared with 1995.
23
<PAGE>
Net investment gains, net of related costs, often fluctuate from period
to period.
Nonrecurring charges for 1997 represent an increase to claim reserves of
$41.5 million and the write-off of cost of policies produced and cost of
policies purchased of $20.9 million related to Medicare supplement business in
the state of Massachusetts. Regulators in that state have not allowed premium
increases for Medicare supplement products necessary to avoid losses on the
business. We are currently seeking rate increases. We are no longer writing new
Medicare supplement business in Massachusetts.
24
<PAGE>
<TABLE>
<CAPTION>
Annuities:
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Annuity premiums collected:
Traditional fixed (first-year)................................ $ 857.8 $1,148.6 $1,536.4
Traditional fixed (renewal)................................... 79.4 92.7 62.8
--------- -------- --------
Subtotal - traditional fixed.............................. 937.2 1,241.3 1,599.2
--------- -------- --------
Market value - adjusted (first-year).......................... 165.7 237.2 27.7
Market value - adjusted (renewal)............................. 13.8 20.5 3.1
--------- -------- --------
Subtotal - market value - adjusted........................ 179.5 257.7 30.8
--------- -------- --------
Equity-indexed (all first-year)............................... 387.7 80.4 -
--------- -------- --------
Variable annuities (first-year)............................... 127.4 37.9 17.2
Variable annuities (renewal).................................. 57.8 53.0 46.7
--------- -------- --------
Subtotal - variable annuities............................. 185.2 90.9 63.9
--------- -------- --------
Total annuity premiums collected.......................... $1,689.6 $1,670.3 $1,693.9
======== ======== ========
Insurance policy income.......................................... $ 96.8 $ 77.6 $ 68.4
Net investment income:
General account invested assets............................... 960.9 891.2 851.5
Change in fair value of S&P 500 Call Options.................. 39.4 - -
Separate account assets....................................... 70.3 48.4 28.8
--------- -------- --------
Total revenues (a)...................................... 1,167.4 1,017.2 948.7
--------- -------- --------
Insurance policy benefits and change in future policy benefits... 74.1 67.3 61.8
Amounts added to policyholder account balances:
Annuity products other than those listed below................ 542.2 523.2 505.0
Equity-indexed products based on S&P 500 Index................ 39.3 - -
Variable annuity products..................................... 70.3 48.4 28.8
Amortization related to operations............................... 84.8 76.9 64.9
Interest expense on investment borrowings........................ 23.2 14.3 16.9
Other operating costs and expenses............................... 28.4 32.1 27.2
--------- -------- --------
Total benefits and expenses (a)......................... 862.3 762.2 704.6
--------- -------- --------
Operating income before income taxes, minority
interest and extraordinary charge..................... 305.1 255.0 244.1
Net investment gains (losses), net of related costs and
amortization.................................................. 53.2 (.7) 72.0
--------- -------- --------
Income before income taxes, minority interest
and extraordinary charge.............................. $ 358.3 $ 254.3 $ 316.1
========= ========= ========
Weighted average gross interest spread on annuity products (b)... 2.8% 2.9% 3.1%
=== === ===
Total traditional fixed and market value-adjusted annuity
product insurance liabilities at end of period................ $13,007.4 $11,998.6 $10,169.1
========= ========= =========
Total annuity product insurance liabilities at end of period..... $14,150.8 $12,421.8 $10,396.1
========= ========= =========
<FN>
(a) Revenues exclude net investment gains (losses); benefits and expenses
exclude amortization related to net investment gains (losses).
(b) Excludes variable annuity products where the credited amount is based on
investment income from segregated investments.
</FN>
</TABLE>
General: This segment includes traditional fixed rate annuity products
(SPDAs, FPDAs and SPIAs), market value-adjusted annuity products, equity-indexed
annuity products and variable annuities sold through both career agents and
professional independent producers. The profitability of this segment largely
depends on the investment spread earned (i.e., the excess of investment earnings
25
<PAGE>
over interest credited on annuity deposits), the persistency of in-force
business, and expense management. In addition, comparability between periods is
affected by: (i) the LPG Merger, effective July 1, 1996; and (ii) the ALH Stock
Purchase, effective September 30, 1996.
Premiums collected by this segment in 1997 were $1,689.6 million, up 1.2
percent over 1996. Premiums collected in 1996 were $1,670.3 million, down 1.4
percent from 1995. Increased competition from products such as mutual funds,
traditional bank investments, variable annuities and other investment and
retirement funding alternatives was a significant factor in the modest increase
in annuity premiums collected, despite the full-year impact of the former LPG
subsidiaries.
Traditional fixed rate annuity products include SPDAs, FPDAs and SPIAs,
which are credited with a guaranteed rate. SPDA and FPDA policies (which make up
78 percent, 84 percent and 90 percent of traditional fixed rate annuity premiums
collected in 1997, 1996 and 1995, respectively) typically have an interest rate
that is guaranteed for the first policy year, after which we have the
discretionary ability to change the crediting rate to any rate not below a
guaranteed minimum rate. The interest rate credited on SPIAs is based on market
conditions existing when a policy is issued and remains unchanged over the life
of the SPIA. The demand for traditional fixed rate annuity contracts has
decreased in recent years, as relatively low interest rates have made other
investment products more attractive. Annuity premiums on these products
decreased 24 percent in 1997, to $937.2 million, and decreased 22 percent in
1996, to $1,241.3 million.
We offer deferred annuity products with a "market value adjustment"
feature designed to provide additional protection from early terminations during
a period of rising interest rates by reducing the surrender value payable upon a
full surrender of the policy in excess of the allowable penalty-free withdrawal
amount. Conversely, during a period of declining interest rates, the market
value adjustment feature would increase the surrender value payable to the
policyholder. Annuity premiums collected with this feature represent 11 percent
and 16 percent of total annuity premiums collected during 1997 and 1996,
respectively.
In response to consumers' desire for alternative investment products with
returns linked to equities, we introduced an equity- indexed annuity product in
June 1996. The accumulation value of these annuities is credited with interest
at an annual minimum guaranteed rate of 3 percent, but the annuities provide for
higher returns based on a percentage of the change in the S&P 500 Index during
each year of their term. We purchase S&P 500 Call Options in an effort to hedge
potential increases to policyholder benefits resulting from increases in the S&P
500 Index to which the product's return is linked. Total collected premiums for
this product were $387.7 million in 1997 compared with $80.4 million in 1996.
Variable annuities offer contract holders a rate of return based on the
specific investment portfolios into which premiums may be directed. The
popularity of such annuities has increased recently as a result of the desire of
investors to invest in common stocks. In addition, in 1996, we began to offer
more investment options for variable annuity deposits, and we expanded our
marketing efforts, which resulted in increased collected premiums. Profits on
variable annuities are derived from the fees charged to contract holders rather
than from the investment spread. Variable annuity collected premiums increased
104 percent in 1997, to $185.2 million, and increased 42 percent in 1996, to
$90.9 million.
Insurance policy income includes: (i) premiums received on SPIA policies
that incorporate significant mortality features; (ii) cost of insurance and
expenses charged to annuity policies; and (iii) surrender charges earned on
annuity policy withdrawals. In accordance with GAAP, premiums on annuity
contracts without mortality features are not reported as revenues, but rather
are reported as deposits to insurance liabilities. Insurance policy income
increased in 1997 and 1996 primarily because of increased surrender charges
collected (changes in premiums received on policies with mortality features and
cost of insurance and expenses charged to annuity policies were not
significant). Surrender charges were $64.0 million in 1997, $41.2 million in
1996 and $28.6 million in 1995. Annuity policy withdrawals were $1.8 billion in
1997, compared with $1.7 billion in 1996 and $1.5 billion in 1995. The increase
in policy withdrawals and surrender charges generally corresponds to the aging
and the growth of our annuity business in force. In addition, policyholders are
using the systematic withdrawal features available in several of our annuity
policies, and more policyholders are surrendering in order to invest in
alternative investments. Total withdrawals and surrenders were 15 percent, 16
percent and 16 percent of insurance liabilities related to surrenderable
policies in 1997, 1996 and 1995, respectively.
Net investment income on general account invested assets (excluding
income on separate account assets related to variable annuities and the change
in the fair value of S&P 500 Call Options related to equity-indexed products)
increased 7.8 percent in 1997, to $960.9 million, and increased 4.7 percent in
1996, to $891.2 million. These increases primarily reflect the increase in
general account invested assets acquired in conjunction with the recent
acquisitions. The segment's average invested assets increased 11 percent to
$12.8 billion in 1997, compared with 1996, and the annualized yield earned on
average invested assets decreased from 7.9 percent to 7.5 percent in 1997. The
segment's average invested assets increased 10 percent to $11.2 billion in 1996,
and the annualized yield earned on average invested assets decreased from 8.4
percent to 7.9 percent in 1996. Cash flows received during 1997 and 1996
(including cash flows from the sales of investments) were invested in lower
yielding securities due to a general decline in interest rates.
26
<PAGE>
Net investment income from the change in fair value of S&P 500 Call
Options is substantially offset by a corresponding charge to amounts added to
policyholder account balances for equity-indexed products. Such income and
related charge fluctuate based on the performance of the S&P 500 Index to which
the returns on such products are linked.
Net investment income on separate account assets is offset by a
corresponding charge to amounts added to policyholder account balances for
variable annuity products. Such income and related charge fluctuate in
relationship to total separate account assets and the return earned on such
assets.
Insurance policy benefits and change in future policy benefits relate
solely to annuity policies that incorporate significant mortality features. The
increase corresponds to the increase in the in-force block of such policies.
Amounts added to policyholder account balances for interest expense on
annuity products increased 3.6 percent in 1997 and 3.6 percent in 1996,
primarily due to a larger block of annuity business in force in 1997, partially
offset by a reduction in crediting rates. The weighted average crediting rates
for these annuity liabilities were 4.8 percent in 1997, 5.0 percent in 1996 and
5.3 percent in 1995.
Amortization related to operations increased 10 percent in 1997 and 18
percent in 1996. Amortization related to operations includes amortization of:
(i) the cost of policies produced; (ii) the cost of policies purchased; and
(iii) goodwill related to this segment's business. The amount of amortization
increased primarily because of the increase in balances subject to amortization
as a result of recent acquisitions.
Interest expense on investment borrowings is affected by changes in
investment borrowing activities during the last three years and the changes in
interest rates paid on such borrowings.
Other operating costs and expenses decreased 12 percent in 1997 and
increased 18 percent in 1996. Other operating costs and expenses were favorably
affected in 1997 by the consolidation of all annuity operations in Conseco's
Carmel, Indiana facilities. The increase in 1996 corresponds to the increases in
the total business in force primarily related to acquisition transactions
described above under "General."
Net investment gains (losses), net of related costs and amortization,
often fluctuate from period to period. Selling securities at a gain and
reinvesting the proceeds at lower yields may, absent other management action,
tend to decrease future investment yields. We believe, however, that the
following factors mitigate the adverse effect of such decreases on net income:
(i) we recognized additional amortization of cost of policies purchased and cost
of policies produced in order to reflect reduced future yields (thereby reducing
such amortization in future periods); (ii) we can reduce interest rates credited
to some products, thereby diminishing the effect of the yield decrease on the
investment spread; and (iii) the investment portfolio grows as a result of
reinvesting the realized gains. As a result of the sales of fixed maturity
investments, the amortization of the cost of policies produced and the cost of
policies purchased increased $132.0 million in 1997, $31.6 million in 1996 and
$117.3 million in 1995.
27
<PAGE>
Life insurance:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Universal life (first-year).......................................$ 96.6 $ 62.2 $ 15.7
Universal life (renewal).......................................... 354.3 208.9 97.4
---------- ------- ---------
Subtotal - universal life..................................... 450.9 271.1 113.1
---------- ------- ---------
Traditional life (first-year)..................................... 49.0 17.0 16.1
Traditional life (renewal)........................................ 209.1 115.5 124.4
---------- ------- ---------
Subtotal - traditional life................................... 258.1 132.5 140.5
---------- ------- ---------
Total life premiums collected.............................$ 709.0 $ 403.6 $ 253.6
========== ======= =========
Insurance policy income:
Premiums earned on traditional life products......................$ 258.6 $ 141.1 $ 143.5
Mortality charges and administrative fees......................... 357.8 211.2 73.8
Surrender charges................................................. 14.1 8.2 5.1
---------- ------- ---------
Total insurance policy income................................... 630.5 360.5 222.4
Net investment income................................................ 448.2 279.7 176.9
---------- ------- ---------
Total revenues (a)........................................ 1,078.7 640.2 399.3
---------- ------- ---------
Insurance policy benefits and change in future policy benefits....... 456.9 270.5 182.5
Interest added to financial product policyholder account balances.... 154.9 97.0 51.6
Amortization related to operations................................... 61.3 48.1 33.4
Interest expense on investment borrowings............................ 11.6 6.3 3.5
Other operating costs and expenses................................... 89.3 91.5 53.5
---------- ------- ---------
Total benefits and expenses (a)........................... 774.0 513.4 324.5
---------- ------- ---------
Operating income before income taxes,
minority interest and extraordinary
charge................................................. 304.7 126.8 74.8
Net investment gains (losses), net of related costs
and amortization.................................................. 2.4 (2.0) (4.6)
---------- ------- ---------
Income before income taxes, minority
interest and extraordinary charge......................$ 307.1 $ 124.8 $ 70.2
========== ======= =========
Total life product insurance liabilities.............................$ 7,075.0 $4,992.7 $ 2,102.2
========== ======== =========
Life insurance in force..............................................$104,144.5 $80,149.5 $33,783.2
========== ========= =========
<FN>
(a) Revenues exclude net investment gains (losses); benefits and expenses
exclude amortization related to net investment gains (losses).
</FN>
</TABLE>
General: This segment includes traditional life and universal life
products sold through career agents, professional independent producers and
direct response distribution channels. This segment's operations were
significantly affected by recent acquisitions (LPG effective July 1, 1996; PFS
effective April 1, 1997; Colonial Penn effective September 30, 1997; and WNIC
effective December 1, 1997). The profitability of this segment largely depends
on the investment spread earned (for universal life), the persistency of
in-force business, claim experience and expense management.
28
<PAGE>
Premiums collected by this segment were up 76 percent in 1997, to $709.0
million. Premiums collected in 1996 were up 59 percent in 1996, to $403.6
million. Such increases relate primarily to premiums collected by recently
acquired companies in periods after their acquisition.
Universal life product collected premiums increased 66 percent in 1997,
to $450.9 million, and increased 140 percent in 1996, to $271.1 million.
Traditional life product collected premiums increased 95 percent in 1997,
to $258.1 million, and decreased 5.7 percent in 1996, to $132.5 million.
Insurance policy income includes: (i) premiums received on traditional
life products; (ii) the mortality charges and administrative fees earned on
universal life insurance; and (iii) surrender charges on terminated universal
life insurance policies. In accordance with GAAP, premiums on universal life
products are accounted for as deposits to insurance liabilities. Revenues are
earned over time in the form of investment income on policyholder account
balances, surrender charges, and mortality and other charges deducted from
policyholders' account balances.
All three components of insurance policy income have increased over the
last three years primarily as a result of the acquisition transactions described
above under "General."
Net investment income increased 60 percent in 1997, to $448.2 million,
and 58 percent in 1996, to $279.7 million. Investment income fluctuates with
changes in: (i) the amount of average invested assets supporting insurance
liabilities; and (ii) the yield earned on invested assets. During 1997, the
segment's average invested assets increased 71 percent, to $6.0 billion, and the
net yield on invested assets decreased from 7.9 percent to 7.5 percent. During
1996, the segment's average invested assets increased 66 percent, to $3.5
billion, and the net yield on invested assets decreased from 8.4 percent to 7.9
percent. Invested assets grew primarily as a result of the growth in insurance
liabilities from the acquisition transactions described above under "General."
Insurance policy benefits and change in future policy benefits increased
in 1997 and 1996, reflecting the larger amount of business in force on which
benefits are incurred as a result of the acquisition transactions described
above under "General." There were no unusual fluctuations in claim experience
during the periods.
Interest added to financial product policyholder account balances
increased 60 percent in 1997, to $154.9 million, and 88 percent in 1996, to
$97.0 million. Such expense fluctuates with changes in: (i) the amount of
insurance liabilities for universal life products; and (ii) the interest rate
credited to such products. During 1997, such average liabilities increased 66
percent, to $3.3 billion, and the rate credited decreased from 5.0 percent to
4.8 percent. During 1996, such average liabilities increased 98 percent, to $2.0
billion, and the rate credited decreased from 5.2 percent to 5.0 percent.
Universal life product liabilities increased primarily as a result of the
acquisition transactions described above under "General."
Amortization related to operations increased 27 percent in 1997, to $61.3
million, and 44 percent in 1996, to $48.1 million. Amortization related to
operations includes amortization of: (i) the cost of policies produced; (ii) the
cost of policies purchased; and (iii) goodwill related to this segment's
business. The amount of amortization was primarily affected by the increases in
balances subject to amortization as a result of the recent acquisitions, net of
the effect of reductions in the balances of the cost of policies purchased and
cost of policies produced resulting from net investment gains recognized during
1997 and 1996 (see "Net investment gains (losses)" below).
Interest expense on investment borrowings is affected by changes in
investment borrowing activities during the last three years and the changes in
interest rates paid on such borrowings.
Other operating costs and expenses decreased 2.4 percent in 1997, to
$89.3 million, and increased 71 percent in 1996, to $91.5 million. The
fluctuations correspond to the increases in this segment's business as a result
of recent acquisitions, offset in 1997 by expense reductions realized as a
result of the consolidation of certain operations.
Net investment gains (losses), net of related costs and amortization,
often fluctuate from period to period. Net investment gains (losses) affect the
timing of the amortization of costs of policies purchased and the cost of
policies produced. As a result of net investment gains (losses) from the sales
of fixed maturity investments, amortization of cost of policies purchased and
cost of policies produced increased $49.2 million in 1997, $4.4 million in 1996
and $9.3 million in 1995.
29
<PAGE>
Individual and group major medical:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Individual (first-year)...............................................$ 70.3 $ 6.0 $ 8.4
Individual (renewal).................................................. 147.4 44.9 56.1
------- -------- --------
Subtotal - individual............................................. 217.7 50.9 64.5
------- -------- --------
Group (first-year).................................................... 63.6 - -
Group (renewal)....................................................... 462.9 290.1 289.1
------- -------- --------
Subtotal - group.................................................. 526.5 290.1 289.1
------- -------- --------
Total individual and group major medical premiums collected.......$ 744.2 $ 341.0 $ 353.6
======= ======== ========
Insurance policy income..................................................$ 758.1 $ 357.0 $ 352.0
Net investment income.................................................... 17.3 8.8 9.5
------- -------- --------
Total revenues (a)................................................ 775.4 365.8 361.5
------- -------- --------
Insurance policy benefits and changes in future policy benefits.......... 579.5 300.3 300.8
Amortization related to operations....................................... 21.2 16.0 13.6
Interest expense on investment borrowings................................ .6 .1 .2
Other operating costs and expenses....................................... 133.9 17.3 11.8
------- -------- --------
Total benefits and expenses....................................... 735.2 333.7 326.4
------- -------- --------
Operating income before income taxes, minority interest and
extraordinary charge............................................ 40.2 32.1 35.1
Net investment gains, net of related costs............................... .1 - .1
------- -------- --------
Income before income taxes, minority interest and extraordinary
charge..........................................................$ 40.3 $ 32.1 $ 35.2
======= ======== ========
Benefit ratio ........................................................... 78.0% 85.7% 85.4%
<FN>
(a) Revenues exclude net investment gains.
</FN>
</TABLE>
General: This segment includes individual and group major medical health
insurance products. The segment's operations were significantly affected by the
PFS Merger, effective April 1, 1997, and to a lesser extent, by the LPG Merger,
effective July 1, 1996. The profitability of this business depends largely on
the overall persistency of the business in force, as well as claim experience
and expense management.
Premiums collected by this segment increased 118 percent in 1997, to
$744.2 million, and decreased 3.6 percent in 1996, to $341.0 million. Individual
health premiums increased 328 percent in 1997, to $217.7 million, and decreased
21 percent in 1996, to $50.9 million. Group premiums increased 81 percent in
1997, to $526.5 million, and did not change materially between 1995 and 1996.
The recently acquired companies accounted for all of the 1997 increases.
Insurance policy income comprises premiums earned on the segment's
policies and fee income earned for group medical risk management services.
Fluctuations in premiums earned have been consistent with the fluctuations in
premiums collected described above. Fee income (which is earned by a subsidiary
acquired in the LPG Merger) was $15.0 million in 1997 and $7.0 million in 1996.
Net investment income increased 97 percent in 1997, to $17.3 million, and
decreased 7.4 percent in 1996, to $8.8 million. Investment income fluctuates
when changes occur in: (i) the amount of average invested assets supporting
insurance liabilities; and (ii) the yield earned on invested assets. During
1997, the segment's average invested assets increased approximately 111 percent,
to $244.0 million, and the net yield on invested assets decreased from 7.6
percent to 7.1 percent. During 1996, the segment's average
30
<PAGE>
invested assets did not change significantly and the net yield on invested
assets decreased from 7.9 percent to 7.6 percent. Average invested assets
increased in 1997 as a result of the PFS Merger.
Insurance policy benefits and change in future policy benefits increased
in 1997, primarily as a result of the larger amount of segment business in
force. In 1997, the ratio of policy benefits to insurance policy income
decreased 7.7 percentage points, to 78.0 percent. In 1996, the ratio of policy
benefits to insurance policy income increased from 85.4 percent to 85.7 percent.
The lower benefit ratio in 1997 reflects: (i) the lower incidence of claims
experienced on business written by the acquired companies compared with the
business of other Conseco subsidiaries; and (ii) favorable claim developments.
Amortization related to operations includes amortization of: (i) the cost
of policies produced; (ii) the cost of policies purchased; and (iii) goodwill
related to this segment's business. Amortization expense increased 33 percent in
1997, to $21.2 million, and 18 percent in 1996, to $16.0 million. The amount of
amortization was primarily affected by the increase in balances subject to
amortization as a result of the recent acquisitions.
Interest expense on investment borrowings is affected by changes in
investment borrowing activities during the last three years and the changes in
interest rates paid on such borrowings.
Other operating costs and expenses increased 674 percent in 1997, to
$133.9 million, and 47 percent in 1996, to $17.3 million. Such increases
correspond to the increases in the total business in force related primarily to
the recently acquired companies.
Net investment gains, net of related costs, realized by this segment were
not material in 1997, 1996 or 1995.
31
<PAGE>
Other:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Other (first-year)................................................ $ 3.9 $ 2.2 $ 2.6
Other (renewal)................................................... 65.3 52.3 64.0
-------- -------- ---------
Total other premiums collected................................ $ 69.2 $ 54.5 $ 66.6
======== ======== =========
Insurance policy income.............................................. $ 67.3 $ 53.2 $ 65.3
Net investment income................................................ 15.4 7.8 9.0
Fee revenue and other income......................................... 65.8 49.8 43.6
-------- -------- ---------
Total revenues (a)............................................ 148.5 110.8 117.9
-------- -------- ---------
Insurance policy benefits and changes in future policy benefits...... 40.3 25.1 36.8
Amortization related to operations................................... 9.4 11.2 10.1
Interest expense on investment borrowings............................ .3 .2 .2
Other operating costs and expenses................................... 40.2 43.6 39.3
-------- -------- ---------
Total benefits and expenses .................................. 90.2 80.1 86.4
-------- -------- ---------
Operating income before income taxes,
minority interest and extraordinary
charge...................................................... 58.3 30.7 31.5
Net investment gains (losses), net of related costs and amortization. 3.3 27.4 (6.3)
-------- -------- --------
Income before income taxes, minority
interest and extraordinary charge........................... $ 61.6 $ 58.1 $ 25.2
======== ======== =========
<FN>
(a) Revenues exclude net investment gains (losses).
</FN>
</TABLE>
General: This segment includes: (i) various other health insurance
products that are not currently being actively marketed; and (ii) beginning
December 1, 1997, the specialty health insurance products of WNIC marketed to
educators through career agents. The segment's operations were significantly
affected by recent acquisitions (THI, effective January 1, 1997, and WNIC,
effective December 1, 1997). The profitability of this business depends largely
on the overall persistency of the business in force, claim experience and
expense management.
This segment also includes the fee revenue generated by our non-life
subsidiaries, including the investment advisory fees earned by CCM and
commissions earned for insurance and investment product marketing and
distribution. Such amounts exclude the fees and commissions we charge to our
consolidated subsidiaries. The profitability of the fee-based business depends
on the total fees generated and on expense management.
Premiums collected by this segment increased 27 percent in 1997, to $69.2
million, and decreased 18 percent in 1996, to $54.5 million. The increase in
premiums collected in 1997 primarily relates to recent acquisitions.
We do not emphasize the sale of many of the products in this segment,
andcollected premiums are expected to decrease in future years. However, the
in-force business continues to be profitable.
Insurance policy income comprises premiums earned on the segment's
policies, and has fluctuated over the last three years consistent with the
explanations provided above for premiums collected.
Net investment income increased 97 percent in 1997, to $15.4 million, and
decreased 13 percent in 1996, to $7.8 million. Such investment income fluctuated
primarily in relationship to the amount of average invested assets supporting
this segment's insurance liabilities. During 1997, the segment's average
invested assets increased 96 percent, to $199.5 million, and the net yield on
invested assets did not change materially. During 1996, the segment's average
invested assets decreased approximately 8.6 percent, to $101.6 million, and the
net yield on invested assets decreased from 8.1 percent to 7.7 percent.
32
<PAGE>
Fee revenue and other income includes: (i) fees for investment management
and for mortgage origination and servicing; and (ii) commissions earned for
insurance and investment product marketing and distribution. Such amounts
exclude the fees and commissions we charge our consolidated subsidiaries. Fee
revenue and other income increased 32 percent in 1997, to $65.8 million,
primarily due to increased investment management fees. Fee revenue and other
income increased 14 percent in 1996, to $49.8 million, primarily as a result of
the acquisition of certain property and casualty insurance brokerage businesses.
Insurance policy benefits and change in future policy benefits fluctuate
in relationship to the amount of segment business in force and the incidence of
claims.
Amortization related to operations decreased 16 percent in 1997, to $9.4
million, and increased 11 percent in 1996, to $11.2 million. Amortization
related to operations includes amortization of: (i) the cost of policies
produced; (ii) the cost of policies purchased; and (iii) goodwill related to
this segment's business. The decrease in amortization in 1997 is consistent with
the declining balance of cost of policies purchased and cost of policies
produced associated with the business included in this segment. The increase in
1996 was primarily due to the increases in such balances as a result of our
purchase of additional shares of BLH common stock in 1995 and 1996. The
acquisitions of THI and WNIC did not materially increase the balance of goodwill
and cost of policies purchased of this segment (valuations of the acquired
blocks indicated that such amounts were insignificant).
Other components of income before income taxes, minority interest and
extraordinary charge:
In addition to the income of the five operating segments, income before
income taxes, minority interest and extraordinary charge is affected by interest
and other corporate expenses, nonrecurring charges and net investment gains not
attributable to the operating segments.
Interest and other corporate expenses were $126.8 million in 1997, $112.4
million in 1996, and $140.5 million in 1995. Interest expense included therein
was $109.4 million in 1997, $108.1 million in 1996, and $119.4 million in 1995.
Such expense fluctuates in relationship to the average debt outstanding during
each period and the interest rate thereon.
Nonrecurring charges of $9.3 million in 1997 represent expenses incurred
related to the death of an executive officer.
Net investment gains, net of related costs, of $15.2 million in 1995
primarily arose from the gain realized on the sale of Conseco's investment in
Eagle Credit (a finance subsidiary of Harley-Davidson).
SALES
In accordance with GAAP, insurance policy income shown in our
consolidated statement of operations consists of premiums received for policies
that have life contingencies or morbidity features. For annuity and universal
life contracts without such features, premiums collected are not reported as
revenues, but rather are reported as deposits to insurance liabilities. Revenues
for these products are recognized over time in the form of investment income and
surrender or other charges assessed to the policy.
33
<PAGE>
Total premiums collected by our business segments during the last three
years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Supplemental health:
First-year....................................................................... $ 290.0 $ 124.1 $ 125.5
Renewal.......................................................................... 1,553.7 686.7 613.3
--------- --------- ---------
Total supplemental health.................................................... 1,843.7 810.8 738.8
--------- --------- ---------
Annuities:
First-year ...................................................................... 1,538.6 1,504.1 1,581.3
Renewal.......................................................................... 151.0 166.2 112.6
--------- --------- ---------
Total annuities.............................................................. 1,689.6 1,670.3 1,693.9
--------- --------- ---------
Life insurance:
First-year....................................................................... 145.6 79.2 31.8
Renewal.......................................................................... 563.4 324.4 221.8
--------- --------- ---------
Total life insurance......................................................... 709.0 403.6 253.6
--------- --------- ---------
Individual and group major medical:
First-year....................................................................... 133.9 6.0 8.4
Renewal.......................................................................... 610.3 335.0 345.2
--------- --------- ---------
Total individual and group major medical..................................... 744.2 341.0 353.6
--------- --------- ---------
Other:
First-year....................................................................... 3.9 2.2 2.6
Renewal.......................................................................... 65.3 52.3 64.0
--------- --------- ---------
Total other.................................................................. 69.2 54.5 66.6
--------- --------- ---------
Total:
First-year....................................................................... 2,112.0 1,715.6 1,749.6
Renewal.......................................................................... 2,943.7 1,564.6 1,356.9
--------- --------- ---------
Total collected premiums...................................................... $ 5,055.7 $ 3,280.2 $ 3,106.5
========= ========= =========
</TABLE>
34
<PAGE>
Fluctuations in premiums collected are discussed above under "Results of
operations by segment for the three years ended December 31, 1997." Our recent
acquisitions will have a significant effect on future premiums collected. Total
premiums collected for all currently consolidated companies (except subsidiaries
of WNIC, which were acquired on December 1, 1997) for all periods (including
periods prior to ownership by Conseco) are provided below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Supplemental health:
First-year....................................................................... $ 303.7 $ 306.0 $ 296.6
Renewal.......................................................................... 1,631.7 1,521.1 1,417.3
--------- --------- ---------
Total supplemental health.................................................... 1,935.4 1,827.1 1,713.9
--------- --------- ---------
Annuities:
First-year....................................................................... 1,540.9 1,549.1 1,613.1
Renewal.......................................................................... 138.8 182.9 177.3
--------- --------- ---------
Total annuities.............................................................. 1,679.7 1,732.0 1,790.4
--------- --------- ---------
Life insurance:
First-year....................................................................... 165.1 185.9 136.0
Renewal.......................................................................... 647.3 620.9 681.5
--------- --------- ---------
Total life insurance......................................................... 812.4 806.8 817.5
--------- --------- ---------
Individual and group major medical:
First-year....................................................................... 172.4 145.6 137.0
Renewal.......................................................................... 691.4 630.8 652.3
--------- --------- ---------
Total individual and group major medical..................................... 863.8 776.4 789.3
--------- --------- ---------
Other:
First-year....................................................................... 1.7 2.3 2.6
Renewal.......................................................................... 89.9 112.5 144.1
--------- --------- ---------
Total other.................................................................. 91.6 114.8 146.7
--------- --------- ---------
Total:
First-year....................................................................... 2,183.8 2,188.9 2,185.3
Renewal.......................................................................... 3,199.1 3,068.2 3,072.5
--------- --------- ---------
Total collected premiums..................................................... $ 5,382.9 $ 5,257.1 $ 5,257.8
========= ========= =========
</TABLE>
INVESTMENTS
Our investment strategy is to: (i) maintain a predominately
investment-grade fixed income portfolio; (ii) provide adequate liquidity to meet
the cash flow requirements of policyholders and other obligations; and (iii)
maximize current income and total investment return through active investment
management. Consistent with this strategy, investments in fixed maturity
securities, mortgage loans, credit-tenant loans, policy loans, separate accounts
and short-term investments made up 97 percent of our $27.0 billion investment
portfolio at December 31, 1997. The remainder of the invested assets were equity
securities and other invested assets.
Our insurance subsidiaries are regulated by insurance statutes and
regulations as to the type of investments that they are permitted to make and
the amount of funds that may be used for any one type of investment. In light of
these statutes and regulations and our business and investment strategy, Conseco
generally seeks to invest in United States government and government-agency
securities and corporate securities rated investment grade by established
nationally recognized rating organizations or, if not rated, in securities of
comparable investment quality.
35
<PAGE>
The following table summarizes investment yields earned over the past
three years:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Weighted average invested assets:
As reported ................................................................. $23,288.8 $16,356.3 $13,769.3
Excluding unrealized appreciation (depreciation) (a)......................... 23,177.7 16,278.8 13,690.6
Net investment income............................................................... 1,825.3 1,302.5 1,142.6
Yields earned:
As reported.................................................................. 7.8% 8.0% 8.3%
Excluding unrealized appreciation (depreciation) (a) ........................ 7.9% 8.0% 8.3%
<FN>
(a) Excludes the effect of reporting fixed maturities at fair value as
described in note 1 to the consolidated financial statements.
</FN>
</TABLE>
Although investment income is a significant component of total revenues,
the profitability of a portion of our insurance products is determined primarily
by spreads between interest rates earned and rates credited or accruing to our
insurance liabilities. At December 31, 1997, the average yield, computed on the
cost basis of our investment portfolio, was 7.5 percent, and the average
interest rate credited or accruing to our total insurance liabilities was 5.2
percent, excluding interest bonuses guaranteed only for the first year of the
contract.
Actively managed fixed maturities
Our actively managed fixed maturity portfolio at December 31, 1997,
included primarily debt securities of the United States government, public
utilities and other corporations, and mortgage-backed securities.
Mortgage-backed securities included collateralized mortgage obligations ("CMOs")
and mortgage-backed pass-through securities.
At December 31, 1997, our fixed maturity portfolio had net unrealized
gains of $484.4 million (equal to approximately 2.1 percent of the portfolio's
carrying value), consisting of $611.5 million of unrealized gains and $127.1
million of unrealized losses. Estimated fair values for fixed maturity
investments were determined based on: (i) estimates from nationally recognized
pricing services (82 percent of the portfolio); (ii) broker-dealer market makers
(8 percent of the portfolio); and (iii) internally developed methods (10 percent
of the portfolio).
As discussed in the notes to the consolidated financial statements, when
we adjust carrying values of actively managed fixed maturity securities for
changes in fair value, we also adjust the cost of policies purchased, cost of
policies produced and liabilities. These adjustments are made in order to
reflect the change in amortization and liability accruals that would be needed
if those fixed maturity investments had actually been sold at their fair values
and the proceeds reinvested at current interest rates.
At December 31, 1997, approximately 5.5 percent of our invested assets
and 6.6 percent of fixed maturity investments were rated below-investment grade
by nationally recognized statistical rating organizations (or, if not rated by
such firms, with ratings below Class 2 assigned by the NAIC). We plan to
maintain approximately the present level of below-investment-grade fixed
maturities. These securities generally have greater risks than other corporate
debt investments, including risk of loss upon default by the borrower, and are
often unsecured and subordinated to other creditors. Below-investment-grade
issuers usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. We are aware of these risks and monitor our
below-investment-grade securities closely. At December 31, 1997, our below-
investment-grade fixed maturity investments had an amortized cost of $1,525.1
million and an estimated fair value of $1,496.2 million.
We periodically evaluate the creditworthiness of each issuer whose
securities the Company holds. Special attention is paid to those securities
whose market values have declined materially for reasons other than changes in
interest rates or other general market conditions. We consider available
information to evaluate the realizable value of the investment, the specific
condition of the issuer and the issuer's ability to comply with the material
terms of the security. Information reviewed may include the recent operational
results and financial position of the issuer, information about its industry,
recent press releases and other information. Conseco employs a staff of
experienced securities analysts in a variety of specialty areas. Among its other
responsibilities, this staff is charged with compiling and reviewing such
information. If evidence does not exist to support a realizable value equal to
or greater than the carrying value of the investment, and such decline in market
value is determined to be other than temporary, we reduce the carrying amount to
its net realizable value, which becomes the new cost basis; the amount of the
reduction is reported as a realized loss. We recognize any recovery of such
reductions in the cost basis of an investment only upon the sale, repayment or
other disposition of the investment. We recorded writedowns of fixed maturity
investments and other invested assets totaling $1.2 million
36
<PAGE>
in 1997, primarily as a result of: (i) changes in the financial condition of a
private company in which we had an indirect equity investment; and (ii) changes
in the value of the underlying collateral associated with certain notes. These
changes caused us to conclude that the decline in fair value of such investments
was other than temporary. Our investment portfolio is subject to the risks of
further declines in realizable value. However, we attempt to mitigate this risk
through the diversification and active management of our portfolio.
As of December 31, 1997, fixed maturity investments in substantive
default (i.e., in default due to nonpayment of interest or principal) had an
amortized cost and carrying value of $2.1 million and $1.2 million,
respectively. Fixed maturity investments in technical (but not substantive)
default (i.e., in default, but not as to the payment of interest or principal)
had an amortized cost and carrying value of $.3 million. There were no other
fixed maturity investments about which we had serious doubts as to the ability
of the issuer to comply on a timely basis with the material terms of the
instruments.
Our policy is to discontinue the accrual of interest and eliminate all
previous interest accruals for defaulted securities, if it is determined that
such amounts will not be ultimately realized in full. Investment income forgone
due to defaulted securities was $.2 million in 1997, $3.8 million in 1996 and
$1.6 million in 1995.
At December 31, 1997, fixed maturity investments included $6.9 billion of
mortgage-backed securities (or 30 percent of all fixed maturity securities). The
yield characteristics of mortgage-backed securities differ from those of
traditional fixed-income securities. Interest and principal payments occur more
frequently, often monthly. Mortgage-backed securities are subject to risks
associated with variable prepayments. Prepayment rates are influenced by a
number of factors that cannot be predicted with certainty, including: the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates; a variety of economic, geographic and other factors; and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans and the
securities backed by these loans, increase when the level of prevailing interest
rates declines significantly relative to the interest rates on such loans.
Mortgage-backed securities purchased at a discount to par will experience an
increase in yield when the underlying mortgages prepay faster than expected.
These securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When interest rates decline, the proceeds from the
prepayment of mortgage-backed securities are likely to be reinvested at lower
rates than we were earning on the prepaid securities. When interest rates
increase, prepayments on mortgage-backed securities decrease, because fewer
underlying mortgages are refinanced. When this occurs, the average maturity and
duration of the mortgage-backed securities increase, which decreases the yield
on mortgage-backed securities purchased at a discount, because the discount is
realized as income at a slower rate and increases the yield on those purchased
at a premium as a result of a decrease in annual amortization of the premium.
CMOs are securities backed by pools of pass-through securities and/or
mortgages that are segregated into sections or "tranches" that provide for
sequential retirement of principal, rather than the pro rata share of principal
return that occurs through regular monthly principal payments on pass-through
securities.
All mortgage-backed securities are subject to risks associated with
variable prepayments. As a result, these securities may have a different actual
maturity than planned at the time of purchase. When securities having a cost
greater than par are backed by mortgages that prepay faster than expected, we
record a charge to investment income. When securities having a cost less than
par prepay faster than expected, we record investment income.
The degree to which a mortgage-backed security is susceptible to income
fluctuations is influenced by: (i) the difference between its cost and par; (ii)
the relative sensitivity of the underlying mortgages backing the security to
prepayment in a changing interest rate environment; and (iii) the repayment
priority of the security in the overall securitization structure. The Company
seeks to limit the extent of these risks by: (i) purchasing securities that are
backed by collateral with lower prepayment sensitivity (such as mortgages priced
at a discount to par value and mortgages that are extremely seasoned); (ii)
avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities); (iii)
investing in securities structured to reduce prepayment risk (such as planned
amortization class ("PAC") and targeted amortization class ("TAC") CMOs); and
(iv) actively managing the entire portfolio of mortgage-backed securities to
dispose of those which are deemed more likely to be prepaid. PAC and TAC
instruments represented approximately 24 percent of our mortgage-backed
securities at December 31, 1997. The call-adjusted modified duration of our
mortgage-backed securities at December 31, 1997, was 5.2 years.
37
<PAGE>
The following table sets forth the par value, amortized cost and
estimated fair value of mortgage-backed securities at December 31, 1997,
summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent............................................................ $2,025.5 $1,980.4 $2,014.7
7 percent - 8 percent...................................................... 3,568.0 3,546.5 3,638.2
8 percent - 9 percent...................................................... 712.9 716.1 730.5
9 percent and above........................................................ 445.1 455.5 467.0
-------- -------- --------
Total mortgage-backed securities............................... $6,751.5 $6,698.5 $6,850.4
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
at December 31, 1997, summarized by type of security, were as follows:
<TABLE>
<CAPTION>
Estimated fair value
--------------------
% of
Amortized fixed
Type cost Amount maturities
- ---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............ $4,599.7 $4,697.5 21%
Planned amortization classes and accretion-directed bonds.................. 1,515.9 1,547.6 7
Support classes............................................................ 36.0 36.9 -
Accrual (Z tranche) bonds.................................................. 27.9 28.8 -
Subordinated classes....................................................... 519.0 539.6 2
-------- -------- --
$6,698.5 $6,850.4 30%
======== ======== ==
</TABLE>
Pass-throughs and sequential and targeted amortization classes have
similar prepayment variability. Pass-throughs historically provide the best
liquidity in the mortgage-backed securities market and provide the best
price/performance ratio in a highly volatile interest rate environment. This
type of security is also frequently used as collateral in the dollar-roll
market. Sequential classes pay in a strict sequence; all principal payments
received by the CMO are paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing. Thus, they offer slightly better call protection than sequential
classes and pass-throughs.
Planned amortization classes and accretion-directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments as long as the underlying mortgage collateral experiences prepayments
within a certain range. Changes in prepayment rates are first absorbed by
support classes. This insulates the planned amortization classes from the
consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Support classes absorb the prepayment risk from which planned
amortization and targeted amortization classes are protected. As such, they are
usually extremely sensitive to prepayments. Most of our support classes are
higher-average-life instruments that generally will not lengthen if interest
rates rise further, and will have a tendency to shorten if interest rates
decline. However, since these bonds have costs below their par values, higher
prepayments will have the effect of increasing yields.
Accrual bonds are CMOs structured such that the payment of coupon
interest is deferred until principal payments begin. On each accrual date, the
principal balance is increased by the amount of the interest (based on the
stated coupon rate) that otherwise would have been payable. As such, these
securities act much the same as zero-coupon bonds until cash payments begin.
Cash payments typically do not commence until earlier classes in the CMO
structure have been retired, which can be significantly influenced by the
prepayment experience of the underlying mortgage loan collateral in the CMO
structure. Because of the zero-coupon element of these securities and the
potential uncertainty as to the timing of cash payments, their market values and
yields are more sensitive to changing interest rates than are other CMOs,
pass-through securities and coupon bonds.
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to enhance the credit quality of the senior
securities, and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowner defaults.
38
<PAGE>
If we determine that an investment held in the actively managed fixed
maturity category will be sold, we will either sell the security or transfer it
to the trading account at its fair value and recognize the gain or loss
immediately. There were no material transfers in 1997. During 1997, we sold
actively managed fixed maturity securities with a $17.8 billion book value,
resulting in $342.6 million of investment gains and $41.4 million of investment
losses (both before related expenses, amortization and taxes). Such securities
were sold in response to changes in the investment environment, which created
opportunities to enhance the total return of the investment portfolio without
adversely affecting the quality of the portfolio or the matching of expected
maturities of assets and liabilities. The realization of gains and losses
affects the timing of the amortization of the cost of policies produced and the
cost of policies purchased, as explained in note 10 to the consolidated
financial statements.
Other investments
Credit-tenant loans are loans on commercial properties where the lease of
the principal tenant is assigned to the lender. The principal tenant, or any
guarantor of such tenant's obligations, must have a credit rating at the time of
origination of the loan of at least BBB- or its equivalent. The underwriting
guidelines consider such factors as: (i) the lease term of the property; (ii)
the mortgagee's management ability, including business experience, property
management capabilities and financial soundness; and (iii) economic, demographic
or other factors that may affect the income generated by the property or its
value. The underwriting guidelines also generally require a loan-to-value ratio
of 75 percent or less. Credit-tenant loans are carried at amortized cost and
totaled $558.6 million at December 31, 1997, or 2.1 percent of total invested
assets. The total estimated fair value of credit-tenant loans was $587.2 million
at December 31, 1997.
At December 31, 1997, we held mortgage loan investments with a carrying
value of $516.2 million (or 1.9 percent of total invested assets) and a fair
value of $551.0 million. The balance of mortgage loans included 96 percent
commercial loans, 2 percent residential loans and 2 percent residual interests
in CMOs. The residual interests in CMOs entitle the Company to the excess cash
flows arising from the difference between: (i) the cash flows required to make
principal and interest payments on the related senior interests in the CMOs; and
(ii) the actual cash flows received on the mortgage loan assets included in the
CMO portfolios. If prepayments vary from projections on the mortgage loan assets
included in such CMO portfolios, the total cash flows to the Company from such
junior and residual interests could change from projected cash flows, resulting
in a gain or loss.
Noncurrent mortgage loans were insignificant at December 31, 1997. We
recognized realized losses of $.8 million on mortgage loans for the year ended
December 31, 1997. At December 31, 1997, we had a loan loss reserve of $9.0
million. Approximately 20 percent of the mortgage loans were on properties
located in California, 11 percent in Texas and 9 percent in Florida. No other
state accounted for more than 7 percent of the mortgage loan balance.
At December 31, 1997, we held $64.8 million of trading securities that
are included in other invested assets. Trading securities are investments that
are held with the intent to be traded prior to their maturity, or are believed
likely to be disposed of in the foreseeable future as a result of market or
issuer developments. Trading securities are carried at estimated fair value,
with the changes in fair value reflected in the statement of operations.
Other invested assets include: (i) trading securities; (ii) S&P 500 Call
Options; and (iii) certain nontraditional investments, including investments in
venture capital funds, limited partnerships, mineral rights and promissory
notes.
Short-term investments totaled $990.5 million, or 3.7 percent of invested
assets at December 31, 1997, and consisted primarily of commercial paper and
repurchase agreements relating to government securities.
As part of our investment strategy, we enter into reverse repurchase
agreements and dollar-roll transactions to increase our return on investments
and improve our liquidity. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that the repurchase involves securities that are only substantially the
same as the securities sold. We enhance our investment yield by investing the
proceeds from the sales in short-term securities pending the contractual
repurchase of the securities at discounted prices in the forward market. We are
able to engage in such transactions due to the market demand for mortgage-backed
securities to form CMOs. Such investment borrowings averaged $719.3 million
during 1997 and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average interest rate on
short-term collateralized borrowings was 5.8 percent in 1997. The primary risk
associated with short-term collateralized borrowings is that the counterparty
will be unable to perform under the terms of the contract. Our exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1997). We believe that the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
39
<PAGE>
CONSOLIDATED FINANCIAL CONDITION
Changes in the consolidated balance sheet of 1997 compared with 1996
Our consolidated balance sheet at December 31, 1997, compared with 1996,
reflects growth through operations, changes in the fair value of actively
managed fixed maturity securities, and the following capital and financing
transactions described in the notes to the consolidated financial statements:
(i) the CAF Merger; (ii) the issuance of $800 million of Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts; (iii) the
repurchase of senior subordinated notes and senior notes with a par value of
$130.1 million; (iv) the conversion of convertible debentures acquired in the
ATC Merger into Conseco common stock; (v) the conversion of PRIDES into Conseco
common stock; (vi) the repurchase of mandatorily redeemable preferred stock of a
subsidiary; (vii) the PFS Merger; (viii) the Colonial Penn Purchase; (ix) the
WNIC Merger; (x) common stock repurchases; and (xi) the issuance of commercial
paper and notes payable.
Our total capital at December 31, 1997 and 1996, was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Notes payable...................................................... $1,906.7 $1,094.9
Commercial paper................................................... 448.2 -
Minority interest:
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts............................. 1,383.9 600.0
Mandatorily redeemable preferred stock of subsidiary........... - 97.0
Common stock of subsidiary..................................... .7 .7
Shareholders' equity:
Preferred stock................................................ 115.8 267.1
Common stock and additional paid-in capital.................... 2,382.0 2,029.6
Accumulated other comprehensive income......................... 182.0 38.9
Retained earnings.............................................. 1,210.3 749.7
-------- --------
Total shareholders' equity.................................. 3,890.1 3,085.3
--------- --------
Total capital of Conseco.................................... $7,629.6 $4,877.9
======== ========
</TABLE>
Notes payable increased during 1997 primarily as a result of: (i) debt
issued or assumed in connection with the acquisitions of CAF, PFS, Colonial Penn
and WNIC; (ii) debt used to finance common stock repurchases; and (iii) the
redemption of mandatorily redeemable preferred stock of a subsidiary of ALH. The
increase in notes payable was partially offset by the repayment of debt using
the proceeds from the issuance of Company-obligated mandatorily redeemable
preferred securities.
We instituted a commercial paper program in April 1997 to lower our
borrowing costs and improve our liquidity. Borrowings under our commercial paper
program averaged approximately $525.9 million during the period of April 24,
1997 through December 31, 1997. The weighted average interest rate on such
borrowings was 5.8 percent during 1997.
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts are classified as minority interest in accordance with GAAP.
During 1997, we issued $300 million of Capital Securities and $500 million of
FELINE PRIDES. See note 8 to the consolidated financial statements for a
description of these securities.
Minority interest, excluding the Company-obligated mandatorily redeemable
preferred securities, at December 31, 1997, included a $.7 million interest in
common stock of a subsidiary of ALH. At December 31, 1996, minority interest
included: (i) $97.0 million of mandatorily redeemable preferred stock of a
subsidiary of ALH; and (ii) $.7 million interest in the common stock of a
subsidiary of ALH.
During 1997, we repurchased all of the mandatorily redeemable preferred
stock of a subsidiary of ALH formerly held by minority interests. As a result,
gains of $3.7 million were realized from the sale of securities having an
amortized cost of $47.7 million; such securities had been held in a segregated
account to ensure the redemption of such preferred stock.
40
<PAGE>
Shareholders' equity increased by $804.8 million in 1997, to $3.9
billion. Significant components of the increase included: (i) Conseco common
stock issued in the CAF Merger with a value of $117.4 million; (ii) Conseco
common stock issued in the PFS Merger with a value of $354.1 million; (iii) net
income of $567.3 million; (iv) the conversion of convertible debentures into
Conseco common stock with a value of $150.0 million; (v) the issuance of common
stock related to stock options and employee benefit plans (including the tax
benefit thereon) of $276.1 million; and (vi) the increase in net unrealized
appreciation of $143.1 million. These increases were partially offset by: (i)
repurchases of common stock for $711.7 million; and (ii) common and preferred
stock dividends totaling $80.6 million.
Book value per common share outstanding increased to $20.22 at December
31, 1997, from $16.86 at December 31, 1996. Such increase was primarily
attributable to the factors discussed in the previous paragraph. Excluding
unrealized appreciation of fixed maturity securities in accordance with SFAS
115, book value per common share outstanding was $19.27 at December 31, 1997,
compared with $16.62 at December 31, 1996.
Total assets increased by $10.3 billion in 1997, to $35.9 billion,
primarily due to the assets acquired in the CAF Merger, the PFS Merger, the
Colonial Penn Purchase and the WNIC Merger.
In accordance with SFAS 115, Conseco records its actively managed fixed
maturity investments at estimated fair value. At December 31, 1997 and 1996,
such investments were increased by $484.4 million and $103.8 million,
respectively, as a result of the SFAS 115 adjustment.
Financial ratios
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges:
As reported........................................................ 2.04X 1.61X 1.57X 2.26X 2.19X
Excluding interest on annuities and financial products(a).......... 7.21X 4.55X 3.80X 4.55X 8.85X
Ratio of earnings to fixed charges and preferred dividends:
As reported........................................................ 1.95X 1.50X 1.50X 1.95X 2.04X
Excluding interest on annuities and financial products(a).......... 5.77X 3.14X 3.06X 3.14X 6.00X
Ratio of earnings to fixed charges, preferred dividends and
distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts:
As reported..................................................... 1.82X 1.49X 1.50X 1.95X 2.04X
Excluding interest on annuities and financial products(a)....... 4.20X 3.06X 3.06X 3.14X 6.00X
Ratio of debt to total capital: (b)
As reported........................................................ .31X .22X .49X .43X .34X
Excluding unrealized appreciation (depreciation)(c)................ .32X .23X .53X .39X .36X
Ratio of debt and Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts to total capital:(b) (d)
As reported..................................................... .49X .35X .49X .43X .34X
Excluding unrealized appreciation (depreciation) (c)............ .50X .35X .53X .39X .36X
Rating agency ratios: (c) (e) (f) (g)
Debt to total capital.............................................. .28X .17X .37X .02X .20X
Debt and preferred stock to total capital (h)...................... .47X .30X .37X .02X .20X
<FN>
(a) These ratios are included to assist the reader in analyzing the impact of
interest on annuities and financial products (which is not generally
required to be paid in cash in the period in which it is recognized). Such
ratios are not intended to, and do not, represent the following ratios
prepared in accordance with GAAP: the ratio of earnings to fixed charges;
the ratio of earnings to fixed charges and preferred dividends; and the
ratio of earnings to fixed charges, preferred dividends and distributions
on Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts.
(b) For periods prior to 1996, debt includes obligations for which Conseco was
not directly liable.
(c) Excludes the effect of reporting fixed maturities at fair value.
41
<PAGE>
(d) Represents the ratio of debt and the Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts to the sum of
shareholders' equity, debt, minority interest and the Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts.
(e) Consistent with our discussions with rating agencies, the Company has
targeted: (i) the ratio of debt to total capital to be at or below 35
percent; and (ii) the ratio of debt and preferred stock to total capital to
be at or below 49 percent. These ratios are calculated in a manner
discussed with rating agencies.
(f) Debt is reduced by cash and investments held by non-life companies and
excludes, for periods prior to 1996, obligations for which Conseco was not
directly liable.
(g) Assumes conversion of all convertible debentures.
(h) Assumes purchase of common shares under purchase contracts.
</FN>
</TABLE>
Liquidity for insurance operations
Our insurance operating companies generally receive adequate cash flow
from premium collections and investment income to meet their obligations. Life
insurance and annuity liabilities are generally long-term in nature.
Policyholders may, however, withdraw funds or surrender their policies, subject
to surrender and withdrawal penalty provisions. We seek to balance the duration
of our invested assets with the estimated duration of benefit payments arising
from contract liabilities.
Of our total insurance liabilities at December 31, 1997, approximately 17
percent could be surrendered by the policyholder without a penalty.
Approximately 59 percent could be surrendered by the policyholder subject to
penalty or the release of an insurance liability in excess of surrender benefits
paid. The remaining 24 percent are not subject to surrender. Payment
characteristics of the insurance liabilities at December 31, 1997, were as
follows (dollars in millions):
<TABLE>
<S> <C>
Payments under contracts containing fixed payment dates:
Due in one year or less.............................................. $ 339.6
Due after one year through five years................................ 819.0
Due after five years through ten years............................... 415.9
Due after ten years.................................................. 852.4
---------
Total gross payments whose payment dates are fixed by contract.. 2,426.9
Less amounts representing future interest on such contracts.......... 879.0
---------
Insurance liabilities whose payment dates are fixed by contract 1,547.9
Insurance liabilities whose payment dates are not fixed by contract....... 24,352.2
---------
Total insurance liabilities..................................... $25,900.1
=========
</TABLE>
Of the above insurance liabilities under contracts containing fixed
payment dates, approximately 59 percent relate to payments that will be made for
the lifetime of the contract holder. We consider expected mortality in
determining the amount of this liability. The remaining insurance liabilities
having fixed payment dates are payable regardless of the contract holder's
survival.
Approximately 30 percent of insurance liabilities were contracts subject
to a fixed interest rate for the life of the contract. The remaining liabilities
generally were subject to interest rates that could be reset annually.
The following summarizes insurance liabilities for investment contracts
by credited rate (excluding interest rate bonuses for the first policy year
only) at December 31, 1997 (dollars in millions):
<TABLE>
<S> <C>
Below 4.75 percent......................................................... $ 2,627.0
4.75 percent - 5.00 percent................................................ 2,533.0
5.00 percent - 5.25 percent................................................ 3,588.0
5.25 percent - 5.50 percent................................................ 1,703.0
5.50 percent - 5.75 percent................................................ 676.0
5.75 percent and above..................................................... 1,597.0
---------
Total insurance liabilities on investment contracts.................. $12,724.0
=========
</TABLE>
42
<PAGE>
We believe that the diversity of our investment portfolio and the
concentration of investments in high quality liquid securities provide
sufficient liquidity to meet foreseeable cash requirements. Our investment
portfolio at December 31, 1997, included $1.0 billion of short-term investments
and $19.2 billion of publicly traded investment grade bonds, including $.6
billion of United States government and agency securities. Although there is no
present need or intent to dispose of such investments, our life insurance
subsidiaries could readily liquidate portions of their investments, if such a
need arose. In addition, investments could be used to facilitate borrowings
under reverse repurchase agreements or dollar-roll transactions. Such borrowings
have been used by the life companies from time to time to increase their return
on investments and to improve liquidity. At December 31, 1997, our portfolio of
bonds and redeemable preferred stocks had an aggregate unrealized gain of $484.4
million.
Liquidity of Conseco (parent company)
The parent company is a legal entity, separate and distinct from its
subsidiaries, and has no business operations. The parent company needs cash for:
(i) principal and interest on debt; (ii) dividends on preferred and common
stock; (iii) distributions on the Company-obligated mandatorily redeemable
preferred stock of subsidiary trusts; (iv) holding company administrative
expenses; (v) income taxes; and (vi) investments in subsidiaries. The primary
sources of cash to meet these obligations include statutorily permitted payments
from our life insurance subsidiaries, including: (i) dividend payments; (ii)
surplus debenture interest and principal payments; (iii) tax sharing payments;
and (iv) fees for services provided. The parent company may also obtain cash by:
(i) issuing debt or equity securities; (ii) borrowing additional amounts under
its revolving credit agreement, as described in note 7 to the consolidated
financial statements; or (iii) selling all or a portion of its subsidiaries.
These sources have historically provided adequate cash flow to fund: (i) the
needs of the parent company's normal operations; (ii) internal expansion,
acquisitions and investment opportunities; and (iii) the retirement of debt and
equity. In 1997, we also issued new shares of Conseco common stock for a portion
of the cost to acquire CAF and the entire cost to acquire PFS.
43
<PAGE>
The following table shows the cash flow activity of the parent company
and its wholly owned non-life subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Items relating to operations:
Dividends and surplus debenture interest payments from life subsidiaries..... $ 166.1 $109.9 $ 80.6
Tax sharing payments from life subsidiaries.................................. 9.3 4.6 2.7
Fees from life subsidiaries.................................................. 89.1 74.8 34.7
Fees from unaffiliated companies............................................. 35.2 39.3 39.0
Parent and non-life subsidiary costs......................................... (74.1) (39.8) (64.5)
Interest on debt of Conseco, including direct and indirect obligations....... (117.4) (71.3) (41.6)
Interest on amounts due to life subsidiaries................................. (26.5) (7.3) (8.8)
Income taxes................................................................. (2.3) 2.2 (7.7)
Other........................................................................ 8.9 (4.7) -
------- ------ ------
Total items relating to operations....................................... 88.3 107.7 34.4
------- ------ ------
Items relating to investing:
Purchase of investments...................................................... (140.7) (71.1) (70.8)
Sales and maturities of investments.......................................... 70.2 45.3 125.6
Cash held by non-life subsidiaries prior to acquisition...................... 4.1 40.9 17.0
Investment in consolidated subsidiaries...................................... (939.7) (226.1) (552.3)
Surplus debenture principal payments......................................... 73.9 36.5 -
Expense incurred in terminated merger........................................ - - (5.5)
------- ------ ------
Total items relating to investing......................................... (932.2) (174.5) (486.0)
------- ------ ------
Items relating to financing:
Proceeds from issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of issuance costs.......... 780.4 587.7 -
Proceeds from the issuance of equity securities.............................. 52.3 20.6 1.8
Proceeds from the issuance of debt, net of issuance costs.................... 2,578.8 856.0 827.2
Commercial paper, net........................................................ 448.2 - -
Common and preferred dividends............................................... (76.8) (34.3) (24.6)
Dividends on stock held by subsidiaries...................................... (53.8) (38.1) (38.7)
Distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts........................................... (65.7) (2.9) -
Payments on debt, including prepayments and acquired debt.................... (2,218.8) (1,467.2) (330.0)
Payments to retire redeemable preferred stock of a non-life subsidiary....... (72.4) (.3) -
Repurchases of Conseco common stock ......................................... (593.3) (21.5) (92.4)
Proceeds from the issuance of convertible preferred stock, net of issuance
costs..................................................................... - 257.7 -
------- ------ ------
Total items relating to financing......................................... 778.9 157.7 343.3
------- ------ ------
Change in short-term investments of parent
and its non-life subsidiaries......................................... (65.0) 90.9 (108.3)
Short-term investments, beginning of year................................. 115.1 24.2 132.5
------- ------ ------
Short-term investments, end of year....................................... $ 50.1 $115.1 $ 24.2
======= ====== ======
</TABLE>
44
<PAGE>
At December 31, 1997, the parent company and its non-life subsidiaries
had short-term investments of $50.1 million, of which $28.7 million was expended
in January 1998 for accrued interest and dividends. The parent company and its
non-life subsidiaries had additional investments in fixed maturities, equity
securities and other invested assets of $155.0 million at December 31, 1997,
which, if needed, could be liquidated or contributed to the insurance
subsidiaries.
The ability of our insurance subsidiaries to pay dividends is subject to
state insurance department regulations. These regulations generally permit
dividends to be paid for any 12 month period in amounts equal to the greater of
(or in a few states, the lesser of): (i) net gain from operations for the prior
year; or (ii) 10 percent of surplus as of the end of the preceding year. Any
dividends in excess of these levels require the approval of the director or
commissioner of the applicable state insurance department. The amount of
dividends that our insurance subsidiaries could pay to non-life parent companies
in 1998 without prior approval is approximately $165.1 million.
Statutory operating results and statutory surplus are determined
according to accounting practices prescribed or permitted by each state in which
the subsidiaries do business. Statutory surplus bears no direct relationship to
equity as determined under GAAP. With respect to new business, statutory
accounting practices require acquisition costs and reserves for future
guaranteed benefit payments and interest in excess of statutory rates to be
expensed as the new business is written. These items cause a statutory loss
("surplus strain") on many insurance policies in the year in which they are
issued. We manage the effect of such statutory surplus strain by designing our
products to minimize such first-year losses, and by controlling the amount of
new premiums written.
Note 12 to the consolidated financial statements shows the difference
between pretax income reported using statutory accounting practices and GAAP.
Insurance departments in the states where our life insurance subsidiaries
are domiciled or do business require insurance companies to make annual and
quarterly filings. The interest maintenance reserve ("IMR") and the asset
valuation reserve ("AVR") are required to be appropriated and reported as
liabilities. The IMR captures all investment gains and losses resulting from
changes in interest rates and provides for such amounts to be amortized into
statutory net income on a basis reflecting the remaining lives of the assets
sold. The AVR captures investment gains and losses related to changes in
creditworthiness; it is also adjusted each year based on a formula related to
the quality and loss experience of the Company's investment portfolio. These
reserves affect the ability of our insurance subsidiaries to reflect investment
gains and losses in statutory earnings and surplus.
Our debt agreements require the Company to maintain minimum working
capital and RBC ratios and limit the Company's ability to incur additional
indebtedness. They also restrict the amount of retained earnings that is
available for dividends and require Conseco to maintain certain minimum ratings
at its insurance subsidiaries.
INFLATION
Inflation does not have a significant effect on Conseco's balance sheet;
we have minimal investments in property, equipment or inventories.
Medical cost inflation has had a significant impact on our supplemental
health operations. Generally, these costs have increased more rapidly than the
Consumer Price Index. Medical costs will likely continue to rise. The impact of
medical cost inflation on our operations depends on our ability to increase
premium rates. Such increases are subject to approval by state insurance
departments. Before Medicare supplement plans were standardized, approximately
two-thirds of the states permitted rate plans with automatic escalation clauses.
This permitted Conseco, in periods following initial approval, to adjust premium
rates for changes in Medicare deductibles and increases in medical cost
inflation without refiling with the regulators. Currently, rate changes for all
Medicare supplement plans must be individually approved by each state. We seek
to price our new standardized supplement plans to reflect the impact of these
filings and the lengthening of the period required to implement rate increases.
YEAR 2000 CONVERSION COSTS
We have initiated a corporate-wide program designed to ensure that our
computer systems will function properly in the year 2000. For some of our
operations, the most effective solution will be to ensure timely completion of
the previously planned conversions of their older systems to more modern, year
2000 - compliant systems used in other areas of the Company. In some cases, our
most effective solution will be to purchase new, more modern systems; these
costs will be capitalized as assets and amortized over their expected useful
lives. In other cases, we will modify existing systems, thereby incurring costs
that will be charged to operating expense. To date, we have incurred $11.6
million in costs related to year 2000 projects. We expect to spend approximately
an additional $35 million on these projects over the next two years. We began to
incur expenses related to this program several years ago. We expect our year
2000 program to be completed on a timely basis.
45
<PAGE>
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
We seek to invest our available funds in a manner that will maximize
shareholder value and fund future obligations to policyholders and debtors,
subject to appropriate risk considerations. We seek to meet this objective
through investments that: (i) have similar characteristics to the liabilities
they support; (ii) are diversified among industries, issuers and geographic
locations; and (iii) make up a predominantly investment-grade fixed maturity
securities portfolio. Many of our products incorporate surrender charges, market
interest rate adjustments or other features to encourage persistency.
Approximately 59 percent of our total insurance liabilities at December 31,
1997, had surrender penalties or other restrictions and approximately 24 percent
are not subject to surrender.
We seek to maximize the total return on our investments through active
investment management. Accordingly, we have determined that our entire portfolio
of fixed maturity securities is available to be sold in response to: (i) changes
in market interest rates; (ii) changes in relative values of individual
securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in
credit quality outlook for certain securities; (v) liquidity needs; and (vi)
other factors. From time to time, we invest in securities for trading purposes,
although such investments account for a relatively small portion of our total
portfolio.
Profitability of many of our products is significantly affected by the
spreads between interest yields on investments and rates credited on insurance
liabilities. Although substantially all credited rates on our annuity products
may be changed annually (subject to minimum guaranteed rates), changes in
competition and other factors, including the impact of the level of surrenders
and withdrawals, may limit our ability to adjust or to maintain crediting rates
at levels necessary to avoid narrowing of spreads under certain market
conditions. As of December 31, 1997, the average yield, computed on the cost
basis of our investment portfolio, was 7.5 percent, and the average interest
rate credited or accruing to our total insurance liabilities was 5.2 percent,
excluding interest bonuses guaranteed for the first year of the annuity contract
only.
We use computer models to perform simulations of the cash flows generated
from our existing business under various interest rate scenarios. These
simulations enable us to measure the potential gain or loss in fair value of our
interest rate-sensitive financial instruments. With such estimates, we seek to
closely match the duration of our assets to the duration of our liabilities.
When the estimated durations of assets and liabilities are similar, exposure to
interest rate risk is minimized because a change in the value of assets should
be largely offset by a change in the value of liabilities. At December 31, 1997,
the adjusted modified duration of our fixed maturity securities and short-term
investments was approximately 5.8 years and the duration of our insurance
liabilities was approximately 6.7 years.
If interest rates were to increase by 10 percent from their December 31,
1997 levels, our fixed maturity securities and short-term investments (net of
corresponding changes in the value of cost of policies purchased, cost of
policies produced and insurance liabilities) would decline in fair value by
approximately $545 million. The calculations involved in our computer
simulations incorporate numerous assumptions, require significant estimates and
assume an immediate change in interest rates without any management of the
investment portfolio in reaction to such change. Consequently, potential changes
in value of our financial instruments indicated by the simulations will likely
be different from the actual changes experienced under given interest rate
scenarios, and the differences may be material. Because we actively manage our
investments and liabilities, actual losses could be less than those estimated
above.
We manage the composition of our borrowed capital by considering
factors such as the ratio of borrowed capital to total capital, the portion of
our outstanding capital subject to fixed and variable rates, the current
interest rate environment and other market conditions. Our borrowed capital at
December 31, 1997, includes commercial paper, notes payable and
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts totaling $3.7 billion ($1.8 billion of which is at floating rates and
$1.9 billion of which is at fixed rates). Based on the interest rate exposure
and prevalent rates at December 31, 1997, a relative 10 percent decrease in
interest rates would increase the fair value of our fixed-rate borrowed capital
by approximately $75 million. Our interest expense on floating-rate debt will
fluctuate as prevailing interest rates change.
We periodically use options and interest rate swaps to hedge interest
rate risk associated with our investments and borrowed capital. Although we had
no such agreements outstanding at December 31, 1997, we entered into four
interest rate swap agreements in March 1998. The Company entered into such
agreements to create a hedge that effectively converts a portion of its
fixed-rate borrowed capital into floating-rate instruments for the period during
which the agreements are outstanding. Such interest rate swap agreements have an
aggregate notional principal amount of $1.0 billion, mature in various years
through 2008, and have an average remaining life of seven years. If the
counterparties of these interest rate swaps do not meet their obligations,
Conseco could have a loss. Conseco limits its exposure to such a loss by
diversifying among several counterparties believed to be financially sound and
creditworthy. At March 13, 1998, all of the counterparties were rated "A" or
higher by Standard & Poor's Corporation. These swap agreements, if in existence
when the assumed 10 percent decrease in interest rates occurred (see
46
<PAGE>
preceding paragraph), would cause the increase in the fair value of our borrowed
capital to be $55.0 million, or $20.0 million less than indicated in the
preceding paragraph.
OUTLOOK
As indicated in this report, Conseco intends to continue to grow its life
and health insurance operations.
Conseco's operations in 1998 and in future years will be significantly
affected by its recently completed acquisitions. After completing an
acquisition, Conseco generally seeks to improve results of operations by
centralizing, standardizing and more efficiently performing many functions
common to most life insurance companies and by focusing on the sale of
profitable products. In the case of Colonial Penn, which is engaged primarily in
the sale of life insurance through direct marketing, many activities remain at
its Philadelphia facility.
Conseco believes that a number of life insurance companies will become
available for acquisition in the next 10 years as a result of strategic
restructuring and industry consolidation. The Company may participate in those
acquisitions which fit Conseco's strategic growth plan. We evaluate a potential
acquisition based on a variety of factors, including its operating results and
financial condition, growth potential, management and personnel, potential
return on the acquisition in relation to other investment opportunities and
internal development of our existing business operations. Conseco's ability to
complete acquisitions that achieve those objectives depends on a number of
external factors, including: (i) the attitudes of rating agencies toward
Conseco's strategic plan and capital structure; (ii) the availability and cost
of both debt and equity capital; (iii) pressures that motivate companies to seek
to be acquired at a reasonable cost; and (iv) competition from other acquirers,
which affects the cost of acquisitions.
Conseco believes it has the resources and capabilities to continue being
a successful acquirer of life insurance companies. It also believes that its
past record of successfully acquiring, financing and operating life insurance
companies will be an advantage compared with others who may attempt to acquire
available candidates. However, many acquisition targets that have been available
recently did not appear to provide significant strategic benefits and their
asking prices were high relative to their expected value. Management believes it
is more beneficial to use Conseco's resources to improve the value of its
products, distribution capabilities and operating systems rather than to
complete acquisitions that do not offer comparable potential returns on its
investment.
Conseco continually reviews its capital structure, including the need and
desirability of restructuring the existing debt and equity of the Company.
As a result of its recent acquisitions, Conseco has significant in-force
business and marketing activity in multiple segments of the life insurance
industry, including universal life, whole life, term life, single-premium and
flexible-premium deferred and immediate annuities (including variable, indexed
and fixed), Medicare supplement insurance, long-term care coverage, specified-
disease coverage, and individual and group health insurance. Conseco will
continue to concentrate on opportunities to improve the effectiveness of its
distribution systems in marketing these products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information included under the caption "Market-Sensitive Instruments
and Risk Management" in "Item 7. Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" is incorporated
herein by reference.
47
<PAGE>
<TABLE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
<CAPTION>
Page
----
<S> <C>
Report of Management...................................................................................................49
Report of Independent Accountants......................................................................................50
Consolidated Balance Sheet at December 31, 1997 and 1996...............................................................51
Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995...................................................................................53
Consolidated Statement of Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995...............................................................55
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................................................................57
Notes to Consolidated Financial Statements.............................................................................59
</TABLE>
48
<PAGE>
REPORT OF MANAGEMENT
To Our Shareholders
Management of Conseco, Inc. is responsible for the reliability of the
financial information in this annual report. The financial statements are
prepared in accordance with generally accepted accounting principles, and the
other financial information in this annual report is consistent with that of the
financial statements (except for such information described as being in
accordance with regulatory or statutory accounting requirements).
The integrity of the financial information relies in large part on
maintaining a system of internal control that is established by management to
provide reasonable assurance that assets are safeguarded and transactions are
properly authorized, recorded and reported. Reasonable assurance is based upon
the premise that the cost of controls should not exceed the benefits derived
from them. The Company's internal auditors continually evaluate the adequacy and
effectiveness of this system of internal control and actions are taken to
correct deficiencies as they are identified.
Certain financial information presented depends upon management's
estimates and judgments regarding the ultimate outcome of transactions which are
not yet complete. Management believes these estimates and judgments are fair and
reasonable in view of present conditions and available information.
The Company engages independent accountants to audit its financial
statements and express their opinion thereon. They have full access to each
member of management in conducting their audits. Such audits are conducted in
accordance with generally accepted auditing standards and include a review of
internal controls, tests of the accounting records, and such other auditing
procedures as they consider necessary to express an opinion on the Company's
financial statements.
The Audit Committee of the Board of Directors, composed solely of
nonmanagement directors, meets periodically with management, internal auditors
and the independent accountants to review internal accounting control, audit
activities and financial reporting matters. The internal auditors and the
independent accountants have full and free access to the Audit Committee.
Stephen C. Hilbert Rollin M. Dick
Chairman of the Board, Executive Vice President and
President and Chief Financial Officer
Chief Executive Officer
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders
Conseco, Inc.
We have audited the accompanying consolidated balance sheet of Conseco,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Conseco, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 23, 1998
50
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997 and 1996
(Dollars in millions)
ASSETS
1997 1996
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1997 - $22,289.3; 1996 - $17,203.3)............................................. $22,773.7 $17,307.1
Equity securities at fair value (cost: 1997 - $227.6; 1996 - $97.6)................ 228.9 99.7
Mortgage loans..................................................................... 516.2 356.0
Credit-tenant loans................................................................ 558.6 447.1
Policy loans....................................................................... 692.4 542.4
Other invested assets ............................................................. 518.1 259.6
Short-term investments............................................................. 990.5 281.6
Assets held in separate accounts................................................... 682.8 337.6
--------- ---------
Total investments............................................................ 26,961.2 19,631.1
Accrued investment income.............................................................. 379.3 296.9
Cost of policies purchased............................................................. 2,466.4 2,015.0
Cost of policies produced.............................................................. 915.2 544.3
Reinsurance receivables................................................................ 849.1 504.2
Income tax assets...................................................................... 85.6 8.8
Goodwill (net of accumulated amortization: 1997 - $167.7; 1996 - $83.2)............... 3,637.3 2,200.8
Property and equipment (net of accumulated depreciation: 1997 - $83.8; 1996 - $69.7)... 171.6 110.5
Other assets........................................................................... 449.1 301.1
--------- ---------
Total assets................................................................. $35,914.8 $25,612.7
========= =========
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1997 and 1996
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products..................................................... $17,357.6 $14,795.5
Traditional products............................................................ 5,784.8 3,251.5
Claims payable and other policyholder funds..................................... 1,668.8 984.9
Unearned premiums............................................................... 406.1 272.4
Liabilities related to separate accounts ....................................... 682.8 337.6
Investment borrowings.............................................................. 1,389.5 383.4
Other liabilities.................................................................. 995.6 709.5
Commercial paper................................................................... 448.2 -
Notes payable...................................................................... 1,906.7 1,094.9
--------- ---------
Total liabilities.......................................................... 30,640.1 21,829.7
--------- ---------
Minority interest:
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts............................................................ 1,383.9 600.0
Mandatorily redeemable preferred stock of subsidiary............................... - 97.0
Common stock of subsidiary......................................................... .7 .7
Shareholders' equity:
Preferred stock.................................................................... 115.8 267.1
Common stock and additional paid-in capital (no par value, 1,000,000,000 shares
authorized, shares issued and outstanding: 1997 - 186,665,591;
1996 - 167,128,228)............................................................. 2,382.0 2,029.6
Accumulated other comprehensive income:
Unrealized appreciation of fixed maturity securities (net of applicable deferred
income taxes: 1997 - $95.5; 1996 - $21.5)................................... 177.2 39.8
Unrealized appreciation (depreciation) of other investments (net of applicable
deferred income taxes: 1997 - $2.6; 1996 - $(.5))........................... 4.8 (.9)
Retained earnings.................................................................. 1,210.3 749.7
--------- ---------
Total shareholders' equity................................................. 3,890.1 3,085.3
--------- ---------
Total liabilities and shareholders' equity................................. $35,914.8 $25,612.7
========= =========
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions, except per share data)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $2,954.1 $1,384.3 $1,355.6
Interest sensitive products...................................... 456.7 269.9 109.4
Net investment income............................................... 1,825.3 1,302.5 1,142.6
Net investment gains................................................ 266.5 60.8 204.1
Fee revenue and other income........................................ 65.8 49.8 43.6
-------- -------- --------
Total revenues.............................................. 5,568.4 3,067.3 2,855.3
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 2,185.7 1,173.3 1,075.5
Change in future policy benefits.................................... 182.6 21.7 32.0
Amounts added to annuity and financial product policyholder account
balances:
Interest...................................................... 697.1 620.2 556.6
Other amounts added to variable and equity-indexed
annuity products........................................... 109.6 48.4 28.8
Interest expense on notes payable................................... 109.4 108.1 119.4
Interest expense on short-term investment borrowings................ 42.0 22.0 22.2
Amortization related to operations.................................. 408.8 240.0 203.6
Amortization related to investment gains............................ 181.2 36.0 126.6
Nonrecurring charges................................................ 71.7 - -
Other operating costs and expenses.................................. 577.2 304.0 272.1
-------- -------- --------
Total benefits and expenses................................... 4,565.3 2,573.7 2,436.8
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 1,003.1 493.6 418.5
Income tax expense...................................................... 376.6 179.8 87.0
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 626.5 313.8 331.5
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes... 49.0 3.6 -
Dividends on preferred stock of subsidiaries........................ 3.3 8.9 11.9
Equity in earnings of subsidiaries.................................. - 22.4 97.1
-------- -------- -------
Income before extraordinary charge ......................... 574.2 278.9 222.5
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 6.9 26.5 2.1
-------- -------- -------
Net income.................................................. 567.3 252.4 220.4
Less amounts applicable to preferred stock:
Charge related to induced conversions............................... 13.2 - -
Preferred stock dividends........................................... 8.7 27.4 18.4
-------- -------- -------
Net income applicable to common stock....................... $ 545.4 $ 225.0 $ 202.0
======== ======== =======
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions, except per share data)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 185,751,000 104,584,000 81,405,000
Net income before extraordinary charge ........................ $2.98 $2.40 $2.51
Extraordinary charge .......................................... .04 .25 .03
----- ----- -----
Net income................................................ $2.94 $2.15 $2.48
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 210,179,000 138,860,000 103,881,000
Net income before extraordinary charge ........................ $2.67 $2.01 $2.14
Extraordinary charge........................................... .03 .19 .02
----- ----- -----
Net income................................................ $2.64 $1.82 $2.12
===== ===== =====
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
Common stock Accumulated other
Preferred and additional comprehensive Retained
Total stock paid-in capital income earnings
----- ----- --------------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.................................. $ 747.0 $ 283.5 $ 165.8 $(139.7) $ 437.4
Comprehensive income, net of tax:
Net income........................................... 220.4 - - - 220.4
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of
$132.8 million).................................... 252.4 - - 252.4 -
---------
Total comprehensive income....................... 472.8
Issuance of shares for stock options and employee
benefit plans........................................ 6.0 - 6.0 - -
Tax benefit related to issuance of shares under stock
option plans......................................... .4 - .4 - -
Cost of shares acquired................................ (92.4) - (15.0) - (77.4)
Dividends on preferred stock........................... (18.4) - - - (18.4)
Dividends on common stock.............................. (3.7) - - - (3.7)
---------- ------- -------- ------- ---------
Balance, December 31, 1995................................ 1,111.7 283.5 157.2 112.7 558.3
Comprehensive income, net of tax:
Net income........................................... 252.4 - - - 252.4
Change in unrealized appreciation (depreciation) of
securities (net of applicable income tax benefit of
$45.9 million)..................................... (73.8) - - (73.8) -
---------
Total comprehensive income....................... 178.6
Issuance of convertible preferred stock................ 267.1 267.1 - - -
Conversion of preferred stock into common shares....... - (283.2) 283.2 - -
Redemption of preferred stock for cash................. (.3) (.3) - - -
Issuance of shares in merger transactions.............. 1,568.6 - 1,568.6 - -
Issuance of shares for stock options and employee
benefit plans........................................ 29.5 - 29.5 - -
Tax benefit related to issuance of shares under stock
option plans......................................... 15.9 - 15.9 - -
Cost of issuance of preferred stock.................... (21.7) - (21.7) - -
Cost of shares acquired................................ (26.0) - (3.1) - (22.9)
Dividends on preferred stock........................... (27.4) - - - (27.4)
Dividends on common stock.............................. (10.7) - - - (10.7)
--------- ------- -------- ------- ---------
Balance, December 31, 1996................................ 3,085.3 267.1 2,029.6 38.9 749.7
(continued on following page)
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, continued
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
Common stock Accumulated other
Preferred and additional comprehensive Retained
Total stock paid-in capital income earnings
----- ----- --------------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 (carried forward from
prior page)............................................$3,085.3 $ 267.1 $2,029.6 $ 38.9 $ 749.7
Comprehensive income, net of tax:
Net income........................................... 567.3 - - - 567.3
Change in unrealized appreciation (depreciation) of
securities (net of applicable income taxes of
$77.1 million)..................................... 143.1 - - 143.1 -
--------
Total comprehensive income....................... 710.4
Conversion of preferred stock into common shares....... - (151.3) 151.3 - -
Issuance of shares in merger transactions.............. 471.5 - 471.5 - -
Issuance of shares for stock options and agent and
employee benefit plans............................... 190.9 - 190.9 - -
Tax benefit related to issuance of shares under stock
option plans......................................... 85.2 - 85.2 - -
Conversion of convertible debentures into common
shares............................................... 150.0 - 150.0 - -
Cost of shares acquired................................ (711.7) - (685.6) - (26.1)
Value of stock purchase contracts, a component of the
FELINE PRIDES........................................ (3.4) - (3.4) - -
Other.................................................. (7.5) - (7.5) - -
Amounts applicable to preferred stock:
Charge related to induced conversion of convertible
preferred stock.................................... (13.2) - - - (13.2)
Dividends on preferred stock......................... (8.7) - - - (8.7)
Dividends on common stock.............................. (58.7) - - - (58.7)
-------- --------- -------- ------- --------
Balance, December 31, 1997................................$3,890.1 $ 115.8 $2,382.0 $ 182.0 $1,210.3
======== ========= ======== ======= ========
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 567.3 $ 252.4 $ 220.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation................................ 604.1 336.3 339.4
Income taxes................................................. 181.0 13.6 (34.7)
Insurance liabilities........................................ (344.4) (123.8) (3.0)
Amounts added to annuity and financial product policyholder
account balances........................................... 806.7 668.6 585.4
Fees charged to insurance liabilities........................ (456.7) (269.9) (109.4)
Accrual and amortization of investment income................ (70.5) (29.5) (71.8)
Deferral of cost of policies produced........................ (602.6) (308.4) (282.1)
Nonrecurring charges......................................... 71.7 - -
Minority interest............................................ 75.4 26.8 91.9
Extraordinary charge on extinguishment of debt............... 10.6 36.9 3.7
Net investment gains......................................... (266.5) (60.8) (204.1)
Other........................................................ (15.6) (73.9) (28.9)
--------- --------- --------
Net cash provided by operating activities.................. 560.5 468.3 506.8
--------- --------- --------
Cash flows from investing activities:
Sales of investments............................................... 18,459.4 8,394.1 7,900.9
Maturities and redemptions......................................... 750.7 614.3 417.1
Purchases of investments........................................... (20,043.8) (9,409.7) (9,112.3)
Acquisition of subsidiaries, net of cash held at the date of the
mergers......................................................... (759.7) (21.7) (586.3)
Short-term investments held by CCP Insurance, Inc. before
consolidation at January 1, 1995................................ - - 123.0
Repurchase of equity securities by CCP Insurance, Inc.............. - - (44.5)
Cash paid in reinsurance transactions.............................. - - (71.1)
Other.............................................................. - (.7) (3.3)
--------- --------- --------
Net cash used by investing activities...................... (1,593.4) (423.7) (1,376.5)
--------- --------- --------
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of notes payable of Conseco, net.......................... $ 2,578.8 $ 856.0 $ 795.2
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts....................... 780.4 587.7 -
Issuance of commercial paper, net.................................. 448.2 - -
Investment borrowings.............................................. 962.5 30.6 298.1
Issuance of notes payable of affiliates, net - not direct
obligations of Conseco ......................................... - 459.4 233.4
Payments on notes payable of Conseco............................... (2,273.3) (1,207.9) (330.0)
Payments on notes payable of affiliates - not direct
obligations of Conseco.......................................... - (926.4) (269.0)
Purchase of preferred stock of a subsidiary........................ (98.4) (12.6) -
Deposits to insurance liabilities.................................. 2,099.4 1,881.3 1,757.5
Withdrawals from insurance liabilities............................. (2,072.3) (1,842.5) (1,622.6)
Issuance of shares for employee benefit plans...................... 52.3 20.6 1.8
Issuance of convertible preferred stock............................ - 257.7 -
Issuance of equity interests in subsidiaries, net.................. - 2.2 16.8
Payments to repurchase equity securities of Conseco ............... (593.3) (21.5) (92.4)
Payments related to the induced conversion of convertible
preferred stock................................................. (13.2) - -
Redemption of preferred stock...................................... - (.3) -
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts....................... (65.7) (2.9) -
Dividends paid..................................................... (63.6) (34.3) (24.6)
--------- -------- --------
Net cash provided by financing activities.................. 1,741.8 47.1 764.2
--------- -------- --------
Net increase (decrease) in short-term investments.......... 708.9 91.7 (105.5)
Short-term investments, beginning of year.............................. 281.6 189.9 295.4
--------- -------- --------
Short-term investments, end of year.................................... $ 990.5 $ 281.6 $ 189.9
========= ======== ========
The accompanying notes are an integral
part of the consolidated financial
statements.
</TABLE>
58
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The following summary explains the accounting policies we use to arrive
at the more significant numbers in our financial statements. We have restated
all share and per-share amounts for the two-for-one stock splits distributed
February 11, 1997 and April 1, 1996. We prepare our financial statements in
accordance with generally accepted accounting principles ("GAAP"). We follow the
accounting standards established by the Financial Accounting Standards Board,
the American Institute of Certified Public Accountants and the Securities and
Exchange Commission.
Conseco, Inc. ("We," "Conseco" or "the Company" ) is a financial services
holding company. The Company develops, markets and administers supplemental
health insurance, annuity, individual life insurance, individual and group major
medical insurance and other 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 and strong distribution systems. Once a company is
acquired, our operating strategy has been to consolidate and streamline
management and administrative functions where appropriate, 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.
Consolidation issues. Conseco Capital Partners, L.P. ("Partnership I"),
an investment partnership formed by Conseco with other investors, was the
Company's vehicle for acquiring four insurance companies: Great American Reserve
Insurance Company ("Great American Reserve") in June 1990, Jefferson National
Life Insurance Company in November 1990 (it was merged with Great American
Reserve in 1994), Beneficial Standard Life Insurance Company ("Beneficial
Standard") in March 1991 and Bankers Life and Casualty Company ("Bankers Life")
in November 1992. CCP Insurance, Inc. ("CCP"), a newly organized holding company
for Partnership I's first three acquisitions, completed an initial public
offering ("IPO") in July 1992. In August 1995, we completed the purchase of all
the shares of CCP common stock we did not previously own in a transaction
pursuant to which CCP was merged with Conseco, with Conseco being the surviving
corporation (the merger and related transactions are referred to herein as the
"CCP Merger"). As a result, CCP's subsidiaries (Great American Reserve and
Beneficial Standard) became wholly owned subsidiaries of the Company. The
accounts of CCP are consolidated with Conseco's for all periods in the
accompanying financial statements.
We were required to use step-basis accounting when we acquired the shares
of CCP common stock in various transactions. As a result, the assets and
liabilities of CCP included in our consolidated balance sheet represent the
following combination of values: (i) the portion of CCP's net assets acquired by
Conseco in the initial acquisitions of CCP's subsidiaries made by Partnership I
is valued as of those respective acquisition dates; and (ii) the portion of
CCP's net assets acquired in the CCP Merger is valued as of August 31, 1995.
Bankers Life Holding Corporation ("BLH"), a company formed by Partnership
I to acquire Bankers Life, completed an IPO in March 1993. As a result of the
IPO and the acquisition of additional BLH common shares in September 1993, we
owned 56 percent of BLH at January 1, 1995. In June 1995, we purchased
additional common shares of BLH, increasing the Company's ownership of BLH to 85
percent. Conseco's ownership of BLH increased to 88 percent at December 31,
1995, and 90.5 percent at March 5, 1996, as a result of share repurchases by
BLH. On December 31, 1996, we completed the purchase of all of the shares of BLH
common stock we did not already own in a transaction pursuant to which BLH
merged with a wholly owned subsidiary of Conseco (the "BLH Merger"). The
accounts of BLH are consolidated with Conseco's accounts for all periods in the
accompanying consolidated financial statements.
We were required to use step-basis accounting when we acquired the BLH
common shares at the various acquisition dates. The assets and liabilities of
BLH included in our consolidated balance sheet represent the following
combination of values: (i) the portion of BLH's net assets acquired by Conseco
in the November 1992 acquisition made by Partnership I is valued as of that
acquisition date; (ii) the portion of BLH's net assets acquired in 1993, 1995
and the first quarter of 1996 is valued as of the dates of their purchase; and
(iii) the portion of BLH's net assets acquired in the BLH Merger is valued as of
December 31, 1996.
Conseco Capital Partners II, L.P. ("Partnership II"), Conseco's second
investment partnership, acquired American Life Holdings, Inc. ("ALH" and the
parent of American Life and Casualty Insurance Company) on September 29, 1994.
Because Conseco was the sole general partner of Partnership II, Conseco
controlled Partnership II and ALH even though our ownership interest was
59
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
less than 50 percent. Because of this control, Conseco's consolidated financial
statements were required to include the accounts of ALH.
On January 1, 1995, Conseco had a 27 percent ownership interest in ALH.
On November 30, 1995, ALH issued 2,142,857 shares of its common stock for $30.0
million (including $13.2 million paid by Conseco and its subsidiaries) in a
private placement transaction. Conseco's ownership interest in ALH increased to
36 percent at December 31, 1995, as a result of this transaction and changes in
our ownership of affiliated companies with ownership interests in ALH.
On September 30, 1996, we purchased all of the common shares of ALH we
did not previously own from Partnership II for $166.0 million in cash (the "ALH
Stock Purchase") and Partnership II was terminated. We were required to use
step-basis accounting when we acquired the shares of ALH common stock in the ALH
Stock Purchase and for our previous acquisitions. As a result, the assets and
liabilities of ALH included in the December 31, 1996, consolidated balance sheet
represent the following combination of values: (i) the portion of ALH's net
assets acquired by Conseco in the initial acquisition of ALH made by Partnership
II is valued as of September 29, 1994; (ii) the portion of ALH's net assets
acquired on November 30, 1995 is valued as of that date; and (iii) the portion
of ALH's net assets acquired in the ALH Stock Purchase is valued as of September
30, 1996.
On August 2, 1996, we completed the acquisition (the "LPG Merger") of
Life Partners Group, Inc. ("LPG") and LPG became a wholly owned subsidiary of
Conseco. On December 17, 1996, we completed the acquisition (the "ATC Merger")
of American Travellers Corporation ("ATC") and ATC was merged with and into
Conseco, with Conseco being the surviving corporation. On December 23, 1996, we
completed the acquisition (the "THI Merger") of Transport Holdings Inc. ("THI")
and THI was merged with and into Conseco, with Conseco being the surviving
corporation. On March 4, 1997, we completed the acquisition (the "CAF Merger")
of Capitol American Financial Corporation ("CAF") and CAF became a wholly owned
subsidiary of Conseco. On May 30, 1997, we completed the acquisition (the "PFS
Merger") of Pioneer Financial Services, Inc. ("PFS") and PFS became a wholly
owned subsidiary of Conseco. On September 30, 1997, we completed the acquisition
(the "Colonial Penn Purchase") of Colonial Penn Life Insurance Company and
Providential Life Insurance Company and certain other assets (collectively
referred to as "Colonial Penn"). Colonial Penn became a wholly owned subsidiary
of Conseco. On December 5, 1997, we completed the acquisition (the "WNIC
Merger") of Washington National Corporation ("WNIC") and WNIC became a wholly
owned subsidiary of Conseco. The accounts of LPG are consolidated with Conseco
effective July 1, 1996; the accounts of ATC and THI are consolidated effective
December 31, 1996; the accounts of CAF are consolidated effective January 1,
1997; the accounts of PFS are consolidated effective April 1, 1997; the accounts
of Colonial Penn are consolidated effective September 30, 1997; and the accounts
of WNIC are consolidated effective December 1, 1997.
Neither "consolidation" nor "non-consolidation" methods of accounting for
partially owned subsidiaries affect our reported net income or shareholders'
equity. Our consolidated financial statements do not include the results of
material transactions between us and our consolidated affiliates, or among our
consolidated affiliates. We reclassified some amounts in our 1996 and 1995
consolidated financial statements and notes to conform with the 1997
presentation.
60
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Investments
Fixed maturities are securities that mature more than one year after
issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
Actively managed - fixed maturity securities that we may sell prior
to maturity in response to changes in interest rates, issuer credit
quality or our liquidity requirements. We carry actively managed
securities at estimated fair value. We record any unrealized gain
or loss, net of tax and the related adjustments described below, as
a component of shareholders' equity.
Trading - fixed maturity securities that we buy principally for the
purpose of selling in the near term. We carry trading securities at
estimated fair value. We include any unrealized gain or loss in net
investment gains (losses). We held $64.8 million of trading
securities at December 31, 1997, which are included in other
invested assets. We did not hold any trading securities at December
31, 1996 or 1995.
Held to maturity - fixed maturity securities that we have the
ability and positive intent to hold to maturity. When we own such
securities, we carry them at amortized cost. We may dispose of
these securities if the credit quality of the issuer deteriorates,
if regulatory requirements change or under other unforeseen
circumstances. We have not held any held to maturity securities
since implementing SFAS 115 in 1993.
We consider the anticipated returns from investing policyholder balances,
including investment gains and losses, in determining the amortization of the
cost of policies purchased and the cost of policies produced. When we state
actively managed fixed maturities at fair value, we also adjust the cost of
policies purchased and the cost of policies produced to reflect the change in
cumulative amortization that we would have recorded if we had sold these
securities at their fair value and reinvested the proceeds at current yields. If
future yields on such securities decline, it may be necessary to increase
certain of our insurance liabilities. We are required to adjust such liabilities
when their balances and future net cash flows (including investment income) are
insufficient to cover future benefits and expenses.
The unrealized gains and losses and the related adjustments described
above have no effect on our earnings. We record them, net of tax and other
adjustments, to shareholders' equity. The following table summarizes the effect
of these adjustments on the related balance sheet accounts as of December 31,
1997:
<TABLE>
<CAPTION>
Effect of fair value
adjustment to
Balance actively managed
before fixed maturity Reported
adjustment securities amount
---------- ---------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $22,289.3 $ 484.4 $22,773.7
Other balance sheet items:
Cost of policies purchased................................. 2,639.0 (172.6) 2,466.4
Cost of policies produced.................................. 949.9 (34.7) 915.2
Other...................................................... - (4.4) (4.4)
Income tax assets.......................................... 181.1 (95.5) 85.6
-------
Unrealized appreciation of fixed maturity securities,
net................................................. $ 177.2
=======
</TABLE>
When there are changes in conditions that cause us to transfer a fixed
maturity investment to a different category (i.e., actively managed, trading or
held to maturity), we transfer it at its fair value on that date. We account for
the security's unrealized gain or loss (such amounts were immaterial in 1997) as
follows:
For a transfer to the trading category - we recognize the unrealized
gain or loss immediately in earnings.
For a transfer from the trading category - we do not reverse the
unrealized gain or loss already recognized in earnings.
61
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
For a transfer to actively managed from held to maturity - we
recognize the unrealized gain or loss immediately in shareholders'
equity.
For a transfer to held to maturity from actively managed - we continue
to report the unrealized gain or loss at the date of transfer in
shareholders' equity, but we amortize the gain or loss over the
remaining life of the security as an adjustment of yield.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We treat them like actively managed fixed maturities (as
described above).
Credit-tenant loans ("CTLs") are loans for commercial properties. When we
make these loans: (i) the lease of the principal tenant must be assigned to
Conseco; (ii) the lease must produce adequate cash flow to fund substantially
all the requirements of the loan; and (iii) the principal tenant or the
guarantor of such tenant's obligations must have an investment-grade credit
rating when the loan is made. These loans also must be collateralized by the
value of the related property. Our underwriting guidelines take into account
such factors as: (i) the lease term of the property; (ii) the borrower's
management ability, including business experience, property management
capabilities and financial soundness; and (iii) such economic, demographic or
other factors that may affect the income generated by the property, or its
value. The underwriting guidelines generally require a loan-to-value ratio of 75
percent or less. We carry both CTLs and traditional mortgage loans at amortized
cost.
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities.
Other invested assets include: (i) trading securities; (ii) Standard &
Poor's 500 Call Options ("S&P 500 Call Options"); and (iii) certain
non-traditional investments. Trading securities are carried at estimated fair
value as described above. The S&P 500 Call Options are also carried at estimated
fair value and are further described below under "Financial Instruments."
Non-traditional investments include investments in venture capital funds,
limited partnerships, mineral rights and promissory notes and are accounted for
using either the cost method, or for investments in partnerships over whose
operations the Company exercises significant influence, the equity method.
Policy loans are stated at their current unpaid principal balances.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value. We consider
all short-term investments to be cash equivalents.
We defer any fees received or costs incurred when we originate
investments--principally CTLs and mortgages. We amortize fees, costs, discounts
and premiums as yield adjustments over the contractual lives of the investments.
We consider anticipated prepayments on mortgage-backed securities in determining
estimated future yields on such securities.
When we sell a security (other than a trading security), we report the
difference between our sale proceeds and its amortized cost as an investment
gain or loss.
We regularly evaluate all of our CTLs, mortgage loans and other
investments based on current economic conditions, credit loss experience and
other investee-specific developments. If there is a decline in a security's net
realizable value that is other than temporary, we treat it as a realized loss
and we reduce our cost basis of the security to its estimated fair value.
Separate Accounts
Separate accounts are funds on which investment income and gains or
losses accrue directly to certain policyholders. The assets of these accounts
are legally segregated. They are not subject to the claims that may arise out of
any other business of Conseco. We report separate account assets at market
value; the underlying investment risks are assumed by the contract holders. We
record the related liabilities at amounts equal to the underlying assets; the
fair value of these liabilities equals their carrying amount.
62
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Cost of Policies Purchased
When we acquire an insurance company, we assign a portion of its cost to
the right to receive future cash flows from insurance contracts existing at the
date of the acquisition. This cost of policies purchased represents the
actuarially determined present value of the projected future cash flows from the
acquired policies. To determine this value, we use a method that is consistent
with methods commonly used to value blocks of insurance business and with the
basic methodology generally used to value assets. It can be summarized as
follows:
- Identify the expected future cash flows from the blocks of business.
- Identify the risks to realizing those cash flows (i.e., assess the
probability that the cash flows will be realized).
- Identify the rate of return that we must earn in order to accept these
risks, based on consideration of the factors summarized below.
- Determine the value of the policies purchased by discounting the
expected future cash flows by the discount rate we need to earn.
The expected future cash flows we use in determining such value are based
on actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of Conseco's management. Our
actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate we use to determine the value of the cost of policies
purchased is the rate of return we need to earn in order to invest in the
business being acquired. In determining this required rate of return, we
consider the following factors:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows
(as described above).
- The cost of our capital required to fund the acquisition.
- The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
- The acquired company's compatibility with other Conseco activities
that may favorably affect future cash flows.
- The complexity of the acquired company.
- Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After we determine the cost of policies purchased, we amortize that
amount and evaluate recoverability in the same manner as cost of policies
produced as described below.
The cost of policies purchased related to acquisitions completed prior to
November 19, 1992 (representing 8 percent of the balance of cost of policies
purchased at December 31, 1997) is amortized under a slightly different method
than that described above. However, the effect of the different method on 1997
net income was insignificant.
63
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Cost of Policies Produced
The costs that vary with and are primarily related to producing new
business are referred to as cost of policies produced. They consist primarily of
commissions, first-year bonus interest and certain costs of policy issuance and
underwriting, net of fees charged to the policy in excess of ultimate fees
charged. To the extent that they are recoverable from future profits, we defer
these costs and amortize them, using the interest rate credited to the
underlying policies, as follows:
- For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from the
contracts.
- For immediate annuities with mortality risks, in relation to the
present value of benefits to be paid.
- For traditional life and accident and health products, in relation to
future anticipated premium revenue, using the same assumptions that
are used in calculating the insurance liabilities.
Each year, we evaluate the recoverability of the unamortized balance of
the cost of policies produced. For universal life-type contracts and
investment-type contracts, we increase or decrease the accumulated amortization
whenever there is a material change in the estimated gross profits expected over
the life of a block of business. We do this in order to maintain a constant
relationship between the cumulative amortization and the present value
(discounted at the rate of interest that accrues to the policies) of expected
gross profits. For most other contracts, we reduce the unamortized asset balance
(by a charge to income) only when the present value of future cash flows, net of
the policy liabilities, is insufficient to recover the asset balance.
Goodwill
Goodwill is the excess of the amount we paid to acquire a company over
the fair value of its net assets. We amortize goodwill on the straight-line
basis over a 40-year period. We continually monitor the value of our goodwill
based on our estimates of future earnings. We determine whether goodwill is
fully recoverable from projected undiscounted net cash flows from earnings of
the subsidiaries over the remaining amortization period. If we were to determine
that changes in such projected cash flows no longer supported the recoverability
of goodwill over the remaining amortization period, we would reduce its carrying
value with a corresponding charge to expense or shorten the amortization period
(no such changes have occurred). Cash flows considered in such an analysis are
those of the business acquired, if separately identifiable, or the business
segment that acquired the business if such earnings are not separately
identifiable.
Property and Equipment
We carry property and equipment at depreciated cost. We depreciate
property and equipment on a straight-line basis over the estimated useful lives
of the assets, which average approximately 13 years. Our depreciation expense
was $19.2 million in 1997, $11.9 million in 1996 and $9.3 million in 1995.
Insurance Liabilities, Recognition of Insurance Policy Income and Related
Benefits and Expenses
Our reserves for universal life-type and investment-type contracts are
based either on the contract account balance (if future benefit payments in
excess of the account balance are not guaranteed) or on the present value of
future benefit payments (if such payments are guaranteed). We make additions to
insurance liabilities if we determine that future cash flows (including
investment income) are insufficient to cover future benefits and expenses.
For investment contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit either Conseco or the insured to make changes in the
contract terms (such as single- premium whole life and universal life), we are
required to record premium deposits and benefit payments as increases or
decreases in a liability account, rather than as revenue and expense. We record
as revenue any amounts charged against the liability account for the cost of
insurance, policy administration and surrender penalties. We record as expense
any interest credited to the liability account and any benefit payments that
exceed the contract liability account balance.
64
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
We calculate our reserves for traditional and limited-payment life
contracts generally using the net-level-premium method, based on assumptions as
to investment yields, mortality, withdrawals and dividends. We make these
assumptions at the time we issue the contract or, in the case of contracts
acquired by purchase, at the purchase date. We base these assumptions on
projections from past experience, modified as necessary to reflect anticipated
trends and making allowance for possible unfavorable deviation.
For traditional life insurance contracts, we recognize premiums as income
when due or, for short-duration contracts, over the period to which the premiums
relate. We recognize benefits and expenses as a level percentage of earned
premiums. We accomplish this by providing for future policy benefits and by
amortizing deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), we use an accounting treatment similar to that
used for traditional contracts. An exception is that we defer the excess of the
gross premium over the net premium and recognize it in relation to the present
value of expected future benefit payments (when accounting for annuity
contracts) or in relation to insurance in force (when accounting for life
insurance contracts).
We establish reserves for the estimated present value of the remaining
net cost of all reported and unreported claims. We base our estimates on past
experience and on published tables for disabled lives. We believe that the
reserves we have established are adequate. Final claim payments, however, may
differ from the established reserves, particularly when those payments may not
occur for several years. Any adjustments we make to reserves are reflected in
the results for the year during which the adjustments are made.
The liability for future policy benefits for accident and health policies
consists of active life reserves and the estimated present value of the
remaining ultimate net cost of incurred claims. Active life reserves include
unearned premiums and additional reserves. The additional reserves are computed
on the net level premium method using assumptions for future investment yield,
mortality and morbidity experience. Our assumptions are based on projections of
past experience and include provisions for possible adverse deviation.
For participating policies, we determine annually the amount of dividends
to be paid. We include as an insurance liability the portion of the earnings
allocated to participating policyholders.
Reinsurance
In the normal course of business, Conseco seeks to limit its exposure to
loss on any single insured and to recover a portion of the benefits paid over
such limits. We do this by ceding reinsurance to other insurance enterprises or
reinsurers under excess coverage and coinsurance contracts. We limit how much
risk per policy we will retain. We currently retain no more than $.8 million of
risk on any one policy.
We report assets and liabilities related to insurance contracts before
the effects of reinsurance. We report reinsurance receivables and prepaid
reinsurance premiums (including amounts related to insurance liabilities) as
assets. We recognize estimated reinsurance receivables in a manner consistent
with the liabilities related to the underlying reinsured contracts.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of assets
and liabilities. This liability method of accounting for income taxes also
requires us to reflect in income the effect of a tax-rate change on accumulated
deferred income taxes in the period in which the change is enacted.
In assessing the realization of deferred income tax assets, we consider
whether it is more likely than not that the deferred income tax assets will be
realized. The ultimate realization of deferred income tax assets depends upon
generating future taxable income during the periods in which temporary
differences become deductible. If future income is not generated as expected,
deferred income tax assets may need to be written off.
65
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Minority Interest
Our consolidated financial statements for 1995 and 1996 include all of
the assets, liabilities, revenues and expenses of BLH and ALH, even though we
did not own all of the common stock of these subsidiaries until December 1996.
We make a charge against consolidated income for: (i) the share of earnings
allocable to minority interests; (ii) dividends on preferred stock of
subsidiaries; and (iii) distributions on the Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts. We show the shareholders'
equity of such entities allocable to the minority interests separately on our
consolidated balance sheet.
We report Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts at their book value under minority interest. We charge the
distributions on these securities against consolidated income.
Earnings Per Share
As of December 31, 1997, we adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share"("SFAS 128"). SFAS 128 provides new
accounting and reporting standards for earnings per share. It replaces primary
and fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share represents the potential
dilution that could occur if all convertible securities, warrants and stock
options were exercised and converted into common stock if their effect is
dilutive. The diluted earnings per share calculation assumes that the proceeds
received upon the conversion of all dilutive options and warrants are used to
repurchase the Company's common shares at the average market price of such
shares during the period. Prior period earnings per share amounts have been
restated. We have also restated all share and per-share amounts for the
two-for-one stock splits distributed February 11, 1997 and April 1, 1996.
Comprehensive Income
As of December 31, 1997, we adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
includes all changes in shareholders' equity (except those arising from
transactions with shareholders) and includes net income and net unrealized gains
(losses) on securities. The new standard requires only additional disclosures in
the consolidated financial statements; it does not affect our financial position
or results of operations.
Comprehensive income excludes net investment gains (losses) included in
net income of: (i) $42.1 million (after income taxes of $22.6 million) in 1997;
(ii) $(2.0) million (after income tax benefit of $1.0 million) in 1996; and
(iii) $48.1 million (net of income taxes of $25.9 million) in 1995.
Use of Estimates
Our financial statements have been prepared in accordance with GAAP. As
such, they include amounts based on our informed estimates and judgment, with
consideration given to materiality. We use many estimates and assumptions
calculating amortized value and recoverability of securities, cost of policies
produced, cost of policies purchased, goodwill, insurance liabilities, guaranty
fund assessment accruals, liabilities for litigation, and deferred income taxes.
Actual results could differ from reported results using those estimates.
Financial Instruments
In 1996, we introduced equity-indexed annuity products, which provide a
guaranteed base rate of return with a higher potential return linked to the
performance of a broad-based equity index. We buy S&P 500 Call Options in an
effort to hedge potential increases to policyholder benefits resulting from
increases in the S&P 500 Index to which the product's return is linked. We
include the cost of the S&P 500 Call Options in the pricing of the
equity-indexed annuity products. We reflect changes in the values of the S&P 500
Call Options, which fluctuate in relation to changes in policyholder account
balances for these annuities, in net investment income. Premiums paid to
purchase these instruments are deferred and amortized over their term.
During the year ended December 31, 1997, net investment income increased
by $39.4 million as a result of changes in the value of the S&P 500 Call
Options. Such investment income was substantially offset by amounts added to
policyholder account balances
66
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
for annuities and financial products. The value of the S&P 500 Call Options was
$41.4 million at December 31, 1997. We classify such instruments as other
invested assets.
If the counterparties of the aforementioned financial instruments do not
meet their obligations, Conseco may have to recognize a loss. Conseco limits its
exposure to such a loss by diversifying among several counterparties believed to
be strong and creditworthy. At December 31, 1997, all of the counterparties were
rated "A"or higher by Standard & Poor's Corporation.
In conjunction with its investment in a consumer financing company,
Conseco has guaranteed up to $10.0 million of the financing company's
indebtedness to its primary lender through 1998. Conseco believes the likelihood
of a significant loss from the guarantee is remote.
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including
redeemable preferred stocks) and for equity and trading securities, we
use quotes from independent pricing services, where available. For
investment securities for which such quotes are not available, we use
values obtained from broker-dealer market makers or by discounting
expected future cash flows using a current market rate appropriate for
the yield, credit quality, and for fixed maturity securities, the
maturity of the investment being priced.
Short-term investments. We use quoted market prices. The carrying amount
reported on our consolidated balance sheet for these instruments
approximates their estimated fair value.
Mortgage loans, credit-tenant loans and policy loans. We discount future
expected cash flows based on interest rates currently being offered for
similar loans to borrowers with similar credit ratings. We aggregate
loans with similar characteristics in our calculations.
Other invested assets. We use quoted market prices, where available. For
other invested assets, which are not material, we have assumed a market
value equal to carrying value.
Other assets. The portion of other assets in 1996 representing the value
attributable to the U.S. Treasury securities held in escrow for the
future redemption of mandatorily redeemable preferred stock of a
subsidiary of ALH are based on quoted market prices. In 1997, the
redeemable preferred stock was redeemed and the securities held in escrow
were released.
Insurance liabilities for investment contracts. We use discounted cash
flow calculations based on interest rates currently being offered for
similar contracts having maturities consistent with the contracts being
valued.
Investment borrowings and notes payable. We use either: (i) discounted
cash flow analyses based on our current incremental borrowing rates for
similar types of borrowing arrangements; or (ii) current market values
for publicly traded debt.
Other liabilities. The portion of other liabilities representing the
value attributable to the conversion features of subordinated convertible
debentures acquired in conjunction with the ATC Merger and the PFS Merger
are valued at estimated fair value.
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts. We use quoted market prices.
Mandatorily redeemable preferred stock of a subsidiary of ALH (a
component of minority interest). The estimated fair value of redeemable
preferred stock which is publicly-traded is based on quoted market
prices. The estimated fair value of the privately placed redeemable
preferred stock is determined by discounting expected future cash flows
using assumed incremental dividend rates for similar duration securities.
These securities were redeemed in 1997.
67
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1997 1996
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets held for purposes other than trading:
Actively managed fixed maturities...................... $22,773.7 $22,773.7 $17,307.1 $17,307.1
Equity securities ..................................... 228.9 228.9 99.7 99.7
Mortgage loans......................................... 516.2 551.0 356.0 356.1
Credit-tenant loans.................................... 558.6 587.2 447.1 446.3
Policy loans........................................... 692.4 692.4 542.4 542.4
Other invested assets.................................. 453.3 453.3 259.6 259.6
Short-term investments................................. 990.5 990.5 281.6 281.6
Other assets........................................... - - 45.6 49.1
Financial liabilities held for purposes other than trading:
Insurance liabilities for investment contracts (1)..... 12,724.0 12,724.0 11,491.6 11,491.6
Investment borrowings.................................. 1,389.5 1,389.5 383.4 383.4
Other liabilities...................................... 72.6 95.1 145.5 145.5
Commercial paper....................................... 448.2 448.2 - -
Notes payable.......................................... 1,906.7 1,950.6 1,094.9 1,140.8
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts........... 1,383.9 1,491.6 600.0 604.3
Mandatorily redeemable preferred stock of a subsidiary
(a component of minority interest).................. - - 97.0 97.0
<FN>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1997 and
1996. This was because interest rates credited on the vast majority of
account balances approximate current rates paid on similar investments
and because these rates are not generally guaranteed beyond one year.
We are not required to disclose fair values for insurance liabilities,
other than those for investment contracts. However, we take into
consideration the estimated fair values of all insurance liabilities
in our overall management of interest rate risk. We attempt to
minimize exposure to changing interest rates by matching investment
maturities with amounts due under insurance contracts.
</FN>
</TABLE>
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125") was issued in June 1996 and provides accounting and reporting
standards for transfers of financial assets and extinguishments of liabilities.
SFAS 125 is effective for 1997 financial statements; however, certain provisions
relating to accounting for repurchase agreements and securities lending are not
effective until January 1, 1998. Provisions effective in 1997 did not have any
effect on our financial position or results of operations. The adoption of
provisions effective in 1998 are not expected to have a material effect on our
financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") establishes new
standards for reporting about operating segments and products and services,
geographic areas and major customers. Under SFAS 131, segments are to be defined
consistent with the basis management uses internally to assess performance and
allocate resources. Implementing SFAS 131 will have no impact on the
consolidated amounts we report, and we do not expect any significant changes to
our segment disclosures. SFAS 131 is effective for our December 31, 1998
financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") was
issued in February 1998 and revises current disclosure requirements for
employers' pensions and other
68
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
retiree benefits. SFAS 132 will have no effect on our financial position or
results of operations. SFAS 132 is effective for our December 31, 1998 financial
statements.
Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SOP 97-3") was issued by the
American Institute of Certified Public Accountants in December 1997 and provides
guidance for determining when an insurance company or other enterprise should
recognize a liability for guaranty-fund assessments and guidance for measuring
the liability. The statement is effective for 1999 financial statements with
early adoption permitted. The adoption of this statement is not expected to have
a material effect on our financial position or results of operations.
2. ACQUISITIONS/DISPOSITIONS:
CCP Insurance, Inc.
At January 1, 1995, we owned 45 percent of the common stock of CCP, which
was acquired through several separate transactions beginning in 1990. In early
1995, CCP repurchased an additional 2.2 million shares under this program
increasing our ownership interest to 49 percent.
In August 1995, we completed the purchase of all of the shares of common
stock of CCP that we did not previously own. A total of 11.8 million shares were
purchased for $281.8 million (including transaction costs and the cost to settle
outstanding stock options of CCP) in a transaction pursuant to which CCP was
merged with Conseco, with Conseco being the surviving corporation. Income tax
expense was reduced by $8.4 million in the third quarter of 1995 as a result of
the release of deferred income taxes previously accrued on income related to
CCP. Such deferred tax is no longer required because the CCP Merger was
completed without incurring additional tax. We funded the CCP Merger with
available cash and borrowings from our credit facility.
Bankers Life Holding Corporation
At January 1, 1995, we owned 58 percent of the common stock of BLH, which
was acquired in various transactions beginning in 1992. During 1995, we acquired
12.8 million shares of BLH common stock for $262.4 million in open market and
negotiated transactions, increasing our ownership of BLH to 85 percent. Income
tax expense was reduced by $66.5 million in the second quarter of 1995 as a
result of the release of deferred income taxes previously accrued on income
related to BLH. Such deferred tax was no longer required since we were permitted
to file a consolidated tax return with BLH. In addition, BLH repurchased 2.2
million shares of its common stock during 1995 at a cost of $42.1 million,
increasing our ownership interest in BLH to 88 percent as of December 31, 1995.
During the first three months of 1996, BLH repurchased 1.3 million shares of its
common stock at a cost of $27.7 million. As a result of such repurchases,
Conseco's ownership interest in BLH increased to 90.5 percent.
On December 31, 1996, we completed the BLH Merger. Each outstanding share
of BLH common stock not already owned by Conseco was exchanged for 0.7966 of a
share of Conseco common stock. We 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.
American Life Holdings, Inc.
At January 1, 1995, we owned 27 percent of ALH through our direct
investment and through our investment in Partnership II. On November 30, 1995,
ALH issued 2,142,857 shares of its common stock for $30.0 million (including
$13.2 million paid by Conseco and its subsidiaries) in a private placement
transaction. Eighty percent of the shares were purchased by Partnership II and
the remainder were purchased by the other holders of ALH common stock. The
proceeds from the sale were used to reduce the amount of ALH's outstanding debt.
In accordance with the Partnership II agreement, Conseco earned fees of $.2
million (net of taxes of $.1 million) for services in connection with such
transaction. On September 30, 1996, we repurchased all of the common shares of
ALH we did not already own for $166.0 million in cash in the ALH Stock Purchase.
The Partnership II agreement provided that an additional ownership
interest in ALH would be allocated to Conseco if returns to the limited partners
were in excess of prescribed targets. Upon termination of Partnership II, such
targets were exceeded and the additional ownership interest allocated to Conseco
was recognized as follows: (i) $10.2 million, which represents Conseco's
increased ownership interest in the previously reported net income of
Partnership II, was recorded as a reduction of amounts that would otherwise be
charged to the minority interest; and (ii) $16.6 million was recorded as net
investment gains. Such income of Conseco
69
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
was offset by $16.2 million of expenses incurred in connection with the
realization of the investment gains.
Life Partners Group, Inc.
Effective July 1, 1996, we completed the LPG Merger. Each of the issued
and outstanding shares of LPG common stock was converted into 1.1666 shares of
Conseco common stock. We issued 32.6 million shares of common stock (including
.4 million common equivalent shares issued in exchange for LPG's outstanding
options) with a value of $586.8 million. In connection with the LPG Merger, we
also assumed notes payable of $253.1 million.
The LPG Merger was accounted for under the purchase method of accounting.
Under this method, we allocated the cost to acquire LPG to the assets and
liabilities acquired based on their fair values as of July 1, 1996, and recorded
the excess of the total purchase cost over the fair value of the liabilities we
assumed as goodwill. The LPG Merger did not qualify to be accounted for under
the pooling of interest method in accordance with Accounting Principles Board
Opinion No. 16, Business Combinations ("APB No.16"), because of Conseco's
significant common stock repurchases.
American Travellers Corporation
On December 17, 1996, we completed the ATC Merger. Each outstanding share
of ATC common stock was exchanged for 1.1672 shares of Conseco common stock. We
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. We 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, was classified as notes payable and $145.5 million,
representing the additional value attributable to the conversion feature, was
classified as other liabilities).
The ATC Merger was accounted for under the purchase method of accounting
effective December 31, 1996. Under this method, we allocated the cost to acquire
ATC to the assets and liabilities acquired based on fair values as of the date
of the ATC Merger, and reported the excess of the total purchase cost over the
fair value of the assets acquired less the fair value of the liabilities assumed
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.
Transport Holdings Inc.
On December 23, 1996, we completed the THI Merger. Each outstanding share
of THI common stock was exchanged for 2.8 shares of Conseco common stock. We
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 addition, pursuant to an 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, we allocated the cost to acquire
THI to the assets and liabilities acquired based on 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.
Capitol American Financial Corporation
On March 4, 1997, we completed the CAF Merger. Each outstanding share of
CAF common stock was exchanged for $30.75 in cash plus 0.1647 of a share of
Conseco common stock. We paid $552.8 million (including acquisition expenses of
$14.2 million) in cash and issued 3.0 million shares of common stock (including
.1 million common equivalent shares issued in exchange for CAF's outstanding
options) with a value of $117.4 million. In addition, we assumed a $31.0 million
note payable of CAF, which we repaid on the merger date.
The CAF Merger was accounted for under the purchase method of accounting
effective January 1, 1997. Under this method, we allocated the cost to acquire
CAF to the assets and liabilities acquired based on fair values as of the date
of the CAF Merger, and
70
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
reported the excess of the total purchase cost over the fair value of the assets
acquired less the fair value of the liabilities assumed as goodwill.
Pioneer Financial Services, Inc.
On May 30, 1997, we completed the PFS Merger. Each outstanding share of
PFS common stock was exchanged for .7077 of a share of Conseco common stock. We
issued 9.0 million shares of common stock (including .6 million common
equivalent shares issued in exchange for PFS's outstanding options) with a value
of $354.1 million. We also assumed PFS's convertible subordinated notes, which
are convertible into 3.1 million shares of Conseco common stock, with a value of
$130.6 million (of which $86.3 million, representing the principal amount
outstanding, was classified as notes payable and $44.3 million, representing the
additional value attributable to the conversion feature, was classified as other
liabilities). In addition, we assumed a $21.3 million note payable of PFS, which
we repaid on the merger date.
The PFS Merger was accounted for under the purchase method of accounting
effective April 1, 1997. Under this method, we allocated the cost to acquire PFS
to the assets and liabilities acquired based on fair values as of the date of
the PFS Merger, and reported the excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed as
goodwill. The PFS Merger did not qualify to be accounted for under the pooling
of interests method in accordance with APB No. 16 because an affiliate of PFS
sold a portion of his holdings of PFS common stock after the PFS Merger was
announced.
Colonial Penn
On September 30, 1997, we completed the Colonial Penn Purchase from
Leucadia National Corporation ("Leucadia") for $460.0 million in cash and notes
payable. The Colonial Penn Purchase was funded with: (i) $60.0 million in cash
which was borrowed under our bank credit facility; and (ii) notes payable to
Leucadia (the "Leucadia Notes") totaling $400.0 million.
The Colonial Penn Purchase was accounted for under the purchase method of
accounting effective September 30, 1997. Under this method, we allocated the
cost to acquire Colonial Penn to the assets and liabilities acquired based on
fair values as of the date of the Colonial Penn Purchase, and reported the
excess of the total purchase cost over the fair value of the assets acquired
less the fair value of the liabilities assumed as goodwill.
Washington National Corporation
On December 5, 1997, we completed the WNIC Merger. In the merger, each
share of WNIC common stock was converted into the right to receive $33.25 in
cash. We paid $400.6 million in cash, of which $73.7 million was funded through
a dividend to Conseco from WNIC. The remaining purchase price was funded with
amounts borrowed under our bank credit facilities.
We accounted for the WNIC Merger under the purchase method of accounting
effective December 1, 1997. Under this method, we allocated the cost to acquire
WNIC to the assets and liabilities acquired based on fair values as of the date
of the WNIC Merger, and reported the excess of the total purchase cost over the
fair value of the assets acquired less the fair value of the liabilities assumed
as goodwill.
Effect of Merger Transactions on Consolidated Financial Statements
We used purchase accounting to account for all our acquisitions during
1997, 1996 and 1995. We allocated the total purchase cost of acquisitions
completed in 1997 to the assets and liabilities acquired, based on a preliminary
determination of their fair values. We may adjust this allocation when we make a
final determination of such values (within one year of the acquisition date). We
don't expect any adjustment to be material, however.
The following unaudited pro forma results of operations of the Company
are presented as if the following had occurred as of January 1, 1995: (i) the
LPG Merger; (ii) the call for redemption of Conseco's Series D Convertible
Preferred Stock (the "Series D Call") completed on September 26, 1996; (iii) the
ALH Stock Purchase; (iv) the issuance of $600.0 million of Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts (see note 8);
(v) the ATC Merger; (vi) the THI Merger; (vii) the BLH Merger; (viii) the CCP
Merger; (ix) the increase of Conseco's ownership in BLH to 90.4 percent, as a
result of purchases of BLH common shares in 1995 and 1996; (x) the issuance of
4.37 million shares of Preferred Redeemable Increased Dividend Equity
71
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Securities, 7% PRIDES Convertible Preferred Stock ("PRIDES") in January 1996;
(xi) the BLH tender offer for and repurchase of its 13 percent senior
subordinated notes due 2002 and related financing transactions completed in
March 1996; and (xii) the debt restructuring of ALH in the fourth quarter of
1995. The pro forma data are not necessarily indicative of the results of
Conseco's operations had these transactions occurred on January 1, 1995, nor the
results of future operations. We have not presented pro forma data for the 1997
acquisitions because, in accordance with the disclosure requirements of the
Securities and Exchange Commission, such acquisitions are not significant
individually or in the aggregate.
<TABLE>
<CAPTION>
1996 1995(1)
---- -------
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues...................................................................................... $3,967.8 $4,031.6
Income before extraordinary charge............................................................ 352.7 314.1
Income before extraordinary charge per common share:
Basic.................................................................................... $2.10 $1.80
Diluted.................................................................................. 1.79 1.63
<FN>
(1) We have excluded $74.9 million from pro forma income before extraordinary
charge and $.39 from income before extraordinary charge per diluted
common share. These amounts related to the release of deferred income
taxes that are no longer required to be accrued as a result of the CCP
Merger and the purchase of additional BLH common shares in 1995.
</FN>
</TABLE>
3. INVESTMENTS:
At December 31, 1997, the amortized cost and estimated fair value of
actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations of
United States government corporations and agencies.................. $ 541.4 $ 20.9 $ .1 $ 562.2
Obligations of states and political subdivisions........................ 277.1 8.3 .8 284.6
Debt securities issued by foreign governments........................... 204.3 4.4 9.6 199.1
Public utility securities............................................... 2,267.5 69.0 26.0 2,310.5
Other corporate securities.............................................. 12,300.5 352.9 86.5 12,566.9
Mortgage-backed securities ............................................. 6,698.5 156.0 4.1 6,850.4
--------- ------ ------ ---------
Total actively managed fixed maturities.......................... $22,289.3 $611.5 $127.1 $22,773.7
========= ====== ====== =========
</TABLE>
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations of
United States government corporations and agencies.................. $ 509.9 $ 5.1 $ 1.2 $ 513.8
Obligations of states and political subdivisions........................ 103.5 2.8 .2 106.1
Debt securities issued by foreign governments........................... 144.4 1.4 2.2 143.6
Public utility securities............................................... 2,148.8 42.8 35.4 2,156.2
Other corporate securities.............................................. 8,808.3 145.1 81.2 8,872.2
Mortgage-backed securities ............................................. 5,488.4 64.5 37.7 5,515.2
--------- ------ ------ ---------
Total actively managed fixed maturities.......................... $17,203.3 $261.7 $157.9 $17,307.1
========= ====== ====== =========
</TABLE>
72
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
At December 31, 1997, the amortized cost and estimated fair value of
actively managed fixed maturities based upon the pricing source used to
determine estimated fair value were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services............................................................ $18,272.9 $18,703.7
Broker-dealer market makers....................................................................... 1,808.9 1,831.8
Internally developed methods (calculated based on a weighted-average
current market yield of 7.0 percent)........................................................... 2,207.5 2,238.2
--------- ---------
Total actively managed fixed maturities.................................................... $22,289.3 $22,773.7
========= =========
</TABLE>
The following table sets forth fixed maturity investments at December 31,
1997, classified by rating categories. The category assigned is the highest
rating by a nationally recognized statistical rating organization or, as to
$651.2 million fair value of fixed maturities not rated by such firms, the
rating assigned by the National Association of Insurance Commissioners ("NAIC").
For purposes of the table, NAIC Class 1 is included in the "A" rating; Class 2,
"BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and below."
<TABLE>
<CAPTION>
Percent of Percent of
Investment rating fixed maturities total investments
----------------- ---------------- -----------------
<S> <C> <C>
AAA.................................. 35% 29%
AA................................... 8 7
A.................................... 24 20
BBB+................................. 8 7
BBB.................................. 11 9
BBB- ................................ 7 6
----- ---
Investment grade................. 93 78
----- ---
BB+.................................. 2 2
BB................................... 1 1
BB-.................................. 1 1
B+ and below......................... 3 2
----- ---
Below-investment grade............ 7 6
----- ---
Total fixed maturities........ 100% 84%
=== ==
</TABLE>
The following table sets forth below-investment-grade fixed maturity
investments as of December 31, 1997, summarized by the amount their amortized
cost exceeds fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by 30% or more.................................................$ 9.5 $ 4.7
Amortized cost exceeds fair value by 15%, but less than 30%...................................... 141.3 110.0
Amortized cost exceeds fair value by 5%, but less than 15%....................................... 158.7 142.3
All others....................................................................................... 1,215.6 1,239.2
-------- --------
Total below-investment-grade fixed maturity investments................................... $1,525.1 $1,496.2
======== ========
</TABLE>
73
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The following table sets forth the amortized cost and estimated fair
value of actively managed fixed maturities at December 31, 1997, by contractual
maturity. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties and because most mortgage-backed securities provide for
periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less......................................................................... $ 238.9 $ 239.8
Due after one year through five years........................................................... 2,243.1 2,264.7
Due after five years through ten years.......................................................... 5,481.4 5,539.5
Due after ten years............................................................................. 7,627.4 7,879.3
--------- ---------
Subtotal................................................................................... 15,590.8 15,923.3
Mortgage-backed securities...................................................................... 6,698.5 6,850.4
--------- ---------
Total actively managed fixed maturities ................................................ $22,289.3 $22,773.7
========= =========
</TABLE>
Equity securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- --------------------
Estimated Estimated
fair fair
Cost value Cost value
---- ----- ---- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Preferred stock, non-redeemable.......................................... $149.3 $152.5 $64.7 $66.3
Common stock............................................................. 78.3 76.4 32.9 33.4
------ ------ ------ -----
Total equity securities........................................... $227.6 $228.9 $97.6 $99.7
====== ====== ===== =====
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities..................................................................... $1,467.5 $1,109.5 $ 988.6
Equity securities.................................................................... 23.6 6.5 2.8
Mortgage loans....................................................................... 39.5 42.6 43.3
Credit-tenant loans.................................................................. 44.5 28.8 19.7
Policy loans......................................................................... 38.6 25.9 19.4
Equity-indexed products.............................................................. 39.4 - -
Other invested assets................................................................ 74.8 27.8 17.5
Short-term investments............................................................... 39.6 15.6 26.4
Separate accounts.................................................................... 70.3 48.4 28.8
-------- -------- --------
Gross investment income........................................................ 1,837.8 1,305.1 1,146.5
Investment expenses.................................................................. 12.5 2.6 3.9
-------- -------- --------
Net investment income.......................................................... $1,825.3 $1,302.5 $1,142.6
======== ======== ========
</TABLE>
The carrying value of fixed maturity investments and mortgage loans not
accruing investment income totaled $3.1 million, $2.1 million and $1.5 million
at December 31, 1997, 1996 and 1995, respectively.
74
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The proceeds from sales of fixed maturity investments were $18.1 billion
in 1997, $8.2 billion in 1996, and $7.9 billion in 1995.
Investment gains (losses), net of investment gain expenses, were included
in revenue as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities:
Gross gains......................................................................... $342.6 $126.8 $270.8
Gross losses........................................................................ (41.4) (52.5) (17.5)
Other than temporary decline in fair value.......................................... (1.2) (.6) (21.9)
------ ------ ------
Net investment gains from fixed maturities before expenses..................... 300.0 73.7 231.4
Equity securities....................................................................... 13.2 2.6 .4
Mortgages............................................................................... (.8) (.4) (2.1)
Other than temporary decline in fair value of other invested assets..................... - (8.3) (3.0)
Other................................................................................... (1.2) 29.9 13.9
------ ------ ------
Net investment gains before expenses........................................... 311.2 97.5 240.6
Investment gain expenses................................................................ 44.7 36.7 36.5
------ ------ ------
Net investment gains........................................................... $266.5 $ 60.8 $204.1
====== ======= ======
</TABLE>
Changes in unrealized appreciation (depreciation) on investments were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Investments carried at fair value:
Actively managed fixed maturities .................................................. $380.6 $(504.4) $981.6
Equity securities................................................................... (.8) .1 5.4
Other investments................................................................... 9.6 (2.2) (2.7)
------ ------- -------
389.4 (506.5) 984.3
Equity in unrealized appreciation of CCP's investments.................................. - - 46.2
Adjustment for effect on other balance sheet accounts:
Cost of policies purchased ......................................................... (128.4) 141.6 (269.6)
Cost of policies produced........................................................... (36.4) 45.4 (56.7)
Other............................................................................... (4.4) - -
Income taxes........................................................................ (77.1) 116.4 (246.5)
Minority interest................................................................... - 129.3 (205.3)
------ ------- -------
Change in unrealized appreciation (depreciation) of investments ............... $143.1 $ (73.8) $ 252.4
====== ======= =======
</TABLE>
At December 31, 1997, net appreciation of equity securities (before
income tax) was $1.3 million, consisting of $7.3 million of appreciation and
$6.0 million of depreciation.
At December 31, 1997, the amortized cost and fair value of fixed maturity
investments in default as to the payment of principal and interest totaled $2.4
million and $1.5 million, respectively. Conseco recorded writedowns of fixed
maturity investments and other invested assets of $1.2 million in 1997, $8.9
million in 1996 and $24.9 million in 1995. These writedowns were the result of
changes in conditions that caused the Company to conclude that the decline in
fair value of the investment was other than temporary. Investment income forgone
due to defaulted securities was $.2 million in 1997, $3.8 million in 1996 and
$1.6 million in 1995.
75
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Investments in mortgage-backed securities at December 31, 1997, included
collateralized mortgage obligations ("CMOs") of $3,210.2 million and
mortgage-backed pass-through securities of $3,640.2 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return that occurs
through regular monthly principal payments on pass-through securities.
The following table sets forth the par value, amortized cost and
estimated fair value of investments in mortgage-backed securities including CMOs
at December 31, 1997, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent .................................................................... $2,025.5 $1,980.4 $2,014.7
7 percent - 8 percent............................................................... 3,568.0 3,546.5 3,638.2
8 percent - 9 percent............................................................... 712.9 716.1 730.5
9 percent and above................................................................. 445.1 455.5 467.0
-------- -------- --------
Total mortgage-backed securities.................................. $6,751.5 $6,698.5 $6,850.4
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1997, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
---------------------
Percent
Amortized of fixed
Type cost Amount maturities
- ---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes................ $4,599.7 $4,697.5 21%
Planned amortization classes and accretion directed bonds..................... 1,515.9 1,547.6 7
Support classes............................................................... 36.0 36.9 -
Accrual (Z tranche) bonds..................................................... 27.9 28.8 -
Subordinated classes ......................................................... 519.0 539.6 2
-------- -------- --
Total mortgage-backed securities............................. $6,698.5 $6,850.4 30%
======== ======== ==
</TABLE>
At December 31, 1997, approximately 73 percent of the estimated fair
value of Conseco's mortgage-backed securities was determined by nationally
recognized pricing services, 8 percent was determined by broker-dealer market
makers, and 19 percent was determined by internally developed methods. The
call-adjusted modified duration of our mortgage-backed securities was 5.2 years
at December 31, 1997.
At December 31, 1997, the mortgage loan balance was primarily comprised
of commercial loans, including multifamily residential loans. Approximately 20
percent, 11 percent and 9 percent of the mortgage loan balance were on
properties located in California, Texas and Florida, respectively. No other
state comprised greater than 7 percent of the mortgage loan balance. Less than 2
percent of the mortgage loan balance was noncurrent at December 31, 1997. At
December 31, 1997, the Company had an allowance for loss on mortgage loans of
$9.0 million.
At December 31, 1997, we held $558.6 million of CTLs. CTLs are mortgage
loans for commercial properties that we make based on the underwriting
guidelines described in note 1. We classify CTLs as a separate class of
securities because they are principally underwritten based on the
creditworthiness of the tenant rather than the value of the underlying property.
As with commercial mortgages, CTLs are additionally collateralized by liens on
the underlying property.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. Reverse repurchase agreements involve a
sale of securities and an
76
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
agreement to repurchase the same securities at a later date at an agreed upon
price. Dollar rolls are similar to reverse repurchase agreements except that,
with dollar rolls, the repurchase involves securities that are only
substantially the same as the securities sold. These transactions are accounted
for as short-term collateralized borrowings. Such borrowings averaged
approximately $719.3 million during 1997 (compared with an average of $424.7
million during 1996) and were collateralized by investment securities with fair
values approximately equal to the loan value. The weighted average interest rate
on short-term collateralized borrowings was 5.8 percent in 1997 and 5.2 percent
in 1996. The primary risk associated with short-term collateralized borrowings
is that the counterparty will be unable to perform under the terms of the
contract. The Company's exposure is limited to the excess of the net replacement
cost of the securities over the value of the short-term investments (which was
not material at December 31, 1997). The Company believes that the counterparties
to its reverse repurchase and dollar-roll agreements are financially responsible
and that the counterparty risk is minimal.
Other invested assets include: (i) trading securities of $64.8 million;
(ii) S&P 500 Call Options issued in conjunction with equity-indexed annuities
described in note 1 of $41.4 million; and (iii) certain non-traditional
investments, including investments in venture capital funds, limited
partnerships, mineral rights and promissory notes of $411.9 million. During
1996, Conseco sold its non-traditional investment in Noble Broadcast Group, Inc.
and realized a gain of $30.0 million. During 1995, Conseco sold its
non-traditional investment in Eagle Credit (a finance subsidiary of
Harley-Davidson) and realized a gain of $20.6 million.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $202.5 million at December 31, 1997.
Conseco had no investments in any single entity in excess of 10 percent
of shareholders' equity at December 31, 1997, other than investments issued or
guaranteed by the United States government or a United States government agency.
4. INSURANCE LIABILITIES:
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate
assumption assumption assumption 1997 1996
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment contracts............................ N/A N/A (c) $12,724.0 $11,491.6
Universal life-type contracts................... N/A N/A 5% 4,633.6 3,303.9
--------- ---------
Total interest-sensitive products............. 17,357.6 14,795.5
--------- ---------
Traditional products:
Traditional life insurance contracts............ Company (a) 4% 1,925.0 1,234.7
experience
Limited-payment contracts....................... None (b) 6% 968.4 761.5
Individual accident and health ................. Company Company 6% 2,820.4 1,184.0
experience experience
Group life and health........................... N/A N/A N/A 71.0 71.3
--------- ---------
Total traditional products.................... 5,784.8 3,251.5
--------- ---------
Claims payable and other policyholder funds ........ N/A N/A N/A 1,668.8 984.9
Unearned premiums................................... N/A N/A N/A 406.1 272.4
Liabilities related to separate accounts............ N/A N/A N/A 682.8 337.6
--------- ---------
Total insurance liabilities..................... $25,900.1 $19,641.9
========= =========
<FN>
(a) Principally modifications of the 1965 - 70 and 1975 - 80 Basic, Select
and Ultimate Tables.
77
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
(b) Principally the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(c) In both 1997 and 1996: (i) approximately 95 percent of this liability
represented account balances where future benefits are not guaranteed;
and (ii) 5 percent represented the present value of guaranteed future
benefits determined using an average interest rate of approximately 5
percent.
</FN>
</TABLE>
Participating policies represented approximately 2 percent, 2 percent and
12 percent of total life insurance in force at December 31, 1997, 1996 and 1995,
respectively. Participating policies represented approximately 2 percent, 1
percent and 1 percent of premium income for the years ended December 31, 1997,
1996 and 1995, respectively. Dividends on participating policies amounted to
$13.0 million, $13.4 million and $12.3 million in 1997, 1996 and 1995,
respectively.
5. REINSURANCE:
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $499.0 million, $313.8 million and $72.6 million in 1997, 1996 and
1995, respectively. This cost was deducted from insurance premium revenue.
Conseco is contingently liable for claims reinsured if the assuming company is
unable to pay. Reinsurance recoveries netted against insurance policy benefits
totaled $587.5 million, $281.4 million, and $59.8 million in 1997, 1996 and
1995, respectively.
The Company has ceded certain policy liabilities under assumption
reinsurance agreements. Since all of Conseco's obligations under these insurance
contracts have been ceded to another company, insurance liabilities related to
such policies were not reported in the balance sheet. We believe the assuming
companies are able to honor all contractual commitments under the assumption
reinsurance agreements, based on our periodic reviews of financial statements,
insurance industry reports and reports filed with state insurance departments.
The Company's reinsurance receivable at December 31, 1997, relates to
approximately 181 reinsurers. Two major United States insurance companies rated
"A (Excellent)" or better by A.M. Best Company, a recognized insurance rating
agency, account for approximately 19 percent of such balance. Each of our other
reinsurers (the majority of which are rated "A- (Excellent)" or better) accounts
individually for less than 4 percent of reinsurance receivables.
6. INCOME TAXES:
Income tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax assets (liabilities):
Investments................................................................................... $ (95.9) $ 52.2
Cost of policies purchased and cost of policies produced...................................... (750.5) (573.7)
Insurance liabilities......................................................................... 898.9 474.0
Unrealized appreciation....................................................................... (98.1) (21.0)
Net operating loss carryforward............................................................... 258.0 154.4
Other......................................................................................... (136.6) (87.6)
-------- --------
Deferred income tax assets (liabilities)................................................ 75.8 (1.7)
Current income tax assets ........................................................................ 9.8 10.5
-------- --------
Income tax assets....................................................................... $ 85.6 $ 8.8
======== ========
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Current tax provision......................................................................... $174.0 $110.5 $121.0
Deferred tax provision (benefit).............................................................. 202.6 69.3 (34.0)
------ ------ ------
Income tax expense................................................................ $376.6 $179.8 $ 87.0
====== ====== ======
</TABLE>
78
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Income tax expense differed from that computed at the applicable federal
statutory rate (35 percent) for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Tax on income before income taxes at statutory rate........................................... $351.1 $172.8 $146.5
Goodwill ............................................................................... 29.6 12.3 7.9
State taxes................................................................................... 12.4 7.3 .3
Other......................................................................................... (16.5) (12.6) 7.2
Reversal of deferred tax liabilities as a result of increased ownership
in certain subsidiaries...................................................................... - - (74.9)
------ ------ -------
Income tax expense................................................................ $376.6 $179.8 $ 87.0
====== ====== =======
</TABLE>
At December 31, 1997, Conseco had federal income tax loss carryforwards
of $737.1 million available (subject to various statutory restrictions) for use
on future tax returns. Portions of these carryforwards begin expiring in 1999.
Of the loss carryforwards: (i) $25.3 million may be used only to offset income
from the non-life insurance companies and, under certain circumstances, a
portion of the income of life insurance companies; and (ii) $77.5 million are
attributable to acquired companies and may be used only to offset the income
from those companies. None of the carryforwards are available to reduce the tax
provision for financial reporting purposes. With respect to determining that the
Company's net operating loss carryforwards will be fully utilized, the Company
is relying upon its past history of earnings.
The IRS has completed its examination of Conseco's consolidated tax
returns for years through 1994 and is currently conducting an examination for
years 1995 through 1996. Certain companies acquired in the LPG Merger have been
audited by the IRS through 1994. Colonial Penn Life Insurance Company is
currently being examined for the tax years 1992 and 1993. Conseco believes the
adjustment, if any, related to these audits will not be significant.
7. NOTES PAYABLE AND COMMERCIAL PAPER:
Notes payable and commercial paper of the Company at December 31, 1997
and 1996, were as follows:
<TABLE>
<CAPTION>
Interest rate 1997 1996
------------- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Bank debt............................................................ 6.23% (1) $1,000.0 (2) $ 465.0
Leucadia Notes....................................................... 6.44% (1) 400.0 -
Senior notes due 2003................................................ 8.125% 168.5 170.0
Senior notes due 2004................................................ 10.5% 184.9 200.0
Subordinated notes due 2004.......................................... 11.25% 10.9 98.1
Convertible subordinated notes due 2003.............................. 6.5% 86.1 -
Convertible subordinated debentures due 2005......................... 6.5% 29.1 102.8
Other................................................................Various 21.3 45.2
-------- --------
Total principal amount.......................................... 1,900.8 1,081.1
Unamortized net premium.............................................. 5.9 13.8
-------- --------
Total........................................................... $1,906.7 $1,094.9
======== ========
Commercial paper..................................................... 5.8% (3) $ 448.2 -
======== ========
<FN>
(1) Current rate at December 31, 1997.
(2) See note 15 for description of $248.0 million repayment in 1998 using
proceeds from the offering of 6.4 percent notes due February 10, 2003.
(3) Weighted average rate during 1997.
</FN>
</TABLE>
79
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Maturities of notes payable at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Maturity date Amount
------------- ------
(Dollars in millions)
<S> <C>
1998....................................................................... $ 601.1 (1)
1999....................................................................... 1.1
2000....................................................................... 1.1
2001....................................................................... 401.1
2002....................................................................... 2.0
Thereafter................................................................. 894.4
--------
Total par value at December 31, 1997.................................. $1,900.8
========
<FN>
(1) See note 15 for description of $248.0 million repayment in 1998 using
proceeds from the offering of 6.4 percent notes due February 10, 2003.
</FN>
</TABLE>
Bank debt. Bank debt is comprised of our revolving bank credit facility
and various bank loans described below.
The Company's current revolving credit agreement (the "Credit Facility"),
executed in November 1996, permits borrowings up to $1.4 billion. Maximum
permitted borrowings under the Credit Facility are reduced by any aggregate
outstanding commercial paper of Conseco. At December 31, 1997, outstanding
borrowings under the Credit Facility totaled $400.0 million. Borrowings bear
interest at the bank's base rate, a Eurodollar rate or a rate determined based
on a solicitation of bids from lenders. Eurodollar rates are equal to the
reserve-adjusted LIBOR rate plus a margin of .225 percent to .75 percent, based
on the credit rating of Conseco's senior notes. The current margin of .35
percent will increase by .125 percent after December 31, 1997, if Conseco's debt
to total capitalization ratio exceeds 35 percent. Borrowings at December 31,
1997, bore interest at a weighted average rate of 6.21 percent. The Credit
Facility also permits revolving Swingline loans up to $50.0 million. Such loans
are due within 7 days and bear interest at the bank's base rate or a reserve
adjusted three-month CD rate plus the Eurodollar rate margin and an assessment
rate.
Borrowings are due in November 2001. Mandatory prepayments, which reduce
the maximum permitted borrowings, are required under the Credit Facility upon
the sale or disposition of any significant assets other than in the ordinary
course of business. The Credit Facility contains various restrictive covenants
that primarily pertain to levels of indebtedness, limitations on payment of
dividends, limitations on the quality and types of investments, and capital
expenditures. Additionally, the Company must comply with several financial
covenant restrictions, including maintaining: (i) shareholders' equity and
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts in excess of $2.4 billion in 1997 and 1998 and $3.5 billion thereafter;
(ii) the interest coverage ratio in excess of 2.5:1 through December 1997
(escalating to 2.75:1 during the period January 1, 1998 through December 31,
1999; and 3.0:1 thereafter); and (iii) the debt to total capital ratio less than
.45:1. As of December 31, 1997 the Company was in compliance with all covenants
under its debt agreements.
On the last day of each quarter, we pay a commitment fee that ranges from
.08 percent to .25 percent per annum (depending on the credit rating of
Conseco's senior debt) on the average daily unused commitments during the
quarter. This fee was .125 percent per annum during 1997.
During 1997, Conseco entered into various unsecured bank loans totaling
$600 million. The proceeds from such bank loans were used: (i) to finance the
WNIC Merger; (ii) to finance a portion of the Colonial Penn Purchase; (iii) to
redeem all of the $2.16 Redeemable Cumulative Preferred Stock of a subsidiary
formerly held by minority interest; and (iv) for general corporate purposes. The
interest rates on these bank loans are based on LIBOR and averaged 6.25 percent
at December 31, 1997. These bank loans mature at various dates through September
1998.
We recognized an extraordinary loss of $12.9 million during 1996 (net of
a $7.0 million tax benefit) as a result of prepaying our prior bank credit
agreements and the bank credit agreements of BLH and ALH.
Leucadia Notes. Conseco entered into these notes in conjunction with the
Colonial Penn Purchase. The notes bear interest
80
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
at the one month LIBOR rate plus a margin of .50 percent payable semi-annually
on March 31 and September 30. Such rate was 6.44 percent at December 31, 1997.
The notes mature on January 2, 2003 and may be put back to Conseco by the holder
at any time after December 31, 1997, in the event that: (i) all or substantially
all of Leucadia's assets are sold; or (ii) there is an acquisition of beneficial
ownership of 20 percent or more of Leucadia's voting securities. In addition,
the notes are putable (in whole or in increments of $10 million of par value) at
any time on or after September 30, 1999, at a discount to par. The discount rate
is equal to (i) 3 percent of the then outstanding principal balance during the
period September 30, 1999, through September 29, 2000; (ii) 2 percent of the
then outstanding principal balance during the period September 30, 2000, through
September 29, 2001; and (iii) 1 percent of the then outstanding principal
balance thereafter prior to maturity. The notes and accrued interest thereon are
secured by standby letters of credit totaling $420.0 million which Conseco may
use to fund redemption of the notes. Such letters of credit expire on September
30, 1998, but may be extended in one-year increments through 2003. The Company
pays a fee on the letters of credit based upon the credit rating of Conseco's
senior debt. At December 31, 1997, such fee was .20 percent per annum on the
$420.0 million of outstanding letters of credit.
8.125% senior notes due 2003 were issued to the public in 1993, are
unsecured and rank pari passu with all other unsecured and unsubordinated
indebtedness of the Company. The notes are not redeemable prior to maturity. We
recognized an extraordinary charge of $.1 million during 1997 as a result of
repurchasing $1.5 million par value of these notes.
10.5% senior notes due 2004 were issued to the public by CCP in 1994, are
unsecured and rank pari passu with all other unsecured and unsubordinated
indebtedness of Conseco. The notes are not redeemable prior to maturity. We
recognized an extraordinary charge of $1.2 million (net of a $.6 million tax
benefit) during 1997 as a result of repurchasing $15.1 million par value of
these notes.
11.25% senior subordinated notes due 2004 were issued to the public by
ALH in conjunction with its acquisition by Partnership II. Such notes are
unsecured and will be subordinated in the right of payment to the prior payment
in full of all senior indebtedness. The notes are redeemable at the Company's
option, in whole or in part, at any time on or after September 15, 1999,
initially at 105.625 percent of their principal amount, plus accrued interest,
declining to 100 percent of their principal amount, plus accrued interest, on
and after September 15, 2001. We recognized an extraordinary charge of $5.6
million (net of a $3.0 million tax benefit) during 1997 as a result of
repurchasing $87.2 million par value of these notes. We recognized an
extraordinary charge of $4.2 million (net of a $2.3 million tax benefit) during
1996 as a result of repurchasing $51.9 million par value of these notes.
6.5% convertible subordinated notes due 2003 were acquired in conjunction
with the PFS Merger and bear interest at 6.5 percent payable semi-annually on
April 1 and October 1. The notes are redeemable by Conseco, under certain
conditions, at 103.3 percent of par value after April 1999 under certain
conditions. The notes are convertible into Conseco common stock any time prior
to maturity at a conversion rate of 35.38 Conseco common shares per $1,000
principal amount of notes. During 1997, $.2 million par value of the notes were
converted into 6,613 shares of Conseco common stock. At December 31, 1997, the
value of the remaining debentures in excess of the principal balance (the value
attributable to the conversion feature) of $34.4 million is included in other
liabilities.
6.5% convertible subordinated debentures due 2005 were acquired in
conjunction with the ATC Merger and are convertible into Conseco common stock at
any time prior to maturity, at a conversion ratio of 76.96 shares of Conseco
common stock for each $1,000 principal amount of debentures. The convertible
debentures may be redeemed at Conseco's option at a price equal to 103.25
percent after October 1998, declining to 100 percent after October 2001. During
1997, we induced the conversion of $64.8 million par value of the debentures
into 5.0 million shares of Conseco common stock. Conseco paid $4.4 million to
induce the holders to convert. In addition, during 1997, Conseco repurchased
$7.5 million par value of the debentures for $24.8 million. An additional $1.4
million par value of the debentures was converted into .1 million shares of
Conseco common stock at the option of the holders during 1997. At December 31,
1997, the value of the remaining debentures in excess of the principal balance
(the value attributable to the conversion feature) of $38.2 million is included
in other liabilities.
Other debt. During the third quarter of 1997, we repurchased or called
for redemption the remaining $23.2 million par value of 12.75 percent senior
subordinated notes due 2002. Such notes had been assumed in connection with the
LPG Merger.
81
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
In March 1996, BLH completed a tender offer in which it repurchased
$148.3 million principal balance of its senior subordinated notes. In addition,
Conseco repurchased $28.5 million of such notes during 1996. Conseco recognized
an extraordinary charge of $9.0 million (net of a $4.9 million tax benefit)
related to such repurchases.
In conjunction with the LPG Merger and the THI Merger, Conseco repaid
acquired debt in 1996 of $214.5 million and $78.5 million, respectively. Conseco
also repurchased other debt of $65.8 million during 1996. Conseco recognized an
extraordinary charge of $.4 million (net of $.2 million tax benefit) related to
such repurchases.
Conseco recognized extraordinary charges of $2.1 million (net of a $1.5
million tax benefit) in 1995 related to the repayment of notes payable.
Commercial paper. We instituted a commercial paper program in April 1997
to lower our borrowing costs and improve our liquidity. Borrowings under our
commercial paper program averaged approximately $525.9 million during the period
April 24, 1997 through December 31, 1997. The weighted average interest rate on
such borrowings was 5.8 percent during 1997. Conseco's commercial paper has
maturities ranging from 2 to 37 days. However, the Company has the ability to
refinance such obligations through its bank credit facility.
8. OTHER DISCLOSURES:
Leases
The Company rents office space, equipment and computer software under
noncancellable operating leases. Rental expense was $35.1 million in 1997, $21.3
million in 1996 and $20.8 million in 1995. Future required minimum rental
payments as of December 31, 1997, were as follows (dollars in millions):
1998.......................... $ 24.3
1999.......................... 21.1
2000.......................... 19.2
2001.......................... 17.7
2002.......................... 16.3
Thereafter.................... 55.5
------
Total................... $154.1
======
Employment Arrangements
Some officers of the Company are employed under long-term employment
agreements. One of these agreements provides for a base salary plus an annual
bonus equal to 3 percent of the Company's consolidated defined pretax profits.
This contract was modified to permit a reduction in such bonus amount for 1997.
This agreement renews annually for a five-year period unless either party
notifies the other, in which case the agreement expires five years from the last
renewal date. In addition, a $1.9 million interest-free loan has been granted to
the officer. Repayment is due two years after termination of the officer's
employment contract.
The agreements described above also include provisions under which the
employees may elect to receive, in the event of a termination of the agreement
following a change in control of the Company (as defined), a severance allowance
equal to 60 months' salary, bonus and other benefits. The employee also may
elect to have the Company purchase all Conseco stock and all options to purchase
Conseco stock, without deduction of the applicable exercise prices, held by such
person at a price per share equal to the highest market price in the preceding
six months.
The Company has qualified defined contribution plans in which
substantially all employees are eligible to participate. Company contributions,
which match certain voluntary employee contributions to the plan, totaled $3.8
million in 1997, $2.0 million in 1996, and $2.2 million in 1995. These
contributions may be made either in cash or in Conseco common stock.
The Company also has a stock bonus and deferred compensation program for
certain officers and directors. Company contributions vary based on the
profitability of the Company. Each year's contribution, which is fully funded in
the form of Conseco
82
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
common stock, vests five years later or upon certain other events. The cost of
the program is charged to expense over the vesting period and amounted to $14.4
million in 1997 ($10.3 million of which is a nonrecurring charge due to the
death of an executive officer), $3.9 million in 1996 and $3.7 million in 1995.
The market value of Conseco common stock held under the program (included in
other assets and other liabilities) was $158.0 million and $101.7 million at
December 31, 1997 and 1996, respectively.
The Company has a noncontributory, unfunded deferred compensation plan
for qualifying members of Bankers Life's career agency force. Benefits are based
on years of service and career earnings. The liability recognized in the
consolidated balance sheet for the agents' deferred compensation plan was $37.3
million and $34.5 million at December 31, 1997 and 1996, respectively.
Substantially all of this liability represents vested benefits. Costs incurred
on this plan, primarily representing interest on unfunded benefit costs, were
$3.4 million, $3.2 million and $2.8 million during 1997, 1996 and 1995,
respectively.
The Company also provides certain health care and life insurance benefits
for eligible retired employees of certain subsidiaries under partially funded
and unfunded plans in existence at the date on which such subsidiaries were
acquired. Benefits under the plans are provided on a contributory basis. Some of
the benefits provided are subject to cost-sharing features determined at the
discretion of management. Amounts related to the postretirement benefit plans
(which increased in 1997 as a result of acquisitions) are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees, dependents and disabled participants.................... $23.1 $ 1.9
Fully eligible active plan participants........................... 2.1 4.6
Other active participants......................................... .5 .6
----- ----
Total accumulated postretirement benefit obligations............ 25.7 7.1
Unrecognized net reduction in prior service cost.................... 1.6 2.8
Fair value of assets held for partially funded plan................. (5.9) -
----- ----
Accrued liability included in other liabilities................. $21.4 $9.9
===== ====
</TABLE>
The weighted average rate used in determining the accumulated
postretirement benefit obligations under the plans was 7.25 percent. The
weighted average after-tax expected rate of return on plan assets was 4.60
percent. The health care cost trend rate in 1997 was 11.1 percent for pre-age 65
and 9.3 percent for post-age 65 participants, graded evenly to 5.0 percent in 13
years. Increasing the trend rate by 1 percent would increase the accumulated
postretirement benefit obligation by $1.5 million at December 31, 1997 (for
plans without employer's maximum cost sharing provisions).
Litigation
The Company and its subsidiaries are involved in lawsuits related to their
operations. In most cases, such lawsuits involve claims under insurance policies
or other contracts of the Company. None of the lawsuits currently pending,
either individually or in the aggregate, is expected to have a material effect
on the Company's consolidated financial condition, cash flows or results of
operations.
Guaranty Fund Assessments
From time to time, mandatory assessments are levied on the Company's
insurance subsidiaries by life and health guaranty associations of most states
in which these subsidiaries are licensed. These assessments are to cover losses
to policyholders of insolvent or rehabilitated insurance companies. The
associations levy assessments (up to prescribed limits) on all insurers in a
particular state in order to pay claims on the basis of the proportionate share
of premiums written by insurers in the lines of business in which the insolvent
or rehabilitated insurer is engaged. These assessments may be deferred or
forgiven in certain states if they would threaten an insurer's financial
strength and, in some states, these assessments can be partially recovered
through a reduction in future premium taxes. The balance sheet at December 31,
1997, includes accruals of $16.9 million, which approximate the Company's
estimate of: (i) all known assessments that will be levied against the Company's
insurance subsidiaries by various state guaranty associations based
83
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
on premiums that have been written through December 31, 1997; less (ii) amounts
that would be recoverable through a reduction in future premium taxes as a
result of such assessments. Such estimate is subject to change as the
associations determine more precisely the losses that have occurred and how such
losses will be allocated to insurance companies. The Company's cost for such
assessments incurred by its insurance company subsidiaries was $3.7 million in
1997, $4.0 million in 1996 and $3.2 million in 1995.
Minority Interest
Minority interest represents the interest of investors other than Conseco
in its subsidiaries. Minority interest at December 31, 1997, includes: (i)
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts with a carrying value of $1,383.9 million; and (ii) $.7 million interest
in the common stock of a subsidiary of ALH. Minority interest at December 31,
1996, included: (i) $600.0 million par value of Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts; (ii) $97.0 million
interest in the redeemable preferred stock of a subsidiary of ALH; and (iii) $.7
million interest in the common stock of a subsidiary of ALH.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts at December 31, 1997, were as follows :
<TABLE>
<CAPTION>
Estimated
Amount Carrying fair
outstanding value value
----------- ----- -----
(Dollars in millions)
<S> <C> <C> <C>
9.16% Trust Originated Preferred Securities ("TOPrS")................. $ 275.0 $ 275.0 $ 284.6
8.70% Capital Trust Pass-through Securities ("TruPS")................. 325.0 325.0 359.2
8.796% Capital Securities............................................. 300.0 300.0 335.3
FELINE PRIDES......................................................... 500.0 483.9 512.5
-------- -------- --------
$1,400.0 $1,383.9 $1,491.6
======== ======== ========
</TABLE>
On November 19, 1996, Conseco Financing Trust I ("Trust I"), a wholly
owned subsidiary of Conseco, issued 11 million of the TOPrS at $25 per security.
Each TOPrS security pays cumulative cash distributions at the annual rate of
9.16 percent of the stated $25 liquidation amount per security, payable
quarterly. The TOPrS are fully and unconditionally guaranteed by Conseco.
Proceeds from the offering of $266.1 million (after underwriting and associated
costs) were used by the trust to purchase a subordinated debenture from Conseco.
Conseco then used the net proceeds to repay bank debt. Conseco has the right to
redeem the securities at any time, in whole or in part, on or after November 19,
2001, at the principal amount plus accrued and unpaid interest. The securities
are subordinated to all senior indebtedness of Conseco and mature on November
30, 2026. Conseco may extend the maturity date by one or more periods, but in no
event later than November 30, 2045. The terms of the TOPrS parallel the terms of
Conseco's debentures held by Trust I, which debentures account for substantially
all of the assets of Trust I.
On November 27, 1996, Conseco Financing Trust II ("Trust II"), a wholly
owned subsidiary of Conseco, issued 325,000 of the TruPS at $1,000 per security.
Each TruPS security pays cumulative cash distributions at the annual rate of
8.70 percent of the stated $1,000 liquidation amount per security, payable
semi-annually. The TruPS are fully and unconditionally guaranteed by Conseco.
Proceeds from the offering of $321.6 million (after underwriting and associated
costs) were used by the trust to purchase a subordinated debenture from Conseco.
Conseco then used the net proceeds to repay bank debt. Conseco has the right to
redeem the securities at the principal amount plus a premium equal to the
excess, if any, of the sum of the discounted present values of the remaining
scheduled payments of principal and interest over the principal amount of
securities to be redeemed. The securities are subordinated to all senior
indebtedness of Conseco and mature on November 15, 2026. The terms of the TruPS
parallel the terms of Conseco's debentures held by Trust II, which debentures
account for substantially all of the assets of Trust II.
On March 31, 1997, Conseco Financing Trust III ("Trust III"), a wholly
owned subsidiary of Conseco, issued 300,000 Capital Securities at $1,000 per
security. Each Capital Security pays cumulative cash distributions at the annual
rate of 8.796 percent of the stated $1,000 liquidation amount per security,
payable semi-annually. The Capital Securities are fully and unconditionally
guaranteed by Conseco. Proceeds from the offering of $296.7 million (after
underwriting and associated costs) were used by the trust to purchase
84
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
a subordinated debenture from Conseco. Conseco then used the net proceeds to
repay bank debt. Conseco has the right to redeem the securities at the principal
amount plus a premium equal to the excess, if any, of the sum of the discounted
present values of the remaining scheduled payments of principal and interest
over the principal amount of securities to be redeemed. The securities are
subordinated to all senior indebtedness of Conseco and mature on April 1, 2027.
The terms of the Capital Securities parallel the terms of Conseco's debentures
held by Trust III, which debentures account for substantially all of the assets
of Trust III.
On December 12, 1997, Conseco Financing Trust IV ("Trust IV"), a wholly
owned subsidiary of Conseco, issued 10,000,000 FELINE PRIDES at $50 per
security. Each FELINE PRIDES includes: (a) a stock purchase contract under which
(i) the holder will purchase a number of shares of Conseco common stock on
February 16, 2001 (ranging from .9363 and 1.1268 shares per FELINE PRIDES) under
the terms specified in the stock purchase contract; and (ii) will receive a
contract adjustment payment equal to .25 percent of the value of the security;
and (b) a beneficial ownership of a 6.75 percent trust originated preferred
security. Each holder will receive aggregate cumulative cash distributions at
the annual rate of 7 percent of the $50 stated amount per security, payable
quarterly. The applicable distribution rate on the trust originated preferred
securities that remain outstanding during the period February 16, 2001 through
February 16, 2003, will be reset so that the market value of the trust
originated preferred securities will be equal to 100.5 percent of the par value.
Conseco may limit the market rate reset to be no higher than the rate on the
2-year benchmark Treasury plus 200 basis points. The trust originated preferred
securities are fully and unconditionally guaranteed by Conseco. Proceeds from
the offering of approximately $483.7 million (after underwriting and associated
costs) were used by the trust to purchase a subordinated debenture from Conseco.
Conseco then used the net proceeds to repay bank debt and for other corporate
purposes. The trust originated preferred securities are subordinated to all
senior indebtedness of Conseco and mature on February 16, 2001. The terms of the
trust originated preferred security parallel the terms of Conseco's debentures
held by Trust IV, which debentures account for substantially all of the assets
of Trust IV.
Common Stock
At December 31, 1997 and 1996, minority interest in common stock of
Conseco's subsidiaries includes only the $.7 million interest in the common
stock of a subsidiary.
Changes in minority interest in common and preferred stock of
consolidated subsidiaries during 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Minority interest, beginning of year........................................................... $ 97.7 $ 403.3
Changes in investments held by minority interest:
Repurchase of mandatorily redeemable preferred stock of a subsidiary.................... (93.4) -
Mandatorily redeemable preferred stock of a subsidiary held by PFS prior to the
PFS Merger........................................................................... (2.7) -
Transactions resulting from ALH Stock Purchase, BLH Merger and related events........... - (224.9)
Equity of minority interest in the change in financial position of the
Company's subsidiaries:
Dividends............................................................................... (3.3) (10.0)
Amortization of value in excess of par of mandatorily redeemable preferred stock........ (.9) -
Net income before extraordinary charge.................................................. 3.3 31.3
Extraordinary charge.................................................................... - (1.7)
Unrealized depreciation of securities .................................................. - (100.3)
------ -------
Minority interest, end of year ................................................................ $ .7 $ 97.7
====== =======
</TABLE>
During 1997, we completed the purchase of all of the mandatorily
redeemable preferred stock of a subsidiary formerly held by minority interests.
85
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
9. SHAREHOLDERS' EQUITY:
Authorized preferred stock is 20 million shares. 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 notes payable of Conseco. Each share of PRIDES pays quarterly
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). 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. From February 1, 1999 through
February 1, 2000, the Company 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 (i) the
sum of (a) $62.195, declining to $61.125; and (b) accrued and unpaid dividends
divided by (ii) the market price of Conseco common stock at such date. In no
event will a holder receive less than 3.42 shares of Conseco common stock.
During 1996, 400 shares of PRIDES were converted by holders of such shares into
1,368 shares of Conseco common stock. In 1997, the holders of 2,374,300 shares
of PRIDES converted such shares into 8.1 million shares of common stock. We paid
$13.2 million to induce these conversions. We recorded this payment in the
consolidated financial statements as a dividend paid to such holders. In
addition, during 1997, 100,050 shares of PRIDES were converted by holders of
such shares into 342,171 shares of Conseco common stock.
Conseco issued 5.75 million shares of Series D Cumulative Convertible
Preferred Stock ("Series D preferred stock") with annual dividends of $3.25 per
share and with a total stated value of $287.5 million ($50 per share) in January
1993 in a public offering. Prior to January 1, 1995, Conseco had repurchased or
the holders had converted 80,275 Series D preferred shares. In 1996, the Company
exercised its right to redeem all outstanding Series D preferred stock. A total
of 6,358 Series D shares were redeemed at $52.916 per share including $.641 per
share of accrued and unpaid dividends. Holders of the remaining 5,666,559 Series
D shares elected to convert their shares into 17,766,864 shares of Conseco
common stock.
Changes in the number of shares of common stock outstanding during the
years ended December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Shares in thousands)
<S> <C> <C> <C>
Balance, beginning of year...................................................... 167,128 81,032 88,739
Stock options exercised..................................................... 12,341 4,893 366
Shares issued in conjunction with acquired companies........................ 11,264 60,560 -
Common shares converted from convertible subordinated debentures............ 5,138 4,250 -
Common shares converted from Series D preferred shares...................... - 17,767 -
Common shares converted from PRIDES......................................... 8,463 1 -
Shares issued under employee and agent benefit compensation plans........... 321 282 17
Treasury stock purchased.................................................... (17,989) (1,657) (8,090)
------- -------- ------
Balance, end of year............................................................ 186,666 167,128 81,032
======= ======== ======
</TABLE>
Dividends declared on common stock for 1997, 1996 and 1995, were $.313,
$.083 and $.046 per common share, respectively. A liability was accrued for
dividends declared but unpaid at December 31, 1997, totaling $23.5 million. Such
dividends were paid in January 1998.
The Company was authorized under its 1983 employee stock option plan to
grant options to purchase up to 48 million shares of Conseco common stock at a
price not less than its market value on the date the option was granted. The
1983 stock option plan continues to govern options granted thereunder, but
expired in all other respects in December 1993. The 1994 Stock and Incentive
Plan authorizes the granting of options to employees and directors of the
Company to purchase up to 24 million shares of Conseco common stock at a price
not less than its market value on the date the option is granted. The options
may become exercisable immediately or over a period of time. The plan also
permits granting of stock appreciation rights and certain other awards. In 1997,
the Company adopted the 1997 Non-qualified Stock Option Plan which authorizes
the granting of non-qualified options to employees of the Company to purchase
shares of Conseco common stock. The aggregate number of shares of common stock
for which options may be granted under the 1997 plan, when added to all
outstanding, unexpired options under the Company's other employee benefit
86
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
plans, shall not exceed 20 percent of the total of shares of common stock
outstanding plus the number of shares issuable upon conversion of any
outstanding convertible security on the date of grant (calculated in the manner
set forth in the 1997 plan).
Conseco implemented two option exercise programs under which its chief
executive officer and four of its executive vice presidents exercised
outstanding options to purchase 9.1 million shares of Conseco common stock under
the 1997 program (the "1997 Program") and 3.1 million shares under the 1996
program (the "1996 Program"). The options exercised would otherwise have
remained exercisable until various dates through 2006 with respect to the 1997
Program and until the years 2000 through 2002 with respect to the 1996 Program.
We implemented these programs in order to accelerate the recording of tax
benefits we derived from the exercise of the options and to better manage our
capital structure. With respect to both programs, no cash was exchanged as the
executives paid for the exercise price of the options by tendering previously
owned shares. The Company withheld shares or the executives tendered previously
held shares to cover federal and state taxes owed by the executives as a result
of the exercise transactions. The 1997 Program resulted in the following changes
to common stock and additional paid-in capital: (i) an increase for a tax
benefit of $81.9 million (net of payroll taxes incurred of $3.5 million); (ii)
an increase for the exercise price of $120.0 million; and (iii) a decrease of
$229.9 million related to shares withheld or tendered by the executives for the
exercise price and for federal and state taxes. The 1996 Program resulted in the
following changes to common stock and additional paid-in capital: (i) an
increase for a tax benefit of $15.1 million (net of payroll taxes incurred of
$.7 million); (ii) an increase for the exercise proceeds of $5.2 million; and
(iii) a decrease of $20.8 million related to shares withheld or tendered by the
executives for federal and state taxes. Net of shares withheld or tendered, the
Company issued approximately 3.3 million and 1.6 million shares of common stock
to the executives under the 1997 Program and the 1996 Program, respectively. As
an inducement to encourage the exercise of options prior to their expiration
date, we granted to the executive officers new options to purchase a total of
5.8 million shares at an average price of $39.52 per share and 1.6 million
shares at $16.22 per share (in each case equal to the market price per share on
the grant date) to replace the shares surrendered for taxes and the exercise
price in connection with the 1997 and 1996 Programs, respectively.
In 1997, 1996 and 1995, we repurchased approximately 17.9 million, 1.7
million and 8.1 million shares of our common stock for $711.7 million, $26.0
million and $92.4 million, respectively, in connection with our stock repurchase
programs and shares withheld or tendered for the exercise price of options and
for federal and state taxes. The cost of the common stock we repurchased in
connection with these programs was allocated to the shareholders' equity
accounts in 1997, 1996 and 1995 as follows: (i) $685.6 million, $3.1 million and
$15.0 million, respectively, to common stock and additional paid-in capital
(such allocation was based on the average common stock and paid-in capital
balance per share) and (ii) $26.1 million, $22.9 million and $77.4 million,
respectively, to retained earnings (representing the purchase price in excess of
such average).
Conseco's Director, Executive and Senior Officer Stock Purchase Plan was
implemented to encourage direct, long-term ownership of Conseco stock by Board
members, executive officers and certain senior officers. Under the program, 8
million shares of Conseco common stock have been purchased in open market or
negotiated transactions with independent parties. Purchases are financed by
personal loans to the participants from a bank. Such loans are collateralized by
the Conseco stock purchased. Conseco has guaranteed the loans, but has recourse
to the participants if we incur a loss under the guarantee. In addition, we
provide loans to the participants for interest payments under the bank loans. A
total of 39 directors and officers of Conseco participated in the plan. At
December 31, 1997, the bank loans guaranteed by us totaled $247.4 million, and
the loans provided by us for interest totaled $9.3 million. The common stock
that collateralizes the loans had a fair value of $343.5 million on December 31,
1997.
In December 1996, we granted options to selected key managers to purchase
1.1 million shares at a price of $30.41 per share (the "Key Manager Program").
These options contain lengthy vesting and non-compete requirements designed to
encourage continuity of employment with these individuals. The options will
become fully vested normally only upon both: (i) eleven years of continuous
employment; and (ii) the earlier of: (a) two years following termination of
employment during which time the individual is not in competition with the
Company; (b) the grantee reaching age 65; or (c) death or disability of the
grantee. In certain cases, the options remain exercisable throughout the
lifetime of the grantee.
We apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for our
stock option plans. Accordingly, no compensation cost has been recognized for
such plans. Had compensation cost been determined based on the fair value at the
grant dates for awards granted after January 1, 1995, consistent with the method
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company's pro forma net income and
pro forma earnings per share for the years ended December 31, 1997, 1996 and
1995 would have been as follows:
87
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- ------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- --------- ----------- --------- ----------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income........................ $567.3 $521.2 $252.4 $245.4 $220.4 $211.9
Basic earnings per share.......... 2.94 2.69 2.15 2.08 2.48 2.38
Diluted earnings per share........ 2.64 2.42 1.82 1.77 2.12 2.04
</TABLE>
The fair value of each option grant used to determine the pro forma
amounts summarized above is estimated on the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 Grants 1996 Grants 1995 Grants
--------------------- ------------------------------------ -----------
Option Option Key
Traditional exercise Traditional exercise Manager Traditional
grants program grants program Program grants
------ ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Weighted average risk-free interest rates.. 6.0% 6.5% 6.1% 6.0% 6.8% 6.2%
Weighted average dividend yields........... .9% .9% .1% .1% .1% .2%
Volatility factors......................... .28 .28 .28 .28 .28 .43
Weighted average expected life............. 6 years 4 years 5 years 5 years 25 years 5 years
Weighted average fair value per share...... $13.13 $11.95 $10.17 $5.54 $24.50 $5.53
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of our employee stock options. Because SFAS 123 is
effective only for awards granted after January 1, 1995, the pro forma
disclosures provided above may not be representative of the effects on reported
net income for future years.
88
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
In conjunction with the CAF Merger and the PFS Merger in 1997 and the LPG
Merger, the ATC Merger, the THI Merger and the BLH Merger in 1996, outstanding
options to purchase common stock of the acquired companies were converted into
options to purchase Conseco stock. These options, which were immediately
exercisable, were for the number of shares and the price per share equal to what
holders would have been entitled to receive at the dates of the mergers had the
former options been exercised at that time and exchanged for Conseco shares in
the mergers. The fair value of these options is included in the cost to acquire
the companies (see note 2). A summary of options issued in connection with the
mergers and, together with related information, is presented below:
<TABLE>
<CAPTION>
Weighted
Total value average
at merger exercise price
Shares date per share
------ ---- ---------
(Shares in (Dollars in millions, except
thousands) per share amounts)
<S> <C> <C> <C>
Options issued in 1997 in connection with the:
CAF Merger............................................... 226 $ 3.5 $23.96
PFS Merger............................................... 1,132 22.4 19.78
----- ------
1,358 $25.9 20.48
===== =====
Options issued in 1996 in connection with the:
LPG Merger............................................... 1,133 $ 7.7 11.18
ATC Merger............................................... 2,049 26.9 16.87
THI Merger............................................... 644 6.5 14.90
BLH Merger............................................... 609 2.6 27.18
----- -----
4,435 $43.7 16.54
===== =====
</TABLE>
89
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
A summary of the Company's stock option activity and related information
for the years ended December 31, 1997, 1996 and 1995, is presented below (shares
in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of year.. 28,720 $15.38 25,487 $11.76 22,029 $11.43
Granted or assumed in connection with:
Traditional grants................. 1,212 40.02 1,206 28.54 4,117 12.60
Option exercise program............ 5,818 39.52 1,605 16.22 - -
Key Manager Program................ - - 1,100 30.41 - -
Mergers............................ 1,358 20.48 4,435 16.54 - -
------- ------ ------
Total granted................ 8,388 36.51 8,346 20.04 4,117 12.60
------- ------ ------
Exercised............................. (12,341) 13.71 (4,893) 4.75 (366) 3.06
Forfeited............................. (339) 17.58 (220) 11.62 (293) 9.98
------- ------ ------
Outstanding at the end of the year.... 24,428 23.45 28,720 15.38 25,487 11.76
======= ====== ======
Options exercisable at year-end....... 9,765 9,554 7,352
======= ====== ======
Available for future grant............ 17,206 2,933 8,399
======= ======= =======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------- -----------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding life (in years) price exercisable price
- --------------- ----------- --------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.36-1.56........................... 50 .6 $ 1.51 50 $ 1.51
2.61................................ 35 1.6 2.61 35 2.61
4.57-6.72........................... 190 1.6 6.01 190 6.01
6.91-10.28.......................... 109 1.9 8.20 109 8.20
10.47-15.47.......................... 13,210 5.3 14.27 1,637 13.22
16.06-23.67.......................... 995 6.5 19.53 963 19.55
25.11-30.41.......................... 1,890 5.6 29.17 903 28.62
30.41 (Key Manager Program)......... 1,100 24.0 30.41 - -
30.73-45.84.......................... 6,822 7.5 39.91 5,878 39.36
48.38................................ 27 9.9 48.38 - -
------ -----
24,428 9,765
====== =====
</TABLE>
90
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
In connection with the THI Merger, the outstanding warrants to purchase
shares of THI common stock were converted into warrants to purchase the same
number of shares of Conseco common stock at the same total cost that the holders
would have been entitled to receive if such warrants were exercised immediately
prior to the THI Merger. Such warrants may be exercised to buy 700,000 shares of
Conseco common stock for $13.8 million at anytime through September 29, 2005.
Accordingly, 700,000 shares of common stock are reserved for issuance under the
warrants. The value of the warrants on the THI Merger date of $3.8 million is
included in the total cost to acquire THI (see note 2).
A total of 69.0 million shares of common stock are reserved for issuance
under the previously described convertible subordinated debentures, PRIDES,
FELINE PRIDES, stock options granted and available for future grant, warrants,
and stock bonus and deferred compensation plans.
A reconciliation of income and shares used to calculate basic and diluted
earnings per share is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions and shares in thousands)
<S> <C> <C> <C>
Income:
Net income before extraordinary charge.................................. $574.2 $278.9 $222.5
Preferred stock dividends............................................... 21.9 27.4 18.4
------ ------ ------
Income before extraordinary charge applicable to common ownership
for basic earnings per share........................................ 552.3 251.5 204.1
Effect of dilutive securities:
Preferred stock dividends............................................. 8.7 27.4 18.4
------ ------ ------
Income before extraordinary charge applicable to common ownership
and assumed conversions for diluted earnings per share.............. $561.0 $278.9 $222.5
====== ====== ======
Shares:
Weighted average shares outstanding for basic earnings per share........ 185,751 104,584 81,405
Effect of dilutive securities on weighted average shares:
Stock options......................................................... 9,767 6,013 2,921
Employee stock plans.................................................. 2,268 2,172 1,768
PRIDES................................................................ 6,936 14,042 -
Convertible preferred stock........................................... - 12,049 17,787
Convertible debentures................................................ 5,457 - -
------- ------- -------
Dilutive potential common shares.................................. 24,428 34,276 22,476
------- ------- -------
Weighted average shares outstanding for diluted earnings
per share.................................................... 210,179 138,860 103,881
======= ======= =======
</TABLE>
91
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
10. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Traditional products:
Direct premiums collected......................................................... $5,264.4 $3,528.2 $3,173.0
Reinsurance assumed............................................................... 290.3 65.8 6.1
Reinsurance ceded................................................................. (499.0) (313.8) (72.6)
-------- -------- --------
Premiums collected, net of reinsurance...................................... 5,055.7 3,280.2 3,106.5
Change in unearned premiums....................................................... (2.2) (14.6) 6.6
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities ................................ 2,099.4 1,881.3 1,757.5
-------- -------- --------
Premiums on traditional products with mortality or morbidity risk,
recorded as insurance policy income...................................... 2,954.1 1,384.3 1,355.6
Fees and surrender charges on interest sensitive products............................. 456.7 269.9 109.4
-------- -------- --------
Insurance policy income..................................................... $3,410.8 $1,654.2 $1,465.0
======== ======== ========
</TABLE>
The five states with the largest shares of premiums collected in 1997
were Florida (9.4 percent), Illinois (9.0 percent), California (8.4 percent),
Texas (8.1 percent) and Michigan (5.0 percent). No other state accounted for
more than 5 percent of total collected premiums.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Commission expense.................................................................... $201.2 $ 72.5 $ 47.7
Other................................................................................. 376.0 231.5 224.4
------ ------ ------
Other operating costs and expenses........................................... $577.2 $304.0 $272.1
====== ====== ======
</TABLE>
Conseco considers anticipated returns from the investment of policyholder
balances in determining the amortization of the cost of policies purchased and
cost of policies produced for universal life-type and investment-type contracts.
Sales of fixed maturity investments change the incidence of profits on such
policies because gains (losses) are recognized currently and, if the sale
proceeds are reinvested at the current market yields, the expected future yields
on the investment of policyholder balances are reduced (increased). Accordingly,
amortization of the cost of policies purchased was increased by $151.4 million,
$31.1 million and $106.4 million in the years ended December 31, 1997, 1996 and
1995, respectively. Amortization of the cost of policies produced was increased
by $29.8 million, $4.9 million and $20.2 million in the years ended December 31,
1997, 1996 and 1995, respectively.
92
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $2,015.0 $1,030.7 $1,021.6
Additional acquisition expense on acquired policies............................... 93.9 - -
Amortization related to operations:
Cash flow realized............................................................. (436.5) (285.1) (252.0)
Interest added................................................................. 174.7 127.6 133.2
Amortization related to sales of investments...................................... (151.4) (31.1) (106.4)
Amounts related to fair value adjustment
of actively managed fixed maturities........................................... (128.4) 141.6 (395.6)
Transferred to cost of policies produced related to
exchanged health policies...................................................... (16.1) (13.4) (13.5)
Amounts acquired in mergers and acquisitions...................................... 914.2 1,042.0 643.4
Nonrecurring charge............................................................... (8.8) - -
Reinsurance and other ............................................................ 9.8 2.7 -
-------- -------- --------
Balance, end of year.................................................................. $2,466.4 $2,015.0 $1,030.7
======== ======== ========
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 9 percent of
the December 31, 1997, balance of cost of policies purchased in 1998, 9 percent
in 1999, 8 percent in 2000, 7 percent in 2001, and 7 percent in 2002. The
discount rates used to determine the cost of policies purchased ranged from 18
percent to 20 percent during the three-year period ended December 31, 1997. The
discount rates used to determine the amortization of the cost of policies
purchased averaged 7 percent in 1997, 10 percent in 1996, and 12 percent in
1995.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $544.3 $391.0 $ 300.7
Additions......................................................................... 550.7 331.5 302.9
Amortization related to operations................................................ (110.4) (72.9) (62.0)
Amortization of deferred revenue.................................................. 5.4 1.4 1.3
Amortization related to sales of investments...................................... (29.8) (4.9) (20.2)
Amounts related to fair value adjustment of
actively managed fixed maturities.............................................. (36.4) 45.4 (74.9)
Transferred from cost of policies purchased related to
exchanged health policies, net of related reserves............................. 3.5 4.0 1.6
Amounts related to BLH Merger and share repurchases............................... - (54.7) (107.5)
Amounts related to ALH Stock Purchase............................................. - (96.5) -
Amounts related to CCP Merger..................................................... - - (62.8)
Consolidation of CCP, effective January 1, 1995................................... - - 111.9
Nonrecurring charge............................................................... (12.1) - -
------ ------ -------
Balance, end of year.................................................................. $915.2 $544.3 $ 391.0
====== ====== =======
</TABLE>
Nonrecurring charges in 1997 include an increase to claim reserves of
$41.5 million and the write-off of cost of policies produced and cost of
policies purchased of $20.9 million related to premium deficiencies on our
Medicare supplement business in the state of Massachusetts. Regulators in that
state have not allowed premium increases for Medicare supplement products
necessary to avoid losses on the business. We are currently seeking rate
increases. We are no longer writing new Medicare supplement business in
Massachusetts.
Nonrecurring charges in 1997 also include expenses of $9.3 million (net
of proceeds from a life insurance policy) related to the death of an executive
officer.
93
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
11. CONSOLIDATED STATEMENT OF CASH FLOWS:
The following disclosures are provided to support and/or supplement our
consolidated statement of cash flows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Impact of acquisition transactions (described in note 2) on the consolidated statement
of cash flows:
Total investments................................................................ $ 4,716.6 $ 5,022.8 $ 4,528.4
Cost of policies purchased....................................................... 914.2 1,046.4 493.7
Goodwill......................................................................... 1,133.9 1,747.2 241.6
Income taxes..................................................................... 6.4 134.9 (114.9)
Insurance liabilities............................................................ (5,193.8) (5,943.6) (4,405.8)
Notes payable.................................................................... (540.6) (448.2) (213.7)
Minority interest................................................................ - 210.4 225.4
Common stock and additional paid-in capital...................................... (471.5) (1,568.6) -
Other............................................................................ 194.5 (179.6) (168.4)
--------- --------- ---------
Net cash used.................................................................. $ 759.7 $ 21.7 $ 586.3
========= ========= =========
Additional non-cash items not reflected in the consolidated statement of cash
flows:
Issuance of common stock under stock option and employee benefit plans............. $ 20.2 $ 12.2 $ 4.2
Tax benefit related to the issuance of common stock under employee benefit plans... 85.2 15.9 .4
Conversion of preferred stock into common stock.................................... 151.3 283.2 -
Conversion of convertible debentures into common stock............................. 150.0 - -
Redemption of convertible subordinated debentures of a subsidiary using
segregated cash.................................................................. - - 9.2
Cash paid for:
Interest expense on debt and commercial paper...................................... 117.4 111.3 112.0
Income taxes....................................................................... 200.0 122.5 90.3
</TABLE>
12. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from GAAP. The Company's
life insurance subsidiaries reported the following amounts to regulatory
agencies, after appropriate eliminations of intercompany accounts among such
subsidiaries:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................................... $1,662.4 $1,170.8
Asset valuation reserve.......................................................................... 329.2 232.9
Interest maintenance reserve..................................................................... 414.9 272.6
Portion of surplus debenture carried as a liability ............................................. 99.2 98.8
-------- --------
Total...................................................................................... $2,505.7 $1,775.1
======== ========
</TABLE>
Combined statutory net income of the Company's life insurance
subsidiaries for the periods during which such subsidiaries were included in our
consolidated financial statements was $243.4 million, $215.0 million and $183.8
million in 1997, 1996 and 1995, respectively, after appropriate eliminations of
intercompany amounts among such subsidiaries, but before elimination of
intercompany amounts between such subsidiaries and non-life insurance
subsidiaries and the parent company.
The statutory capital and surplus of the insurance subsidiaries include
surplus debentures issued to the parent holding companies totaling $793.4
million. Payments of interest and principal on such debentures are generally
subject to the approval of the insurance
94
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
department of the subsidiary's state of domicile.
Statutory accounting practices require the asset valuation reserve
("AVR") and the interest maintenance reserve ("IMR") be reported as liabilities.
The purpose of these reserves is to stabilize statutory surplus against
fluctuations in the market value of investments. The IMR captures all realized
investment gains and losses, net of income taxes, on debt instruments resulting
from changes in interest rates, and provides for subsequent amortization of such
amounts into statutory net income on a basis reflecting the remaining lives of
the assets sold. The AVR captures all realized and unrealized investment gains
(losses), net of income taxes, related to equity investments and to changes in
creditworthiness of debt instruments. AVR is also adjusted each year based on a
formula related to the quality and loss experience of the Company's investment
portfolio.
Included in statutory capital and surplus shown above are the following
investments in non-life insurance affiliates, all of which are eliminated in the
consolidated financial statements prepared in accordance with GAAP:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Admitted Admitted
asset asset
Cost value Cost value
---- ----- ---- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Common stock of Conseco purchased in open market
transactions (1997 includes 39,823,149 shares and 1996
includes 39,021,822 shares)......................................... $ 99.8 $152.4 $ 89.6 $ 80.9
Notes payable of Conseco and its non-life subsidiaries................. 275.0 275.7 261.3 245.2
Common stock of ALH (463,649 shares in 1997 and 614,057
shares in 1996) .................................................... 2.4 6.3 5.8 9.8
Preferred stock of a non-life subsidiary............................... 900.0 - 900.0 -
Investment in ALH 1994 Series PIK Preferred Stock...................... 72.2 72.2 62.8 62.8
Preferred stock of American Life Holding Company....................... 6.5 6.5 6.5 6.5
</TABLE>
95
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The following table compares the consolidated pretax income determined on a
statutory accounting basis with such income reported in accordance with GAAP:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Life insurance subsidiaries:
Pretax income as reported on a statutory
accounting basis before deduction of
investment management fees paid to affiliates and
transfers to and from and amortization
of the IMR......................................................................... $ 606.3 $332.2 $370.4
GAAP adjustments:
Change in difference in carrying values of investments............................. 111.7 51.9 185.9
Changes in cost of policies purchased and produced and insurance liabilities....... 256.2 70.1 (52.0)
Other adjustments, net............................................................. (7.9) (.1) (7.7)
-------- ------ ------
GAAP pretax income of life insurance subsidiaries.......................... 966.3 454.1 496.6
Non-life companies:
Interest expense..................................................................... (109.4) (108.1) (119.4)
All other income and expense, net
(excluding investment management fees received from affiliates).................... 146.2 147.6 41.3
-------- ------ ------
GAAP consolidated pretax income............................................ $1,003.1 $493.6 $418.5
======== ====== ======
</TABLE>
State insurance laws generally restrict the ability of insurance
companies to pay dividends or make other distributions. Net assets of the
Company's wholly owned life insurance subsidiaries, determined in accordance
with GAAP, aggregated approximately $7.8 billion at December 31, 1997, of which
approximately $165.1 million is available for distribution to Conseco in 1998
without the permission of state regulatory authorities.
Most states have adopted risk-based capital ("RBC") rules to evaluate the
adequacy of statutory capital and surplus in relation to investment and
insurance risks. The RBC formula is designed as an early warning tool to help
state regulators identify possible weakly capitalized companies for the purpose
of initiating regulatory action. At December 31, 1997, the average ratio of
total adjusted capital to RBC (as defined by the rules) for our principal
insurance subsidiaries was greater than twice the level at which regulatory
attention is triggered.
13. BUSINESS SEGMENT AND DISTRIBUTION CHANNELS:
Conseco conducts and manages its business through five segments,
reflecting the Company's major lines of insurance business and target markets:
(i) supplemental health; (ii) annuities; (iii) life insurance; (iv) individual
and group major medical insurance; and (v) other. Summarized data for the
Company's business segments follows:
96
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
<TABLE>
<CAPTION>
Income before
Amortization income taxes,
of cost of minority
policies produced interest and
Premiums Total and cost of policies extraordinary Total
collected revenues purchased (a) charge assets
--------- -------- ------------- ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
1997
Supplemental health...................... $1,843.7 $2,160.2 $194.9 $ 371.9 $ 7,522.5
Annuities................................ 1,689.6 1,350.5 198.9 358.3 16,535.6
Life insurance........................... 709.0 1,130.3 87.8 307.1 9,771.1
Individual and group major medical....... 744.2 775.5 16.8 40.3 896.8
Other ................................... 69.2 151.9 7.3 61.6 577.4
Corporate................................ - - - (136.1) 611.4
-------- -------- ------ -------- ---------
Total.................................. $5,055.7 $5,568.4 $505.7 $1,003.1 $35,914.8
======== ======== ====== ======== =========
1996
Supplemental health...................... $ 810.8 $ 873.2 $ 81.2 $ 136.7 $ 3,841.1
Annuities................................ 1,670.3 1,047.4 95.1 254.3 14,186.5
Life insurance........................... 403.6 642.6 41.5 124.8 6,512.4
Individual and group major medical....... 341.0 365.8 15.1 32.1 418.2
Other ................................... 54.5 138.3 7.9 58.1 170.0
Corporate ............................... - - - (112.4) 484.5
-------- -------- ------ -------- ---------
Total.................................. $3,280.2 $3,067.3 $240.8 $ 493.6 $25,612.7
======== ======== ====== ======= =========
1995
Supplemental health...................... $ 738.8 $ 827.2 $ 78.3 $ 97.1 $ 1,759.6
Annuities................................ 1,693.9 1,135.5 169.9 316.1 12,152.8
Life insurance........................... 253.6 404.0 38.6 70.2 2,667.6
Individual and group major medical....... 353.6 361.7 13.1 35.2 269.4
Other ................................... 66.6 111.7 7.6 25.2 193.8
Corporate................................ - 15.2 - (125.3) 254.3
-------- -------- ------ ------- ---------
Total.................................. $3,106.5 $2,855.3 $307.5 $ 418.5 $17,297.5
======== ======== ====== ======= =========
<FN>
(a) Includes additional amortization related to gains on sales of investments.
</FN>
</TABLE>
97
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
We compute earnings per common share for each quarter independently of
earnings per share for the year. The sum of the quarterly earnings per share may
not equal the earnings per share for the year because of: (i) transactions
affecting the weighted average number of shares outstanding in each quarter; and
(ii) the uneven distribution of earnings during the year.
<TABLE>
<CAPTION>
1997
----------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Insurance policy income................................................... $ 670.1 $ 885.0 $ 885.8 $ 969.9
Revenues.................................................................. 1,099.0 1,360.5 1,483.5 1,625.4
Income before income taxes, minority interest
and extraordinary charge .............................................. 195.4 231.2 275.2 301.3
Net income................................................................ 111.5 130.6 153.8 171.4
Net income per common share:
Basic:
Income before extraordinary charge .................................. $.57 $.68 $.81 $.91
Extraordinary charge................................................. .02 .01 - .01
---- ---- ---- ----
Net income......................................................... $.55 $.67 $.81 $.90
==== ==== ==== ====
Diluted:
Income before extraordinary charge .................................. $.51 $.62 $.73 $.81
Extraordinary charge................................................. .02 .01 - -
---- ---- ---- ----
Net income......................................................... $.49 $.61 $.73 $.81
==== ==== ==== ====
</TABLE>
98
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
<TABLE>
<CAPTION>
1996
-----------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Insurance policy income..................................................... $369.8 $371.6 $451.8 $461.0
Revenues.................................................................... 691.8 672.5 834.3 868.7
Income before income taxes, minority interest
and extraordinary charge ................................................ 120.2 101.3 131.5 140.6
Net income.................................................................. 46.3 50.1 78.1 77.9
Net income per common share:
Basic:
Income before extraordinary charge .................................... $.68 $.49 $.62 $.61
Extraordinary charge................................................... .21 - .01 .06
----- ---- ---- ----
Net income........................................................... $.47 $.49 $.61 $.55
==== ==== ==== ====
Diluted:
Income before extraordinary charge .................................... $.55 $.41 $.51 $.54
Extraordinary charge................................................... .15 - .01 .05
---- ---- ---- ----
Net income........................................................... $.40 $.41 $.50 $.49
==== ==== ==== ====
</TABLE>
Our quarterly results of operations are based on numerous estimates,
principally related to policy reserves, amortization of cost of policies
purchased, amortization of cost of policies produced and income taxes. We revise
all such estimates each quarter and we ultimately adjust them to year-end
amounts. When we determine revisions are necessary, we report them as part of
operations of the current quarter.
15. SUBSEQUENT EVENTS (UNAUDITED):
On February 9, 1998, we completed the offering of $250.0 million of 6.4
percent Notes (the "Notes") due February 10, 2003. Proceeds from the offering of
approximately $248.0 million (after original issue discount and other associated
costs) were used to retire bank debt. Interest is paid semi-annually on February
10 and August 10 of each year. The Notes are redeemable in whole or in part at
the option of Conseco at any time, at a redemption price equal to the sum of (a)
the greater of: (i) 100 percent of the principal amount; and (ii) the sum of the
present values of the remaining scheduled payments of principal and interest
thereon from the redemption date to the maturity date, computed by discounting
such payments, in each case, to the redemption date on a semi-annual basis at
the Treasury rate (as defined in the Notes) plus 25 basis points, plus (b)
accrued and unpaid interest on the principal amount thereof to the date of
redemption. The Notes are unsecured and rank pari passu with all other unsecured
and unsubordinated obligations of Conseco.
We periodically use options and interest rate swaps to hedge interest
rate risk associated with our investments and borrowed capital. Although we had
no such agreements outstanding at December 31, 1997, we entered into four
interest rate swap agreements in March 1998. The Company entered into such
agreements to create a hedge that effectively converts a portion of its
fixed-rate borrowed capital into floating-rate instruments for the period during
which the agreements are outstanding. Such interest rate swap agreements have an
aggregate notional principal amount of $1.0 billion, mature in various years
through 2008 and have an average remaining life of 7 years. If the
counterparties of these interest rate swaps do not meet their obligations,
Conseco could have a loss. Conseco limits its exposure to such a loss by
diversifying among several counterparties believed to be financially sound and
creditworthy. At March 13, 1998, all of the counterparties were rated A or
higher by Standard & Poor's Corporation.
On March 3, 1998, we commenced a new program to repurchase up to 5
million Conseco common shares in open market or negotiated transactions. The
timing and terms of the purchases are to be determined based on market
conditions and other considerations. As of March 17, 1998, we had repurchased .5
million shares under the program for $26.4 million.
In March 1998, we repurchased $139 million par value of our 10.5 percent
senior notes due 2004 for $171 million. We will recognize an extraordinary
charge of approximately $15.6 million (net of an $8.3 million tax benefit)
related to the repurchases in the quarter ended March 31, 1998.
99
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by Part III is hereby incorporated by reference
from the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1997, except that
the information required by Item 10 regarding Executive Officers is included
herein under a separate caption at the end of Part I.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See Index to Consolidated Financial
Statements on page 48 for a list of financial statements included
in this Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following
the signature page:
Schedule II -- Condensed Financial Information of Registrant
(Parent Company)
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not applicable,
not required, or because the information they contain is included elsewhere in
the consolidated financial statements or notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits
filed with this report
(b) Reports on Form 8-K. - None
100
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, this 27th day of March, 1998.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
-----------------------------
Stephen C. Hilbert, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title (Capacity) Date
--------- ---------------- ----
<S> <C> <C>
/s/ STEPHEN C. HILBERT Chairman of the Board, March 27, 1998
- ---------------------- President and Director
Stephen C. Hilbert (Principal Executive Officer)
/s/ ROLLIN M. DICK Executive Vice President and Director March 27, 1998
- ------------------------- (Principal Financial Officer)
Rollin M. Dick
/s/JAMES S. ADAMS Senior Vice President and Treasurer March 27, 1998
- ------------------------- (Principal Accounting Officer)
James S. Adams
/s/ NGAIRE CUNEO Director March 27, 1998
- -------------------------
Ngaire Cuneo
/s/ DAVID R. DECATUR Director March 27, 1998
- -------------------------
David R. Decatur
/s/ JOHN M. MUTZ Director March 27, 1998
- -------------------------
John M. Mutz
/s/ DONALD F. GONGAWARE Director March 27, 1998
- -------------------------
Donald F. Gongaware
/s/ M. PHIL HATHAWAY Director March 27, 1998
- -------------------------
M. Phil Hathaway
/s/ DENNIS E. MURRAY, SR. Director March 27, 1998
- -------------------------
Dennis E. Murray, Sr.
/s/ JAMES D. MASSEY Director March 27, 1998
- -------------------------
James D. Massey
</TABLE>
101
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and
Board of Directors
Conseco, Inc.
Our report on the consolidated financial statements of Conseco, Inc. and
Subsidiaries is included on page 50 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 100 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/COOPERS & LYBRAND L.L.P.
---------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 23, 1998
102
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
<TABLE>
<CAPTION>
Condensed Financial Information of Registrant (Parent Company)
Balance Sheet
as of December 31, 1997 and 1996
(Dollars in millions)
ASSETS
1997 1996
---- ----
<S> <C> <C>
Short-term investments......................................................................... $ 17.4 $ 74.9
Actively managed fixed maturities ............................................................. 12.9 2.1
Equity securities.............................................................................. 14.0 7.9
Other invested assets.......................................................................... 128.1 55.3
Investment in wholly owned subsidiaries (eliminated in consolidation).......................... 6,734.6 3,811.9
Receivable from subsidiaries (eliminated in consolidation)..................................... 949.9 871.5
Income taxes................................................................................... 207.1 155.7
Other assets................................................................................... 231.9 188.6
-------- --------
Total assets............................................................................ $8,295.9 $5,167.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable............................................................................... $1,906.7 $1,094.9
Commercial paper............................................................................ 448.2 -
Notes payable to subsidiaries (eliminated in consolidation)................................. 213.1 101.6
Other liabilities due to subsidiaries (eliminated in consolidation)......................... 210.5 93.5
Other liabilities........................................................................... 243.4 192.6
-------- --------
Total liabilities....................................................................... 3,021.9 1,482.6
-------- --------
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts............. 1,383.9 600.0
Shareholders' equity:
Preferred stock............................................................................. 115.8 267.1
Common stock and additional paid-in capital (no par value, 1,000,000,000
shares authorized, shares issued and outstanding: 1997 - 186,665,591
1996 - 167,128,228)....................................................................... 2,382.0 2,029.6
Accumulated other comprehensive income:
Unrealized appreciation of fixed maturity securities (net of applicable
deferred income taxes: 1997 - $95.5; 1996 - $21.5)...................................... 177.2 39.8
Unrealized appreciation (depreciation) of other investments (net of applicable deferred
income taxes: 1997 - $2.6; 1996 - $(.5))................................................ 4.8 (.9)
Retained earnings........................................................................... 1,210.3 749.7
-------- --------
Total shareholders' equity.............................................................. 3,890.1 3,085.3
-------- --------
Total liabilities and shareholders' equity.............................................. $8,295.9 $5,167.9
======== ========
The accompanying note is an integral
part of the condensed financial
information.
</TABLE>
103
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
<TABLE>
<CAPTION>
Condensed Financial Information of Registrant (Parent Company)
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income.............................................................. $ 46.5 $ 5.5 $ 8.5
Dividends from subsidiaries (eliminated in consolidation).......................... 185.2 146.9 106.5
Fee and interest income from subsidiaries (eliminated in consolidation)............ 93.9 30.9 12.9
Net investment gains............................................................... - 30.1 20.6
Other income (losses).............................................................. 2.5 1.1 (6.4)
------ ------- -------
Total revenues................................................................. 328.1 214.5 142.1
------ ------- -------
Expenses:
Interest expense on notes payable.................................................. 109.1 69.2 42.6
Interest expense to subsidiaries (eliminated in consolidation)..................... 31.2 7.2 7.5
Operating costs and expenses....................................................... 24.7 10.2 27.8
------ ------- -------
Total expenses................................................................. 165.0 86.6 77.9
------ ------- -------
Income before income taxes, equity in undistributed earnings of
subsidiaries, distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
and extraordinary charge..................................................... 163.1 127.9 64.2
Income tax expense (benefit).......................................................... (5.5) 1.2 (93.2)
------ ------- -------
Income before equity in undistributed earnings of subsidiaries,
distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts
and extraordinary charge..................................................... 168.6 126.7 157.4
Equity in undistributed earnings of subsidiaries (eliminated in consolidation)........ 454.6 155.8 65.1
------- ------- -------
Income before distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts and extraordinary charge........... 623.2 282.5 222.5
Distributions on Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts............................................................... 49.0 3.6 -
------- ------- ------
Income before extraordinary charge............................................. 574.2 278.9 222.5
Extraordinary charge on extinguishment of debt, net of tax............................ 6.9 26.5 2.1
------- ------- ------
Net income..................................................................... 567.3 252.4 220.4
Less amounts applicable to preferred stock:
Charge related to induced conversions.............................................. 13.2 - -
Preferred stock dividends.......................................................... 8.7 27.4 18.4
------- ------- ------
Earnings applicable to common stock............................................ $545.4 $ 225.0 $202.0
====== ======= ======
The accompanying note is an
integral part of the condensed
financial information.
</TABLE>
104
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
<TABLE>
<CAPTION>
Condensed Financial Information of Registrant (Parent Company)
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 567.3 $ 252.4 $ 220.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of consolidated subsidiaries.................... (454.6) (155.8) (65.1)
Net investment gains............................................................. - (30.1) (20.6)
Income taxes .................................................................... (62.0) (3.2) (101.3)
Extraordinary charge on extinguishment of debt................................... 10.6 36.9 3.7
Distributions on Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts.............................................................. 75.4 5.5 -
Other............................................................................ 7.0 (21.4) 10.8
-------- -------- -------
Net cash provided by operating activities...................................... 143.7 84.3 47.9
-------- -------- -------
Cash flows from investing activities:
Sales and maturities of investments.................................................. 70.0 45.0 125.6
Investments in consolidated subsidiaries............................................. (983.1) (226.1) (556.9)
Purchases of investments............................................................. (143.3) (66.0) (70.8)
Investment in Conseco Capital Partners II, L.P....................................... - - (7.1)
Expenses incurred in conjunction with terminated merger.............................. - - (5.5)
Cash held by subsidiaries prior to acquisition....................................... 4.1 38.9 17.0
Payments from subsidiaries........................................................... 72.9 36.5 -
-------- -------- -------
Net cash used by investing activities.......................................... (979.4) (171.7) (497.7)
-------- -------- -------
Cash flows from financing activities:
Issuance of equity securities, net................................................... 52.3 20.6 1.8
Issuance of convertible preferred stock.............................................. - 257.7 -
Issuance of Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts............................................................... 780.4 587.7 -
Issuance of notes payable, net....................................................... 2,577.0 856.0 827.2
Issuance of commercial paper......................................................... 448.2 - -
Payments on notes payable............................................................ (2,217.7) (1,467.2) (330.0)
Payments to repurchase equity securities of Conseco.................................. (593.3) (21.5) (92.4)
Dividends paid ...................................................................... (76.8) (34.3) (24.6)
Dividends on stock held by subsidiaries.............................................. (53.8) (38.1) (38.7)
Distributions on Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts............................................................... (65.7) (2.9) -
Payments to retire preferred stock................................................... (72.4) (.3) -
-------- -------- -------
Net cash provided by financing activities...................................... 778.2 157.7 343.3
-------- -------- -------
Net increase (decrease) in short-term investments.............................. (57.5) 70.3 (106.5)
Short term investments, beginning of year............................................ 74.9 4.6 111.1
-------- -------- -------
Short term investments, end of year.................................................. $ 17.4 $ 74.9 $ 4.6
======== ======== =======
The accompanying note is an
integral part of the condensed financial
information.
</TABLE>
105
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
Note to Condensed Financial Information
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Conseco, Inc. The condensed financial
information includes the accounts and activity of the Parent Company and its
wholly-owned non-insurance subsidiaries which act as the holding companies for
the Company's life insurance subsidiaries.
106
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE III
<TABLE>
<CAPTION>
Supplementary Insurance Information
(Dollars in millions)
Amortization
of
Cost of policies Insurance cost of policies
produced and Insurance Net policy benefits produced and Other
cost of policies Insurance policy investment and cost of policies operating
Segment purchased liabilities income income expenses(1) purchased(2) expenses(3)
- ------- --------- ----------- ------ ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Supplemental health
operations.................. $1,527.8 $ 3,759.6 $1,858.1 $ 273.8 $1,217.5 $194.9 $313.5
Annuity operations............ 828.0 14,150.8 96.8 1,070.6 725.9 198.9 67.3
Life operations............... 921.7 7,075.0 630.5 448.2 611.8 87.8 123.6
Individual and group
major medical............... 44.1 577.2 758.1 17.3 579.5 16.8 139.0
Other......................... 60.0 337.5 67.3 15.4 40.3 7.3 42.7
Corporate..................... - - - - - - 126.8
-------- --------- -------- -------- -------- ------ ------
Total..................... $3,381.6 $25,900.1 $3,410.8 $1,825.3 $3,175.0 $505.7 $812.9
======== ========= ======== ======== ======== ====== ======
1996
Supplemental health
operations.................. $ 990.8 $ 1,891.9 $ 805.9 $ 66.6 $ 531.8 $ 81.2 $123.5
Annuity operations............ 858.6 12,421.8 77.6 939.6 638.9 95.1 59.1
Life operations............... 626.5 4,992.7 360.5 279.7 367.5 41.5 108.9
Individual and group
major medical............... 49.4 227.4 357.0 8.8 300.3 15.1 18.3
Other......................... 34.0 108.1 53.2 7.8 25.1 7.9 47.1
Corporate..................... - - - - - - 112.4
-------- --------- -------- -------- -------- ------ ------
Total..................... $2,559.3 $19,641.9 $1,654.2 $1,302.5 $1,863.6 $240.8 $469.3
======== ========= ======== ======== ======== ====== ======
1995
Supplemental health
operations.................. $ 571.9 $ 842.6 $ 756.9 $ 66.9 $ 525.6 $ 78.3 $126.2
Annuity operations............ 535.9 10,396.1 68.4 880.3 595.6 169.9 53.9
Life operations............... 220.9 2,102.2 222.4 176.9 234.1 38.6 61.1
Individual and group
major medical............... 54.7 144.2 352.0 9.5 300.8 13.1 12.6
Other......................... 38.3 120.3 65.3 9.0 36.8 7.6 42.1
Corporate..................... - - - - - - 140.5
-------- --------- -------- -------- -------- ------ ------
Total..................... $1,421.7 $13,605.4 $1,465.0 $1,142.6 $1,692.9 $307.5 $436.4
======== ========= ======== ======== ======== ====== ======
<FN>
(1) Includes insurance policy benefits, change in future policy benefits and
amounts added to annuity and financial product policyholder account
balances.
(2) Includes additional amortization related to gains on sales of investments.
(3) Includes interest expense on notes payable, interest expense on short-term
investment borrowings, change in future policy benefits related to realized
gains, amortization of goodwill and other operating costs and expenses.
</FN>
</TABLE>
107
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE IV
<TABLE>
<CAPTION>
Reinsurance
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Life insurance in force:
Direct............................................................ $136,711.4 $98,835.5 $36,040.7
Assumed........................................................... 4,198.7 3,659.3 562.8
Ceded............................................................. (36,765.6) (22,345.3) (2,820.3)
---------- ---------- ---------
Net insurance in force...................................... $104,144.5 $80,149.5 $33,783.2
========== ========= =========
Percentage of assumed to net................................ 4.0% 4.6% 1.7%
=== === ===
Premiums recorded as revenue for generally accepted accounting principles:
Direct............................................................ $3,162.8 $1,632.3 $1,422.1
Assumed........................................................... 290.3 65.8 6.1
Ceded............................................................. (499.0) (313.8) (72.6)
-------- -------- --------
Net premiums................................................ $2,954.1 $1,384.3 $1,355.6
======== ======== ========
Percentage of assumed to net................................ 9.8% 4.7% .4%
=== === ==
</TABLE>
108
<PAGE>
EXHIBIT INDEX
Annual Report on Form 10-K
of Conseco, Inc.
Exhibit
No. Document
2.4 Agreement and Plan of Merger dated as of May 19, 1995, by and
between CCP Insurance, Inc. and Conseco, Inc. was filed with
the Commission as Exhibit 2.4 to the Registrant's Report on
Form 8-K dated August 31, 1995, and is incorporated herein by
this reference.
2.5 Agreement and Plan of Merger dated as of March 11, 1996, by
and among Conseco, Inc., LPG Acquisition Company and Life
Partners Group, Inc. was filed with the Commission as Exhibit
2.5 to the Registrant's Report on Form 8-K dated March 11,
1996, and is incorporated herein by this reference.
2.6 Agreement and Plan of Merger dated as of August 25, 1996, by
and between the Registrant and American Travellers Corporation
was filed with the Commission as Exhibit 2.6 to the
Registrant's Report on Form 8-K dated August 25, 1996, and is
incorporated herein by this reference.
2.7 Agreement and Plan of Merger dated August 25, 1996, by and
among the Registrant, CAF Acquisition Company and Capitol
American Financial Corporation was filed with the Commission
as Exhibit 2.7 to the Registrant's Report on Form 8-K dated
August 25, 1996, and is incorporated herein by this reference.
2.8 Agreement and Plan of Merger dated as of September 25, 1996,
by and between the Registrant and Transport Holdings Inc. was
filed with the Commission as Exhibit 2.8 to the Registrant's
Report on Form 8-K dated September 25, 1996, and is
incorporated herein by this reference.
2.8.1 First Amendment to Agreement and Plan of Merger dated as of
November 7, 1996, by and between the Registrant and Transport
Holdings Inc. was filed with the Commission as Exhibit 2.8.1
to its Registration Statement on Form S-4, No. 333-14377 and
is incorporated herein by this reference.
2.9 Agreement and Plan of Merger dated as of December 15, 1996, by
and among the Registrant, Rock Acquisition Company and Pioneer
Financial Services, Inc. was filed with the Commission as
Exhibit 2.9 to the Registrant's Report on Form 8-K dated
December 15, 1996, and is incorporated herein by this
reference.
*3.1 Amended and Restated Articles of Incorporation of the
Registrant.
*3.2 Amended and Restated By-Laws of the Registrant.
4.8 Indenture dated as of February 18, 1993, between the
Registrant and Shawmut Bank Connecticut, National Association,
as Trustee, for the 8 1/8 percent Senior Notes due 2003, was
filed with the Commission as Exhibit 4.8 to the Registrant's
Annual Report on Form 10-K for 1992, and is incorporated
herein by this reference.
<PAGE>
Exhibit
No. Document
4.12 Indenture dated as of September 29, 1994 between ALHC Merger
Corporation and LTCB Trust Company and First Supplemental
Indenture dated as of September 29, 1994 between American Life
Holding Company and the Trustee for the 11 1/4% Senior
Subordinated Notes due 2004 were filed with the Commission as
Exhibit 4.12 to the Registrant's Report on Form 8-K dated
September 29, 1994, and are incorporated herein by this
reference.
4.13 Indenture dated as of December 15, 1994, between CCP
Insurance, Inc., and LTCB Trust Company, as Trustee, for the
$200,000,000 aggregate principal amount of 10 1/2% Senior
Notes due 2004 was filed with the Commission as Exhibit 4.13
to the Registrant's Annual Report on Form 10-K for 1995, and
is incorporated herein by this reference.
4.13.1 First Supplemental Indenture between Conseco, Inc., as Issuer,
and LTCB Trust Company as Trustee, dated as of August 31,
1995, was filed with the Commission as Exhibit 4.13.1 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1995, and is incorporated herein by this
reference.
4.14 Credit Agreement among the Registrant, Bank of America
National Trust and Savings Association, First Union National
Bank of North Carolina and Nationsbank, N.A. dated November
22, 1996 ("Credit Agreement"), was filed with the Commission
as Exhibit 4.17 to the Registrant's Report on Form 8-K dated
December 17, 1996, and is incorporated herein by this
reference.
4.14.1 First Amendment dated as of March 10, 1997 to Credit Agreement
was filed with the Commission as Exhibit 4.14.1 to the
Registrant's Report on Form 8-K dated April 1, 1997, and
is incorporated herein by this reference.
4.17.1 Subordinated Indenture, dated as of November 14, 1996, between
the Registrant and Fleet National Bank, as Trustee, was filed
with the Commission as Exhibit 4.17.1 to the Registrant's
Report on Form 8-K dated November 19, 1996, and is
incorporated herein by this reference.
4.17.2 First Supplemental Indenture, dated as of November 14, 1996,
between the Registrant and Fleet National Bank, as Trustee,
was filed with the Commission as Exhibit 4.17.2 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.3 9.16% Subordinated Deferrable Interest Debenture due 2006 was
filed with the Commission as Exhibit 4.17.3 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.4 Second Supplemental Indenture, dated as of November 22, 1996,
between Conseco, Inc. and Fleet National Bank, as Trustee was
filed with the Commission as Exhibit 4.17.1 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.17.5 8.70% Subordinated Deferrable Interest Debenture due 2026 was
filed with the Commission as Exhibit 4.17.4 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.17.6 Third Supplemental Indenture, dated as of March 26, 1997
between the Registrant and Fleet National Bank, as Trustee,
was filed with the Commission as Exhibit 4.17.6 to the
Registrant's Report on Form 8-K dated April 1, 1997, and is
incorporated herein by this reference.
4.17.7 8.796% Subordinated Deferrable Interest Debenture due 2027 was
filed with the Commission as Exhibit 4.17.7 to the
Registrant's Report on Form 8-K dated April 1, 1997, and
is incorporated herein by this reference.
<PAGE>
Exhibit
No. Document
4.18.1 Amended and Restated Declaration of Trust of Conseco Financing
Trust I, dated as of November 14, 1996, among Conseco, Inc.,
as sponsor, the Trustees named therein and the holders from
time to time of undivided beneficial interests in the assets
of Conseco Financing Trust I was filed with the Commission
as Exhibit 4.18.1 to the Registrant's Report on Form 8-K dated
November 19, 1996, and is incorporated herein by this
reference.
4.18.2 Global Certificate for Preferred Security of Conseco Financing
Trust I was filed with the Commission as Exhibit 4.18.2 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.18.3 Preferred Securities Guarantee Agreement, dated as of
November 19, 1996, between the Registrant and Fleet National
Bank was filed with the Commission as Exhibit 4.18.3 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.19.1 Amended and Restated Declaration of Trust of Conseco Financing
Trust II, dated as of November 22, 1996, among Conseco, Inc.,
as sponsor, the Trustees named therein and the holders from
time to time of undivided beneficial interests in the assets
of Conseco Financing Trust II was filed with the Commission as
Exhibit 4.19.1 to the Registrant's Report on Form 8-K dated
November 27, 1996, and is incorporated herein by this
reference.
4.19.2 Global Certificate for Preferred Security of Conseco Financing
Trust II was filed with the Commission as Exhibit 4.19.2 to
the Registrant's Report on Form 8-K dated November 27, 1996,
and is incorporated herein by this reference.
4.19.3 Preferred Securities Guarantee Agreement, dated as of November
27, 1996, between Conseco, Inc. and Fleet National Bank was
filed with the Commission as Exhibit 4.19.3 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.20 Indenture relating to the 6.5% Convertible Subordinated
Debentures due October 1, 2005 issued by American Travellers
Corporation was filed with the Commission as Exhibit 4(c) to
the Annual Report on Form 10-K of American Travellers
Corporation for the year ended December 31, 1995, and is
incorporated herein by this reference.
4.20.1 First Supplemental Indenture between the Registrant and
Firstar Bank of Minnesota, N.A. Trustee, as Trustee, relating
to the 6.5% Convertible Subordinated Debentures due October 1,
2005 was filed with the Commission as Exhibit 4.20.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and is incorporated herein by this
reference.
4.21.1 Amended and Restated Declaration of Trust of Conseco Financing
Trust III, dated as of March 26, 1997, among the Registrant,
as sponsor, the trustees named therein and the holders from
time to time of undivided beneficial interests in the assets
of Conseco Financing Trust III was filed with the Commission
as Exhibit 4.20.1 to the Registrant's Report on Form 8-K dated
April 1, 1997, and is incorporated herein by this reference.
4.21.2 Global Certificate for Capital Security of Conseco Financing
Trust III was filed with the Commission as Exhibit 4.20.2 to
the Registrant's Report on Form 8-K dated April 1, 1997, and
is incorporated herein by this reference.
<PAGE>
Exhibit
No. Document
4.21.3 Capital Securities Guarantee Agreement, dated as of April 1,
1997 between the Registrant and Fleet National Bank was filed
with the Commission as Exhibit 4.20.3 to the Registrant's
Report on Form 8-K dated April 1, 1997, and is incorporated
herein by this reference.
4.22.1 Senior Indenture, dated November 13, 1997, by and between the
Registrant and LTCB Trust Company, as Trustee (the "Senior
Indenture"), was filed with the Commission as Exhibit 4.1 to
Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-3, No. 333-27803, and is
incorporated herein by this reference.
*4.22.2 6.4% Note due February 10, 2003 issued under the Senior
Indenture (one of several identical notes aggregating $250
million).
4.23.1 Subordinated Indenture between the Registrant and The First
National Bank of Chicago, as Trustee, was filed with the
Commission as Exhibit 4.2 to the Registrant's Registration
Statement on Form S-3, No. 333-40423, and is incorporated
herein by this reference.
4.24.1 Amended and Restated Declaration of Trust of Conseco Financing
Trust IV was filed with the Commission as Exhibit 4.12 to the
Registrant's Registration Statement on Form S-3, No.
333-40423, and is incorporated herein by this reference.
4.24.2 Preferred Securities Guarantee of the Registrant for the
benefit of the holders of trust preferred securities of
Conseco Financing Trust IV was filed with the Commission as
Exhibit 4.13 to the Registrant's Registration Statement on
Form S-3, No. 333-40423, and is incorporated herein by
reference.
4.24.3 Purchase Contract Agreement between the Registrant and The
First National Bank of Chicago, as Purchase Contract Agent,
was filed with the Commission as Exhibit 4.20 to the
Registrant's Registration Statement on Form S-3, No.
333-40423, and is incorporated herein by reference.
4.24.4 Pledge Agreement among the Registrant, The Chase Manhattan
Bank, as Collateral Agent, and The First National Bank of
Chicago, as Purchase Contract Agent, was filed with the
Commission as Exhibit 4.21 to the Registrant's Registration
Statement on Form S-3, No. 333-40423, and is incorporated
herein by reference.
The Registrant agrees to furnish the Commission upon its
request a copy of any instrument defining the rights of
holders of long-term debt of the Company and its consolidated
subsidiaries.
<PAGE>
Exhibit
No. Document
10.1.2 Employment Agreement dated January 1, 1987, between the
Registrant and Stephen C. Hilbert was filed with the
Commission as Exhibit 10.1.2 to the Registrant's Annual Report
on Form 10-K for 1986, and Amendment No. 1 thereto were filed
with the Commission as Exhibit 10.1.2 to the Registrant's
Annual Report on Form 10-K for 1987; and are incorporated
herein by this reference.
10.1.3 Employment Agreement dated July 1, 1991, between the
Registrant and Rollin M. Dick was filed with the Commission as
Exhibit 10.1.3 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991, and is incorporated herein by
this reference.
10.1.3(a) Amendment No. 1 to Employment Agreement between the Registrant
and Rollin M. Dick was filed with the Commission as Exhibit
10.1.3(a) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and is incorporated herein
by this reference.
10.1.3(b) Amendment No.2 to Employment Agreement between the Registrant
and Rollin M. Dick was filed with the Commission as Exhibit
10.1.3(b) to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1997, and is incorporated herein
by this reference.
10.1.4 Employment Agreement dated July 1, 1991, between the
Registrant and Donald F. Gongaware was filed with the
Commission as Exhibit 10.1.4 to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 1991, and is
incorporated herein by this reference.
10.1.4(a) Amendment No. 1 to Employment Agreement between the Registrant
and Donald F. Gongaware was filed with the Commission as
Exhibit 10.1.4(a) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, and is incorporated
herein by this reference.
10.1.4(b) Amendment No. 2 to Employment Agreement between the Registrant
and Donald F. Gongaware was filed with the Commission as
Exhibit 10.1.4(b) to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1997, and is incorporated
herein by this reference.
10.1.9 Unsecured Promissory Note of Stephen C. Hilbert dated May 13,
1996 was filed with the Commission as Exhibit 10.1.9 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and is incorporated herein by this
reference.
10.1.10 Employment Agreement dated August 17, 1992, between the
Registrant and Ngaire E. Cuneo was filed with the Commission
as Exhibit 10.1.10 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1992, and is incorporated
herein by this reference.
10.1.10(a) Amendment No. 1 to Employment Agreement between the Registrant
and Ngaire E. Cuneo was filed with the Commission as Exhibit
10.1.10(a) to the Registrant's Report on Form 10-K for the
year ended December 31, 1996, and is incorporated herein by
this reference.
10.1.10(b) Amendment No. 2 to Employment Agreement between the Registrant
and Ngaire E. Cuneo was filed with the Commission as Exhibit
10.1.10(b) to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1997, and is incorporated herein
by this reference.
<PAGE>
Exhibit
No. Document
10.1.11 Employment Agreement dated September 8, 1997 between the
Registrant and John J. Sabl was filed with the Commission as
Exhibit 10.1.11 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1997, and is incorporated
herein by this reference.
10.8 The Registrant's Stock Option Plan was filed with the
Commission as Exhibit B to its definitive Proxy Statement
dated December 10, 1983; Amendment No. 1 thereto was filed
with the Commission as Exhibit 10.8.1 to its Report on Form
10-Q for the quarter ended June 30, 1985; Amendment No. 2
thereto was filed with the Commission as Exhibit 10.8.2 to its
Registration Statement on Form S-1, No. 33-4367; Amendment No.
3 thereto was filed with the Commission as Exhibit 10.8.3 to
the Registrant's Annual Report on Form 10-K for 1986;
Amendment No. 4 thereto was filed with the Commission as
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K
for 1987; Amendment No. 5 thereto was filed with the
Commission as Exhibit 10.8 to the Registrant's Report on Form
10-Q for the quarter ended September 30, 1991; and are
incorporated herein by this reference.
10.8.3 The Registrant's Cash Bonus Plan was filed with the Commission
as Exhibit 10.8.3 to the Registrant's Report on Form 10-Q for
the quarter ended March 31, 1989, and is incorporated herein
by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred
Compensation Program was filed with the Commission as Exhibit
10.8.4 to the Registrant's Annual Report on Form 10-K for
1992, and is incorporated herein by this reference.
10.8.6 Conseco Performance - Based Compensation Bonus Plan for
Executive Vice Presidents was filed with the Commission as
Exhibit B to the Registrant's definitive Proxy Statement dated
April 29, 1994, and is incorporated herein by this reference.
10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation Plan
was filed with the Commission as Exhibit A to the Registrant's
definitive Proxy Statement dated April 26, 1995, and is
incorporated herein by this reference.
10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus and
Deferred Compensation Program was filed with the Commission as
Exhibit 10.8.8 to the Registrant's Annual Report on Form 10-K
for 1994, and is incorporated herein by this reference.
10.8.9 Conseco 1994 Stock and Incentive Plan was filed as Exhibit A
to the Registrant's definitive Proxy Statement dated April 29,
1994 and is incorporated herein by this reference.
10.8.10 Amendment Number 2 to the Amended and Restated Conseco Stock
Bonus and Deferred Compensation Program was filed with the
Commission as Exhibit 10.8.10 to the Registrant's Annual
Report on Form 10-K for 1995 and is incorporated herein by
reference.
*10.8.11 Amended and Restated Director, Executive and Senior Officer
Stock Purchase Plan.
10.8.12 Guaranty regarding Director, Executive and Senior Officer
Stock Purchase Plan was filed with the Commission as Exhibit
10.8.12 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1996, and is incorporated herein by
this reference.
10.8.13 Form of Promissory Note payable to the Registrant relating to
the Registrant's Director, Executive and Senior Officer Stock
Purchase Plan was filed with the Commission as Exhibit 10.8.13
to the Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996, and is incorporated herein by this
reference.
*10.8.14 Conseco, Inc. Amended And Restated 1997 Non-qualified Stock
Option Plan.
<PAGE>
Exhibit
No. Document
10.23 Aircraft Lease Agreement dated December 22, 1988, between
General Electrical Capital Corporation and Conseco Investment
Holding Company was filed with the Commission as Exhibit 10.23
to the Registrant's Annual Report on Form 10-K for 1988, and
is incorporated herein by this reference.
10.23.1 Amendment to Aircraft Lease Agreement dated December 22, 1988,
between General Electric Capital Corporation and Conseco
Investment Holding Company was filed with the Commission as
Exhibit 10.23.1 to the Registrant's Annual Report on Form 10-K
for 1993, and is incorporated herein by this reference.
10.24 Aircraft Lease Agreement dated April 26, 1991 between General
Electric Capital Corporation and Conseco Investment Holding
Company was filed with the Commission as Exhibit 10.29 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1991, and is incorporated herein by this
reference.
10.24.1 Amendment to Aircraft Lease Agreement dated April 26, 1991,
between General Electric Capital Corporation and Conseco
Investment Holding Company was filed with the Commission as
Exhibit 10.24.1 to the Registrant's Annual Report on Form 10-K
for 1993, and is incorporated herein by this reference.
10.25 Aircraft Lease Purchase Agreement dated December 28, 1993,
between MetLife Capital Corporation and Conseco Investment
Holding Company was filed with the Commission as Exhibit 10.25
to the Registrant's Annual Report on Form 10-K for 1993, and
is incorporated herein by this reference.
10.31 Helicopter Lease Agreement dated April 9, 1992 between General
Electric Capital Corporation and Conseco Investment Holding
Company was filed with the Commission as Exhibit 10.31 to the
Registrant's Report on Form 10-Q for the quarter ended June
30, 1992, and is incorporated herein by this reference.
10.32 Aircraft Lease Agreement dated October 6, 1993, between
General Electric Capital Corporation and Conseco Investment
Holding Company and the associated Assignment Agreement dated
October 25, 1993, between General Electric Capital Corporation
and Nationsbanc Leasing Corporation were filed with the
Commission as Exhibit 10.32 to the Registrant's Annual Report
on Form 10-K for 1993, and are incorporated herein by this
reference.
10.36 Lease dated as of December 18, 1992 between LaSalle National
Trust, N.A. as trustee and Bankers Life and Casualty Company
relating to the lease of executive office and administration
space by BLH was filed with the Commission as Exhibit 10.17 to
Amendment No. 1 to BLH's Registration Statement on Form S-1,
No. 33-55026, and is incorporated herein by this reference.
10.37 Lease dated as of August 20, 1993 between REO Holding
Corporation and Bankers Life and Casualty Company relating the
lease of warehouse space by BLH was filed with the Commission
as Exhibit 10.14 to BLH's Report on Form 10-K for 1994, and is
incorporated herein by this reference.
*12.1 Computation of Ratio of Earnings to Fixed Charges, Preferred
Dividends and Distributions on Company-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts.
*21 List of Subsidiaries.
<PAGE>
Exhibit
No. Document
*23 Consent of Independent Accountants.
*27 Financial data schedule for Conseco, Inc. dated December 31,
1997
*Filed herewith
Compensation Plans and Arrangements
10.1.2 Employment Agreement dated January 1, 1987, between the
Registrant and Stephen C. Hilbert and Amendment No. 1 thereto.
10.1.3 Employment Agreement dated July 1, 1991, between the
Registrant and Rollin M. Dick.
10.1.3(a) Amendment No. 1 to Employment Agreement between the Registrant
and Rollin M. Dick.
10.1.3(b) Amendment No. 2 to Employment Agreement between the Registrant
and Rollin M. Dick.
10.1.4 Employment Agreement dated July 1, 1991, between the
Registrant and Donald F. Gongaware.
10.1.4(a) Amendment No. 1 to Employment Agreement between the Registrant
and Donald F. Gongaware.
10.1.4(b) Amendment No. 2 to Employment Agreement between the Registrant
and Donald F. Gongaware.
10.1.9 Unsecured Promissory Note of Stephen C. Hilbert.
10.1.10 Employment Agreement dated August 17, 1992, between the
Registrant and Ngaire E. Cuneo.
10.1.10(a) Amendment No. 1 to Employment Agreement between the Registrant
and Ngaire E. Cuneo.
10.1.10(b) Amendment No. 2 to Employment Agreement between the Registrant
and Ngaire E. Cuneo.
10.11 Employment Agreement between the Registrant and John J. Sabl.
10.8 The Registrant's Stock Option Plan; Amendment No. 1 thereto;
Amendment No. 2 thereto; Amendment No. 3 thereto; Amendment
No. 4 thereto; and Amendment No. 5 thereto.
10.8.3 The Registrant's Cash Bonus Plan.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred
Compensation Program.
10.8.6 Conseco Performance - Based Compensation Bonus Plan for
Executive Vice Presidents.
10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation Plan.
10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus and
Deferred Compensation Program.
10.8.9 Conseco 1994 Stock and Incentive Plan.
10.8.10 Amendment No. 2 to the Amended and Restated Stock Bonus and
Deferred Compensation Program.
*10.8.11 Amended and Restated Director, Executive and Senior Officer
Stock Purchase Plan.
10.8.12 Guaranty regarding Director, Executive and Senior Officer
Stock Purchase Plan.
10.8.13 Form of Promissory Note Payable to the Registrant relating to
the Registrant's Director, Executive and Senior Officer Stock
Purchase Plan.
*10.8.14 Conseco, Inc. Amended and Restated 1997 Non-qualified Stock
Option Plan.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CONSECO, INC.
The undersigned officer of Conseco, Inc. (hereinafter referred to as the
"Corporation") existing pursuant to the provisions of the Indiana Business
Corporation Law, as amended (hereinafter referred to as the "Act"), desiring to
give notice of certain corporate action effectuating amendment of provisions of
its Articles of Incorporation, by the adoption of new Amended and Restated
Articles of Incorporation, superseding and replacing all Articles of
Incorporation, and amendments and restatements thereto heretofore existing,
hereby certifies as follows:
ARTICLE I
Text of the Amended and Restated Articles
The exact text of the entire Articles of Incorporation of the Corporation,
as amended and restated (hereinafter referred to as the "Amended Articles"), is
as follows:
ARTICLE I
NAME
The name of the Corporation is Conseco, Inc.
ARTICLE II
Purpose
The purposes for which the Corporation is formed are: to transact for
pecuniary profit any lawful business or businesses as permitted by the Act.
ARTICLE III
Period of Existence
The period during which the Corporation shall continue is perpetual.
<PAGE>
ARTICLE IV
Resident Agent and Principal Office
Section 1. Resident Agent. The name and address of the Corporation's
Resident Agent for service of process is John J. Sabl, 11825 N. Pennsylvania
Street, Carmel, Indiana 46032.
Section 2. Principal Office. The post office address of the principal
office of the Corporation is 11825 N. Pennsylvania Street, Carmel, Indiana
46032.
ARTICLE V
Terms of Authorized Shares
Section 1. Designation. The authorized shares of the Corporation shall
be divided into two (2) classes, as follows:
(a) 1,000,000,000 shares of Common Stock without par value. The shares
of Common Stock shall be identical with each other in all respects.
(b) 20,000,000 shares of Preferred Stock without par value, which
shares may, in the discretion of the Board of Directors of the Corporation, be
issued in one or more classes or series having differing rights, preferences,
restrictions and limitations. All shares of Preferred Stock of the same series
shall be identical with each other in all respects.
The Preferred Stock and any class or series thereof shall possess such
relative rights, preferences, limitations and restrictions as may be established
by resolution of the Board of Directors of the Corporation prior to the issuance
thereof, which is vested to the fullest extent permitted by law with authority
to fix the relative rights, preferences, qualifications, limitations or
restrictions for the Preferred Stock or any class or any series thereof,
including without limiting the generality of the foregoing, the following:
(i) The number of shares which shall initially constitute
each class or series of a class of Preferred Stock;
(ii) The rate or rates and the time or times at which
dividends and other distributions on the shares of each class or each
series thereof shall be paid, the relationship or priority of such
dividends to those
2
<PAGE>
payable on Common Stock or to other classes or series of Preferred
Stock, and whether or not any such dividends shall be cumulative;
(iii) The amount payable on the shares of each class or series
in the event of the voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, and the relative
priorities, if any, to be accorded such payments in liquidation;
(iv) The terms and conditions upon which either the
Corporation may exercise a right to redeem shares of each class or
series or upon which the holder of such shares may exercise a right to
require redemption of such Shareholder's Preferred Stock, including any
premiums or penalties applicable to exercise of such rights;
(v) Whether or not a sinking fund shall be created for the
redemption of the shares of a class or series, and the terms and
conditions of any such fund;
(vi) Rights, if any, to convert any shares of Preferred Stock
either into shares of Common Stock or into other classes or series of
Preferred Stock and the prices, premiums or penalties, ratios and other
terms applicable to any such conversion;
(vii) Restrictions on acquisition, rights of first refusal or
other limitations on transfer as may be applicable to any class or
series, including any series intended to be offered to a special
class or group; and
(viii) Any other relative rights, preferences, limitations,
qualifications or restrictions on the Preferred Stock or any class or
series of such shares, including rights and remedies in the event of
default in connection with dividends, other distributions or
redemptions.
Section 2. Preemptive Rights. No holder of any share of capital stock
of the Corporation shall have any preemptive rights.
3
<PAGE>
Section 3. Issuance of Shares. The shares of capital stock of the
Corporation may be issued by the Corporation from time to time in the discretion
of the Board of Directors to such persons for such consideration and upon such
terms and conditions as it may determine, subject to the provisions of the Act
and these Amended Articles. Such of its shares as the Corporation may reacquire
may be resold or otherwise disposed of upon such terms and conditions and for
such consideration as the Board of Directors may determine from time to time.
The Board of Directors may from time to time grant or issue options, warrants or
rights to purchase shares of capital stock of the Corporation upon such terms
and conditions and for such consideration as it shall determine, subject to the
provisions of the Act.
Section 4. Dissolution Distribution on Common Stock. In the event of
any voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, the holders of the outstanding shares of Common Stock shall be
entitled, after due payment or provisions for payment of the debts and other
liabilities of the Corporation, and after and subject to such distributions as
may be required with respect to any class or series of Preferred Stock
outstanding, to share ratably, share for share, in the remaining net assets of
the Corporation.
ARTICLE VI
Directors
Section 1. Number of Directors. The number of director(s) may be from
time to time fixed by the Bylaws of the Corporation at any number. In the
absence of a Bylaw fixing the number of directors, the number shall be seven
(7).
Section 2. Names and Post Office Addresses of the Board of Directors.
The names and post office addresses of the Board of Directors of the Corporation
holding office at the time of the adoption of these Amended Articles are:
<TABLE>
<CAPTION>
Number and
Name Street or Building City State Zip Code
- ---- ------------------ ---- ----- --------
<S> <C> <C> <C> <C>
Stephen C. Hilbert 11825 N. Pennsylvania St., Carmel, Indiana 46032
Rollin M. Dick 11825 N. Pennsylvania St., Carmel, Indiana 46032
Donald F. Gongaware 11825 N. Pennsylvania St., Carmel, Indiana 46032
Ngaire E. Cuneo 11825 N. Pennsylvania St., Carmel, Indiana 46032
4
<PAGE>
John M. Mutz 11825 N. Pennsylvania St., Carmel, Indiana 46032
M. Phil Hathaway 11825 N. Pennsylvania St., Carmel, Indiana 46032
David R. Decatur 11825 N. Pennsylvania St., Carmel, Indiana 46032
James D. Massey 11825 N. Pennsylvania St., Carmel, Indiana 46032
Dennis E. Murray, Sr. 11825 N. Pennsylvania St., Carmel, Indiana 46032
</TABLE>
Section 3. Qualifications of Directors (if any). Qualifications for
the directors, if any, shall be set out in the Bylaws.
Section 4. Staggered Terms of Directors Authorized. At any time as such
may be permitted under the laws of the State of Indiana applicable to and
governing the Corporation, the Bylaws of the Corporation may provide for the
staggering of the terms of office of the Directors of the Corporation by
dividing the total number of Directors into groups and the election of the
groups in alternate years for terms of more than one year. The number of groups,
lengths of terms and other provisions for such staggering may be in any manner
permitted by the laws of the State of Indiana, as such may be amended from time
to time.
Section 5. Amendment of Section 4. Notwithstanding any provisions of
these Amended Articles to the contrary, the provisions of Section 4 above of
this Article VI may not be amended, altered, changed or repealed, nor may any
provision inconsistent with said provisions be added to these Amended Articles
or to the Bylaws of the Corporation, except upon the affirmative vote of the
holders of not less than 80% of the total voting power of all outstanding shares
of the Voting Stock of the Corporation (as hereinafter defined in Article VIII,
Section 5) voting as a single class.
ARTICLE VII
President and Secretary
The names and post office addresses of the President and Secretary of
the Corporation at the time of filing these Amended Articles are:
<TABLE>
<CAPTION>
Number and
Name Street or Building City State Zip Code
---- ------------------ ---- ----- --------
<S> <C> <C> <C> <C>
Stephen C. Hilbert 11825 N. Pennsylvania St., Carmel, Indiana 46032
President
5
<PAGE>
John J. Sabl 11825 N. Pennsylvania St., Carmel, Indiana 46032
Secretary
</TABLE>
ARTICLE VIII
Provisions for Regulation of Business
and Conduct of Affairs of Corporation
Section 1. Bylaws. Bylaws will be adopted by the Directors from time
to time.
Section 2. Place of Meetings. Meetings of the Shareholders shall be
held at such time or place as set out in the calls, notices or waivers for such
meetings and may be either inside or outside the State of Indiana.
Section 3. Purchase of Corporate Stock. By resolution of Directors to
the extent required by any purchase of the Corporation's own stock, such
purchase may be made out of unreserved and unrestricted capital surplus
available therefor.
Section 4. Distribution Out of Capital Surplus. The Directorsmay from
time to time distribute to Shareholders out of capital surplus a portion of the
Corporation's assets, in cash or property, as provided by the Act.
Section 5. Minimum Price Provisions for Certain Business Combinations.
This Section 5 shall govern the approval of certain business combination
transactions involving the Corporation. Each capitalized term used in this
Section 5 shall have the meaning ascribed to it in Clause (d) hereof.
(a) Special Business Combination Transactions. Except as provided in
subsection (b) of this Section 5, holders of Voting Stock shall not be entitled
to vote on a Special Business Combination Transaction and such Special Business
Combination Transaction shall not be effected unless the aggregate amount of the
cash and the fair value of any consideration other than cash to be received per
share by holders of the Corporation's Common Stock in such Special Business
Combination Transaction shall be at least equal to the highest per share price
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees and adjusted for any intervening stock splits and stock dividends) paid in
order to acquire any shares of Common Stock beneficially owned by the Related
Person, and the aggregate amount of the cash and the fair value of any
consideration other than cash to be received per share by holders of any class
or series of the Corporation's Preferred Stock in such Special Business
Combination
6
<PAGE>
Transaction shall be at least equal to the highest per share price (including
any brokerage commissions, transfer taxes, and soliciting dealers' fees and
adjusted for any intervening stock splits and stock dividends) paid in order to
acquire any shares of such class or series of Preferred Stock beneficially owned
by the Related Person. In the event of a Special Business Combination
Transaction in which the Corporation survives, the phrase "any consideration
other than cash to be received" as used in this subsection (a) of Section 5
shall include the shares of Common Stock or Preferred Stock retained by the
holders thereof.
(b) Exceptions for Approval by Continuing Directors. The provisions
of subsection (a) of this Section 5 shall not apply to any Special Business
Combination Transaction if such Special Business Combination Transaction shall
have been approved by two-thirds of the Continuing Directors.
(c) Definitions. For purposes of this Section 5, the following
definitions shall apply:
(1) The term "Special Business Combination Transaction" shall
mean:
(i) any merger or consolidation of the Corporation or any
Subsidiary with (x) any Related Person or (y) any other corporation or
entity (whether or not itself a Related Person) which is, or after each
merger or consolidation would be, an Affiliate of a Related Person; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or in a series of transactions)
to or with any Related Person or any Affiliate of any Related Person of
all or a Substantial Part of the assets of the Corporation (including,
without limitation, any securities of a Subsidiary) or any Subsidiary;
or
(iii) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on behalf of a Related
Person or any Affiliate of a Related Person; or
(iv) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or in a series of related transactions)
of any securities of the
7
<PAGE>
Corporation or any Subsidiary to a Related Person, or any Affiliate of
a Related Person, in exchange for cash, securities or other property
(or a combination thereof); or
(v) any reclassification of securities (including any reverse
stock split), or recapitalization or reorganization of the Corporation,
or any merger or consolidation of the Corporation with any of its
Subsidiaries, or any self tender offer for or repurchase of securities
of the Corporation or any Subsidiary by the Corporation or any
Subsidiary, or any other transaction (whether or not with or into or
otherwise involving a Related Person) which in any such case has the
effect, directly or indirectly, of increasing the proportionate shares
of the outstanding shares of any class or series of stock or securities
convertible into stock of the Corporation or any Subsidiary which is
directly or indirectly beneficially owned by any Related Person or any
Affiliate of any Related Person.
(2) The term "Substantial Part" (as distinguished from the phrase "all
or substantially all") shall mean more than 10% of the book value of the total
assets of the person or entity in question, as of the end of its most recent
fiscal year ending prior to the time of the determination.
(3) The term "person" shall mean any individual, firm, corporation,
partnership, group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as in effect on April 23, 1986) or other entity.
(4) The term "Related Person" shall mean any person (other than the
Corporation or Subsidiary or any employee benefit plan of the Corporation or any
Subsidiary) who or which, as of the date on which such determination is made:
(i) is the beneficial owner, directly or indirectly,
of more than 10 percent of the combined voting power of the
then outstanding shares of Voting Stock; or
(ii) is an Affiliate of the Corporation and at any
time within the two-year period immediately prior thereto was
the beneficial owner, directly or
8
<PAGE>
indirectly, of 10 percent or more of the combined voting power of the
then outstanding shares of Voting Stock; or
(iii) which is an assignee of or has otherwise succeeded to
the beneficial ownership of any shares of Voting Stock that were at any
time within the two-year period immediately prior thereto beneficially
owned by a Related Person, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
utilizing the facilities of a national securities exchange, occurring
in the national over-the-counter market or involving a public
distribution.
(5) A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates
has (a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (b) the right to vote or direct the vote pursuant to any agreement,
arrangement or understanding; or
(iii) which is beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
(6) For the purposes of determining whether a person is a Related
Person pursuant to subsection (c)(4) of this Section 5, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of subsection (c)(5) of this Section 5 but shall not include any
other shares of Voting Stock that may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
9
<PAGE>
(7) The terms "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934.
(8) "Subsidiary" shall mean any corporation more than 50 percent of
whose outstanding stock having ordinary voting power in the election of
directors is owned, directly or indirectly, by the Corporation or by a
Subsidiary or by the Corporation and one or more Subsidiaries; provided,
however, that for the purposes of the definition of Related Person set forth in
subsection (c)(4) of this Section 5, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(9) "Continuing Director" shall mean any director who (i) was a member
of the Corporation's Board of Directors on April 23, 1986, or (ii) was
designated (before such person's initial election as a Director) by a majority
of the Continuing Directors as a Continuing Director, or (iii) with respect to a
Special Business Combination Transaction, was a member of the Board of Directors
immediately prior to the date on which any Related Person involved, either
directly or through an Affiliate or Associate, in such Special Business
Combination Transaction first became a Related Person.
(10) The term "Voting Stock" shall mean all outstanding shares of
capital stock of all classes and series of the Corporation entitled to vote
generally in the election of Directors of the Corporation, in each case voting
together as a single class (it being understood that for purposes of this
Section 5 each share of the Voting Stock shall have the number of votes granted
to it pursuant to Article V of these Amended Articles).
(d) Determinations by Continuing Directors. A majority of the
Continuing Directors shall have the power and duty to determine, on the basis of
information known to them after reasonable inquiry, all facts necessary to
determine compliance with this Section 5, including, without limitation:
(1) whether a person is a Related Person;
(2) the number of shares of Voting Stock beneficially owned by any
person;
(3) whether a person is an Affiliate or Associate of another
person; and
10
<PAGE>
(4) the fair value of any consideration other than cash to be
received by holders of shares of any class or series of Voting
Stock in a Special Business Combination Transaction.
The good faith determination of a majority of the Continuing Directors
on such matters shall be conclusive and binding for all purposes of this Section
5.
(e) Amendment of Section 5. Notwithstanding any provision of these
Amended Articles to the contrary, the provisions set forth in Section 5 of
Article VIII may not be amended, altered, changed or repealed, nor may any
provision inconsistent with said provisions be added to these Amended Articles
or to the Bylaws of the Corporation, except upon the affirmative vote of the
holders of not less than 80% of the total voting power of all outstanding shares
of the Voting Stock of the Corporation voting as a single class.
ARTICLE IX
Designations, Rights and Preferences of
Series E Preferred Stock
The designations, rights, preferences, limitations and restrictions of
the shares of Preferred Stock, without par value, to be designated as Series E
Redeemable Preferred Stock (in addition to those set forth elsewhere in these
Amended Articles) are hereby fixed as follows:
Section 1. Designation; Number of Shares; Stated Value. Ninety Thousand
(90,000) shares of Preferred Stock shall be designated Series E Redeemable
Preferred Stock (hereinafter referred to as the "Series E Preferred Stock").
Shares of the Series E Preferred Stock shall have a stated value of $10,000 per
share.
Section 2. Dividends.
(a) The holders of the shares of Series E Preferred Stock shall be
entitled to receive cumulative cash dividends, when and as declared by the Board
of Directors out of funds legally available therefor, at a rate of $400.00 per
share per annum and no more, before any dividend or distribution in cash or
other property (other than dividends or distributions payable in stock ranking
junior to the Series E Preferred Stock as to dividends or upon liquidation,
dissolution or winding-up) on any class or series of stock of the Corporation
ranking junior to the Series E Preferred Stock as to dividends or upon
liquidation, dissolution or winding-up shall be declared or paid or set apart
for
11
<PAGE>
payment.
(b) Dividends on the Series E Preferred Stock shall be declared by the
Board of Directors on or prior to December 31 of each calendar year and payable
on March 1 of the next calendar year, commencing March 1, 1995 (each such date
being hereinafter individually a "Dividend Payment Date" and collectively the
"Dividend Payment Dates"), except that if any such Dividend Payment Date is a
Saturday, Sunday or legal holiday then such dividend shall be payable on the
first immediately succeeding calendar day which is not a Saturday, Sunday or
legal holiday, to holders of record as they appear on the books of the
Corporation on December 31 of the year preceding such Dividend Payment Date or
such other date as may be determined by the Board of Directors. Dividends in
arrears may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to holders of record on such date as may be fixed by the
Board of Directors of the Corporation. Dividends payable on the Series E
Preferred Stock for the initial dividend period and for any period less than a
yearly period shall be computed on the basis of a 360-day year of twelve 30-day
months.
(c) Dividends on the Series E Preferred Stock shall be cumulative and
shall accrue from and after December 31, 1993, whether or not declared by the
Board of Directors. Accruals of dividends shall not bear interest.
(d) No dividend may be declared on any other class or series of stock
ranking on a parity with the Series E Preferred Stock as to dividends in respect
of any dividend period unless there shall also be or have been declared on the
Series E Preferred Stock like dividends ratably in proportion to the respective
annual dividend rates fixed therefor.
Section 3. Redemption.
(a) The Corporation, at its sole option, may redeem shares of the
Series E Preferred Stock, in whole or in part, at any time or from time to time,
at the stated value, plus in each case accrued and unpaid dividends thereon to
the date fixed for redemption (the total sum so payable on any such redemption
being herein referred to as the "redemption price"). In the case of the
redemption of a part only of the shares of the Series E Preferred Stock at the
time outstanding, the shares to be so redeemed shall be selected by lot, pro
rata (as nearly as may be), or in such other equitable manner as the Board of
Directors may determine.
12
<PAGE>
(b) Notice of any redemption pursuant to this Section 3 shall be mailed
at least 30, but not more than 60, days in advance of the date designated for
such redemption (herein called the "redemption date") to the holders of record
of shares of the Series E Preferred Stock so to be redeemed at their respective
addresses as the same shall appear on the books of the Corporation; but no
failure to mail such notice to particular shareholders or any defect therein or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of the Series E Preferred Stock. In order to facilitate
the redemption of shares of the Series E Preferred Stock, the Board of Directors
may fix a record date for the determination of holders of shares of the Series E
Preferred Stock to be redeemed not more than 60 days prior to the redemption
date. Each such notice shall state: (1) the redemption date; (2) the number of
shares of Series E Preferred Stock to be redeemed and, if less than all the
shares held by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (3) the redemption price; (4) the place or places
where certificates for such shares are to be surrendered for payment of the
redemption price; and (5) that dividends on the shares to be redeemed will cease
to accrue on such redemption date. If less than all the shares represented by
any such surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(c) The Corporation shall, on or prior to the date fixed for redemption
of any shares, but not earlier than 45 days prior to the date fixed for
redemption, deposit with a redemption agent selected by the Board of Directors
of the Corporation, as a trust fund, a sum sufficient to redeem the shares
called for redemption, with irrevocable instructions and authority to such
redemption agent to give or complete the notice of redemption thereof and to pay
the respective holders of such shares, as evidenced by a list of such holders
certified by an officer of the Corporation, the redemption price upon surrender
of their respective share certificates. Such deposit shall be deemed to
constitute full payment of such shares to their holders; and from and after the
date of such deposit, notwithstanding that any certificates for such shares
shall not have been surrendered for cancellation, the shares represented thereby
shall no longer be deemed outstanding, the rights to receive dividends and
distributions shall cease to accrue from and after the redemption date, and all
rights of the holders of the shares of the Series E Preferred Stock called for
redemption, as shareholders of the Corporation with respect to such shares,
shall cease and terminate, except the right to receive the redemption price,
without interest, upon the surrender of their respective certificates. In case
the holders of any shares shall not, within six years after such deposit, claim
the amount deposited for redemption thereof, such
13
<PAGE>
redemption agent shall, upon demand, pay over to the Corporation the balance of
such amount so deposited. Thereupon, such transfer agent or other redemption
agent shall be relieved of all responsibility to the holders thereof and the
sole right of such holders shall be as general creditors of the Corporation. Any
interest accrued on any funds so deposited shall belong to the Corporation, and
shall be paid to it from time to time on demand.
Section 4. No Conversion Rights. The holders of shares of Series E
Preferred Stock shall not have the right to convert such shares into any other
shares of capital stock of the Corporation.
Section 5. Voting. The shares of the Series E Preferred Stock shall not
have any voting powers, either general or special, except as set forth in this
Amended and Restated Certificate or as otherwise provided by law.
Section 6. Liquidation Rights. Upon the dissolution, liquidation or
winding-up of the Corporation, whether voluntary or involuntary, the holders of
the shares of the Series E Preferred Stock shall be entitled to receive, before
any payment or distribution of the assets of the Corporation or proceeds thereof
(whether capital or surplus) shall be made to or set apart for the holders of
the Common Stock or any other class or series of stock ranking junior to the
Series E Preferred Stock upon liquidation, dissolution or winding-up, the amount
of $10,000 per share, plus a sum equal to all dividends on such shares (whether
or not earned or declared) accrued and unpaid thereon to the date of final
distribution, but such holders shall not be entitled to any further payment. If,
upon any liquidation, dissolution or winding-up of the Corporation, the assets
of the Corporation, or proceeds thereof, distributable among the holders of
shares of the Series E Preferred Stock and any other class or series of
Preferred Stock ranking on a parity with the Series E Preferred Stock as to
payments upon liquidation, dissolution or winding-up shall be insufficient to
pay in full the preferential amount aforesaid, then such assets or the proceeds
thereof shall be distributed among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were paid in full. For the purposes of this Section 6, the voluntary
sale, conveyance, lease, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all the property or
assets of the Corporation to, or a consolidation or merger of the Corporation
with, one or more other corporations (whether or not the Corporation is the
corporation surviving such consolidation or merger) shall not be deemed to be a
liquidation, dissolution or winding-up, voluntary or involuntary.
14
<PAGE>
Section 7. No Purchase, Retirement or Sinking Fund. The shares of the
Series E Preferred Stock shall not be subject to the operation of any purchase,
retirement or sinking fund.
Section 8. Status. Shares of the Series E Preferred Stock which have
been issued and reacquired in any manner by the Corporation (excluding, until
the Corporation elects to retire them, shares which are held as treasury shares,
but including shares redeemed and shares purchased and retired) shall, upon
compliance with any applicable provisions of the Indiana Business Corporation
Law, have the status of authorized and unissued shares of Preferred Stock and
may be reissued as a part of a new series of Preferred Stock to be established
by the Board of Directors or as part of any other series of Preferred Stock the
terms of which do not prohibit such reissue.
Section 9. Priority. The Common Stock of the Corporation shall rank
junior to and the Cumulative Convertible Preferred Stock of the Corporation
shall rank on a parity with the Series E Preferred Stock as to dividends and
distribution of assets upon liquidation, dissolution or winding-up.
Section 10. Special Rights on Default.
(a) If at any time the Corporation shall have failed to pay dividends
in full on the Series E Preferred Stock, thereafter and until dividends in full,
including all accumulated and unpaid dividends to the next preceding Dividend
Payment Date on the Series E preferred Stock outstanding, shall have been
declared and set apart for payment or paid, the Corporation shall not redeem any
Preferred Stock, by operation of any sinking fund or otherwise, including shares
of Series E Preferred Stock, unless all then outstanding shares of Preferred
Stock are redeemed, and neither the Corporation nor any subsidiary may purchase
any shares of Preferred Stock, including shares of Series E Preferred Stock, and
neither the Corporation nor any subsidiary may redeem or purchase any shares of
stock subordinate to the shares of Series E Preferred Stock in respect of
dividends or distribution of assets upon liquidation, provided that nothing
shall prevent the Corporation from completing the purchase or redemption of
shares of Preferred Stock for which a purchase contract was entered into, or
notice of redemption of which was initially given, prior to such default.
(b) Whenever, at any time or times, dividends payable on the shares of
Series E Preferred Stock shall be in arrears in an amount equal to at least two
full annual dividends on the shares at the time outstanding, the holders of the
outstanding shares of Series E
15
<PAGE>
Preferred Stock shall have the exclusive right, voting separately as a class
with holders of shares of any one or more other series of Preferred Stock
ranking on a parity with Series E Preferred Stock either as to dividends or the
distribution of assets upon liquidation, dissolution or winding-up and upon
which like voting rights have been conferred and are exercisable, to elect two
directors of the Corporation at the Corporation's next annual meeting of
shareholders and at each subsequent annual meeting of shareholders. At meetings
for election of such directors, the presence, in person or by proxy, of the
holders of a majority of the outstanding shares of Series E Preferred Stock
(together with the holders of shares of any one or more other series of
Preferred Stock ranking on a parity with respect to the election of such
additional directors) shall be required and be sufficient to constitute a quorum
of such class for the election of such directors. At meetings for election of
such directors or adjournments thereof, (1) the absence of a quorum of Series E
Preferred Stock (together with the holders of shares of any one or more other
series of Preferred Stock ranking on a parity with respect to the election of
such additional directors) shall not prevent the election of the directors to be
elected otherwise than pursuant to this subsection (b), and the absence of a
quorum of the holders of stock other than holders of Series E Preferred Stock
(together with the holders of shares of any one or more other series of
Preferred Stock ranking on a parity with respect to the election of such
additional directors) shall not prevent the election of the directors to be
elected pursuant to this subsection (b), and (2) in the absence of such quorum
either of holders of Series E Preferred Stock or of holders of stock other than
Series E Preferred Stock, or both, a majority of the holders, present in person
or by proxy, of the class or classes of stock which lack a quorum shall have a
power to adjourn the meeting for the election of directors whom they are
entitled to elect, from time to time without notice other than announcement at
the meeting, until a quorum shall be present. Upon the vesting of such right of
the holders of Series E Preferred Stock, the maximum authorized number of
members of the Board of Directors shall automatically be increased by two and
the two vacancies so created shall be filled by vote of the holders of the
outstanding shares of Series E Preferred Stock (together with the holders of
shares of any one or more other series of Preferred Stock ranking on a parity
with respect to the election of such additional directors) as herein set forth.
The right of the holders of Series E Preferred Stock, voting separately as a
class, to elect (together with the holders of shares of any one or more other
series of Preferred Stock ranking on a parity with respect to the election of
such additional directors) members of the Board of Directors of the Corporation
as aforesaid shall continue until such time as all dividends in arrears on this
Series E Preferred Stock shall have been
16
<PAGE>
paid in full, at which time such right shall immediately terminate, except as
herein or by law expressly provided, subject to revesting in the event of each
and every subsequent default of the character above mentioned.
Each director elected by the holders of shares of Series E Preferred
Stock shall continue to serve as such director until such time as all dividends
in arrears on the Series E Preferred Stock shall have been paid in full, at
which time the term of office of all persons elected as directors by the holders
of shares of Series E Preferred Stock shall immediately terminate and the number
of members of the Board of Directors of the Corporation shall be reduced
accordingly. If the office of any director elected by the holders of Series E
Preferred Stock voting as a class becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office, or otherwise,
the remaining director elected by the holders of Series E Preferred Stock voting
as a class may choose a successor who shall hold office for the unexpired term
in respect of which such vacancy occurred. Whenever the term of office of the
directors elected by the holders of Series E Preferred Stock as provided in this
subsection (b) shall have expired, the number of directors shall be such number
as may be provided for in the Bylaws irrespective of any increase made pursuant
to the provisions of this subsection (b).
Section 11. Relative Rights of Series E Preferred Stock. So long as any
of the Series E Preferred Stock is outstanding, the Corporation will not:
(a) Declare, or pay, or set apart for payment, any dividends (other
than dividends or distributions payable in stock ranking junior to the Series A
Preferred Stock as to dividends or upon liquidation, dissolution or winding-up)
or make any distribution in cash or other property on any other class or series
of stock of the Corporation ranking junior to the Series E Preferred Stock
either as to dividends or upon liquidation, dissolution or winding-up, and will
not redeem, purchase or otherwise acquire any shares of any such junior class or
series of stock if at the time of making such declaration, payment or setting
apart for payment, distribution, redemption, purchase or acquisition the
Corporation shall be in default with respect to any dividend payable on, or any
obligation to retire shares of Series E Preferred Stock; and
(b) Without the affirmative vote or consent of the holders, given in
person or by proxy, either in writing or by resolution adopted either at an
annual meeting or special meeting called for the purpose, of at least (i) a
majority of the shares of Series E Preferred Stock at
17
<PAGE>
the time outstanding (the holders of Series E Preferred Stock consenting or
voting separately as a class), authorize, create, or issue, or increase the
authorized or issued amount, of any class or series of stock ranking prior to
the Series E Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding-up, or (ii) 66 2/3% of the shares of Series E Preferred
Stock at the time outstanding (the holders of Series E Preferred Stock
consenting or voting separately as a class), amend, alter or repeal (whether by
merger, consolidation or otherwise) any of the provisions of these Amended
Articles so as to materially and adversely affect the preferences, special
rights, privileges or powers of the Series E Preferred Stock; provided, however,
that any increase in the authorized Preferred Stock or the creation and issuance
of any other series of Preferred Stock ranking on a parity with or junior to the
Series E Preferred Stock shall not be deemed to materially and adversely affect
such preferences, rights, privileges or powers.
ARTICLE X
Designations, Rights and Preferences of
7% PRIDES (SM), Convertible Preferred Stock
The designations, rights, preferences, limitations and restrictions of
the shares of Preferred Stock, without par value, to be designated as 7% PRIDES
(SM), Convertible Preferred Stock are hereby fixed as follows;
Section 1. Designation and Amount. The designation of the series of
Preferred Stock created by this Article X shall be "7% PRIDES (SM), Convertible
Preferred Stock, no par value per share" (the "PRIDES"). The PRIDES are
Preferred Redeemable Increased Dividend Equity Securities (SM). The authorized
number of shares constituting the PRIDES shall be 4,370,000.
(SM) Service mark of Merrill Lynch & Co., Inc.
Section 2. Dividends.
(a) The holders of outstanding shares of PRIDES shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available therefor, cumulative preferential dividends from January 23, 1996, at
the rate per share of $4.279 per annum, and no more, payable quarterly for each
share of PRIDES, payable in arrears on the 1st day of each February, May, August
and November, respectively (each such date being hereinafter referred to as a
"Dividend Payment Date"), or, if any Dividend Payment Date is not a business
day, then the Dividend Payment Date shall be the next succeeding business day;
18
<PAGE>
provided, however, that, with respect to any dividend period during which a
redemption occurs, the Corporation may, at its option, declare accrued dividends
to, and pay such dividends on, the redemption date, in which case such dividends
would be payable on the redemption date in cash to the holders of the shares of
PRIDES as of the record date for such dividend payment and such accrued
dividends would not be included in the calculation of the related Call Price (as
hereinafter defined). Each dividend on the shares of PRIDES shall be payable to
holders of record as they appear on the stock register of the Corporation on
such record date, not less than 10 (except as otherwise provided with respect to
the first dividend payment) nor more than 60 days preceding the payment dates
thereof, as shall be fixed by the Board of Directors. The first dividend payment
shall be for the period from January 23, 1996 to but excluding February 1, 1996
and the first dividend will be payable on February 1, 1996 to holders of record
at the close of business on January 23, 1996. Dividends (or amounts equal to
accrued and unpaid dividends) payable on shares of PRIDES for any period less
than a full quarterly dividend period will be computed on the basis of a 360-day
year of twelve 30-day months and the actual number of days elapsed in any period
less than one month.
Dividends on the shares of PRIDES will accrue whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared on a daily basis from the previous Dividend Payment
Date. Accumulated unpaid dividends shall not bear interest. Dividends will cease
to accrue in respect of shares of PRIDES on the Mandatory Conversion Date (as
hereinafter defined) or on the date of their earlier conversion or redemption.
The shares of PRIDES will rank on a parity, both as to payment of
dividends and distribution of assets upon liquidation, with the Cumulative
Convertible Preferred Stock and with any future preferred stock issued by the
Corporation (the "Preferred Stock") that by its terms ranks on a parity with the
shares of PRIDES.
(b) As long as any shares of PRIDES are outstanding, no dividends for
any dividend period (other than dividends payable in shares of, or warrants,
rights or options exercisable for or convertible into shares of, Common Stock
(as defined below) or any other capital stock of the Corporation ranking junior
to the shares of PRIDES as to the payment of dividends and the distribution of
assets upon liquidation ("Junior Stock") and cash in lieu of fractional shares
of such Junior Stock in connection with any such dividend) will be paid in cash
or otherwise, nor will any other distribution be made (other than a distribution
payable in Junior Stock and cash in lieu of fractional shares of such Junior
Stock in connection with any such distribution), on any Junior
19
<PAGE>
Stock unless: (i) full dividends on all outstanding shares of Preferred Stock
(including the shares of PRIDES), that does not constitute Junior Stock ("Parity
Preferred Stock") have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such Junior Stock
dividend or distribution payment to the extent such dividends are cumulative;
(ii) dividends in full, in the case of a dividend payment with respect to Junior
Stock, for any Parity Preferred Stock dividend period commencing on or prior to
the date of such Junior Stock dividend payment or, in the case of any other
distribution with respect to Junior Stock, for the current quarterly dividend
period, have been paid, or declared and set aside for payment, on all
outstanding shares of Parity Preferred Stock to the extent such dividends are
cumulative; (iii) the Corporation has paid or set aside all amounts, if any,
then or theretofore required to be paid or set aside for all purchase,
retirement, and sinking funds, if any, for any outstanding shares of Parity
Preferred Stock; and (iv) the Corporation is not in default on any of its
obligations to redeem any outstanding shares of Parity Preferred Stock.
In addition, as long as any shares of PRIDES are outstanding, no shares
of any Junior Stock may be purchased, redeemed, or otherwise acquired by the
Corporation or any of its subsidiaries (except in connection with a
reclassification or exchange of any Junior Stock through the issuance of other
Junior Stock (and cash in lieu of fractional shares of such Junior Stock in
connection therewith) or the purchase, redemption, or other acquisition of any
Junior Stock with any Junior Stock (and cash in lieu of fractional shares of
such Junior Stock in connection therewith)) nor may any funds be set aside or
made available for any sinking fund for the purchase or redemption of any Junior
Stock unless: (i) full dividends on all outstanding shares of Parity Preferred
Stock have been paid, or declared and set aside for payment, for all dividend
periods terminating on or prior to the date of such purchase, redemption or
acquisition to the extent such dividends are cumulative; (ii) the Corporation
has paid or set aside all amounts, if any, then or theretofore required to be
paid or set aside for all purchase, retirement, and sinking funds, if any, for
any outstanding shares of Parity Preferred Stock; and (iii) the Corporation is
not in default on any of its obligations to redeem any outstanding shares of
Parity Preferred Stock.
Subject to the provisions described above, such dividends or other
distributions (payable in cash, property, or Junior Stock) as may be determined
by the Board of Directors may be declared and paid on the shares of any Junior
Stock from time to time and Junior Stock may be purchased, redeemed or otherwise
acquired by the Corporation or any of
20
<PAGE>
its subsidiaries from time to time. In the event of the declaration and payment
of any such dividends or other distributions, the holders of such Junior Stock
will be entitled, to the exclusion of holders of any outstanding Parity
Preferred Stock, to share therein according to their respective interests.
As long as any shares of PRIDES are outstanding, dividends for any
dividend period or other distributions may not be paid on any outstanding shares
of Parity Preferred Stock (other than dividends or other distributions payable
in Junior Stock and cash in lieu of fractional shares of such Junior Stock in
connection therewith), unless either: (a) (i) full dividends on all outstanding
shares of Parity Preferred Stock have been paid, or declared and set aside for
payment, for all dividend periods terminating on or prior to the date of such
Parity Preferred Stock dividend or distribution payment to the extent such
dividends are cumulative; (ii) dividends in full, in the case of a dividend
payment, for any Parity Preferred Stock dividend period commencing on or prior
to the date of such dividend payment or, in the case of any other distribution,
for the current quarterly dividend period, have been paid, or declared and set
aside for payment, on all outstanding shares of Parity Preferred Stock to the
extent such dividends are cumulative; (iii) the Corporation has paid or set
aside all amounts, if any, then or theretofore required to be paid or set aside
for all purchase, retirement and sinking funds, if any, for any outstanding
shares of Parity Preferred Stock; and (iv) the Corporation is not in default on
any of its obligations to redeem any outstanding shares of Parity Preferred
Stock; or (b) any such dividends are declared and paid pro rata so that the
amounts of any dividends declared and paid per share on outstanding shares of
PRIDES and each other share of such Parity Preferred Stock will in all cases
bear to each other the same ratio that accrued and unpaid dividends (including
any accumulation with respect to unpaid dividends for prior dividend periods, if
such dividends are cumulative) per share of outstanding shares of PRIDES and
such other outstanding shares of Parity Preferred Stock bear to each other.
In addition, as long as any shares of PRIDES are outstanding, the
Corporation may not purchase, redeem or otherwise acquire any Parity Preferred
Stock (except with any Junior Stock and cash in lieu of fractional shares of
such Junior Stock in connection therewith) unless: (i) full dividends on Parity
Preferred Stock have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such Parity Preferred
Stock purchase, redemption or other acquisition payment to the extent such
dividends are cumulative; (ii) the Corporation has paid or set aside all
amounts, if any, then or theretofore required to be paid or set
21
<PAGE>
aside for all purchase, retirement, and sinking funds, if any, for any Parity
Preferred Stock; and (iii) the Corporation is not in default of any of its
obligations to redeem any Parity Preferred Stock.
(c) Any dividend payment made on the shares of PRIDES shall first be
credited against the earliest accrued but unpaid dividend due with respect to
the shares of PRIDES.
(d) All dividends paid with respect to the shares of PRIDES shall be
paid pro rata to the holders entitled thereto.
(e) Holders of the shares of PRIDES shall be entitled to receive
dividends in preference to and in priority over any dividends upon any shares of
the Corporation ranking junior to the shares of PRIDES as to dividends, but
subject to the rights of holders of shares of the Corporation having a
preference and a priority over the payment of dividends on the shares of PRIDES.
Section 3. Redemption and Conversion.
(a) Mandatory Conversion. On February 1, 2000 (the "Mandatory
Conversion Date"), each outstanding share of PRIDES shall convert automatically
(the "Mandatory Conversion") into shares of Common Stock at the Common
Equivalent Rate (as hereinafter defined) in effect on the Mandatory Conversion
Date and the right to receive an amount in cash equal to all accrued and unpaid
dividends on such share of PRIDES (other than previously declared dividends
payable to a holder of record on a prior date) to the Mandatory Conversion Date,
whether or not declared, out of funds legally available for the payment of
dividends, subject to the right of the Corporation to redeem the shares of
PRIDES on or after February 1, 1999 (the "Initial Redemption Date") and prior to
the Mandatory Conversion Date, as described below, and subject to the conversion
of the shares of PRIDES at the option of the holder at any time prior to the
Mandatory Conversion Date. The Common Equivalent Rate is initially one share of
Common Stock for each share of PRIDES and is subject to adjustment as set forth
below. Dividends on the shares of PRIDES shall cease to accrue and such shares
shall cease to be outstanding on the Mandatory Conversion Date. The Corporation
shall make such arrangements as it deems appropriate for the issuance of
certificates representing shares of Common Stock and for the payment of cash in
respect of such accrued and unpaid dividends, if any, or cash in lieu of
fractional shares, if any, in exchange for and contingent upon surrender of
certificates representing the shares of PRIDES, and the Corporation may defer
the payment of dividends on such shares of Common Stock and the voting thereof
until, and make such payment and voting contingent upon, the surrender of such
certificates representing
22
<PAGE>
the shares of PRIDES, provided that the Corporation shall give the holders of
the shares of PRIDES such notice of any such actions as the Corporation deems
appropriate and upon such surrender such holders shall be entitled to receive
such dividends declared and paid on such shares of Common Stock subsequent to
the Mandatory Conversion Date. Amounts payable in cash in respect of the shares
of PRIDES or in respect of such shares of Common Stock shall not bear interest.
(b) Redemption by the Corporation.
(i) Right to Redeem. Shares of PRIDES are not redeemable by
the Corporation prior to the Initial Redemption Date. At any time and
from time to time on or after the Initial Redemption Date and prior to
the Mandatory Conversion Date, the Corporation shall have the right to
redeem, in whole or in part, the outstanding shares of PRIDES. Upon any
such redemption, the Corporation shall deliver to the holders of shares
of PRIDES, in accordance with the provisions of this Article X, in
exchange for each share so redeemed, the greater of (A) a number of
shares of Common Stock equal to the Call Price in effect on the
redemption date, divided by the Current Market Price (as hereinafter
defined) of the Common Stock determined as of the second trading day
immediately preceding the Notice Date (as hereinafter defined) or (B)
.855 of a share of Common Stock (subject to adjustment in the same
manner as the Optional Conversion Rate (as hereinafter defined) is
adjusted). The public announcement of any call for redemption shall be
made prior to, or at the time of, the mailing of the notice of such
call to holders of shares of PRIDES as described below. If fewer than
all the outstanding shares of PRIDES are to be redeemed, shares of
PRIDES to be redeemed shall be selected by the Corporation from
outstanding shares of PRIDES not previously redeemed by lot or pro rata
(as nearly as may be practicable) or by any other method determined by
the Board of Directors in its sole discretion to be equitable. As used
in this subparagraph (b), the term "Notice Date" with respect to any
notice given by the Corporation in connection with a redemption of
shares of PRIDES means the date on which first occurs either the public
announcement of such redemption or the commencement of mailing of such
notice to the holders of shares of PRIDES.
23
<PAGE>
(ii) Notice of Redemption. The Corporation shall provide
notice of any redemption of the shares of PRIDES to holders of record
of PRIDES to be called for redemption not less than 15 nor more than 60
days prior to the date fixed for such redemption. Such notice shall be
provided by mailing notice of such redemption, first class postage
prepaid, to each holder of record of shares of PRIDES to be redeemed,
at such holder's address as it appears on the stock register of the
Corporation; provided, however, that neither failure to give such
notice nor any defect therein shall affect the validity of the
proceeding for the redemption of any shares of PRIDES to be redeemed
except as to the holders to whom the Corporation has failed to give
said notice or whose notice was defective.
Each such notice shall state, as appropriate, the following and may
contain such other information as the Corporation deems advisable:
(A) the redemption date;
(B) that all outstanding shares of PRIDES are to be
redeemed or, in the case of a call for redemption of
fewer than all outstanding shares of PRIDES, the
number of such shares held by such holder to be
redeemed;
(C) the number of shares of Common Stock deliverable upon
redemption of each share of PRIDES to be redeemed
and, if applicable, the Call Price and the Current
Market Price used to calculate such number of shares
of Common Stock;
(D) the place or places where certificatesfor such shares
are to be surrendered for redemption; and
(E) that dividends on the shares of PRIDES to be redeemed
shall cease to accrue on such redemption date (except
as otherwise provided herein).
24
<PAGE>
(iii) Deposit of Shares and Funds. The Corporation's
obligation to deliver shares of Common Stock and provide funds upon
redemption in accordance with this Section 3 shall be deemed fulfilled
if, on or before a redemption date, the Corporation shall irrevocably
deposit, with a bank or trust company, or an affiliate of a bank or
trust company, having an office or agency in New York City and having a
capital and surplus of at least $50,000,000, or shall set aside or make
other reasonable provision for the issuance of such number of shares of
Common Stock as are required to be delivered by the Corporation
pursuant to this Section 3 upon the occurrence of the related
redemption (and for the payment of cash in lieu of the issuance of
fractional share amounts and accrued and unpaid dividends payable in
cash on the shares to be redeemed as and to the extent provided by this
Section 3). Any interest accrued on such funds shall be paid to the
Corporation from time to time. Any shares of Common Stock or funds so
deposited and unclaimed at the end of two years from such redemption
date shall be repaid and released to the Corporation, after which the
holder or holders of such shares of PRIDES so called for redemption
shall look only to the Corporation for delivery of such shares of
Common Stock or funds.
(iv) Surrender of Certificates; Status. Each holder of
shares of PRIDES to be redeemed shall surrender the certificates
evidencing such shares (properly endorsed or assigned for transfer, if
the Board of Directors shall so require and the notice shall so state)
to the Corporation at the place designated in the notice of such
redemption and shall thereupon be entitled to receive certificates
evidencing shares of Common Stock and to receive any funds payable
pursuant to this Section 3 following such surrender and following the
date of such redemption. In case fewer than all the shares represented
by any such surrendered certificate are called for redemption, a new
certificate shall be issued at the expense of the Corporation
representing the unredeemed shares. If such notice of redemption shall
have been given, and if on the date fixed for redemption, shares of
Common Stock and funds necessary for the redemption shall have been
irrevocably either set aside by the Corporation separate and apart from
its other funds or assets in
25
<PAGE>
trust for the account of the holders of the shares to be redeemed or
converted (and so as to be and continue to be available therefor) or
deposited with a bank or a trust company or an affiliate thereof as
provided herein or the Corporation shall have made other reasonable
provision therefor, then, notwithstanding that the certificates
evidencing any shares of PRIDES so called for redemption or subject to
conversion shall not have been surrendered, the shares represented
thereby so called for redemption shall be deemed no longer outstanding,
dividends with respect to the shares so called for redemption shall
cease to accrue on the date fixed for redemption (except that holders
of shares of PRIDES at the close of business on a record date for any
payment of dividends shall be entitled to receive the dividend payable
on such shares on the corresponding Dividend Payment Date
notwithstanding the redemption of such shares following such record
date and prior to such Dividend Payment Date) and all rights with
respect to the shares so called for redemption shall forthwith after
such date cease and terminate, except for the rights of the holders to
receive the shares of Common Stock and funds, if any, payable pursuant
to this Section 3 without interest upon surrender of their certificates
therefor (unless the Corporation defaults on the delivery of such
shares or the payment of such funds). Holders of shares of PRIDES that
are redeemed shall not be entitled to receive dividends declared and
paid on such shares of Common Stock, and such shares of Common Stock
shall not be entitled to vote, until such shares of Common Stock are
issued upon the surrender of the certificates representing such shares
of PRIDES and upon such surrender such holders shall be entitled to
receive such dividends declared and paid on such shares of Common Stock
subsequent to such redemption date without interest thereon.
(c) Conversion at Option of Holder. Shares of PRIDES are convertible,
in whole or in part, at the option of the holders thereof, at any time prior to
the Mandatory Conversion Date, unless previously redeemed, into shares of Common
Stock at a rate of .855 of a share of Common Stock for each share of PRIDES (the
"Optional Conversion Rate") (equivalent to a conversion price of $71.49 per
share of Common Stock), subject to adjustment as set forth below. The right to
convert shares of PRIDES called for redemption shall terminate immediately prior
to
26
<PAGE>
the close of business on the redemption date.
Conversion of shares of PRIDES at the option of the holder may be
effected by delivering certificates evidencing such shares, together with
written notice of conversion and a proper assignment of such certificates to the
Corporation or in blank, to the office or agency to be maintained by the
Corporation for that purpose (and, if applicable, cash payment of an amount
equal to the dividend payable on such shares), and otherwise in accordance with
conversion procedures established by the Corporation. Each optional conversion
shall be deemed to have been effected immediately prior to the close of business
on the date on which the foregoing requirements shall have been satisfied. The
conversion shall be at the Optional Conversion Rate in effect at such time and
on such date.
Holders of shares of PRIDES at the close of business on a record date
for any payment of declared dividends shall be entitled to receive the dividend
payable on such shares on the corresponding Dividend Payment Date
notwithstanding the conversion of such shares following such record date and
prior to the corresponding Dividend Payment Date. However, shares of PRIDES
surrendered for conversion after the close of business on a record date for any
payment of dividends and before the opening of business on the next succeeding
Dividend Payment Date must be accompanied by payment in cash of an amount equal
to the dividend thereon which is to be paid on such Dividend Payment Date
(unless such shares have been called for redemption on a redemption date between
such record date and such Dividend Payment Date). A holder of shares of PRIDES
called for redemption on February 1, 1999 or any other Dividend Payment Date
thereafter will receive the dividend on such shares payable on that date without
paying an amount equal to such dividend to the Corporation upon conversion.
Except as provided above, upon any optional conversion of shares of PRIDES, the
Corporation shall make no payment or allowance for unpaid dividends, whether or
not in arrears, on converted shares of PRIDES or for previously declared
dividends or distributions on the shares of Common Stock issued upon such
conversion.
(d) Common Equivalent Rate and Optional Conversion Rate Adjustments.
The Common Equivalent Rate and the Optional Conversion Rate shall be each
subject to adjustment from time to time as provided below in this section (d).
(i) If the Corporation shall, after January 23,
1996:
(A) pay a stock dividend or make a
27
<PAGE>
distribution with respect to its Common Stock in
shares of such Common Stock,
(B) subdivide or split its outstanding Common Stock into
a greater number of shares,
(C) combine its outstanding shares of Common Stock into a
smaller number of shares, or
(D) issue by reclassification of its shares of Common
Stock any shares of common stock of the Corporation,
then, in any such event, the Common Equivalent Rate
and the Optional Conversion Rate in effect
immediately prior to such event shall each be
adjusted so that the holder of any shares of PRIDES
shall thereafter be entitled to receive, upon
Mandatory Conversion or upon conversion at the option
of the holder, the number of shares of Common Stock
of the Corporation which such holder would have owned
or been entitled to receive immediately following any
event described above had such shares of PRIDES been
converted immediately prior to such event or any
record date with respect thereto. Such adjustment
shall become effective at the opening of business on
the business day next following the record date for
determination of stockholders entitled to receive
such dividend or distribution, in the case of a
dividend or distribution, and shall become effective
immediately after the effective date, in the case of
a subdivision, split, combination or
reclassification. Such adjustment shall be made
successively.
(ii) If the Corporation shall, after January 23, 1996, issue
rights or warrants to all holders of its Common Stock entitling them
(for a period not exceeding
28
<PAGE>
45 days from the date of such issuance) to subscribe for or purchase
shares of Common Stock at a price per share less than the Current
Market Price of the Common Stock, then, in any such event unless such
rights or warrants are issued to holders of shares of PRIDES on a pro
rata basis with the shares of Common Stock based on the Common
Equivalent Rate on the date immediately preceding such issuance, the
Common Equivalent Rate and Optional Conversion Rate shall each be
adjusted by multiplying the Common Equivalent Rate and the Optional
Conversion Rate, in effect immediately prior to the date of issuance of
such rights or warrants, by a fraction, of which the numerator shall be
the number of shares of Common Stock outstanding on the date of
issuance of such rights or warrants, immediately prior to such
issuance, plus the number of additional shares of Common Stock offered
for subscription or purchase pursuant to such rights or warrants, and
of which the denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or warrants,
immediately prior to such issuance, plus the number of additional
shares of Common Stock which the aggregate offering price of the total
number of shares of Common Stock so offered for subscription or
purchase pursuant to such rights or warrants would purchase at such
Current Market Price (determined by multiplying such total number of
shares by the exercise price of such rights or warrants and dividing
the product so obtained by such Current Market Price). Such adjustment
shall become effective at the opening of business on the business day
next following the record date for the determination of stockholders
entitled to receive such rights or warrants. To the extent that shares
of Common Stock are not delivered after the expiration of such rights
or warrants, the Common Equivalent Rate and the Optional Conversion
Rate shall each be readjusted to the Common Equivalent Rate and the
Optional Conversion Rate which would then be in effect had the
adjustments been made upon the issuance of such rights or warrants upon
the basis of delivery of only the number of shares of Common Stock
actually delivered. Such adjustment shall be made successively.
(iii) If the Corporation shall, after January 23, 1996, pay a
dividend or make a distribution to all holders of its Common Stock of
evidences of its
29
<PAGE>
indebtedness, cash or other assets (including capital stock of the
Corporation but excluding any cash dividends or distributions, other
than Extraordinary Cash Distributions (as hereinafter defined) and
dividends referred to in subparagraph (i) above) or shall issue to all
holders of its Common Stock rights or warrants to subscribe for or
purchase any of its securities (other than Rights issued pursuant to
the Rights Plan and those referred to in subparagraph (ii) above), then
unless such dividend is paid or distribution is made to each holder of
shares of PRIDES on a pro rata basis with the shares of Common Stock
based on the Common Equivalent Rate on the date immediately preceding
such payment or distribution, in any such event, the Common Equivalent
Rate and the Optional Conversion Rate shall each be adjusted by
multiplying the Common Equivalent Rate and the Optional Conversion Rate
in effect on the record date mentioned below, by a fraction of which
the numerator shall be the Current Market Price per share of the Common
Stock on the record date for the determination of stockholders entitled
to receive such dividend or distribution, and of which the denominator
shall be such Current Market Price per share of Common Stock less the
fair market value (as determined by the Board of Directors, whose
determination shall be conclusive, and described in a resolution
adopted with respect thereto) as of such record date of the portion of
the assets or evidences of indebtedness so distributed or of such
subscription rights or warrants applicable to one share of Common
Stock. Such adjustment shall become effective on the opening of
business on the business day next following the record date for the
determination of stockholders entitled to receive such dividend or
distribution. Such adjustment shall be made successively. As used in
this section (d), the term "Extraordinary Cash Distributions" means,
with respect to any cash dividend or distribution paid on any date, the
amount, if any, by which all cash dividends and cash distributions on
the Common Stock paid during the consecutive 12-month period ending on
and including such date (other than cash dividends and cash
distributions for which an adjustment to the Common Equivalent Rate and
the Optional Conversion Rate was previously made) exceeds, on a per
share of Common Stock basis, 10% of the average of the daily Closing
30
<PAGE>
Prices of the Common Stock over such consecutive 12- month period.
(iv) Any shares of Common Stock issuable in payment of a
dividend shall be deemed to have been issued immediately prior to the
close of business on the record date for such dividend for purposes of
calculating the number of outstanding shares of Common Stock under
subsection (ii) above.
(v) The Corporation shall also be entitled to make upward
adjustments in the Common Equivalent Rate, the Optional Conversion Rate
and the Call Price, as it in its sole discretion shall determine to be
advisable, in order that any stock dividends, subdivisions of shares,
distribution of rights to purchase stock or securities, or distribution
of securities convertible into or exchangeable for stock (or any
transaction which could be treated as any of the foregoing transactions
pursuant to Section 305 of the Internal Revenue Code of 1986, as
amended) made by the Corporation to its stockholders after January 23,
1996 shall not be taxable.
(vi) In any case in which subsection 3(d) shall require that
an adjustment as a result of any event become effective at the opening
of business on the business day next following a record date and the
date fixed for conversion pursuant to subsection 3(a) or redemption
pursuant to subsection 3(b) occurs after such record date, but before
the occurrence of such event, the Corporation may, in its sole
discretion, elect to defer the following until after the occurrence of
such event: (A) issuing to the holder of any converted or redeemed
shares of PRIDES the additional shares of Common Stock issuable upon
such conversion or redemption over the shares of Common Stock issuable
before giving effect to such adjustments and (B) paying to such holder
any amount in cash in lieu of a fractional share of Common Stock
pursuant to subsection 3(g).
(vii) All adjustments to the Common Equivalent Rate and the
Optional Conversion Rate shall be calculated to the nearest 1/100th of
a share of Common Stock. No adjustment in the Common Equivalent Rate
or
31
<PAGE>
the Optional Conversion Rate shall be required unless such adjustment
would require an increase or decrease of at least one percent therein;
provided, however, that any adjustment which by reason of this
subsection (vii) is not required to be made shall be carried forward
and taken into account in any subsequent adjustment.
(e) Adjustment for Consolidation or Merger. In case of any
consolidation or merger to which the Corporation is a party (other than a merger
or consolidation in which the Corporation is the surviving or continuing
corporation and in which the Common Stock outstanding immediately prior to the
merger or consolidation remains unchanged), or in case of any sale or transfer
to another corporation of the property of the Corporation as an entirety or
substantially as an entirety, or in case of any statutory exchange of securities
with another corporation (other than in connection with a merger or
acquisition), proper provision shall be made so that each share of PRIDES shall,
after consummation of such transaction, be subject to (i) conversion at the
option of the holder into the kind and amount of securities, cash or other
property receivable upon consummation of such transaction by a holder of the
number of shares of Common Stock into which such share of PRIDES might have been
converted immediately prior to consummation of such transaction, (ii) conversion
on the Mandatory Conversion Date into the kind and amount of securities, cash or
other property receivable upon consummation of such securities, cash or other
property receivable upon consummation of such transaction by a holder of the
number of shares of Common Stock into which such share of PRIDES would have
converted if the conversion on the Mandatory Conversion Date had occurred
immediately prior to the date of consummation of such transaction, plus the
right to receive cash in an amount equal to all accrued and unpaid dividends on
such shares of PRIDES (other than previously declared dividends payable to a
holder of record as of a prior date), (iii) redemption on any redemption date in
exchange for the kind and amount of securities, cash or other property
receivable upon consummation of such transaction by a holder of the number of
shares of Common Stock that would have been issuable at the Call Price in effect
on such redemption date upon a redemption of such share immediately prior to
consummation of such transaction, assuming that, if the Notice Date for such
redemption is not prior to such transaction, the Notice Date had been the date
of such transaction and assuming in each case that such holder of Common Stock
failed to exercise rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon consummation of such
transaction (provided that if the kind or amount of securities, cash or other
property receivable upon consummation of such transaction is not
32
<PAGE>
the same for each non-electing share, then the kind and amount of securities,
cash or other property receivable upon consummation of such transaction for each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). The kind and amount of
securities into or for which the shares of PRIDES shall be convertible or
redeemable after consummation of such transaction shall be subject to adjustment
as described in the immediately preceding paragraph following the date of
consummation of such transaction. The Corporation may not become a party to any
such transaction unless the terms thereof are consistent with the foregoing or
consistent with clause (iii) of Section 7(c).
For purposes of the immediately preceding paragraph and subsection 3(g)
(iii), any sale or transfer to another corporation of property of the
Corporation which did not account for at least 50% of the consolidated net
income of the Corporation for its most recent fiscal year ending prior to the
consummation of such transaction shall not in any event be deemed to be a sale
or transfer of the property of the Corporation as an entirety or substantially
as an entirety.
(f) Notice of Adjustments. Whenever the Common Equivalent Rate
and Optional Conversion Rate are adjusted as herein provided, the Corporation
shall:
(i) forthwith compute the adjusted Common Equivalent Rate and
Optional Conversion Rate in accordance herewith and prepare a
certificate signed by an officer of the Corporation setting forth the
adjusted Common Equivalent Rate and the Optional Conversion Rate, the
method of calculation thereof in reasonable detail and the facts
requiring such adjustment and upon which such adjustment is based,
which certificate shall be conclusive, final and binding evidence of
the correctness of the adjustment, and file such certificate forthwith
with the transfer agent for the shares of PRIDES and the Common Stock;
and
(ii) make a prompt public announcement and mail a notice to
the holders of the outstanding shares of PRIDES stating that the Common
Equivalent Rate and the Optional Conversion Rate have been adjusted,
the facts requiring such adjustment and upon which such adjustment is
based and setting forth the adjusted Common Equivalent Rate and
Optional Conversion Rate, such notice to be mailed at or prior to the
time the
33
<PAGE>
Corporation mails an interim statement to its stockholders covering the
fiscal quarter during which the facts requiring such adjustment
occurred, but in any event within 45 days of the end of such fiscal
quarter.
(g) Notices. In case, at any time while any of the shares of
PRIDES are outstanding,
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock, excluding any cash dividends; or
(ii) the Corporation shall authorize the issuance to all
holders of its Common Stock of rights or warrants to subscribe for or
purchase shares or its Common Stock or of any other subscription rights
or warrants; or
(iii) the Corporation shall authorize any reclassification of its
Common Stock (other than a subdivision or combination thereof) or any
consolidation or merger to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required
(except for a merger of the Corporation into one of its subsidiaries
solely for the purpose of changing the corporate domicile of the
Corporation to another state of the United States and in connection
with which there is no substantive change in the rights or privileges
of any securities of the Corporation other than changes resulting from
differences in the corporate statutes of the then existing and the new
state of domicile), or the sale or transfer to another corporation of
the property of the Corporation as an entirety or substantially as an
entirety; or
(iv) the Corporation shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at each office or agency
maintained for the purpose of conversion of the shares of PRIDES, and
shall cause to be mailed to the holders of shares of PRIDES at their
last addresses as they shall appear on the stock register, at least 10
days before the date hereinafter specified (or the
34
<PAGE>
earlier of the dates hereinafter specified, in the event that more than
one date is specified), a notice stating (A) the date on which a record
is to be taken for the purpose of such dividend, distribution, rights
or warrants, or, if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined, or (B) the date
on which any such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their Common Stock
for securities or other property (including cash), if any, deliverable
upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up. The failure to give or receive
the notice required by this subsection (g) or any defect therein shall
not affect the legality or validity of such dividend, distribution,
right or warrant or other action.
(h) Effect of Conversions and Redemptions. The person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon any conversion or redemption shall be deemed to have
become on the date of any such conversion or redemption the holder or holders of
record of the shares represented thereby; provided, however, that any such
surrender on any date when the stock transfer books of the Corporation shall be
closed shall constitute the person or persons in whose name or names the
certificate or certificates for such shares are to be issued as the record
holder or holders thereof for all purposes at the opening of business on the
next succeeding day on which such stock transfer books are open.
(i) No Fractional Shares. No fractional shares or script representing
fractional shares of Common Stock shall be issued upon the redemption or
conversion of any shares of PRIDES. In lieu of any fractional share otherwise
issuable in respect of the aggregate number of shares of PRIDES of any holder
which are redeemed or converted on any redemption date or upon Mandatory
Conversion or any optional conversion, such holder shall be entitled to receive
an amount in cash (computed to the nearest cent) equal to the same fraction of
the (i) Current Market Price as of the second trading day immediately preceding
the Notice Date, in the case of redemption, or (ii) Closing Price of the Common
Stock determined (A) as of the fifth Trading Date immediately preceding the
Mandatory Conversion Date, in the case of
35
<PAGE>
Mandatory Conversion, or (B) as of the second Trading Date immediately preceding
the effective date of conversion, in the case of an optional conversion by a
holder. If more than one share shall be surrendered for conversion or redemption
at one time by or for the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of PRIDES so surrendered or redeemed.
(j) Reissuance. Shares of PRIDES that have been issued and reacquired
in any manner, including shares purchased, exchanged, redeemed or converted,
shall not be reissued as part of PRIDES and shall (upon compliance with any
applicable provisions of the laws of the State of Indiana) have the status of
authorized and unissued shares of the Preferred Stock undesignated as to series
and may be redesignated and reissued as part of any series of Preferred Stock.
(k) Definitions. As used in this Article X:
(i) the term "business day" shall mean any day other than a
Saturday, Sunday, or a day on which banking institutions in the State
of Indiana are authorized or obligated by law or executive order to
close or are closed because of a banking moratorium or otherwise;
(ii) the term "Call Price" of each share of PRIDES shall be
the sum of (x) $62.195 on and after February 1, 1999, to and including
April 30, 1999, $61.928 on and after May 1, 1999, to and including July
31, 1999, $61.660 on and after August 1, 1999, to and including October
31, 1999, $61.393 on and after November 1, 1999, to and including
December 31, 1999, and $61.125 on and after January 1, 2000 to and
including February 1, 2000 and (y) all accrued and unpaid dividends
thereon to but not including the redemption date (other than previously
declared dividends payable to a holder of record as of a prior date);
(iii) the term "Closing Price" on any day shall mean the
last reported sales price on such day or, in case no such sale takes
place on such day, the average of the reported closing high and low
quotations, in each case on the New York Stock Exchange or, if the
Common Stock is not listed on the New York Stock
36
<PAGE>
Exchange, on the Nasdaq National Market, or, if the Common Stock is not
listed on the Nasdaq National Market, the average of the high bid and
low-asked quotations of the Common Stock in the over-the-counter market
on the day in question as reported by the National Quotation Bureau
Incorporated, or a similarly generally accepted reporting service, or,
if no such quotations are available, the fair market value of the
Common Stock as determined by any New York Stock Exchange member firm
selected from time to time by the Board of Directors for such purpose;
(iv) the term "Current Market Price" per share of Common Stock
at any date shall be deemed to be the lesser of (x) the average of the
daily Closing Prices for the fifteen consecutive Trading Dates ending
on and including the date in question or (y) the Closing Price of the
Common Stock for such date of determination; provided, however, if any
event that results in an adjustment of the Common Equivalent Rate
occurs during such fifteen-day period, the Current Market Price as
determined pursuant to the foregoing shall be appropriately adjusted to
reflect the occurrence of such event; and
(v) the term "Trading Date" shall mean a date on which the New
York Stock Exchange (or any successor thereto) is open for the
transaction of business.
(l) Payment of Taxes. The Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on the redemption or conversion of
shares of PRIDES pursuant to this Section 3; provided, however, that the
Corporation shall not be required to pay any tax which may be payable in respect
of any registration of transfer involved in the issue or delivery of shares of
Common Stock in a name other than that of the registered holder of shares of
PRIDES redeemed or converted or to be redeemed or converted, and no such issue
or delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(m) Reservation of Common Stock. The Corporation shall at all times
reserve and keep available, free from preemptive rights, out of the aggregate of
its authorized but unissued Common Stock and/or its
37
<PAGE>
issued Common Stock held in its treasury, for the purpose of effecting any
Mandatory Conversion of the shares of PRIDES or any conversion of the shares of
PRIDES at the option of the holder, the full number of shares of Common Stock
then deliverable upon any such conversion of all outstanding shares of PRIDES.
Section 4. Liquidation Rights.
(a) In the event of the liquidation, dissolution, or winding up of the
business of the Corporation, whether voluntary or involuntary, the holders of
shares of PRIDES then outstanding, after payment or provision for payment of the
debts and other liabilities of the Corporation and the payment or provision for
payment of any distribution on any shares of the Corporation having a preference
and a priority over the shares of PRIDES on liquidation, and before any
distribution to the holders of Junior Stock, shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders an
amount per share of PRIDES in cash equal to the sum of (i) $61.125 plus (ii) all
accrued and unpaid dividends thereon. In the event the assets of the Corporation
available for distribution to the holders of the shares of PRIDES upon any
dissolution, liquidation or winding up of the Corporation shall be insufficient
to pay in full the liquidation payments payable to the holders of outstanding
shares of PRIDES and of all other series of Parity Preferred Stock, the holders
of shares of PRIDES and of all other series of Parity Preferred Stock shall
share ratably in such distribution of assets in proportion to the amount which
would be payable on such distribution if the amounts to which the holders of
outstanding shares of PRIDES and the holders of outstanding shares of such
Parity Preferred Stock were paid in full. Except as provided in this Section 4,
holders of PRIDES shall not be entitled to any distribution in the event of
liquidation, dissolution or winding up of the affairs of the Corporation.
(b) For the purposes of this Section 4, none of the following shall be
deemed to be a voluntary or involuntary liquidation, dissolution or winding up
of the Corporation:
(i) the sale, lease, transfer or exchange of all or
substantially all of the assets of the Corporation; or
(ii) the consolidation or merger of the Corporation with one
or more other corporations (whether or not the Corporation is the
corporation surviving such consolidation or merger).
38
<PAGE>
Section 5. Definition. As used in this Article XV, the term "Common
Stock" shall mean any stock of any class of the Corporation which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and which is not subject to redemption by the Corporation. However,
shares of Common Stock issuable upon conversion of shares of PRIDES shall
include only shares of the class designated as Common stock as of January 23,
1996, or shares of the Corporation of any class or classes resulting from any
reclassification or reclassification thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and which
are not subject to redemption by the Corporation; provided, however, that, if at
any time there shall be more than one such resulting class, the shares of each
such class then so issuable shall be substantially in the proportion which the
total number of shares of such class resulting from such reclassification bears
to the total number of shares of all classes resulting from all such
reclassification.
Section 6. No Preemptive Rights. The holders of shares of PRIDES shall
have no preemptive rights, including preemptive rights with respect to any
shares of capital stock or other securities of the Corporation convertible into
or carrying rights or options to purchase any such shares.
Section 7. Voting Rights.
(a) The holders of shares of PRIDES shall have the right with the
holders of Common Stock to vote in the election of directors and upon each other
matter coming before any meeting of the stockholders on the basis of 4/5 of a
vote for each share held. The holders of shares of PRIDES and the holders of
Common stock shall vote together as one class except as otherwise set forth
herein or as otherwise provided by law or elsewhere in these Amended Articles.
(b) If at any time dividends payable on the shares of PRIDES or any
other series of Preferred Stock are in arrears and unpaid in an aggregate amount
equal to or exceeding the aggregate amount of dividends payable thereon for six
quarterly dividend periods, or if any other series of Preferred Stock shall be
entitled for any other reason to exercise voting rights, separate from the
Common Stock, to elect any Directors of the Corporation ("Preferred Stock
Directors"), the holders of the shares of PRIDES, voting separately as a class
with the holders of all other series of Preferred Stock upon which like voting
rights have been conferred and are exercisable, with each share of PRIDES
39
<PAGE>
entitled to vote on this and other matters upon which Preferred Stock votes as a
group, shall have the right to vote for the election of two Preferred Stock
Directors of the Corporation, such Directors to be in addition to the number of
Directors constituting the Board of Directors immediately prior to the accrual
of such right. Such right of the holders of shares of PRIDES to elect two
Preferred Stock Directors shall, when vested, continue until all dividends in
arrears on the shares of PRIDES and such other series of Preferred Stock shall
have been paid in full and the right of any other series of Preferred Stock to
exercise voting rights, separate from the Common Stock, to elect Preferred Stock
Directors shall terminate or have terminated and, when so paid, and any such
termination occurs or has occurred, such right of the holders of shares of
PRIDES to elect two Preferred Stock Directors separately as a class shall cease,
subject always to the same provisions for the vesting of such right of the
holders of the shares of PRIDES to elect two Preferred Stock Directors in the
case of future dividend defaults.
The term of office of each Director elected pursuant to the preceding
paragraph shall terminate on the earlier of (i) the next annual meeting of
stockholders at which a successor shall have been elected and qualified or (ii)
the termination of the right of the holders of shares of PRIDES and such other
series of Preferred Stock to vote for Directors pursuant to the preceding
paragraph. Vacancies on the Board of Directors resulting from the death,
resignation or other cause of any such Director shall be filled exclusively by
no less than two-thirds of the remaining Directors and the Director so elected
shall hold office until a successor is elected and qualified.
(c) For as long as any shares of PRIDES remain outstanding, the
affirmative consent of the holders of at least two-thirds thereof actually
voting (voting separately as a class) given in person or by proxy, at any annual
meeting or special meeting of the shareholders called for such purpose, shall be
necessary to (i) amend, alter or repeal any of the provisions of these Amended
Articles of the Corporation which would adversely affect the powers, preferences
or rights of the holders of the shares of PRIDES then outstanding or reduce the
minimum time required for any notice to which holders of shares of PRIDES then
outstanding may be entitled; provided, however, that any such amendment,
alteration or repeal that would authorize, create or increase the authorized
amount of any additional shares of Junior Stock or any other shares of stock
(whether or not already authorized) ranking on a parity with the shares of
PRIDES shall be deemed not to adversely affect such powers, preferences or
rights and shall not be subject to approval by the holders of shares of PRIDES;
and provided further that clause (i) shall not be applicable to the
40
<PAGE>
amendment, alteration or repeal of any provisions of these Amended Articles of
the Corporation approved at a meeting of the shareholders the record date of
which is prior to the issuance of any shares of PRIDES; (ii) authorize or
create, or increase the authorized amount of, any capital stock, or any security
convertible into capital stock, of any class ranking senior to PRIDES as to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up of the Corporation; or (iii) merge or consolidate with or into any
other corporation, unless each holder of the shares of PRIDES immediately
preceding such merger or consolidation shall have the right either to (A)
receive or continue to hold in the resulting corporation the same number of
shares, with substantially the same rights and preferences, as correspond to the
shares of PRIDES so held or (B) convert into shares of Common Stock at the
Common Equivalent Rate in effect on the date immediately preceding the
announcement of any such merger or consolidation.
There is no limitation on the issuance by the Corporation of Parity
Preferred Stock or of any class ranking junior to the shares of PRIDES.
Notwithstanding the provisions summarized in the preceding two
paragraphs, however, no such approval described therein of the holders of the
shares of PRIDES shall be required to authorize an increase in the number of
authorized shares of Preferred Stock or if, at or prior to the time when such
amendment, alteration, or repeal is to take effect or when the authorization,
creation or increase of any such senior stock or security is to be made, or when
such consolidation or merger, liquidation, dissolution or winding up is to take
effect, as the case may be, provision is made for the redemption of all shares
of PRIDES at the time outstanding."
ARTICLE XI
Manner of Adoption and Vote
Section 1. Action by Directors. The Board of Directors of the
Corporation or at a meeting thereof, duly called, constituted and held on March
23, 1998 at which a quorum of such Board of Directors was present, duly adopted
a resolution that the provisions and terms of its Amended and Restated Articles
of Incorporation, as amended, be amended and restated so as to read as set forth
above.
Section 2. Shareholder Vote Not Required. The Amended Articles set
forth above were adopted by the Board of Directors without shareholder action
and shareholder action was not required.
41
<PAGE>
IN WITNESS WHEREOF, the undersigned Corporation has caused these
Amended Articles to be signed and verified by a duly authorized officer, acting
for and on behalf of such Corporation; and the undersigned verifies subject to
the penalties of perjury that the facts contained herein are true.
Dated this 23rd day of March, 1998.
CONSECO, INC.
BY:/S/STEPHEN C. HILBERT
-------------------------
Stephen C. Hilbert,
Chairman of the Board,
Chief Executive Officer and
President
This instrument was prepared by John J. Sabl, General Counsel
Conseco, Inc.
11825 N. Pennsylvania Street
Carmel, IN 46032
42
AMENDED AND RESTATED
BYLAWS OF CONSECO, INC.
Effective March 23, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
ARTICLE 1 - Shares................................................................................................1
Section 1.1. Certificate for Shares.....................................................................1
Section 1.2. Transfer of Shares.........................................................................1
Section 1.3. Regulations................................................................................1
Section 1.4. Lost, Stolen or Destroyed Certificates.....................................................2
Section 1.5. Redemption of Shares Acquired in Control Share Acquisitions................................2
ARTICLE 2 - Shareholders..........................................................................................2
Section 2.1. Place of Meetings..........................................................................2
Section 2.2. Annual Meetings............................................................................2
Section 2.3. Special Meetings...........................................................................3
Section 2.4. Notice of Meeting..........................................................................3
Section 2.5. Addresses of Shareholders..................................................................3
Section 2.6. Quorum.....................................................................................3
Section 2.7. Voting.....................................................................................3
Section 2.8. Voting Lists...............................................................................4
Section 2.9. Fixing of Record Date......................................................................4
Section 2.10. Organization...............................................................................4
Section 2.11. Shareholder Proposals and Board Nominations................................................4
ARTICLE 3- Board of Directors.....................................................................................6
Section 3.1. Number, Election and Term of Office........................................................6
Section 3.2. Vacancies..................................................................................6
Section 3.3. Quorum; Action.............................................................................6
Section 3.4. Action by Consent..........................................................................6
Section 3.5. Telephonic Meetings........................................................................7
Section 3.6. Attendance and Failure to Object or Abstain................................................7
Section 3.7. Annual Meeting.............................................................................7
Section 3.8. Regular Meetings...........................................................................7
Section 3.9. Special Meetings...........................................................................7
Section 3.10. Place of Meeting...........................................................................8
Section 3.11. Compensation of Directors..................................................................8
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued)
PAGE
<S> <C> <C> <C>
ARTICLE 4 - Committees............................................................................................8
Section 4.1. Committees.............................................................................8
Section 4.2. Quorum and Manner of Acting............................................................8
Section 4.3. Committee Chairman, Books and Records, Etc.............................................8
Section 4.4. Executive Committee....................................................................8
Section 4.5. Compensation Committee.................................................................8
Section 4.6. Audit Committee........................................................................9
ARTICLE 5 - Officers..............................................................................................9
Section 5.1. Officers, General Authority and Duties.................................................9
Section 5.2. Election, Term of Office, Qualifications...............................................9
Section 5.3. Other Officers, Elections or Appointment...............................................9
Section 5.4. Resignation...........................................................................10
Section 5.5. Removal...............................................................................10
Section 5.6. Vacancies.............................................................................10
Section 5.7. The Chairman of the Board.............................................................10
Section 5.8. The President.........................................................................10
Section 5.9. The Vice Presidents...................................................................10
Section 5.10. Second or Assistant Vice Presidents...................................................11
Section 5.11. The Secretary.........................................................................11
Section 5.12. The Assistant Secretaries.............................................................11
Section 5.13. The Treasurer.........................................................................12
Section 5.14. The Assistant Treasurers..............................................................12
Section 5.15. The Chief Accounting Officer..........................................................12
Section 5.16. The Salaries..........................................................................13
ARTICLE 6 - Corporate Instruments, Loans and Funds...............................................................13
Section 6.1. Execution of Instruments Generally....................................................13
Section 6.2. Execution and Endorsement of Negotiable Instruments...................................13
Section 6.3. Opening of Bank Accounts..............................................................13
Section 6.4. Voting of Stock Owned by Corporation..................................................13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued)
PAGE
<S> <C> <C> <C>
ARTICLE 7 - Indemnification......................................................................................14
Section 7.1. Indemnification of Officers, Directors and Other Eligible Persons.....................14
Section 7.2. Definition of Claim...................................................................14
Section 7.3. Definition of Eligible Person.........................................................15
Section 7.4. Definitions of Liability and Expense..................................................15
Section 7.5. Definition of Wholly Successful.......................................................15
Section 7.6. Definition of Change of Control.......................................................15
Section 7.7. Procedure for Determination of Entitlement to Indemnification.........................16
Section 7.8. Application to Court for Determination................................................17
Section 7.9. Nonexclusivity........................................................................17
Section 7.10. Advancement of Expenses...............................................................17
Section 7.11. Insurance, Contracts and Funding......................................................17
Section 7.12. Nature of Provisions..................................................................18
Section 7.13. Applicability of Provisions...........................................................18
ARTICLE 8 - Miscellaneous........................................................................................18
Section 8.1. Amendments............................................................................18
Section 8.2. Seal..................................................................................18
Section 8.3. Fiscal Year...........................................................................18
</TABLE>
i
<PAGE>
ARTICLE 1
Shares
Section 1.1. Certificate for Shares. Shares of the Corporation may be
issued in book-entry form or evidenced by certificates. However, unless
otherwise specified in the provisions of the Articles of Incorporation relating
to the class of shares, every holder of shares of the Corporation shall be
entitled upon request to have a certificate evidencing the shares owned by the
shareholder, signed in the name of the Corporation by the Chairman of the Board,
the President or a Vice President and the Secretary or an Assistant Secretary,
certifying the number of shares owned by the shareholder in the Corporation. The
signatures of the Chairman of the Board, the President, Vice President,
Secretary and Assistant Secretary, the signature of the transfer agent and
registrar, and the seal of the Corporation may be facsimiles. In case any
officer or employee who shall have signed, or whose facsimile signature or
signatures shall have been used on, any certificate shall cease to be an officer
or employee of the Corporation before the certificate shall have been issued and
delivered by the Corporation, the certificate may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed the certificate or whose facsimile signature or signatures have been used
thereon had not ceased to be such officer or employee of the Corporation; and
the issuance and delivery by the Corporation of any such certificate shall
constitute an adoption thereof.
Subject to the foregoing provisions, certificates representing shares
of the Corporation shall be in such form as shall be approved by the Board of
Directors. There shall be entered upon the stock books of the Corporation at the
time of the issuance or transfer of each share the number of the certificate
representing such share (if any), the name of the person owning the shares
represented thereby, the class of such share and the date of the issuance or
transfer thereof.
Section 1.2. Transfer of Shares. Shares of the Corporation shall be
transferable only on the books of the Corporation and if the shares are
evidenced by certificates, upon surrender of the certificate or certificates
representing the same properly endorsed by the registered holder or by his or
her duly authorized attorney, such endorsement or endorsements to be witnessed
by one witness. The requirement for such witnessing may be waived in writing
upon the form of endorsement by the Chairman of the Board, the President, a Vice
President or the Secretary of the Corporation.
The Corporation and its transfer agents and registrars shall be
entitled to treat the holder of record of any shares the absolute owner thereof
for all purposes, and accordingly shall not be bound to recognize any legal,
equitable or other claim to or interest in such shares on the part of any other
person whether or not it or they shall have express or other notice thereof,
except as otherwise expressly provided by statute. Shareholders shall notify the
Corporation in writing of any changes in their addresses from time to time.
Section 1.3. Regulations. Subject to the provisions of this Article 1
the Board of Directors may make such rules and regulations as it may deem
expedient concerning the issuance, transfer and regulation of certificates for
shares or book-entry shares of the Corporation.
1
<PAGE>
Section 1.4. Lost, Stolen or Destroyed Certificates. The Corporation
may issue a new certificate for shares of the Corporation in the place of any
certificate theretofore issued and alleged to have been lost, stolen or
destroyed, but the Corporation may require the owner of such lost, stolen or
destroyed certificate, or such holder's legal representative, to furnish
affidavit as to such loss, theft, or destruction, and to give a bond in such
form and substance, and with such surety or sureties, with fixed or open
penalty, as it may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made on account of the alleged
loss, theft or destruction of such certificate or the issuance of such new
certificate.
Section 1.5. Redemption of Shares Acquired in Control Share
Acquisitions. Any or all control shares acquired in a control share acquisition
shall be subject to Corporation's right to redeem, if either:
(a) No acquiring person statement has been filed with the Corporation
with respect to the control share acquisition; or
(b) The control shares are not accorded full voting rights by the
Corporation's shareholders as provided in IC 23-1-42-9.
A redemption pursuant to Section 1.5(a) may be made at any time during
the period ending sixty (60) days after the date of the last acquisition of
control shares by the acquiring person. A redemption pursuant to Section 1.5(b)
may be made at any time during the period ending two (2) years after the date of
the shareholder vote with respect to the voting rights of the control shares in
question. Any redemption pursuant to this Section 1.5 shall be made at the fair
value of the control shares and pursuant to such procedures for the redemption
as may be set forth in these Bylaws or adopted by resolution of the Board of
Directors.
As used in this Section 1.5, the terms "control shares," "control share
acquisition," "acquiring person statement" and "acquiring person" shall have the
meanings ascribed to them in IC 23-1-42.
ARTICLE 2
Shareholders
Section 2.1. Place of Meetings. Meetings of shareholders of the
Corporation shall be held at the place within or without the State of Indiana,
specified in the notices for such meetings.
Section 2.2. Annual Meetings. The annual meeting of the shareholders of
the Corporation for the election of directors and for the transaction of such
other business as properly may come before the meeting shall be held prior to
June 30 of each year on such date as the Board of Directors shall determine by
resolution. The failure to hold an annual meeting in any year shall not affect
otherwise valid corporate acts or work any forfeiture or a dissolution of the
Corporation.
2
<PAGE>
Section 2.3. Special Meetings. Special meetings of shareholders of the
Corporation may be called by the Board of Directors, the Chairman of the Board
or the President. The business transacted at a special meeting of shareholders
shall be limited to the purpose or purposes specified in the notice for such
meeting.
Section 2.4. Notice of Meeting. A written or printed notice, stating
the place, day and hour of the meeting, and in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered or
mailed by the Secretary of the Corporation, or by the officers or persons
calling the meeting, to each shareholder of record entitled to vote on the
business proposed to be transacted at such meeting, at such address as appears
upon the records of the Corporation, at least ten (10) days, and not more than
sixty (60) days, before the date of the meeting. Notice of any such meeting may
be waived in writing by any shareholder before or after the meeting. Attendance
at any meeting in person, or by proxy when the instrument of proxy sets forth in
reasonable detail the purpose or purposes for which the meeting is called, shall
constitute a waiver of notice of such meeting. Notice of any adjourned meeting
of the shareholders of the Corporation shall not be required to be given unless
required by statute.
Section 2.5. Addresses of Shareholders. The address of any shareholder
appearing upon the records of the Corporation shall be deemed to be the same
address as the latest address of such shareholder appearing on the records
maintained by the transfer agent for the class of shares held by such
shareholder.
Section 2.6. Quorum. At any meeting of the shareholders a majority of
the outstanding shares entitled to vote on a matter at such meeting, represented
in person or by proxy, shall constitute a quorum for action on that matter. In
the absence of a quorum, the holders of a majority of the shares entitled to
vote present in person or by proxy, or, if no shareholder entitled to vote is
present in person or by proxy, any officer entitled to preside at or act as
Secretary of such meeting, may adjourn such meeting from time to time, until a
quorum shall be present. At any such adjourned meeting at which a quorum may be
present any business may be transacted which might have been transacted at the
meeting as originally called.
Section 2.7. Voting. Except as otherwise provided by statute or by the
Articles of Incorporation, at each meeting of the shareholders each holder of
shares entitled to vote shall have the right to one vote for each share standing
in the shareholder's name on the books of the Corporation on the record date
fixed for the meeting under Section 2.9. Each shareholder entitled to vote shall
be entitled to vote in person or by proxy executed in writing (which shall
include telegraphing, cabling, facsimile, or electronic transmission) by the
shareholder or a duly authorized attorney in fact. The vote of shareholders
approving any matter to which the Articles of Incorporation, or any applicable
statute, specifies a different percentage of affirmative vote shall require such
percentage of affirmative vote. All other matters, except the election of
directors, shall require that the votes cast in favor of the matter exceed the
votes cast opposing the matter at a meeting at which a quorum is present. In the
event that the Articles of Incorporation or any applicable statute shall require
one or more classes of shares to vote as a separate voting class, the vote of
each class shall be considered and decided separately.
3
<PAGE>
Section 2.8. Voting Lists. The Secretary shall make or cause to be made
after a record date for a meeting of shareholders has been fixed under Section
2.9 and at least five (5) business days before such meeting, a complete list of
the shareholders entitled to vote at such meeting, arranged in alphabetical
order, with the address of each such shareholder and the number of shares so
entitled to vote held by each which list shall be on file at the principal
office of the Corporation and subject to inspection by any shareholder entitled
to vote at the meeting. Such list shall be produced and kept open at the time
and place of the meeting and subject to the inspection of any such shareholder
during the holding of such meeting or any adjournment. Except as otherwise
required by law, such list shall be the only evidence as to who are the
shareholders entitled to vote at any meeting of the shareholders. In the event
that more than one group of shares is entitled to vote as a separate voting
group at the meeting, there shall be a separate listing of the shareholders of
each group.
Section 2.9. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of the shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders, not more than seventy (70) days prior to the
date on which the particular action requiring this determination of shareholders
is to be taken. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this section, the
determination shall, to the extent permitted by law, apply to any adjournment
thereof.
Section 2.10. Organization. Meetings of shareholders shall be presided
over by the Chairman of the Board, or in his or her absence, by the President,
or in his or her absence, by a chairman designated by the Board of Directors, or
in the absence of such designation by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence, the
chairman of the meeting may appoint any person or act as secretary of the
meeting.
Section 2.11. Shareholder Proposals and Board Nominations.
(a) At any annual meeting of the Corporation's shareholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a shareholder in accordance with these
Bylaws. Business may be properly brought before an annual meeting by a
shareholder only if written notice of the shareholder's intent to propose such
business has been delivered, either by personal delivery, United States mail,
first class postage prepaid, or other similar means, to the Secretary of the
Corporation not later than ninety (90) calendar days in advance of the
anniversary date of the release of the Corporation's proxy statement to
shareholders in connection with the preceding year's annual meeting of
shareholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been changed by more than thirty (30)
calendar days from the anniversary of the annual meeting date stated in the
previous year's proxy statement, a shareholder proposal shall be received by the
Corporation a reasonable time before the solicitation is made.
4
<PAGE>
(b) Each notice of new business must set forth: (i) the name and
address of the shareholder who intends to raise the new business; (ii) the
business desired to be brought forth at the meeting and the reasons for
conducting such business at the meeting; (iii) a representation that the
shareholder is a holder of record of shares of the Corporation entitled to vote
with respect to such business and intends to appear in person or by proxy at the
meeting to move the consideration of such business; (iv) such shareholder's
total beneficial ownership of the Corporation's voting shares; and (v) such
shareholder's interest in such business. The chairman of the meeting may refuse
to acknowledge a motion to consider any business that he or she determines was
not made in compliance with the foregoing procedures.
(c) An adjourned meeting, if notice of the adjourned meeting is not
required to be given to shareholders, shall be regarded as a continuation of the
original meeting, and any notice of new business must have met the foregoing
requirements as of the date of the original meeting. In the event of an
adjourned meeting where notice of the adjourned meeting is required to be given
to shareholders, any notice of new business made by a shareholder with respect
to the adjourned meeting must meet the foregoing requirements based upon the
date on which notice of the date of the adjourned meeting was given.
(d) Nominations for the election of directors may be made by the Board
of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote in the election of directors generally. However,
any shareholder entitled to vote in the election of directors may nominate one
or more person for election as director(s) at a meeting only if written notice
of such shareholder's intent to make such nomination or nominations has been
delivered, either by personal delivery, United States mail, first class postage
prepaid, or other similar means, to the Secretary of the Corporation not later
than (i) with respect to an election to be held at an annual meeting of
shareholders, ninety (90) calendar days in advance of the anniversary date of
the release of the Corporation's proxy statement to shareholders in connection
with the preceding year's annual meeting of shareholders, except that if no
annual meeting was held in the previous year or the date of the annual meeting
has been changed by more than thirty (30) calendar days from the anniversary of
the annual meeting date stated in the previous year's proxy statement, a nominee
proposal shall be received by the Corporation a reasonable time before the
solicitation is made, and (ii) with respect to an election to be held at a
special meeting of shareholders for the election of directors, the close of
business on the tenth day following the date on which notice of such meeting is
first given to shareholders.
(e) Each such notice shall set forth: (i) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated; (ii) a representation that the shareholder is a holder of record
of shares of the Corporation entitled to vote at such meeting to nominate the
person or persons specified in the notice; (iii) a description of all
relationships, arrangements or understandings between the shareholder and each
nominee and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by the shareholder; (iv)
such other information regarding each nominee proposed by such shareholder as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had the nominee been
nominated, or intended to be nominated, by the Board of Directors; and (v) the
consent of each nominee to serve as a director of the Corporation if so elected.
The chairman of the meeting may determine and declare to the meeting that a
nomination was not made in compliance with the foregoing procedures in which
case the nomination shall be disregarded.
5
<PAGE>
ARTICLE 3
Board of Directors
Section 3.1. Number, Election and Term of Office. The business of the
Corporation shall be managed by a Board of Directors consisting of nine (9)
members, which number may be increased or diminished by resolution adopted by
not less than a majority of the Directors then in office; provided that the
number may not be diminished below five (5) and no reduction in number shall
have the effect of shortening the term of any incumbent Director. Directors need
not be shareholders of the Corporation. Except as otherwise provided by law, the
Articles of Incorporation or by these Bylaws, the Directors of the Corporation
shall be elected at the annual meeting of shareholders in each year by a
plurality of the votes cast by shareholders entitled to vote in the election at
the meeting, provided a quorum is present. The Board of Directors shall be
divided into three classes, as nearly equal in number as the then total number
of Directors constituting the whole Board permits, with the term of office of
one class expiring each year.
At each annual meeting of shareholders the successors to the class of
Directors whose term shall then expire shall be elected and each Director so
elected shall hold office until such Director's successor is elected and
qualified, or until his or her earlier resignation or removal. If the number of
Directors is changed, any increase or decrease in the number of Directors shall
be apportioned among the three classes so as to make all classes as nearly equal
in number as possible. Notwithstanding the foregoing, whenever holders of any
Preferred Stock, or any series thereof, shall be entitled, voting separately as
a class, to elect any Directors, all Directors so elected shall be allocated,
each time they are so elected, to the class whose term expires at the next
succeeding annual meeting of shareholders and the terms of all Directors so
elected by such holders shall expire at the next succeeding annual meeting of
shareholders, in each case except to the extent otherwise provided in the
Articles of Incorporation.
Section 3.2. Vacancies. Except as may be otherwise provided in the
Articles of Incorporation, any vacancy which may occur in the Board of Directors
may be filled by a majority vote of the remaining members of the Board of
Directors. Each replacement or new Director shall serve for the balance of the
term of the class of the Director he or she succeeds or, in the event of an
increase in the number of directors, of the class to which he or she is
assigned.
Section 3.3. Quorum; Action. A majority of the actual number of
Directors elected and qualified, from time to time, shall be necessary to
constitute a quorum for the transaction of any business, except for any matters
which the Articles of Incorporation, these Bylaws or any applicable statute
specifies may be approved by a lesser number. If a quorum is present when a vote
is taken, the affirmative vote of a majority of the Directors present is the act
of the Board of Directors, unless the Articles of Incorporation or these Bylaws
provide otherwise.
Section 3.4. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting,
if taken by all members of the Board of Directors, as the case may be, evidenced
by one or more written consents signed by all such members and effective on the
date, either prior or subsequent to the date of the consent, specified in the
written consent, or if no effective date is specified in the written consent,
the date on which the consent is filed with the minutes of proceedings of the
Board of Directors.
6
<PAGE>
Section 3.5. Telephonic Meetings. Directors, or any committee of
Directors designated by the Board of Directors, may participate in a meeting of
the Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 3.5 shall constitute presence in person at such meeting.
Section 3.6. Attendance and Failure to Object or Abstain. A Director
who is present at a meeting of the Board of Directors or a committee of the
Board of Directors when corporate action is taken is deemed to have assented to
the action taken unless:
(a) The Director objects at the beginning of the meeting (or promptly
upon the Director's arrival) to holding it or transacting business at the
meeting;
(b) The Director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or
(c) The Director delivers written notice of the Director's dissent or
abstention to the presiding officer of the meeting before its adjournment or to
the Secretary of the Corporation immediately after adjournment of the meeting.
The right of dissent or abstention is not available to a Director who votes in
favor of the action taken.
Section 3.7. Annual Meeting. Unless otherwise provided by resolution of
the Board of Directors, the Board of Directors shall meet each year immediately
after the annual meeting of the shareholders, at the place where such meeting of
the shareholders has been held, for the purpose of appointment of committees,
election of officers, and consideration of any other business that may properly
be brought before the meeting. No notice of any kind to either old or new
members of the Board of Directors for such annual meeting shall be necessary.
Section 3.8. Regular Meetings. Regular meetings of the Board of
Directors may be held without any notice whatever at such places and times, as
may be fixed from time to time by resolution of the Board of Directors.
Section 3.9. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or the
President, and shall be called on the written request of any two Directors.
Notice of the date, time and place of such a special meeting shall be sent by
the Secretary or an Assistant Secretary to each Director at his or her residence
or usual place of business by letter, telegram or facsimile, at such time that,
in regular course, such notice would reach such place not later than during the
day immediately preceding the day for such meeting; or may be delivered by the
Secretary or an Assistant Secretary to a Director personally at any time during
such preceding day. The notice need not describe the purpose of the special
meeting. In lieu of such notice, a Director may sign a written waiver of notice
either before the time of the meeting, at the time of the meeting, or after the
time of the meeting.
Any meeting of the Board of Directors for which notice is required
shall be a legal meeting, without notice thereof having been given, if all the
Directors, who do not waive notice thereof in writing, shall be present in
person.
7
<PAGE>
Section 3.10. Place of Meeting. The Directors may hold their meetings,
within and without the State of Indiana.
Section 3.11. Compensation of Directors. The Board of Directors is
empowered and authorized to fix and determine the compensation of Directors for
attendance at meetings of the Board and additional compensation for such
additional services any of such Directors may perform for the Corporation.
ARTICLE 4
Committees
Section 4.1. Committees. The Board of Directors may from time to time,
in its discretion, by resolution passed by a majority of the entire Board of
Directors, designate committees of the Board of Directors consisting of such
number of directors as the Board of Directors shall determine, which shall have
and may exercise such lawfully delegable powers and duties of the Board of
Directors as shall be conferred or authorized by such resolution. The Board of
Directors shall have the power to change at any time the members of any such
committee, to fill vacancies and to dissolve any such committee.
Section 4.2. Quorum and Manner of Acting. A majority of the members of
any committee of the Board of Directors shall constitute a quorum for the
transaction of business at any meeting of such committee, and the act of a
majority of the members present at any meeting at which a quorum is present
shall be the act of such committee.
Section 4.3. Committee Chairman, Books and Records, Etc. The chairman
of each committee of the Board of Directors shall be selected from among the
members of such committee by the Board of Directors. Each committee shall keep a
record of its acts and proceedings, and all actions of each committee shall be
reported to the Board of Directors when required. Except to the extent
inconsistent with the resolutions of the Board of Directors creating a
committee, the provisions of these Bylaws concerning meetings of the Board of
Directors, actions without meetings, notice and waiver of notice and telephonic
participation apply to each committee.
Section 4.4. Executive Committee. Two or more Directors of the
Corporation shall be appointed by the Board of Directors to act as an Executive
Committee. The Executive Committee shall have and exercise all power and
authority of the Board of Directors in the management of the Corporation to the
fullest extent permitted by statute.
Section 4.5. Compensation Committee. Two or more Directors of the
Corporation shall be appointed by the Board of Directors to act as a
Compensation Committee, each of whom shall be a director who is not an employee
of the Corporation or any subsidiary thereof. The Compensation Committee shall
have the power and authority to set the compensation of the officers of the
Corporation and to act with respect to the compensation, option and other
benefit plans of the Corporation.
8
<PAGE>
Section 4.6. Audit Committee. Two or more Directors of the Corporation
shall be appointed by the Board of Directors to act as an Audit Committee, each
of whom shall be a director who is not an employee of the Corporation or any
subsidiary thereof. The Audit Committee shall have general oversight
responsibility with respect to the Corporation's accounting and financial
reporting activities, including meeting with the Corporation's independent
auditors and its chief financial and accounting officers to review the scope,
cost and results of the independent audit and to review internal accounting
controls, policies and procedures. The Audit Committee also shall make
recommendations to the Board of Directors as to the selection of independent
auditors. In addition, the Audit Committee shall oversee the compliance programs
of the Corporation and its subsidiaries where such oversight is delegated to the
Audit Committee by either the Board of Directors or embodied in an agreement
executed by the Corporation or the applicable subsidiary. In undertaking the
foregoing responsibilities, the Audit Committee shall have unrestricted access,
if necessary, to the Corporation's personnel and documents and shall be provided
with the resources and assistance necessary to discharge its responsibilities,
including periodic reports from management assessing the impact of regulation,
accounting, and reporting of other significant matters that may affect the
Corporation.
ARTICLE 5
Officers
Section 5.1. Officers, General Authority and Duties. The officers of
the Corporation shall be a Chairman of the Board, a President, one (1) or more
Vice Presidents, a Secretary, a Treasurer, a Chief Accounting Officer, and such
other officers as may be elected or appointed in accordance with the provisions
of Section 5.3. One (1) or more of the Vice Presidents may be designated by the
Board to serve as an Executive Vice President. Any two (2) or more offices may
be held by the same person. All officers and agents of the Corporation, as
between themselves and the Corporation, shall have such authority and perform
such duties in the management of the Corporation as may be provided in these
Bylaws or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws.
Section 5.2. Election, Term of Office, Qualifications. Each officer
(except such officers as may be appointed in accordance with the provisions of
Section 5.3) shall be elected by the Board of Directors. Each such officer
(whether elected at an annual meeting of the Board of Directors or to fill a
vacancy or otherwise) shall hold office until the officer's successor is chosen
and qualified, or until death, or until the officer shall resign in the manner
provided in Section 5.4 or be removed in the manner provided in Section 5.5. The
Chairman of the Board shall be chosen from among the Directors. Any other
officer may but need not be a Director of the Corporation. Election or
appointment of an officer shall not of itself create contract rights.
Section 5.3. Other Officers, Election or Appointment. The Board of
Directors from time to time may elect such other officers or agents (including
one or more Second or Assistant Vice Presidents, one or more Assistant
Secretaries and one or more Assistant Treasurers) as it may deem necessary or
advisable. The Board of Directors may delegate to any officer the power to
appoint any such officers or agents and to prescribe their respective terms of
office, powers and duties.
9
<PAGE>
Section 5.4. Resignation. Any officer may resign at any time by giving
written notice of such resignation to the Board of Directors, the Chairman of
the Board, the President or the Secretary of the Corporation. Unless otherwise
specified in such written notice, such resignation shall take effect upon
receipt thereof and unless otherwise specified in it, the acceptance of the
resignation shall not be necessary to make it effective.
Section 5.5. Removal. The officers specifically designated in Section
5.1 may be removed, either for or without cause, at any meeting of the Board of
Directors called for such purpose, by the vote of a majority of the actual
number of Directors elected and qualified. The officers and agents elected or
appointed in accordance with the provisions of Section 5.3 may be removed,
either for or without cause, at any meeting of the Board of Directors at which a
quorum be present, by the vote of a majority of the Directors present at such
meeting, by any superior officer upon whom such power of removal shall have been
conferred by the Board of Directors, or by any officer to whom the power to
appoint such officer has been delegated by the Board of Directors pursuant to
Section 5.3. Any removal shall be without prejudice to the contract rights, if
any, of the person so removed.
Section 5.6. Vacancies. A vacancy in any office by reason of death,
resignation, removal, disqualification or any other cause, may be filled by the
Board of Directors or by an officer authorized under Section 5.3 to appoint to
such office.
Section 5.7. The Chairman of the Board. The Chairman of the Board, who
shall be chosen from among the Directors, shall have general supervision and
direction over the business and affairs of the Corporation and shall exercise
executive management of the day-to-day operations of the Corporation, subject
however to the control of the Board of Directors, shall preside at all meetings
of the Board of Directors and the shareholders, and shall perform such other
duties as, from time to time, may be assigned to him or her by the Board of
Directors. The Chairman of the Board shall be the Chief Executive Officer.
Section 5.8. The President. The President shall perform all the duties
ordinarily connected with the office of President and shall perform such other
duties as, from time to time, may be assigned to him or her by the Board of
Directors. In the case of the absence or inability to act of the Chairman of the
Board, the President shall perform the duties of the Chairman of the Board, and,
when so acting, shall have all the powers of the Chairman of the Board.
Section 5.9. The Vice Presidents. Each Vice President shall have such
powers and perform such duties as the Board of Directors may from time to time
prescribe or as the Chairman of the Board or the President may from time to time
delegate to him or her. The Board of Directors may designate certain Vice
Presidents as being in charge of designated divisions or functions of the
Corporation's business and add appropriate descriptions to their titles. At the
request of the President, any Executive Vice President may, in the case of the
absence or inability to act of the President, temporarily act in such officer's
place, and, when so acting, shall have all the powers of the President. In the
case of the death of the President, or in the case of his or her absence or
inability to act without having designated an Executive Vice President to act
temporarily in his or her place, the Executive Vice President so to perform the
duties of the President shall be designated by the Board of Directors.
10
<PAGE>
Section 5.10. Second or Assistant Vice Presidents. Each Second or
Assistant Vice President (if one or more Second or Assistant Vice Presidents be
elected or appointed) shall perform such other duties as are from time to time
delegated to him or her by the Chairman of the Board, the President, a Vice
President, or the Board of Directors. At the request of one of the Vice
Presidents, or in his or her absence or inability to act, a Second or Assistant
Vice President designated by the Vice President shall perform the duties of such
Vice President, and when so acting shall have all the powers of the Vice
President. In the case of the death of a Vice President, or in the case of his
or her absence or inability to act without having designated a Second or
Assistant Vice President to act temporarily in his or her place, the Second or
Assistant Vice President so to perform the duties of the Vice President shall be
designated by the Board of Directors, the Chairman of the Board or the
President.
Section 5.11. The Secretary. The Secretary shall:
(a) record all the proceedings of the meetings of the shareholders and
of the Board of Directors in books to be kept for such purposes;
(b) cause all notices to be duly given in accordance with the
provisions of these Bylaws and as required by statute;
(c) be custodian of the seal of the Corporation, and cause the seal to
be affixed to all certificates representing shares of the Corporation prior to
the issuance thereof (subject, however, to the provisions of Article 1) and to
all instruments the execution of which on behalf of the Corporation under its
seal shall have been duly authorized in accordance with these Bylaws;
(d) subject to the provisions of Article 1, sign certificates
representing shares of the Corporation the issuance of which shall have been
authorized by the Board of Directors; and,
(e) in general, perform all duties incident to the office of Secretary
and such other duties as may, from time to time, be given to him or her by these
Bylaws, the Board of Directors, the Chairman of the Board, the President or any
Vice President.
Section 5.12. The Assistant Secretaries. Each Assistant Secretary (if
one or more Assistant Secretaries be elected or appointed) shall assist the
Secretary in his or her duties, and shall perform such other duties as the Board
of Directors may from time to time prescribe or the Chairman of the Board, the
President, any Vice President or the Secretary may from time to time delegate to
him or her. At the request of the Secretary, any Assistant Secretary may, in the
case of the absence or inability to act of the Secretary, temporarily act in the
Secretary's place. In the case of the death of the Secretary, or in the case of
his or her absence or inability to act without having designated an Assistant
Secretary to act temporarily in his or her place, the Assistant Secretary so to
perform the duties of the Secretary shall be designated by the Board of
Directors, Chairman of the Board or the President.
11
<PAGE>
Section 5.13. The Treasurer. The Treasurer shall:
(a) have charge of the funds, securities, receipts and disbursements
of the Corporation;
(b) cause the moneys and other valuable effects of the Corporation to
be deposited or invested in the name and to the credit of the Corporation in
such banks or trust companies or with such bankers or other depositories or
investments as shall be selected in accordance with resolutions adopted by the
Board of Directors;
(c) cause the funds of the Corporation to be disbursed from the
authorized depositories of the Corporation, and cause to be taken and preserved
proper records of all moneys disbursed; and,
(d) in general, shall perform all the duties incident to the office of
Treasurer and such other duties as, from time to time, may be assigned to him by
the Board of Directors, the Chairman of the Board, the President or any Vice
President.
Section 5.14. The Assistant Treasurers. Each Assistant Treasurer (if
one or more Assistant Treasurers be elected or appointed) shall assist the
Treasurer in his or her duties, and shall perform such other duties as the Board
of Directors, the Chairman of the Board, the President, any Vice President or
Treasurer may from time to time delegate to him or her. At the request of the
Treasurer, any Assistant Treasurer may, in the case of the absence or inability
to act of the Treasurer, temporarily act in his or her place. In the case of the
death of the Treasurer, or in the case of his or her absence or inability to act
without having designated an Assistant Treasurer to act temporarily in his or
her place, the Assistant Treasurer so to perform the duties of the Treasurer
shall be designated by the Board of Directors, the Chairman of the Board or the
President.
Section 5.15. The Chief Accounting Officer. The Chief Accounting
Officer shall:
(a) keep or cause to be kept full and accurate accounts of all assets,
liabilities, commitments, receipts, disbursements, costs and expenses and other
financial transactions of the Corporation in books belonging to the Corporation,
and conform them to sound accounting principles with adequate internal control;
(b) cause regular audits of such books and records to be made;
(c) see that all expenditures are made in accordance with procedures
duly established, from time to time, by the Corporation;
(d) render financial statements upon the request of the Board of
Directors, and a full financial report prior to the annual meeting of
shareholders, as well as such other financial statements as are required by law
or regulation; and
(e) in general, perform all the duties ordinarily connected with the
office of Chief Accounting Officer and such other duties as, from time to time,
may be assigned to him or her by the Board of Directors, the Chairman of the
Board, the President or any Vice President.
12
<PAGE>
Section 5.16. Salaries. The salaries of the officers shall be fixed,
from time to time, by the Board of Directors or the Compensation Committee. No
officer shall be prevented from receiving such salary by reason of the fact he
is also a Director of the Corporation.
ARTICLE 6
Corporate Instruments, Loans and Funds
Section 6.1. Execution of Instruments Generally. All deeds, contracts,
notes, bonds and other instruments requiring execution by the Corporation may be
signed by the Chairman of the Board, the President, any Vice President,
Treasurer or the Secretary. Authority to sign any deed, contract, note, bond or
other instrument requiring execution by the Corporation may be conferred by the
Board of Directors upon any person or person whether or not such person or
persons be officers of the Corporation. Such person or person may delegate, from
time to time, by instrument in writing, all or any part of such authority to any
other person or persons if authorized so to do by the Board of Directors.
Section 6.2. Execution and Endorsement of Negotiable Instruments. All
checks, drafts, bills of exchange and orders for the payment of money of the
Corporation shall, unless otherwise directed by the Board of Directors, or
unless otherwise required by law, be signed or endorsed for deposit in its
behalf by any one of the following officers: the Chairman of the Board, the
President, any Vice President, the Treasurer, any Assistant Treasurer or the
Secretary. Checks payable to the Corporation may also be endorsed for deposit in
one of the bank accounts of the Corporation by the affixation of a rubber stamp
bearing the legend "For Deposit Only -- CONSECO, INC.". Authority to sign any
checks, drafts, bills of exchange and orders for payment of money requiring
execution by the Corporation may be conferred by the Board of Directors upon any
person or persons whether or not such person or persons be officers of the
Corporation. Such person or persons may delegate, from time to time, by
instrument in writing, all or any part of such authority to any other person or
persons if authorized to do so by the Board of Directors.
Section 6.3. Opening of Bank Accounts. Bank accounts shall be opened in
the name of the Corporation by any one of the following officers: The Chairman
of the Board, the President, any Vice President, the Chief Accounting Officer,
the Treasurer or any Assistant Treasurer of the Corporation. Each of such
officers shall have power to open bank accounts in the name of the Corporation,
singly, without necessity of countersignature. The Board of Directors may
designate officers and employees of the Corporation, other than those named
above, who may open bank accounts in the name of the Corporation. The term "bank
accounts" shall include, without limiting the generality thereof, accounts with
banks, banking associations, trust companies, building and loan associations,
savings and loan associations, cooperative banks, investment bankers and
brokerage firms.
Section 6.4. Voting of Stock Owned by Corporation. Subject always to
the further orders and directions of the Board of Directors, any share or shares
of stock issued by any other corporation and owned or controlled by the
Corporation may be voted at any shareholders' meeting of such other corporation
by the Chairman of the Board, the President, any Vice President or the Treasurer
of the Corporation. Whenever, in the judgment of the Chairman of the Board, the
President or Treasurer, it is desirable for the Corporation to execute a proxy
or give a stockholders' consent in respect to any
13
<PAGE>
share or shares of stock issued by any other corporation and owned by the
Corporation, such proxy or consent shall be executed in the name of the
Corporation by the Chairman of the Board, the President, any Vice President or
the Treasurer. Any person or persons designated in the manner above stated as
the proxy or proxies of the Corporation shall have full right, power and
authority to vote shares of stock issued by such other corporation and owned by
the Corporation the same as such shares might be voted by the Corporation.
ARTICLE 7
Indemnification
Section 7.1. Indemnification of Officers, Directors and Other Eligible
Persons. To the fullest extent not inconsistent with applicable law, every
Eligible Person shall be indemnified by the Corporation against all Liability
and Expense that may be incurred by him or her in connection with or resulting
from any Claim, (a) if such Eligible Person is Wholly Successful with respect to
the Claim, or (b) if not Wholly Successful, then if such Eligible Person is
determined, as provided in either Section 7.7 or 7.8, to have acted in good
faith, in what he or she reasonably believed to be the best interests of the
Corporation or at least not opposed to its best interests and, in addition, with
respect to any criminal claim, is determined to have had reasonable cause to
believe that his or her conduct was lawful or had no reasonable cause to believe
that his or her conduct was unlawful. The termination of any Claim, by judgment,
order, settlement (whether with or without court approval), or conviction or
upon a plea of guilty or of nolo contendere, or its equivalent, shall not create
a presumption that an Eligible Person did not meet the standards of conduct set
forth in clause (b) of this Section 7.1. The actions of an Eligible Person with
respect to an employee benefit plan shall be deemed to have been taken in what
the Eligible Person reasonably believed to be the best interests of the
Corporation or at least not opposed to its best interests if the Eligible Person
acted in good faith and in a manner he or she reasonably believed to be in the
interest of the participants or beneficiaries of the employee benefit plan.
To the extent an Eligible Person has the right to receive indemnity
from another entity (including, but not limited to, a subsidiary of the
Corporation), the indemnity obligations of the Corporation under this Article 7
to the Eligible Person are (as between the Corporation and such other entity)
subordinate and junior to the indemnity obligations of such entity to the
Eligible Person. If the Corporation indemnifies an Eligible Person entitled to
indemnity from another entity (including, but not limited to, a subsidiary of
the Corporation), the Corporation shall have the right of subrogation to be
reimbursed from such other entity the amount of indemnity payments the Eligible
Person was otherwise entitled to receive from such other entity.
Section 7.2. Definition of Claim. The term "Claim" as used in this
Article 7 shall include every pending, threatened or completed claim, action,
suit or proceeding and all appeals thereof (whether brought by or in the right
of the Corporation or any other corporation or otherwise, and whether civil,
criminal, administrative or investigative, formal or informal), in which an
Eligible Person may become involved, as a party or otherwise (including, without
limitation, as a witness):
(a) by reasons of his or her being or having been an Eligible Person,
or
14
<PAGE>
(b) by reason of any action taken or not taken by such Eligible Person
in his or her capacity as an Eligible Person, whether or not such Eligible
Person continued in such capacity at the time any Liability or Expense related
to such Claim shall have been incurred.
Section 7.3. Definition of Eligible Person. The term "Eligible Person"
as used in this Article 7 shall mean every person (and the estate, heirs and
personal representatives of such person) who is or was a director, officer or
employee of the Corporation or a wholly-owned subsidiary of the Corporation
(including, but not limited to, Conseco Services, LLC) or who, while a director,
officer or employee of the Corporation or a wholly-owned subsidiary of the
Corporation, is or was serving at the request of the Corporation or a
wholly-owned subsidiary of the Corporation as a director, officer, employee,
partner, member, manager, trustee or fiduciary of another foreign or domestic
corporation, partnership, joint venture, limited liability company, trust,
employee benefit plan or other organization or entity, whether for profit or
not. An Eligible Person shall also be considered to have been serving an
employee benefit plan at the request of the Corporation or a wholly-owned
subsidiary of the Corporation if his or her duties to the Corporation or a
wholly-owned subsidiary of the Corporation also imposed duties on, or otherwise
involved services by, him or her to the plan or to participants in or
beneficiaries of the plan. The Corporation shall not be required to indemnify a
person in connection with a proceeding initiated by such person, including a
counterclaim or cross claim, unless the proceeding was authorized by the Board
of Directors or commenced following a Change of Control with respect to actions
or failure to act prior to such Change of Control.
Section 7.4. Definitions of Liability and Expense. The Terms
"Liability" and "Expense" as used in this Article 7 shall include, but shall not
be limited to, reasonable counsel fees and disbursements and amounts of
judgments, fines or penalties against (including excise taxes assessed with
respect to an employee benefit plan), and amounts paid in settlement by or on
behalf of, an Eligible Person.
Section 7.5. Definition of Wholly Successful. The term "Wholly
Successful" as used in this Article 7 shall mean (i) termination of any Claim
against the Eligible Person in question without any finding of liability or
guilt against him or her, (ii) approval by a court, with knowledge of the
indemnity herein provided, of a settlement of any Claim, or (iii) the expiration
of a reasonable period of time after the making or threatened making of any
Claim without the institution of the same, without any payment or promise made
to induce a settlement.
Section 7.6. Definition of Change of Control. The term "Change of
Control" as used in this Article 7 shall mean a change of control of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Securities and Exchange Act of 1934 (the
"1934 Act") as revised effective January 20, 1987, or, if Item 6(e) is no longer
in effect, any regulations issued by the Securities and Exchange Commission
pursuant to the 1934 Act which serve similar purposes; provided, that, without
limitation, (x) such a change of control shall be deemed to have occurred if and
when either (A) except as provided in (y) below, any "person" (as such term is
used in Sections 13(d) and 14(d) of the 1934 Act) is or becomes a "beneficial
owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act),
directly or indirectly, of securities of the Corporation representing 25% or
more of the combined voting power of the Corporation's then outstanding
securities entitled to vote with respect to the election of its Board of
Directors or (B) as the result of a tender offer, merger, consolidation, sale of
assets,
15
<PAGE>
or contest for election of directors, or any combination of the foregoing
transactions or events, individuals who were members of the Board of Directors
of the Corporation immediately prior to any such transaction or event shall not
constitute a majority of the Board of Directors following such transaction or
event, and (y) no such change of control shall be deemed to have occurred if and
when either (A) any such change is the result of a transaction which constitutes
a "Rule 13e-3 transaction" as such term is defined in Rule 13e-3 promulgated
under the 1934 Act or (B) any such person becomes, with the approval of the
Board of Directors of the Corporation, the beneficial owner of securities of the
Corporation representing 25% or more but less than 50% of the combined voting
power of the Corporation's then outstanding securities entitled to vote with
respect to the election of its Board of Directors and in connection therewith
represents, and at all times continues to represent, in a filing, as amended,
with the Securities and Exchange Commission on Schedule 13D or Schedule 13G (or
any successor Schedule thereto) that "such person has acquired such securities
for investment and not with the purpose nor with the effect of changing or
influencing the control of the Corporation, nor in connection with or as a
participant in any transaction having such purpose or effect," or words of
comparable meaning and import. The designation by any such person, with the
approval of the Board of Directors of the Corporation, of a single individual to
serve as a member of, or observer at meetings of, the Corporation's Board of
Directors, shall not be considered "changing or influencing the control of the
Corporation" within the meaning of the meaning of the immediately preceding
clause (B), so long as such individual does not constitute at any time more than
one-third of the total number of directors serving on such Board.
Section 7.7. Procedure for Determination of Entitlement to
Indemnification. The determination of whether an Eligible Person who is or at
the time of Claim was a Director (other than one who has been Wholly Successful
with respect to any Claim or one who has requested indemnification following a
Change of Control with respect to actions or failure to act prior to such Change
of Control) is entitled to indemnification shall be made by any one of the
following methods, such method to be selected by the Board of Directors:
(a) by the Board of Directors by a majority vote of a quorum
consisting of Directors who are not and have not been parties to the Claim;
(b) if a quorum cannot be obtained under (a), by the majority vote of a
committee duly designated by the Board of Directors (in which designation
Directors who are or who have been parties to the Claim may participate),
consisting solely of two or more Directors who are not and have not been parties
to the Claim;
(c) by special legal counsel (which may be regular counsel of the
Corporation) (i) selected by the Board of Directors or a committee thereof in
the manner prescribed in (a) or (b); or (ii) if a quorum of the Board of
Directors cannot be obtained under (a) and a committee cannot be designated
under (b), selected by a majority vote of the full Board of Directors (in which
selection Directors who are or who have been parties to the Claim may
participate).
If a Change in Control shall have occurred, the Eligible Person who is
or at the time of Claim was a Director shall be presumed to be entitled to
indemnification (with respect to actions or failures to act occurring prior to
such Change in Control) upon submission of a request for indemnification, and
thereafter the Corporation shall have the burden of proof to overcome that
presumption in reaching a contrary determination. The method for determining
entitlement to indemnification shall
16
<PAGE>
be by special legal counsel selected by the Eligible Person, but only such
special legal counsel to which a majority of the Directors who are not and have
not been parties to the Claim do not object.
In the case of Eligible Persons who are not or were not Directors of
the Corporation, the determination of whether the Eligible Person (other than
one who has been Wholly Successful with respect to any Claim) is entitled to
indemnification shall be made (a) by the Chairman of the Board or (b) if the
Chairman of the Board so directs or in his or her absence, in the manner such
determination would have been made if the Eligible Person was a Director of the
Corporation.
Section 7.8. Application to Court for Determination. If an Eligible
Person claiming indemnification pursuant to Section 7.7 is found not to be
entitled thereto, the Eligible Person may apply for indemnification with respect
to a Claim to a court of competent jurisdiction, including a court in which the
Claim is pending against the Eligible Person. On receipt of an application, the
court, after giving notice to the Corporation and giving the Corporation
opportunity to present to the court any information or evidence relating to the
claim for indemnification that the Corporation deems appropriate, may order
indemnification if it determines that the Eligible Person is entitled to
indemnification with respect to the Claim because such Eligible Person met the
standards of conduct set forth in Section 7.1(b). If the court determines that
the Eligible Person is entitled to indemnification, the court shall also
determine the reasonableness of the Eligible Person's Expenses.
Section 7.9. Nonexclusivity. The rights of indemnification provided in
this Article 7 shall be in addition to any rights to which any Eligible Person
may otherwise be entitled. Irrespective of the provisions of this Article 7, the
Board of Directors may, at any time and from time to time, (a) approve
indemnification of any Eligible Person to the fullest extent permitted by the
provisions of applicable law at the time in effect, whether on account of past
or future transactions, and (b) authorize the Corporation to purchase and
maintain insurance on behalf of any Eligible Person against any Liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against such Liability.
Section 7.10. Advancement of Expenses. The Corporation shall advance to
an Eligible Person who is a director or officer of the Corporation the Expenses
incurred by such Eligible Person with respect to any Claim. The Corporation may
advance to an Eligible Person who is not a director or officer of the
Corporation the Expenses incurred by such Eligible Person with respect to any
Claim. The Corporation shall advance such Expenses within sixty (60) days after
the receipt by the Corporation of a statement or statements from the Eligible
Person requesting such advance or advances from time to time, whether prior to
or after final disposition of such Claim unless a determination has been made
pursuant to Section 7.1 that such Eligible Person is not entitled to
indemnification. Any such statement or statements shall reasonably evidence the
expenses incurred by the Eligible Person and shall include a written affirmation
or undertaking to repay advances if it is ultimately determined that the
Eligible Person is not entitled to indemnification under this Article.
Section 7.11. Insurance, Contracts and Funding. The Corporation may
purchase and maintain insurance to protect itself and any Eligible Person
against any expense, judgments, fines and amounts relating to any Claim or
incurred by any Eligible Person in connection with any Claim, to the fullest
extent permitted by applicable law now or hereafter in effect. The Corporation
may enter into agreements with any Eligible Person supplemental to or in
furtherance of the provisions
17
<PAGE>
of this Article and may create a trust fund or use other means (including,
without limitation, a letter of credit) to ensure the payment of such amounts as
may be necessary to effect indemnification and advancement of expenses as
provided in this Article.
Section 7.12. Nature of Provisions. The provisions of this Article 7
shall be deemed to be a contract between the Corporation and each Eligible
Person, and an Eligible Person's rights hereunder shall not be diminished or
otherwise adversely affected by any repeal, amendment or modification of this
Article 7 that occurs subsequent to such person becoming an Eligible Person with
respect to acts occurring prior to such repeal, amendment or modification.
Section 7.13. Applicability of Provisions. The provisions of this
Article 7 shall be applicable to Claims made or commenced after the adoption
hereof, whether arising from acts or omissions to act occurring before or after
the adoption hereof.
ARTICLE 8
Miscellaneous
Section 8.1. Amendments. The power to make, alter, amend, or repeal
these Bylaws is vested in the Board of Directors, but the affirmative vote of a
majority of the actual number of Directors elected and qualified, from time to
time, shall be necessary to effect any alteration, amendment or repeal of these
Bylaws.
Section 8.2. Seal. The seal of the Corporation shall be circular in
form and mounted on a metal die, suitable for impressing the same upon paper.
About the upper periphery of the seal shall appear the words "CONSECO, INC.,"
and about the lower periphery thereof, the word "Indiana." In the center of the
seal shall appear the word "Seal."
Section 8.3. Fiscal Year. The fiscal year of the Corporation shall
begin on the first day of January of each year and end upon the last day of
December in the same year.
18
Unless this certificate is presented by an authorized representative of
The Depository Trust Company, a New York corporation (the "Depository"), to the
Company or its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of the Depository (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of the Depository), ANY TRANSFER, PLEDGE, OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein.
REGISTERED REGISTERED
CONSECO, INC.
6.4% NOTE DUE FEBRUARY 10, 2003
CUSIP 208464 AG 2
No. 1 US$200,000,000
CONSECO, INC., a corporation duly organized and existing under
the laws of Indiana (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to Cede & Co. or registered assigns, the
principal sum of Two Hundred Million Dollars ($200,000,000) on February 10,
2003, and to pay interest thereon from February 9, 1998 or from the most recent
Interest Payment Date (as hereinafter defined) to which interest has been paid
or duly provided for, as the case may be.
Interest will be payable on February 10 and August 10 of each
year (each an "Interest Payment Date"), at the rate of 6.4% per annum,
commencing August 10, 1998 (except as provided below) until the principal hereof
becomes due and payable. Interest payments will be made in an amount equal to
the amount accrued from and including the immediately preceding Interest Payment
Date in respect of which interest has been paid or duly made available for
payment (or from and including the date of issue, if no interest has been paid
or duly made available for payment) to but excluding the applicable Interest
Payment Date or Maturity. The interest so payable and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture,
be paid to the Person in whose name this Note (or one or more predecessor Notes)
is registered at the close of business on the Regular Record Date for such
interest payment, which shall be the February 1 or August 1 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Except as otherwise provided in the Indenture, any such interest not so
punctually paid or duly provided for will forthwith cease to be payable to the
Holder on such Regular Record Date by virtue of their having been such Holder
and may either be paid to the Person in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest to be fixed by the Trustee,
notice whereof is to be given to Holders of Notes not less than 10 calendar days
prior to such Special Record Date, or be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which Notes of this series may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said Indenture.
1
<PAGE>
If any Interest Payment Date(s) or the date of Maturity falls
on a day that is not a Business Day, the required payment of principal, premium,
if any, and/or interest will be made on the next succeeding Business Day as if
made on the date such payment was due, and no interest will accrue on such
payment for the period from and after such Interest Payment Date or the date of
Maturity, as the case may be, to the date of such payment on the next succeeding
Business Day.
While this Note is represented by one or more global notes
registered in the name of the Depository or its nominee, the Company will cause
payments of principal of, premium, if any, and interest on this Note to be made
to the Depository or its nominee, as the case may be, by wire transfer to the
extent, in the funds and in the manner required by agreements with, or
regulations or procedures prescribed from time to time by, the Depository or its
nominee, and otherwise in accordance with such agreements, regulations and
procedures. THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY
OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY OR BY THE DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR OF THE
DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR.
Unless the certificate of authentication hereon has been
executed by the Trustee referred to herein, or its successor as Trustee, or its
Authenticating Agent, by manual signature of an authorized signatory, this Note
will not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
This Note is one of a duly authorized issue of securities of
the Company (the "Securities") issued under an indenture, dated as of November
13, 1997, as amended from time to time (the "Indenture"), between the Company
and LTCB Trust Company, as trustee (the "Trustee"), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee and the Holders of the Notes and of the terms upon
which the Securities are, and are to be, authenticated and delivered. This Note
is one of the Securities designated on the face hereof limited in aggregate
principal amount to $250,000,000.
The Notes of this series will be redeemable as a whole or in
part at the option of the Company at any time, at a redemption price equal to
the sum of (a) the greater of (i) 100% of the principal amount of such Notes and
(ii) the sum of the present values of the remaining scheduled payments of
principal and interest thereon from the redemption date to the date of Maturity,
computed by discounting such payments, in each case, to the redemption date on a
semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at
the Treasury Rate, plus 25 basis points, plus (b) accrued interest on the
principal amount thereof to the date of redemption.
"Treasury Rate" means, with respect to any redemption date,
the rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
2
<PAGE>
"Comparable Treasury Issue" means the United States Treasury
security selected by an Independent Investment Banker as having a maturity
comparable to the remaining term of this Note to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of this Note. "Independent Investment Banker"
means one of the Reference Treasury Dealers appointed by the Trustee after
consultation with the Company.
"Comparable Treasury Price" means, with respect to any
redemption date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third Business Day preceding such redemption date, as set forth in the
daily statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, the average of
the Reference Treasury Dealer Quotations actually obtained by the Trustee for
such redemption date. "Reference Treasury Dealer Quotations" means, with respect
to each Reference Treasury Dealer and any redemption date, the average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m.
(New York City time) on the third Business Day preceding such redemption date.
"Reference Treasury Dealer" means each of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Deutsche Morgan Grenfell Inc., Salomon
Brothers Inc and SBC Warburg Dillon Read Inc. and their respective successors;
provided, however, that if any of the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"), the
Company may substitute therefor another Primary Treasury Dealer.
Notice of any redemption will be mailed at least 30 days but
no more than 60 days before the redemption date to each holder of Notes to be
redeemed. If, at the time notice of redemption is given, the redemption moneys
are not held by the Trustee, the redemption may be made subject to their receipt
on or before the date fixed for redemption and such notice shall be of no effect
unless such moneys are so received.
Upon payment of the redemption price, on and after the
redemption date interest will cease to accrue on this Note or portions hereof
called for redemption.
The Notes of this series contain the following covenants:
Limitations on Issuance or Disposition of Stock of Significant
Subsidiaries. The Company will not, nor will it permit any Significant
Subsidiary to, issue, sell or otherwise dispose of any shares of Capital Stock
(other than non-voting Preferred Stock) of any Significant Subsidiary, except
for (i) directors' qualifying shares; (ii) sales or other dispositions to the
Company or to one or more wholly owned Significant Subsidiaries; (iii) the sale
or other disposition of all or any part of the Capital Stock of any Significant
Subsidiary for consideration which is at least equal to the fair value
3
<PAGE>
of such Capital Stock as determined by the Company's board of directors (acting
in good faith); or (iv) any issuance, sale, assignment, transfer or other
disposition made in compliance with an order of a court or regulatory authority
of competent jurisdiction, other than an order issued at the request of the
Company or any Significant Subsidiary.
Limitation on Liens. Except as provided below, neither the
Company nor any Significant Subsidiary may incur, issue, assume or guarantee any
Indebtedness secured by a Lien on any property or assets of the Company or any
Significant Subsidiary, or any shares of Capital Stock of any Significant
Subsidiary, without effectively providing that the Notes (together with, if the
Company shall so determine, any other Indebtedness which is not subordinated to
the Notes) shall be secured equally and ratably with (or prior to) such
Indebtedness, so long as such Indebtedness shall be so secured; provided,
however, that this covenant shall not apply to Indebtedness secured by (i) Liens
existing on the date of this Note; (ii) Liens on property of, or on any shares
of stock of, any corporation existing at the time such corporation becomes a
Significant Subsidiary or merges into or consolidates with the Company or a
Significant Subsidiary; (iii) Liens on property or on shares of stock existing
at the time of acquisition thereof by the Company or any Significant Subsidiary;
(iv) Liens to secure the financing of the acquisition, construction or
improvement of property, or the acquisition of shares of stock by the Company or
any Significant Subsidiary, provided that such Liens are created not later than
one year after such acquisition or, in the case of property, no later than one
year after completion of construction or commencement of commercial operation,
whichever is later, are limited to the property acquired, constructed or
improved or the shares of stock acquired and do not secure indebtedness in
excess of the cost of such acquisition, construction or improvement; (v) Liens
in favor of the Company or any Subsidiary; (vi) Liens in favor of, or required
by, governmental authorities; and (vii) any extension, renewal or replacement as
a whole or in part, of any Lien referred to in the foregoing clauses (i) to (vi)
inclusive; provided, however, that (a) such extension, renewal or replacement
Lien shall be limited to all or a part of the same property or shares of stock
that secured the Lien extended, renewed or replaced and (b) the Indebtedness
secured by such Lien at such time is not so increased.
The restrictions in the immediately preceding paragraph do not
apply if, immediately after the incurrence, issuance, assumption or guarantee of
any Indebtedness secured by a Lien, the aggregate principal amount of such
secured Indebtedness, (other then Indebtedness secured by Liens described in
clauses (i) to (vii), inclusive, of the immediately preceding paragraph) at that
time would not exceed 10% of Consolidated Capitalization.
"Capital Lease Obligations" of a Person means any obligation
that is required to be classified and accounted for as a capital lease on the
face of a balance sheet of such person prepared in accordance with generally
accepted accounting principles; the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally accepted
accounting principles; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
4
<PAGE>
"Capital Stock" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interest
in (however designated) corporate stock, including any Preferred Stock.
"Consolidated Capitalization" means the sum of the Company's
consolidated shareholders' equity, redeemable preferred stock and preferred
securities in any trust, partnership or other entities of which more than 50% of
the voting equity is owned directly or indirectly by the Company, including,
without limitation, the trust securities issued by Conseco Financing Trust I,
Conseco Financing Trust II, Conseco Financing Trust III and Conseco Financing
Trust IV.
"Indebtedness" means (i) any liability of any Person (1) for
borrowed money, or under any reimbursement obligation relating to a letter of
credit (other than letters of credit obtained in the ordinary course of
business), or (2) evidenced by a bond, note, debenture or similar instrument
(including a purchase money obligation) given in connection with the acquisition
of any businesses, properties or assets of any kind or with services incurred in
connection with capital expenditures (other than accounts payable or other
indebtedness to trade creditors arising in the ordinary course of business), or
(3) for the payment of money relating to a Capital Lease Obligation; (ii) any
liability of others described in the preceding clause (i) that the Person has
guaranteed or that is otherwise its legal liability; and (iii) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of types referred to in clauses (i) and (ii) above.
"Lien" means any lien, mortgage, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement and any lease in the nature thereof).
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock or limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock," as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Significant Subsidiary" means any Subsidiary with net
earnings which constituted at least 20% of the Company's consolidated total net
earnings, all as determined as of the date of the Company's most recently
prepared quarterly financial statements for the 12-month period then ended.
"Stated Maturity," when used with respect to any security or
any installment of interest on any security, means the date specified in such
security as the fixed date on which the principal of such security or such
installment of interest, respectively, is finally due and payable, except as
otherwise provided in the case of Capital Lease Obligations.
5
<PAGE>
"Subsidiary" means a corporation of which a majority of the
Capital Stock having voting power under ordinary circumstances to elect a
majority of the board of directors is owned directly or indirectly by the
Company or by one or more Subsidiaries, or by the Company and one or more
Subsidiaries.
If any Event of Default with respect to Notes of this series
will occur and be continuing, the principal of the Notes of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities of
each series to be affected under the Indenture at any time by the Company and
the Trustee with the consent of the Holders of not less than a majority in
principal amount of the outstanding Securities of each series to be affected.
The Indenture also contains provisions permitting the Holders of specified
percentages in principal amount of the outstanding Securities of each series, on
behalf of the Holders of all Securities of such series, to waive, with respect
to the Securities of such series, compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Note will
be conclusive and binding upon such Holder and upon all future Holders of this
Note and of any Note issued upon the registration of transfer hereof or in
exchange herefor or in lieu hereof, whether or not notation of such consent or
waiver is made upon this Note.
Holders of Notes may not enforce their rights pursuant to the
Indenture or the Notes except as provided in the Indenture. No reference herein
to the Indenture and no provision of this Note or of the Indenture will alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, and premium, if any, and interest on this Note at the
times, places and rates, herein prescribed.
The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Note and (b) certain
restrictive covenants and the related Events of Default upon compliance by the
Company with certain conditions specified therein, which provisions apply to
this Note.
The Notes of this series are issuable only in global or
certificated registered form, without coupons, in denominations of $1,000 and
integral multiples thereof. As provided in the Indenture and subject to certain
limitations therein specified and to the limitations described below, if
applicable, Notes of this series are exchangeable for Notes of this series of
like aggregate principal amount of a different authorized denomination, as
requested by the Holder surrendering the same.
As provided in the Indenture and subject to certain
limitations therein specified and to the limitations described below, if
applicable, the transfer of this Note is registerable in the Security Register
upon surrender of this Note for registration of transfer at the office or agency
of the
6
<PAGE>
Company maintained for that purpose duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar (which will initially be the Trustee at its principal
corporate trust office located in the Borough of Manhattan, The City of New
York) duly executed by the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Notes of this series with like terms and
conditions, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.
This Note is exchangeable for certificated Notes only upon the
terms and conditions provided in the Indenture. Except as provided in the
Indenture, owners of beneficial interests in this Note will not be entitled to
receive physical delivery of Notes in certificated registered form and will not
be considered the Holders thereof for any purpose under the Indenture.
This Note is in the form of a Global Security as provided in
the Indenture. If at any time the Depository notifies the Company that it is
unwilling or unable to continue as Depository for this Note or if at any time
the Depository for this series shall no longer be eligible or in good standing
under the Securities Exchange Act of 1934, as amended, or other applicable
statute or regulation, the Company shall appoint a successor Depository with
respect to this Note. If a successor Depository for this Note is not appointed
by the Company within 90 days after the Company receives notice or becomes aware
of such ineligibility, the Company will execute, and the Trustee or its agent,
upon receipt of a Company Request for the authentication and delivery of
certificates representing Securities of this series in exchange for this
Security will authenticate and deliver, certificates representing securities of
this series of like tenor and terms in an aggregate principal amount equal to
the principal amount of this Note in exchange for this Note.
If specified by the Company pursuant to the Indenture with
respect to this Note, the Depository may surrender this Note in exchange in
whole or in part for certificates representing Securities of this series of like
tenor and terms in definitive form on such terms as are acceptable to the
Company and the Depository. Thereupon the Company shall execute, and the trustee
or its agent shall authenticate and deliver, without a service charge, (1) to
each Holder specified by the Security Registrar or the Depository a certificate
or certificates representing Securities of this series of like tenor and terms
and of any authorized denomination as requested by such person in an aggregate
principal amount equal to and in exchange for such Holder's beneficial interest
as specified by the security Registrar or the Depository in this Note; and (2)
to the Depository a new Global Security of like tenor and terms and in an
authorized denomination equal to the difference, if any, between the principal
amount of the surrendered Note and the aggregate principal amount of
certificates representing Notes delivered to Holders thereof.
No service charge will be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note
7
<PAGE>
is registered as the owner hereof for all purposes, whether or not this Note be
overdue and notwithstanding any notation of ownership or other writing hereon,
and none of the Company, the Trustee or any such agent will be affected by
notice to the contrary.
The Indenture and the Notes will be governed by and construed
in accordance with the laws of the State of New York.
All terms used in this Note which are defined in the Indenture
will have the meanings assigned to them in the Indenture unless otherwise
defined herein; and all references in the Indenture to "Security" or
"Securities" will be deemed to include this Note.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Date: February 9, 1998 CONSECO, INC.
By /s/ ROLLIN M. DICK
-----------------------------------
Rollin M. Dick
[SEAL]
Attest:
By /s/ DONALD F. GONGAWARE
-----------------------------------
Donald F. Gongaware
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
Dated: February 9, 1998 LTCB TRUST COMPANY,
as Trustee
By: /s/ BARBARA BEVELAQUA
----------------------------------
Authorized Officer
9
<PAGE>
-----------------
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT - ..................Custodian................
(Cust) (Minor)
Under Uniform Gifts to Minors Act
....................................
(State)
Additional abbreviations may also be used though not in the above list.
------------------
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- -------------------------------------
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing __________________ attorney to transfer said Security on the
books of the Company, with full power of substitution in the premises.
Date:
----------------------
Signature
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN INSTRUMENT IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY AN "ELIGIBLE GUARANTOR
INSTITUTION" THAT IS A MEMBER OR PARTICIPANT IN A "SIGNATURE GUARANTEE PROGRAM"
(E.G., THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM, THE STOCK EXCHANGE
MEDALLION PROGRAM OR THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE
PROGRAM).
10
AMENDED AND RESTATED
DIRECTOR, EXECUTIVE AND SENIOR
OFFICER STOCK PURCHASE PLAN
OF CONSECO, INC.
1. PURPOSE. The Amended and Restated Director, Executive and Senior
Officer Stock Purchase Plan (the "Plan"), of Conseco, Inc.
("Conseco"), is adopted to facilitate the purchase, by the Directors,
executives and senior managers of Conseco and its subsidiaries
(collectively, the "Company"), of Conseco's common stock ("Common
Stock") and Conseco's Preferred Redeemable Increased Dividend Equity
Securities, 7% PRIDES, Convertible Preferred Stock ("PRIDES"). The
purchases facilitated by the Plan are intended to achieve the
following specific purposes:
a) more closely align key employees' financial rewards
with the financial rewards realized by all other
shareholders of the Company;
b) increase key employees' motivation to manage the
Company as owners; and
c) increase the ownership of Common Stock and PRIDES
among senior management of the Company.
2. ELIGIBILITY. To be eligible to participate in the Plan, the individual
must be a non-employee Director of the Company, an executive officer
of the Company or a senior officer of the Company selected by the
Directors ("Eligible Participant").
3. PARTICIPATION. To become a Plan participant ("Participant"), an
Eligible Participant must satisfy the following requirements:
a) submit a completed, signed and irrevocable election
to purchase all or, in the case of Directors and
Executive Officers, a portion of the Common Stock or
PRIDES which the Eligible Participant is eligible to
purchase under the Plan along with a power of
attorney authorizing such purchases on the
Participant's behalf;
b) complete and sign all necessary agreements and other
documents relating to the loan described in Section 4
hereof including, but not limited to, personal
financial statements, letters of instruction to
brokers, transfer agents and banks as are necessary
or appropriate under the loan described in Section 4
hereof, and a power of attorney authorizing
<PAGE>
borrowings under such loan; and
c) satisfy all other conditions of participation
specified in the Plan.
The agreements and other documents specified in subsections 3 (a), (b)
and (c) must be submitted at such times and to such Company offices as
specified by the Company. No Eligible Participant is required to
participate in the Plan.
Directors and executive officers may purchase up to 2,500,000 shares of
Common Stock under the Plan. Senior officers electing to become
Participants must purchase at least 10,000 shares of Common Stock. Up
to 8,000,000 shares of Common Stock may be purchased by all
Participants. Directors and executive officers shall have the right to
purchase shares not purchased by other Participants in such amount as
is determined by the pro rata amount of their participation in the Plan
compared to the participation of the other Participants electing to
purchase additional shares. All such purchases may be made by the
individual Participant or by a trust, corporation, partnership or
limited liability company controlled by the Participant ("Participant
Designee"; the term Participant shall include Participant Designee
unless the context otherwise requires).
4. PURCHASE OF SHARES. Conseco, in its sole discretion subject to the
terms and provisions of the Plan, will determine the timing, amount,
price and mechanics of all of the purchases of shares of Common Stock
(the "Purchased Shares") through open market and negotiated
transactions. Purchases of Purchased Shares shall be effected through
a broker in accordance with Rule 10b-18 under the Securities Exchange
Act of 1934. The shares of Common Stock purchased pursuant to the Plan
will be allocated proportionately among Participants at the end of
each trading day based upon the percentage of all of the shares of
Common Stock Participants have elected to purchase and the average
price for all purchases of shares of Common Stock on that day.
Conseco has arranged the opportunity for each Participant to obtain a
loan through Bank of America National Trust and Savings Association
and other participating financial institutions (collectively, the
"Bank") to fund the purchase of the Purchased Shares (the "Loan").
Each Participant must sign a power of attorney authorizing loans
under the Amended and Restated Credit Agreement with the Bank and the
purchase of the Purchased Shares. Each Participant is responsible
for satisfying all of the lending requirements specified by the Bank
to qualify for the Loan including all collateral requirements. Each
Participant is fully obligated to repay to
2
<PAGE>
the Bank all principal, interest, and any prepayment fees on the Loan
when due and payable.
In the event a Participant does not wish to obtain the Loan, the
Participant shall provide sufficient funds to fund the purchase of the
Purchased Shares. Such Participant must execute a power of attorney
authorizing the purchase of the Purchased Shares. If the Participant
fails to fund the purchase of the Purchased Shares, the Participant
may no longer participate in the Plan, and all of the Purchased Shares
not paid for will be allocated to the other Participants.
5. REGISTRATION OF SHARES. The Purchased Shares will be registered in the
name of the Participant or his or her designee and certificated. Each
certificate will bear a legend referring to the Plan. The certificates
for the Purchased Shares of each Participant who participates in the
Loan will be held by the Bank as collateral for the Loan. Each such
Participant must deliver to the Bank a stock power endorsed in blank
with respect to the Purchased Shares. A Participant may be able to
obtain a release of the Purchased Shares from the Bank provided that
other collateral of equal value is substituted as collateral for the
Loan.
6. SHAREHOLDER RIGHTS. Each Participant will have all of the rights of a
shareholder with respect to the Purchased Shares, including the right
to vote the shares and the right to receive dividends. Any dividends
in excess of required interest payments will be deposited to the
Participant's account at the Bank.
7. SALE OF PURCHASED SHARES. Each Participant is permitted to sell all or
any portion of the Purchased Shares; provided, that any such sale does
not violate any provision of a Loan.
8. DEATH OR DISABILITY. Upon the death of a Participant, her or his
estate or the Participant Designee, as the case may be, may elect to
cause Conseco to pay the estate or the Participant Designee, as the
case may be, an amount equal to the purchase price paid for the
Purchased Shares purchased by the deceased Participant minus the value
of such shares on the date of the Participant's death based upon the
average of the high and low trading prices per share for the Purchased
Shares as reported by the principal national stock exchange upon which
such shares are traded. The estate or the Participant Designee, as the
case may be, of a deceased Participant must make such election, in
writing, within 30 days after written notice from Conseco. Upon the
total and permanent disability of a Participant who is an employee of
the Company, such disabled Participant may elect to cause Conseco to
pay the Participant an amount equal to the purchase price paid for the
3
<PAGE>
Purchased Shares by the disabled Participant minus the value of such
shares on the date of the determination of the Participant's total and
permanent disability based upon the average of the high and low trading
prices per share for the Purchased Shares as reported by the principal
national stock market upon which such shares are traded. The
Participant must make such election, in writing, within 30 days after
written notice from Conseco. "Total and permanent disability" means the
inability of a Participant to provide meaningful service for the
Company due to a medically determinable physical or mental impairment.
Such determination of total and permanent disability shall be made by
the Company. Notwithstanding the above, if a Participant qualifies for
Federal Social Security disability benefits or for payments under the
Company's long-term disability income plan, based upon his physical or
mental condition, he shall be deemed to suffer from a total and
permanent disability hereunder. This Section 8 has no effect on a
deceased or disabled Participant's sale of Purchased Shares before the
Participant's death or disability. Payment by Conseco of amounts
described in this Section 8 is conditioned on the payment in full of
the Participant's Loan, if any, and the release of the Company's
guarantee with respect thereto. This Section 8 will terminate January
1, 2002.
9. LOAN GUARANTEE. Conseco will guarantee repayment to the Bank of 100%
of all principal, interest, prepayment fees and other obligations of
each Participant under such Participant's Loan described in Section 4.
The Conseco loan guaranty is a condition to the loan arrangement
Conseco has made with the Bank. The terms and conditions of the
guarantee are as agreed by Conseco and the Bank. If a Participant
specifies a Participant Designee, the Participant shall enter into an
indemnification agreement to indemnify Conseco for any losses under
the guaranty of the Loan with respect to the Participant Designee.
Each Participant is fully obligated to repay to the Bank all
principal, interest, and other amounts on the Loan when due and
payable. Conseco may take any action relating to the Participant and
her or his assets, which the Board of Directors deems reasonable and
necessary, (including, but not limited to, offsetting amounts owed to
Conseco against wages, fees or other amounts owed to the Participant
from Conseco) to obtain full reimbursement for amounts Conseco pays to
the Bank under its guaranty related to the Participant's or a
Participant Designee's Loan ("Loan Default"). Notwithstanding the
foregoing, Conseco will not be subrogated to any right of the Bank as
a holder of a security interest in the Purchased Shares.
10. LOAN OF INTEREST PAYMENTS. At the discretion of the Directors, Conseco
or one of its subsidiaries (the "Lender") may loan funds to the
Participants equal to the amount of
4
<PAGE>
current interest payments owed by the Participants pursuant to the
Amended and Restated Credit Agreement (the "Interest Payment Loans").
All Interest Payment Loans shall be evidenced by promissory notes, the
terms and conditions of which shall be determined at the sole
discretion of the Lender. If a Participant specifies a Participant
Designee, the Participant shall enter into an indemnification agreement
to indemnity the Lender for any losses under the Interest Payment Loan.
11. MARGIN REGULATIONS.
(a) None of the obligations of the Participants to Conseco or
one of its subsidiaries (collectively, Conseco and its subsidiaries
shall be referred to as "Conseco" for the purposes of this Section 11)
hereunder is or will be secured, directly or indirectly, by Margin
Stock (as such term is defined in Regulation U and Regulation G
promulgated by the Board of Governors of the Federal Reserve System);
(b) Neither Conseco nor any third party acting on behalf of
Conseco has taken or will take possession of a Participant's Margin
Stock to secure, directly or indirectly, any of the obligations of
such Participant to Conseco;
(c) Conseco does not and will not have any right to prohibit
such Participant from selling, pledging, encumbering or otherwise
disposing of any Margin Stock owned by such Participant so long as the
obligations of such Participant under this Plan remain outstanding;
(d) Such Participant has not granted and will not grant
Conseco or any third party acting on behalf of Conseco the right to
accelerate repayment of any of the obligations under this Plan of such
Participant if any of the Margin Stock owned by such Participant is
sold by such Participant or otherwise; and
(e) There is no agreement or other arrangement between such
Participant and Conseco or any third party acting on behalf of Conseco
(and no such agreement or arrangement shall be entered into so long as
this Plan is in effect or any of the obligations of such Participant
under this Plan remain outstanding) under which the Margin Stock of
Participant would be made more readily available as security to
Conseco than to other creditors of such Participant.
12. CHANGES OF CONTROL. A "Change of Control" of Conseco shall mean a
change of control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934 (the "1934 Act") as revised
effective January 20,
5
<PAGE>
1987, or if Item 6(e) is no longer in effect, any regulations issued by
the Securities and Exchange Commission pursuant to the 1934 Act which
serve similar purposes; provided, that, without limitations, (x) such a
change of control shall be deemed to have occurred if and when either
(A) except as provided in (y) below, any "person" (as such terms is
used in Sections 13(d) and 14(d) of the 1934 Act) is or becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the 1934 Act), directly or indirectly, of securities of Conseco
representing 25% or more of the combined voting power of Conseco's then
outstanding securities entitled to vote with respect to the election of
its Board of Directors or (B) as the result of a tender offer, merger,
consolidation, sale of assets, or contest for election of directors, or
any combination of the foregoing transactions or events, individuals
who were members of the Board of Directors of Conseco immediately prior
to any such transaction or event shall not constitute a majority of the
Board of Directors following such transaction or event, and (y) no such
change of control shall be deemed to have occurred if and when either
(A) any such change is the result of a transaction which constitutes a
"Rule 13e-3 transaction" as such term is defined in Rule 13e-3
promulgated under the 1934 Act or (B) any such person becomes, with the
approval of the Board of Directors of Conseco, the beneficial owner of
securities of Conseco representing 25% or more but less than 50% of the
combined voting power of Conseco's then outstanding securities entitled
to vote with respect to the election of its Board of Directors and in
connection therewith represents, and at all times continues to
represent, in a filing, as amended, with the Securities and Exchange
Commission on Schedule 13D or Schedule 13G (or any successor Schedule
thereto) that "such person has acquired such securities for investment
and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant
in any transaction having such purpose or effect" or words of
comparable meaning and import. The designation by any such person, with
the approval of the Board of Directors of Conseco, of a single
individual to serve as a member of, or observer at meetings of,
Conseco's Board of Directors, shall not be considered "changing or
influencing the control of the Company" within the meaning of the
immediately preceding clause (B), so long as such individual does not
constitute at any time more than one-third of the total number of
directors serving on such Board. In the event of a Change of Control,
each Participant will receive in exchange for the Purchased Shares the
higher of (i) the purchase price paid for all of each Participant's
Purchased Shares, respectively, plus all interest paid by each
respective Participant under the Loan or (ii) the amount of the
consideration to be paid for the Purchased Shares in connection with
the Change of Control. Such amount shall be paid to the Participants
upon
6
<PAGE>
consummation of the event resulting in a Change of Control.
13. OTHER TERMINATION. If a Participant ceases to be a Director or officer
of Conseco in circumstances other than as described in section 12,
Conseco shall notify the Participant or Participant Designee that such
Participant or Participant Designee shall have the option to either
(i) within 30 days of the notice, retire the Loan and release
Conseco's guaranty or (ii) continue the Loan and the Interest Payment
Loan until their maturity date with Conseco's guaranty, but commence
paying all future interest payments on such Loans as due.
If the Participant desires Conseco's guaranty to continue, he or she
agrees that, as compensation for continuing such guaranty beyond the
termination of such Participant's employment or directorship, as the
case may be, the former Participant shall pay to Conseco the following
fees:
(a) A continuing guaranty fee on the outstanding note
balance at each calendar quarter end to be paid at
the rate of .5% each quarter.
(b) A settlement fee equal to half of the "Exit Profit".
The Exit Profit shall be the excess, if any, of (i)
the proceeds received from the sale of the Related
Shares (as defined herein) or the market value of the
Related Shares on the date the guaranty is released,
whichever occurs first minus (ii) the sum of (x) the
market value of the Related Shares at the
Participant's termination date and (y) the interest
accrued on the Loan since the termination date for
the Related Shares. The "Related Shares" means the
number of Purchased Shares acquired with the proceeds
of the remaining principal amount of the loan at the
date of termination of employment.
14. ADMINISTRATION. The Board of Directors of Conseco shall be charged
with the administration and interpretation of the Plan but may
delegate the ministerial duties hereunder to such persons as it
determines. The Board of Directors of Conseco may adopt such rules as
may be necessary or appropriate for the proper administration of the
Plan. The decision of the Board of Directors of Conseco in all matters
involving the interpretation and application of the Plan shall be
final and shall be given the maximum possible deference allowed by
law.
15. PAYMENT OF EXPENSES. The expenses of administering the Plan shall be
paid by the Company except those expenses which are expenses of the
Participants.
7
<PAGE>
16. EMPLOYER-EMPLOYEE RELATIONSHIP. The establishment of this Plan shall
not be construed as conferring any legal or other rights upon any
employee or any person for a continuation of employment, nor shall it
interfere with the rights of the Company to discharge any employee or
otherwise act with relation to the employee. The Company may take any
action (including discharge) with respect to any employee or other
person and may treat such person without regard to the effect which
such action or treatment might have upon such person as a Participant
of this Plan.
17. AMENDMENT AND TERMINATION. The Company reserves the right to change or
discontinue this Plan by action of the Board of Directors in its
discretion; provided, however, that in the case of any person to whom
benefits under this Plan had accrued upon termination of employment
prior to such Board of Directors action, or in the case of any
Participant who would have been entitled to benefits under this Plan
had the Participant's employment ceased prior to such change or
discontinuance, the benefits such person had accrued under this Plan
prior to such change or discontinuance shall not be adversely affected
thereby.
Notwithstanding anything herein to the contrary, nothing contained
herein shall restrict the Company's right to terminate the Plan.
This Plan completely supersedes and replaces the Conseco, Inc.
Director, Executive and Senior Officer Stock Purchase Plan dated April
4, 1996.
18. WITHHOLDING. The Company shall have the right to deduct in cash
(whether under this Plan or otherwise) in connection with all payments
by the Company to a Participant under this Plan any taxes required by
law to be withheld and to require any payments required to enable it
to satisfy its withholding obligations.
19. GOVERNING LAW. This Plan shall be construed in accordance with the
laws of the State of Indiana.
20. APPROVAL. If a Participant purchases Purchased Shares, such purchase
shall constitute formal approval of this Plan by the Participant and
such Participant's agreement to be bound by the terms and conditions
of the Plan.
Effective Date: August 21, 1997
8
CONSECO, INC.
AMENDED AND RESTATED 1997 NON-QUALIFIED STOCK OPTION PLAN
ARTICLE I.
Purpose
The purpose of the CONSECO, INC. 1997 NON-QUALIFIED STOCK OPTION PLAN
(the "Plan") is to provide a means through which CONSECO, INC., an Indiana
corporation (the "Company"), may provide incentives to increase the personal
financial identification of key personnel with the long-term growth of the
Company and the interests of the Company's shareholders through the ownership
and performance of the common stock of the Company, to enhance the Company's
ability to retain key personnel and to attract outstanding prospective executive
employees.
ARTICLE II.
Definitions
The following definitions shall be applicable throughout the Plan
unless specifically modified by any paragraph:
(a) "Board" means the Board of Directors of the Company.
(b) A "Change of Control" of the Company shall mean a change of control
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the 1934 Act as revised
effective January 20, 1987, or, if Item 6(e) is no longer in effect, any
regulations issued by the Securities and Exchange Commission pursuant to the
1934 Act which serve similar purposes; provided, that, without limitation, (x)
such a change of control shall be deemed to have occurred if and when either (A)
except as provided in (y) below, any "person" (as such term is used in Sections
13(d) and 14(d) of the 1934 Act) is or becomes a "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or
1
<PAGE>
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors or (B) as the result
of a tender offer, merger, consolidation, sale of assets, or contest for
election of directors, or any combination of the foregoing transactions or
events, individuals who were members of the Board of Directors of the Company
immediately prior to any such transaction or event shall not constitute a
majority of the Board of Directors following such transaction or event, and (y)
no such change of control shall be deemed to have occurred if and when either
(A) any such change is the result of a transaction which constitutes a "Rule
13e-3 transaction" as such term is defined in Rule 13e-3 promulgated under the
1934 Act or (B) any such person becomes, with the approval of the Board of
Directors of the Company, the beneficial owner of securities of the Company
representing 25% or more but less than 50% of the combined voting power of the
Company's then outstanding securities entitled to vote with respect to the
election of its Board of Directors and in connection therewith represents, and
at all times continues to represent, in a filing, as amended, with the
Securities and Exchange Commission on Schedule 13D or Schedule 13G (or any
successor Schedule thereto) that "such person has acquired such securities for
investment and not with the purpose nor with the effect of changing or
influencing the control of the Company, nor in connection with or as a
participant in any transaction having such purpose or effect," or words or
comparable meaning and import. The designation by any such person, with the
approval of the Board of Directors of the Company, of a single individual to
serve as a member of, or observer at meetings of, the Company's Board of
Directors, shall not be considered "changing or influencing the control of the
Company" within the meaning of the immediately preceding clause (B), so long as
such individual does not constitute at any time more than one-third of the total
number of directors serving on such Board.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to any section and any regulations under such
section.
2
<PAGE>
(d) "Compensation Committee" means not less than two members of the
Board who are selected by the Board as provided in Article IV, Section 4.01.
(e) "Common Stock" means the common stock, no par value per share, of
the Company.
(f) "Company" means Conseco, Inc., an Indiana corporation, and any
successor thereto.
(g) "Director" means an individual elected to the Board by the
shareholders of the Company or by the Board under applicable corporate law who
is serving on the Board.
(h) An "employee" means any person (including a Director) in an
employment relationship with the Company or any parent or subsidiary corporation
(as defined in Section 424 of the Code).
(i) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(j) "Fair Market Value" means, as of any specified date, the mean of
the reported high and low sales prices of the Common Stock on the stock exchange
composite tape on that date, or if no prices are reported on that date, on the
last preceding date on which such prices of the Common Stock are so reported. If
the Common Stock is traded over the counter at the time a determination of its
fair market value is required to be made hereunder, its fair market value shall
be deemed to be equal to the average between the reported high and low or
closing bid and asked prices of Common Stock on the most recent date on which
Common Stock was publicly traded. In the event Common Stock is not publicly
traded at the time a determination of this value is required to be made
hereunder, the determination of its fair market value shall be made by the
Compensation Committee in such manner as it deems appropriate.
(k) "Holder" means an employee who has been granted an Option.
3
<PAGE>
(l) "Option" means an Option granted under Article VII of the Plan and
includes only Options to purchase Common Stock which do not constitute Incentive
Stock Options under Section 422 of the Code.
(m) "Option Agreement" means a written agreement between the Company
and a Holder with respect to an Option.
(n) "Plan" means Conseco, Inc. 1997 Non-Qualified Stock Option Plan, as
amended from time to time.
(o) "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act,
as such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
ARTICLE III.
Effective Date and Duration of the Plan
The Plan shall be effective as of April 1, 1997, the date of its
adoption by the Board, provided the Plan is approved by the shareholders of the
Company within twelve months thereafter. The Plan shall remain in effect until
all Options granted under the Plan have been satisfied or expired or until the
Plan is terminated in accordance with Article IX.
4
<PAGE>
ARTICLE IV.
Administration
Section 4.01 Composition of Compensation Committee. The Plan shall be
administered by a committee which shall be (i) appointed by the Board; and (ii)
constituted solely of "outside directors," within the meaning of Section 162(m)
of the Code and applicable interpretive authority thereunder.
Section 4.02 Powers. Subject to the provisions of the Plan, the
Compensation Committee shall have sole authority, in its discretion, to
determine which employees shall receive an Option, the time or times when such
Option shall be made, and the number of shares of Common Stock which may be
issued under each Option. In making such determinations the Compensation
Committee may take into account the nature of the services rendered by the
respective individuals, their present and potential contribution to the
Company's success and such other factors as the Compensation Committee in its
discretion shall deem relevant.
Section 4.03 Additional Powers. The Compensation Committee shall have
such additional powers as are delegated to it by the other provisions of the
Plan. Subject to the express provisions of the Plan, the Compensation Committee
is authorized to construe the Plan and the respective agreements executed
thereunder, to prescribe such rules and regulations relating to the Plan as it
may deem advisable to carry out the Plan, to determine the terms, restrictions
and provisions of each Award, and to make all other determinations necessary or
advisable for administering the Plan. The Compensation Committee may correct any
defect or supply any omission or reconcile any inconsistency in any agreement
relating to an Option in the manner and to the extent it shall deem expedient to
carry it into effect. The determinations of the Compensation Committee on the
matters referred to in this Article IV shall be conclusive.
5
<PAGE>
ARTICLE V.
Grant of Options;
Shares Subject to the Plan
Section 5.01 Stock Option Limits. The Compensation Committee may from
time to time grant Options to one or more individuals determined by it to be
eligible for participation in the Plan in accordance with the provisions of
Article VI. Subject to Article VIII, the aggregate number of shares of Common
Stock for which Options may be granted under the Plan, when added to all
outstanding, unexpired options under the Company's other employee benefit plans,
shall not exceed 20% of the shares of Common Stock outstanding on the date of
grant. In determining the number of shares outstanding on the date of grant, the
Compensation Committee shall include the number of shares then issuable under
any outstanding securities of the Company (other than options) which are then
exchangable for or convertible into Common Stock. Notwithstanding any provision
in the Plan to the contrary, the maximum number of shares of Common Stock that
may be subject to Options under Article VII hereof granted to any one individual
during any calendar year is: the sum (subject to adjustment in the same manner
as provided in Article VIII with respect to shares of Common Stock subject to
Options then outstanding) of (a) 1,000,000 plus (b) the number of shares (not to
exceed 3,000,000) issued under a Reload Program as described below, plus (c) the
number of options provided for in an employment contract that has been approved
by a vote of the shareholders. As an inducement to holders of non-qualified
stock options to exercise those options significantly before their expiration
date, the Compensation Committee may offer a Reload Program to such holders.
Under the Reload Program, new Options may be granted for a number of shares
equal to (a) the sum of (i) the total exercise price of the prior options
exercised in the Reload Program plus (ii) the taxes incurred by the holder as a
result of such exercise (deemed to be 45% of the taxable income resulting from
such exercise) divided by (b) the exercise price per share of the newly granted
Option. The limitation set forth in the preceding sentence shall be applied in a
manner which will permit compensation generated in connection with the exercise
of Options to constitute "performance-based" compensation for purposes of
Section 162(m) of the Code, including, without limitation, counting against such
maximum number of shares, to the extent required under Section 162(m) of the
Code and
6
<PAGE>
applicable interpretive authority thereunder, any shares subject to Options that
are canceled or repriced.
Section 5.02 Stock Offered. The stock to be offered pursuant to the
grant of an Option may be authorized but unissued Common Stock or Common Stock
previously issued and outstanding and reacquired by the Company.
ARTICLE VI.
Eligibility
Options may be granted only to persons who, at the time of grant, are
employees. Options under this Plan may not be granted to any Director who is not
an employee of the Company. An Award may be granted on more than one occasion to
the same person.
ARTICLE VII.
Stock Options
Section 7.01 Option Period. The term of each Option shall be as
specified by the Compensation Committee at the date of grant.
Section 7.02 Limitations on Exercise of Option. An Option shall be
exercisable in whole or in such installments and at such times as determined by
the Compensation Committee.
Section 7.03 Option Agreement. Each Option shall be evidenced by an
Option Agreement in such form and containing such provisions not inconsistent
with the provisions of the Plan as the Compensation Committee from time to time
shall approve. An Option Agreement may provide for the payment of the option
price, in whole or in part, by the delivery of a number of shares of Common
Stock (plus cash if necessary) having a Fair Market Value equal to such option
price. Each Option Agreement shall provide that the Option may not be exercised
earlier than six months from the date of grant and shall specify the effect of
termination of employment on the exercisability of the Option. Moreover, an
Option Agreement may provide for a "cashless exercise" of the Option by
establishing procedures whereby the Holder, by a properly-executed written
notice, directs (i) an immediate market sale or margin loan respecting all or a
part of the shares of Common Stock to which he
7
<PAGE>
is entitled upon exercise pursuant to an extension of credit by the Company to
the Holder of the option price, (ii) the delivery of the shares of Common Stock
from the Company directly to a brokerage firm and (iii) the delivery of the
option price from sale or margin loan proceeds from the brokerage firm directly
to the Company. Such Option Agreement may also include, without limitation,
provisions relating to (i) subject to the provisions hereof accelerating such
vesting on a Change of Control, vesting of Options, including a provision that
Options shall continue to vest and remain exercisable for so long as a Holder
who terminates employment with the Company remains an employee of any Company
subsidiary or affiliate of the Company, (ii) tax matters (including provisions
covering any applicable employee wage withholding requirements and requiring
additional "gross-up" payments to Holders to meet any excise taxes or other
additional income tax liability imposed as a result of a Change of Control
payment resulting from the operation of the Plan or of such Option Agreement),
and (iii) any other matters not inconsistent with the terms and provisions of
this Plan that the Compensation Committee shall in its sole discretion
determine. The terms and conditions of the respective Option Agreements need not
be identical.
Section 7.04 Option Price and Payment. The price at which a share of
Common Stock may be purchased upon exercise of an Option shall be determined by
the Compensation Committee, but such purchase price (i) for options granted to
the chief executive officer of the Company and the other four most highly
compensated executive officers of the Company, shall not be less than the Fair
Market Value of a share of Common Stock on the date such Option is granted, and
(ii) shall be subject to adjustment as provided in Article VIII. An option may
not be granted at less than the Fair Market Value of a share of Common Stock on
the date such Option is to be granted if the sum of (i) the number of shares of
Common Stock which could be purchased under such Option plus (ii) the number of
shares of Common Stock which could be purchased under all other Options which
were granted under the Plan previously at less than the Fair Market Value of a
share of Common Stock on the date of grant would exceed five percent of the
maximum number of Options then available for grant under the second sentence of
Section 5.01. The Option or portion thereof may be exercised by delivery of an
irrevocable notice of exercise to the Company. The purchase price of the Option
or portion thereof shall be paid in full in the manner prescribed by the
Compensation Committee.
8
<PAGE>
Section 7.05 Shareholder Rights and Privileges. The Holder shall be
entitled to all the privileges and rights of a shareholder only with respect to
such shares of Common Stock as have been purchased under the Option and for
which certificates of stock have been registered in the Holder's name.
Section 7.06 Options in Substitution for Stock Options Granted by Other
Corporations. Options may be granted under the Plan from time to time in
substitution for stock options held by individuals employed by corporations who
become employees as a result of a merger or consolidation of the employing
corporation with the Company or any subsidiary, or the acquisition by the
Company or a subsidiary of the assets of the employing corporation, or the
acquisition by the Company or a subsidiary of stock of the employing corporation
with the result that such employing corporation becomes a subsidiary.
ARTICLE VIII.
Recapitalization or Reorganization
Section 8.01 Stock Dividends, etc. The shares with respect to which
Options may be granted are shares of Common Stock as presently constituted, but
if, and whenever, prior to the expiration or exercise of an Option theretofore
granted, the Company shall effect a subdivision or consolidation of shares of
Common Stock or the payment of a stock dividend on Common Stock without receipt
of consideration by the Company, the number of shares of Common Stock with
respect to which such Option may thereafter be exercised, (i) in the event of an
increase in the number of outstanding shares shall be proportionately increased,
and the purchase price per share shall be proportionately reduced, and (ii) in
the event of a reduction in the number of outstanding shares shall be
proportionately reduced, and the purchase price per share shall be
proportionately increased.
Section 8.02 Recapitalizations. If the Company recapitalizes or
otherwise changes its capital structure, thereafter upon any exercise of an
Option theretofore granted the Holder shall be entitled to purchase under such
Option, in lieu of the number of shares of Common Stock then covered by such
Option, the number and class of shares of stock and securities to which the
Holder would have been entitled pursuant to the terms of the recapitalization
9
<PAGE>
if, immediately prior to such recapitalization, the Holder had been the holder
of record of the number of shares of Common Stock then covered by such Option.
Section 8.03 Change of Control. In the event of a Change of Control,
all outstanding Options shall immediately vest and become exercisable or
satisfiable, as applicable. The Compensation Committee, in its discretion, may
determine that upon the occurrence of a Change of Control, each Option
outstanding hereunder shall terminate within a specified number of days after
notice to the Holder, and such Holder shall receive, with respect to each share
of Common Stock subject to such Option, cash in an amount equal to the excess of
(i) the higher of (x) the Fair Market Value of such share of Common Stock
immediately prior to the occurrence of such Change of Control or (y) the value
of the consideration to be received in connection with such Change of Control
for one share of Common Stock over (ii) the exercise price per share, if
applicable, of Common Stock set forth in such Option. The provisions contained
in the preceding sentence shall be inapplicable to an Option granted within six
(6) months before the occurrence of a Change of Control if the Holder of such
Option is subject to the reporting requirements of Section 16(a) of the 1934 Act
and such disposition is not exempt under Rule 16b-3 but shall be applicable to
such Option after the expiration of six (6) months from the date of grant. If
the consideration offered to shareholders of the Company in any transaction
described in this paragraph consists of anything other than cash, the
Compensation Committee shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash. The provisions contained
in this paragraph shall not terminate any rights of the Holder to further
payments pursuant to any other agreement with the Company following a Change of
Control.
Section 8.04 Other Adjustments. In the event of changes in the
outstanding Common Stock by reason of recapitalization, reorganizations,
mergers, consolidations, combinations, exchanges or other relevant changes in
capitalization occurring after the date of the grant of any Option and not
otherwise provided for by this Article VIII, any outstanding Options and any
agreements evidencing such Options shall be subject to adjustment by the
Compensation Committee at its discretion as to the number and price of shares of
Common Stock or other consideration subject to such Options.
10
<PAGE>
Section 8.05 Impact of Plan. The existence of the Plan and the Options
granted hereunder shall not affect in any way the right or power of the Board or
the shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
Section 8.06 Shareholder Action. Any adjustment provided for in
Sections 8.01, 8.02, 8.03 and 8.04 above shall be subject to any required
shareholder action.
Section 8.07 Other. Except as hereinbefore expressly provided, the
issuance by the Company of shares of stock of any class or securities
convertible into shares of stock of any class, for cash, property, labor or
services, upon direct sale, upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, and in any case whether or not for fair
value, shall not affect, and no adjustment by reason thereof shall be made with
respect to the number of shares of Common Stock subject to Options theretofore
granted or the purchase price per share.
ARTICLE IX.
Amendment and Termination of the Plan
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided that no change in any Option theretofore granted may be
made which would impair the rights of the Holder without the consent of the
Holder (unless such change is required in order to cause the benefits under the
Plan to qualify as performance-based compensation within the meaning of Section
162(m) of the Code and applicable interpretive authority thereunder), and
provided, further, that the Board may not, without approval of the shareholders,
amend the Plan if such
11
<PAGE>
approval is required under applicable law or stock exchange rule or in order for
the Plan to continue to comply with Section 162(m) of the Code.
ARTICLE X.
Miscellaneous
Section 10.01 No Right To An Option. Neither the adoption of the Plan
by the Company nor any action of the Board or the Compensation Committee shall
be deemed to give an employee any right to be granted an Option to purchase
Common Stock except as may be evidenced by an Option or by an Option Agreement
duly executed on behalf of the Company, and then only to the extent and on the
terms and conditions expressly set forth therein. The Plan shall be unfunded.
The Company shall not be required to establish any special or separate fund or
to make any other segregation of funds or assets to assure the payment of any
Option.
Section 10.02 No Employment Rights Conferred. Nothing contained in the
Plan shall (i) confer upon any employee any right with respect to continuation
of employment with the Company or any subsidiary or (ii) interfere in any way
with the right of the Company or any subsidiary to terminate his or her
employment (or service as a Director, in accordance with applicable corporate
law) at any time.
Section 10.03 Other Laws; Withholding. The Company shall not be
obligated to issue any Common Stock pursuant to any Option granted under the
Plan at any time when the shares covered by such Award have not been registered
under the Securities Act of 1933 and such other state and federal laws, rules or
regulations as the Company or the Compensation Committee deems applicable and,
in the opinion of legal counsel for the Company, there is no exemption from the
registration requirements of such laws, rules or regulations available for the
issuance and sale of such shares. No fractional shares of Common Stock shall be
delivered, nor shall any cash in lieu of fractional shares be paid. The Company
shall have the right to deduct in cash (whether under this Plan or otherwise) in
connection with all Options any taxes required by law to be withheld and to
require any payments required to enable it to satisfy its withholding
obligations. In the case of any Option
12
<PAGE>
satisfied in the form of Common Stock, no shares shall be issued unless and
until arrangements satisfactory to the Company shall have been made to satisfy
any withholding tax obligations applicable with respect to such Option. Subject
to such terms and conditions as the Compensation Committee may impose, the
Company shall have the right to retain, or the Compensation Committee may,
subject to such terms and conditions as it may establish from time to time,
permit Holders to elect to tender Common Stock (including Common Stock issuable
in respect of an Option) to satisfy, in whole or in part, the amount required to
be withheld.
Section 10.04 No Restriction on Corporate Action. Nothing contained in
the Plan shall be construed to prevent the Company or any subsidiary from taking
any corporate action which is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Option granted under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
subsidiary as a result of any such action.
Section 10.05 Restrictions on Transfer. An Option shall not be
transferable except (i) by will or the laws of descent and distribution, or (ii)
by gift to any member of the Holder's immediate family, to a partnership
consisting only of members of the Holder's immediate family or to a trust for
the benefit of such immediate family member or to such other persons or entities
as the Compensation Committee determines in its discretion, if permitted in the
applicable Option Agreement. An option may be exercisable during the lifetime of
the Holder only by such Holder or the Holder's guardian or legal representative
unless it has been transferred to a member of the Holder's immediate family, to
a partnership consisting only of members of the Holder's immediate family or to
a trust for the benefit of such immediate family member, in which case it shall
be exercisable only by such transferee. For the purpose of this provision, a
Holder's "immediate family" shall mean the Holder's spouse, children and
grandchildren. Notwithstanding any such transfer, the Holder will continue to be
subject to the withholding requirements provided for in Section 10.03 hereof.
Section 10.06 Section 162(m). It is intended that the Plan comply fully
with and meet all the requirements of Section 162(m) of the Code so that Options
granted hereunder with an exercise
13
<PAGE>
price not less than Fair Market Value of a share of Common Stock on the date of
grant shall constitute "performance-based" compensation within the meaning of
such section. If any provision of the Plan would disqualify the Plan or would
not otherwise permit the Plan to comply with Section 162(m) as so intended, such
provision shall be construed or deemed amended to conform to the requirements or
provisions of Section 162(m); provided that no such construction or amendment
shall have an adverse effect on the economic value to a Holder of any Option
previously granted hereunder.
Section 10.07 Governing Law. This Plan shall be construed in
accordance with the laws of the State of Indiana.
14
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges,
Preferred Dividends and Distributions on Company-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts - Consolidated Basis
for the years ended December 31, 1997, 1996 and 1995
(Dollars in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pretax income from operations:
Net income $ 567.3 $ 252.4 $ 220.4
Add income tax expense 376.6 179.8 87.0
Add extraordinary charge on extinguishment of debt 6.9 26.5 2.1
Add minority interest 52.3 34.9 109.0
-------- --------- --------
Pretax income from operations 1,003.1 493.6 418.5
-------- -------- --------
Add fixed charges:
Interest expense on annuities and financial products 806.7 668.6 585.4
Interest expense on long-term debt, including amortization 109.4 108.1 119.4
Interest expense on investment borrowings 42.0 22.0 22.2
Other .7 .9 1.0
Portion of rental(1) 9.3 8.0 6.9
-------- -------- --------
Fixed charges 968.1 807.6 734.9
-------- -------- --------
Adjusted earnings $1,971.2 $1,301.2 $1,153.4
======== ======== ========
Ratio of earnings to fixed charges 2.04X 1.61X 1.57X
Ratio of earnings to fixed charges, excluding ===== ===== =====
interest on annuities and financial products 7.21X 4.55X 3.80X
===== ===== =====
Fixed charges $ 968.1 $ 807.6 $ 734.9
Add dividends on preferred stock, including dividends
on preferred stock of subsidiaries (divided by the rate
of income before minority interest and extraordinary
charge to pretax income) 40.5 62.3 36.0
-------- -------- --------
Adjusted fixed charges $1,008.6 $ 869.9 $ 770.9
======== ======== ========
Adjusted earnings $1,971.2 $1,301.2 $1,153.4
======== ======== ========
Ratio of earnings to fixed charges and preferred
dividends 1.95X 1.50X 1.50X
Ratio of earnings to fixed charges and preferred ===== ===== =====
dividends, excluding interest on annuities and
financial products 5.77X 3.14X 3.06X
===== ===== =====
Adjusted fixed charges $1,008.6 $ 869.9 $770.9
Add distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts 75.4 5.6 -
-------- -------- --------
Fixed charges $1,084.0 $ 875.5 $ 770.9
======== ======== ========
Adjusted earnings $1,971.2 $1,301.2 $1,153.4
======== ======== ========
Ratio of earnings to fixed charges, preferred dividends
and distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts 1.82X 1.49X 1.50X
Ratio of earnings to fixed charges, preferred dividends ===== ===== =====
and distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts,
excluding interest on annuities and financial products 4.20X 3.06X 3.06X
===== ===== =====
<FN>
(1) Interest portion of rental is assumed to be 33 percent.
</FN>
</TABLE>
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME (1) JURISDICTION
- -------- ------------
<S> <C>
CIHC, Incorporated Delaware
American Life Holdings, Inc. Delaware
American Life Holding Company Delaware
American Life and Casualty Insurance Company Illinois
Vulcan Life Insurance Company (2) Alabama
American Life and Casualty Marketing Division Co. Iowa
Wabash Life Insurance Company Kentucky
Philadelphia Life Insurance Company Pennsylvania
Lamar Life Insurance Company Mississippi
Conseco Life Insurance Company Indiana
Providential Life Insurance Company Arkansas
Colonial Penn Life Insurance Company Pennsylvania
Capitol American Financial Corporation Ohio
Capitol American Life Insurance Company Arizona
Frontier National Life Insurance Company Ohio
Capitol National Life Insurance Company Ohio
Pioneer Financial Services, Inc. Delaware
Pioneer Life Insurance Company Illinois
Health and Life Insurance Company of America Illinois
Manhattan National Life Insurance Company Illinois
Connecticut National Life Insurance Company Illinois
United Group Holdings, Inc. Nevada
National Group Life Insurance Company Illinois
Continental Life and Accident Company Illinois
Bankers Life Insurance Company of Illinois Illinois
Bankers Life and Casualty Company Illinois
Certified Life Insurance Company Illinois
Conseco Financial Services, Inc. Pennsylvania
Jefferson National Life Insurance Company of Texas Texas
Beneficial Standard Life Insurance Company California
Great American Reserve Insurance Company Texas
American Travellers Life Insurance Company Pennsylvania
Continental Life Insurance Company Texas
United General Life Insurance Company Texas
Conseco Life Insurance Company of New York New York
Bankers National Life Insurance Company Texas
National Fidelity Life Insurance Company Missouri
CNC Entertainment Nevada, Inc. Nevada
Conseco Services, L.L.C. Indiana
Conseco Marketing, L.L.C. Indiana
Conseco Private Capital Group, Inc. Indiana
Conseco Equity Sales, Inc. Texas
Lincoln American Life Insurance Company Tennessee
Conseco Global Investments, Inc. Delaware
CNC Real Estate, Inc. Delaware
Conseco Entertainment, Inc. Indiana
Conseco Entertainment, L.L.C. Indiana
Marketing Distribution Systems Consulting Group, Inc. Delaware
Conseco Risk Management, Inc. Indiana
Wells & Company, Inc. Indiana
Wellsco, Inc. Indiana
Conseco Mortgage Capital, Inc. Delaware
Conseco Capital Management, Inc Delaware
Washington National Corporation Delaware
Washington National Financial Services, Inc. Illinois
Washington National Insurance Company Illinois
<PAGE>
Washington National Development Company Delaware
United Presidential Corporation Indiana
United Presidential Life Insurance Company Indiana
<FN>
(1) Except otherwise indicated, each company is a direct or indirect wholly
owned subsidiary of the indicated parent.
(2) American Life and Casualty Insurance Company owns 98 percent of Vulcan Life
Insurance Company.
</FN>
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Conseco, Inc. (File Nos. 33-57079, 33-56901, 33-57931, 33-40556,
33-58710, 33-58712, 333-10297, 333-18037, 333-18581, 333-19783, 333-23251,
333-27803, 333-28305, 333-32615, 333-32617 and 333-32621) of our report dated
March 23, 1998, on our audits of the consolidated financial statements and
financial statement schedules of Conseco, Inc. as of December 31, 1997 and 1996,
and for the years ended December 31, 1997, 1996 and 1995, which report is
included in this Annual Report on Form 10-K.
/S/COOPERS & LYBRAND L.L.P.
-----------------------------
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-K FOR CONSECO,
INC. DATED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 22,773,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 228,900
<MORTGAGE> 1,074,800 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,961,200
<CASH> 0
<RECOVER-REINSURE> 849,100
<DEFERRED-ACQUISITION> 3,381,600 <F2>
<TOTAL-ASSETS> 35,914,800
<POLICY-LOSSES> 23,142,400
<UNEARNED-PREMIUMS> 406,100
<POLICY-OTHER> 1,303,900
<POLICY-HOLDER-FUNDS> 364,900
<NOTES-PAYABLE> 1,906,700
1,383,900
115,800
<COMMON> 2,382,000
<OTHER-SE> 1,392,300 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 35,914,800
3,410,800
<INVESTMENT-INCOME> 1,825,300
<INVESTMENT-GAINS> 266,500
<OTHER-INCOME> 65,800
<BENEFITS> 3,175,000 <F4>
<UNDERWRITING-AMORTIZATION> 548,000 <F5>
<UNDERWRITING-OTHER> 577,200
<INCOME-PRETAX> 1,003,100
<INCOME-TAX> 376,600
<INCOME-CONTINUING> 626,500
<DISCONTINUED> 0
<EXTRAORDINARY> (6,900)
<CHANGES> 0
<NET-INCOME> 567,300
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.64
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $558,600 of credit-tenant loans.
<F2> Includes $2,466,400 of cost of policies purchased.
<F3> Includes retained earnings of $1,210,300, and other comprehensive income
of $182,000.
<F4> Includes insurance policy benefits of $2,185,700, change in future
policy benefits of $182,600 and amounts added to annuity and financial
product policyholder account balances of $806,700.
<F5> Includes amortization of cost of policies purchased of $261,800 and cost
of policies produced of $105,000 and amortization related to realized
gains of $181,200.
</FN>
</TABLE>
