================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 1-9250
Conseco, Inc.
Indiana No. 35-1468632
------------ -------------------------------
State of Incorporation IRS Employer Identification No.
1825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
- ------------------------------------- --------------
Address of principal executive offices Telephone
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 [ ]
Shares of common stock outstanding as of July 31, 1998: 312,422,989
================================================================================
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1998 - $22,103.1; 1997 - $22,289.3)...................................................... $22,544.3 $22,773.7
Interest-only securities................................................................... 934.0 1,365.8
Equity securities at fair value (cost: 1998 - $345.6; 1997 - $227.6)....................... 340.5 228.9
Mortgage loans............................................................................. 475.6 516.2
Credit-tenant loans........................................................................ 646.9 558.6
Policy loans............................................................................... 688.8 692.4
Other invested assets ..................................................................... 664.7 530.7
Short-term investments..................................................................... 1,053.8 1,179.1
Assets held in separate accounts........................................................... 745.8 682.8
--------- ---------
Total investments...................................................................... 28,094.4 28,528.2
Accrued investment income..................................................................... 391.5 379.3
Finance receivables........................................................................... 3,547.8 1,971.0
Servicing rights.............................................................................. 97.5 77.0
Cost of policies purchased.................................................................... 2,424.1 2,466.4
Cost of policies produced..................................................................... 1,132.9 915.2
Reinsurance receivables....................................................................... 752.6 795.8
Goodwill (net of accumulated amortization: 1998 - $250.9; 1997 - $170.9)...................... 4,015.5 3,693.4
Property and equipment (net of accumulated depreciation: 1998 - $181.4; 1997 - $153.9)........ 315.1 284.0
Cash held in segregated accounts for investors................................................ 685.3 552.8
Cash deposits, restricted under pooling and servicing agreements.............................. 247.7 247.2
Other assets.................................................................................. 770.5 775.7
--------- ---------
Total assets........................................................................... $42,474.9 $40,686.0
========= =========
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products.............................................................. $17,267.3 $17,357.6
Traditional products..................................................................... 6,361.6 5,784.8
Claims payable and other policyholder funds.............................................. 1,571.1 1,615.5
Unearned premiums........................................................................ 409.3 406.1
Liabilities related to separate accounts................................................. 745.8 682.8
Investor payables.......................................................................... 685.3 552.8
Other liabilities.......................................................................... 2,026.6 1,544.4
Income tax liabilities..................................................................... 173.7 532.8
Investment borrowings...................................................................... 1,179.6 1,389.5
Notes payable and commercial paper:
Corporate................................................................................ 2,952.1 2,354.9
Consumer and commercial finance.......................................................... 2,728.8 1,866.3
--------- ---------
Total liabilities.................................................................... 36,101.2 34,087.5
--------- ---------
Minority interest:
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts..................................................................... 1,388.8 1,383.9
Common stock of subsidiary................................................................. .7 .7
Shareholders' equity:
Preferred stock............................................................................ 105.6 115.8
Common stock and additional paid-in capital (no par value, 1,000,000,000 shares
authorized, shares issued and outstanding: 1998 - 312,362,652;
1997 - 310,011,669)...................................................................... 2,661.2 2,619.8
Accumulated other comprehensive income:
Unrealized appreciation of fixed maturity securities (net of applicable deferred income
taxes: 1998 - $106.6; 1997 - $95.5)................................................... 198.0 177.2
Unrealized appreciation of interest-only securities and other investments (net of
applicable deferred income taxes: 1998 - $3.0; 1997 - $16.0).......................... 5.5 26.6
Minimum pension liability adjustment (net of applicable deferred income taxes:
1998 - ($1.9); 1997 - ( $1.9))......................................................... (3.2) (3.2)
Retained earnings.......................................................................... 2,017.1 2,277.7
--------- ---------
Total shareholders' equity........................................................... 4,984.2 5,213.9
--------- ---------
Total liabilities and shareholders' equity........................................... $42,474.9 $40,686.0
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products.................................................. $ 855.3 $ 776.4 $1,714.7 $1,342.6
Interest sensitive products........................................... 134.5 108.6 265.2 212.5
Net investment income:
Assets held by insurance subsidiaries................................. 504.2 444.9 1,087.5 854.1
Finance receivables................................................... 76.3 53.7 135.9 96.6
Interest-only securities.............................................. 36.3 29.4 69.6 56.2
Gain on sale of finance receivables..................................... 135.2 190.5 272.4 348.6
Net investment gains.................................................... 12.3 15.8 117.1 20.9
Fee revenue and other income............................................ 85.2 57.5 161.7 110.5
--------- -------- -------- ----------
Total revenues...................................................... 1,839.3 1,676.8 3,824.1 3,042.0
-------- -------- -------- ---------
Benefits and expenses:
Insurance policy benefits............................................... 681.4 613.2 1,361.8 1,068.5
Amounts added to annuity and financial product policyholder
account balances:
Interest............................................................ 182.2 170.6 370.6 344.3
Other amounts added to variable and equity-indexed annuity
products.......................................................... 23.0 19.3 108.6 35.5
Interest expense:
Corporate............................................................. 36.3 25.5 75.3 51.3
Finance and investment borrowings..................................... 72.6 41.9 140.0 74.5
Amortization............................................................ 142.8 132.5 351.2 250.5
Other operating costs and expenses...................................... 314.7 259.8 609.7 460.9
Nonrecurring charges.................................................... 688.0 9.3 688.0 9.3
-------- -------- -------- --------
Total benefits and expenses......................................... 2,141.0 1,272.1 3,705.2 2,294.8
-------- -------- -------- --------
Income (loss) before income taxes, minority interest and
extraordinary charge ............................................. (301.7) 404.7 118.9 747.2
Income tax expense (benefit)............................................... (52.3) 150.3 117.9 276.8
-------- -------- -------- --------
Income (loss) before minority interest and extraordinary charge .... (249.4) 254.4 1.0 470.4
Minority interest:
Distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts....................................... 18.8 12.9 38.2 21.6
Dividends on preferred stock of subsidiaries............................ - 1.2 - 2.5
-------- -------- -------- --------
Income (loss) before extraordinary charge .......................... (268.2) 240.3 (37.2) 446.3
Extraordinary charge on extinguishment of debt, net of taxes............. 13.9 2.2 30.3 5.5
-------- -------- -------- --------
Net income (loss)................................................... (282.1) 238.1 (67.5) 440.8
Less amounts applicable to preferred stock:
Charge related to induced conversions................................... - .9 - 13.2
Preferred stock dividends............................................... 2.2 2.2 4.2 4.5
-------- -------- -------- --------
Net income (loss) applicable to common stock........................ $ (284.3) $ 235.0 $ (71.7) $ 423.1
======== ======== ======== ========
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS, continued
(Dollars in millions, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings (loss) per common share:
Basic:
Weighted average shares outstanding...................... 310,326,000 314,285,000 309,648,000 309,450,000
Net income (loss) before extraordinary charge........... $(.88) $.76 $(.13) $1.39
Extraordinary charge..................................... .04 .01 .10 .02
----- ---- ----- -----
Net income (loss)...................................... $(.92) $.75 $(.23) $1.37
===== ==== ===== =====
Diluted:
Weighted average shares outstanding...................... 310,326,000 341,795,000 309,648,000 337,993,000
Net income (loss) before extraordinary charge............ $(.88) $.70 $(.13) $1.29
Extraordinary charge..................................... .04 .01 .10 .02
----- ---- ----- -----
Net income (loss)...................................... $(.92) $.69 $(.23) $1.27
===== ==== ===== =====
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Common stock Accumulated other
Preferred and additional comprehensive Retained
Total stock paid-in capital income (loss) earnings
----- ----- --------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998............................. $5,213.9 $115.8 $2,619.8 $200.6 $2,277.7
Comprehensive loss, net of tax:
Net loss........................................ (67.5) - - - (67.5)
Change in unrealized appreciation of fixed
maturity investments (net of applicable income
tax expense of $11.1)......................... 20.8 - - 20.8 -
Change in unrealized appreciation of interest-
only securities and other investments
(net of applicable income tax benefit
of $13.0)..................................... (21.1) - - (21.1) -
--------
Total comprehensive loss.................... (67.8)
Conversion of preferred stock into common shares.. - (10.2) 10.2 - -
Conversion of convertible debentures into
common shares................................... 16.3 - 16.3 - -
Issuance of shares for stock options and for agent
and employee benefit plans...................... 118.1 - 118.1 - -
Tax benefit related to issuance of shares under
stock option plans.............................. 41.8 - 41.8 - -
Issuance of warrants in conjunction with
financing transaction........................... 7.7 - 7.7 - -
Cost of shares acquired........................... (271.2) - (152.7) - (118.5)
Dividends on preferred stock...................... (4.2) - - - (4.2)
Dividends on common stock......................... (70.4) - - - (70.4)
-------- ------ -------- ----- --------
Balance, June 30, 1998............................... $4,984.2 $105.6 $2,661.2 $200.3 $2,017.1
======== ====== ======== ====== ========
Balance, January 1, 1997............................. $4,216.8 $267.1 $2,350.7 $ 36.6 $1,562.4
Comprehensive income, net of tax:
Net income...................................... 440.8 - - - 440.8
Change in unrealized appreciation (depreciation)
of fixed maturity investments (net of
applicable income tax benefit of $7.7)........ (14.2) - - (14.2) -
Change in unrealized appreciation (depreciation)
of interest-only securities and other
investments (net of applicable income tax
benefit of $19.7)............................. (32.1) - - (32.1) -
--------
Total comprehensive income.................. 394.5
Conversion of preferred stock into common shares.. - (145.1) 145.1 - -
Issuance of shares in merger transactions......... 458.2 - 458.2 - -
Issuance of shares for stock options and for agent
and employee benefit plans...................... 213.8 - 213.8 - -
Tax benefit related to issuance of shares under
stock option plans.............................. 83.1 - 83.1 - -
Conversion of convertible debentures into
common shares................................... 152.1 - 152.1 - -
Cost of shares acquired........................... (705.5) - (680.1) - (25.4)
Other ............................................ (5.9) - (5.9) - -
Amounts applicable to preferred stock:
Charge related to induced conversion of
convertible preferred stock................... (12.3) - - - (12.3)
Dividends on preferred stock.................... (5.4) - - - (5.4)
Dividends on common stock......................... (32.7) - - - (32.7)
-------- ------ -------- ------- --------
Balance, June 30, 1997............................... $4,756.7 $122.0 $2,717.0 $ (9.7) $1,927.4
======== ====== ======== ======= ========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Six months ended
June 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................................ $ (67.5) $ 440.8
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sale of finance receivables.................................................... (272.4) (348.6)
Net increase in restricted cash deposits............................................... (.5) (14.8)
Amortization and depreciation.......................................................... 401.2 273.8
Income taxes........................................................................... (185.8) 79.5
Insurance liabilities.................................................................. (83.1) (27.2)
Income added to annuity and financial product policyholder account balances............ 479.2 379.8
Fees charged to insurance liabilities.................................................. (255.8) (211.1)
Accrual and amortization of investment income.......................................... 36.1 2.2
Deferral of cost of policies produced.................................................. (369.0) (261.6)
Nonrecurring charges................................................................... 683.3 -
Minority interest...................................................................... 58.4 33.2
Extraordinary charge on extinguishment of debt......................................... 46.9 8.4
Net investment gains................................................................... (117.1) (20.9)
Other.................................................................................. 31.1 64.2
---------- ---------
Net cash provided by operating activities............................................ 385.0 397.7
---------- ---------
Cash flows from investing activities:
Sales of investments..................................................................... 15,747.5 6,254.8
Maturities and redemptions of investments................................................ 734.8 249.4
Purchases of investments................................................................. (16,254.3) (6,552.4)
Cash received from the sale of finance receivables, net of expenses...................... 5,374.5 4,309.0
Principal payments received on finance receivables....................................... 2,829.8 2,138.5
Finance receivables originated........................................................... (9,642.7) (6,974.0)
Purchase of mandatorily redeemable preferred stock of subsidiary......................... - (30.5)
Acquisition of subsidiaries, net of cash held at date of merger.......................... - (477.9)
Other.................................................................................... (62.0) (86.5)
---------- ---------
Net cash used by investing activities ............................................... (1,272.4) (1,169.6)
---------- ---------
Cash flows from financing activities:
Issuance of Company-obligated mandatorily redeemable preferred stock of subsidiary
trusts................................................................................. 3.7 296.7
Issuance of shares related to stock options and employee benefit plans ................. 103.0 28.1
Issuance of notes payable and commercial paper:
Corporate.............................................................................. 2,177.6 1,804.6
Consumer and commercial finance........................................................ 5,535.3 4,742.7
Payments on notes payable and commercial paper:
Corporate.............................................................................. (1,602.3) (1,180.7)
Consumer and commercial finance........................................................ (4,616.7) (4,030.5)
Payments to repurchase equity securities................................................. (236.0) (585.9)
Investment borrowings.................................................................... (209.9) 49.6
Deposits to insurance liabilities........................................................ 1,148.0 956.4
Withdrawals from insurance liabilities................................................... (1,410.5) (1,083.6)
Charge related to induced conversion of convertible preferred stock...................... - (13.2)
Distributions on Company-obligated mandatorily redeemable preferred stock of
subsidiary trusts...................................................................... (55.2) (25.8)
Dividends paid .......................................................................... (74.9) (38.2)
---------- ---------
Net cash provided by financing activities............................................ 762.1 920.2
---------- ---------
Net increase (decrease) in short-term investments.................................... (125.3) 148.3
Short-term investments, beginning of period................................................. 1,179.1 377.4
---------- ---------
Short-term investments, end of period....................................................... $ 1,053.8 $ 525.7
========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
7
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following notes should be read in conjunction with the notes to the
supplemental consolidated financial statements and the supplemental management's
discussion and analysis of financial condition and results of operations as of
December 31, 1997 and 1996 and for each of the three years ended December 31,
1997, included in Exhibit 99.1 to the Current Report on Form 8-K dated June 30,
1998, as amended, of Conseco, Inc. ("We", "Conseco" or the "Company"). Such
supplemental consolidated financial statements and the supplemental management's
discussion and analysis give retroactive effect to our acquisition (the "Green
Tree Merger") of Green Tree Financial Corporation ("Green Tree") which was
accounted for as a pooling of interests, as further described below.
BASIS OF PRESENTATION
The unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, which are necessary to present fairly
Conseco's financial position and results of operations on a basis consistent
with that of our prior audited supplemental consolidated financial statements.
Pursuant to rules and regulations of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted. Results for interim periods are not necessarily indicative of the
results that may be expected for a full year. We have reclassified certain
amounts from the prior periods to conform to the 1998 presentation.
Conseco is a financial services holding company. The Company's life
insurance subsidiaries develop, market and administer supplemental health
insurance, annuity, individual life insurance, individual and group major
medical insurance and other insurance products. The Company's finance
subsidiaries originate, purchase, sell and service consumer and commercial
finance loans throughout the United States. Conseco's operating strategy is to
grow its business 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 products and distribution channels.
In preparing financial statements in conformity with GAAP, we are required
to make estimates and assumptions that significantly affect various reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting periods. For example, we use significant estimates and
assumptions in calculating the cost of policies produced, the cost of policies
purchased, interest-only securities, servicing rights, goodwill, insurance
liabilities, liabilities related to litigation, guaranty fund assessment
accruals, gain on sale of finance receivables and deferred income taxes. If our
future experience differs materially from these estimates and assumptions, our
financial statements could be affected.
Consolidation issues. The consolidated financial statements give
retroactive effect to the merger with Green Tree in a transaction accounted for
as a pooling of interests (see "Green Tree Merger"). The pooling of interests
method of accounting requires the restatement of all periods presented as if
Conseco and Green Tree had always been combined. The consolidated statement of
shareholders' equity reflects the accounts of the Company as if additional
shares of Conseco common stock had been issued during all periods presented.
Intercompany transactions prior to the merger have been eliminated, and certain
reclassifications were made to Green Tree's financial statements to conform to
Conseco's presentation. No material adjustments were recorded to conform Green
Tree's accounting policies.
Our financial statements do not include the results of material
transactions between us and our consolidated affiliates, or among our
consolidated affiliates.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
We classify fixed maturity securities into three categories: "actively
managed" (which are carried at estimated fair value), "trading" (which are
carried at estimated fair value) and "held to maturity" (which are carried at
amortized cost). We held $60.4 million of trading securities at June 30, 1998,
which are included in other invested assets. We did not classify any fixed
maturity securities in the held to maturity category at June 30, 1998.
8
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Adjustments to carry actively managed fixed maturity securities at fair
value 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 at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------------------------------ ----------------------------------
Effect of Effect of
fair value Carrying fair value Carrying
Cost basis adjustments value Cost basis adjustments value
---------- ----------- ----- ---------- ----------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Actively managed fixed maturity
securities................................ $22,103.1 $ 441.2 $22,544.3 $22,289.3 $ 484.4 $22,773.7
Other balance sheet items:
Cost of policies purchased................ 2,521.6 (97.5) 2,424.1 2,639.0 (172.6) 2,466.4
Cost of policies produced................. 1,171.1 (38.2) 1,132.9 949.9 (34.7) 915.2
Other liability........................... - (.9) (.9) - (4.4) (4.4)
Income tax liabilities.................... (67.1) (106.6) (173.7) (437.3) (95.5) (532.8)
------- -------
Unrealized appreciation of fixed maturity
securities, net........................... $ 198.0 $ 177.2
======= =======
</TABLE>
GREEN TREE MERGER
On June 30, 1998, we completed the Green Tree Merger. Each outstanding
share of Green Tree common stock was exchanged for .9165 of a share of Conseco
common stock. We issued 128.7 million shares of Conseco common stock (including
5.0 million common equivalent shares issued in exchange for Green Tree's
outstanding options). The Green Tree Merger constituted a tax-free exchange and
is accounted for under the pooling of interests method. All prior period
consolidated financial statements presented have been restated to include Green
Tree as though it had always been a subsidiary of Conseco. As a result of the
Green Tree Merger, we recorded merger-related costs of $148 million, net of
income taxes, in the second quarter of 1998. The merger-related costs
(classified as nonrecurring charges) include investment banking, accounting,
legal and regulatory fees and other costs associated with the Green Tree Merger.
The results of operations for Conseco and Green Tree, separately and
combined, for periods prior to the merger were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Conseco............................................................... $1,533.1 $1,360.5 $3,232.1 $2,459.5
Green Tree............................................................ 307.0 317.1 592.8 584.3
Less elimination of intercompany revenues............................. (.8) (.8) (.8) (1.8)
-------- -------- ------- --------
Combined............................................................ $1,839.3 $1,676.8 $3,824.1 $3,042.0
======== ======== ======== ========
Net income (loss):
Conseco............................................................... $ 123.6 $ 130.6 $ 274.7 $242.1
Green Tree (including nonrecurring charges)........................... (402.9) 108.1 (339.4) 199.9
Less elimination of intercompany net income........................... (2.8) (.6) (2.8) (1.2)
-------- -------- -------- --------
Combined............................................................ $ (282.1) $ 238.1 $ (67.5) $440.8
======== ========= ======== ======
</TABLE>
In conjunction with the Green Tree Merger, Conseco has contributed
additional capital to Green Tree. Contributions of $500.0 million were made in
the second quarter of 1998 and Conseco plans to make additional contributions of
$600.0 million of which contributions of $350.0 million were made through August
13, 1998. The contributions were used to increase Green Tree's working capital
and repay debt.
9
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The financial position for Conseco and Green Tree, separately and combined,
at June 30, 1998, the date of the merger, were as follows (dollars in millions):
<TABLE>
<CAPTION>
Intercompany
Conseco Green Tree eliminations Consolidated
------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Investments:
Actively managed fixed maturities.............. $22,544.3 $ - $ - $22,544.3
Interest-only securities....................... - 934.0 - 934.0
Equity securities.............................. 340.5 - - 340.5
Mortgage loans................................. 475.6 - - 475.6
Credit-tenant loans............................ 646.9 - - 646.9
Policy loans................................... 688.8 - - 688.8
Other invested assets.......................... 697.5 34.3 (67.1) 664.7
Short-term investments......................... 876.4 177.4 - 1,053.8
Assets held in separate accounts............... 745.8 - - 745.8
--------- -------- ------- ---------
Total investments.......................... 27,015.8 1,145.7 (67.1) 28,094.4
Accrued investment income......................... 391.5 - - 391.5
Finance receivables............................... - 3,547.8 - 3,547.8
Servicing rights.................................. - 97.5 - 97.5
Cost of policies purchased........................ 2,424.1 - - 2,424.1
Cost of policies produced......................... 1,132.9 - - 1,132.9
Reinsurance receivables........................... 752.6 - - 752.6
Goodwill.......................................... 3,960.9 54.6 - 4,015.5
Property and equipment............................ 183.3 131.8 - 315.1
Segregated and restricted cash.................... - 933.0 - 933.0
Other assets...................................... 928.6 347.2 (505.3) 770.5
--------- -------- ------- ---------
Total assets............................... $36,789.7 $6,257.6 $(572.4) $42,474.9
========= ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
Intercompany
Conseco Green Tree eliminations Consolidated
------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities.......................... $26,355.1 $ - $ - $26,355.1
Investor payables.............................. - 685.3 - 685.3
Other liabilities.............................. 1,145.6 886.0 (5.0) 2,026.6
Income tax liabilities......................... (290.7) 470.5 (6.1) 173.7
Investment borrowings.......................... 1,179.6 - - 1,179.6
Notes payable and commercial paper............. 2,952.1 2,779.0 (50.2) 5,680.9
--------- -------- ------- ---------
Total liabilities.......................... 31,341.7 4,820.8 (61.3) 36,101.2
--------- -------- ------- ---------
Minority interest................................. 1,389.5 - - 1,389.5
Shareholders' equity:
Preferred stock................................ 105.6 - - 105.6
Common stock and additional paid-in capital.... 2,435.6 725.6 (500.0) 2,661.2
Accumulated other comprehensive income......... 201.9 (1.6) - 200.3
Retained earnings.............................. 1,315.4 712.8 (11.1) 2,017.1
--------- -------- ------- ---------
Total shareholders' equity................. 4,058.5 1,436.8 (511.1) 4,984.2
--------- -------- ------- ---------
Total liabilities and shareholders' equity. $36,789.7 $6,257.6 $(572.4) $42,474.9
========= ======== ======= =========
</TABLE>
10
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
INTEREST-ONLY SECURITIES, FINANCE RECEIVABLES AND SERVICING RIGHTS OF
FINANCE SUBSIDIARIES
We pool and securitize substantially all of the finance receivables we
originate, retaining: (i) investments in interest-only securities that are
subordinated to the rights of other investors; and (ii) servicing on the
contracts. In a typical securitization, we sell finance receivables to a special
purpose entity, established for the limited purpose of purchasing the finance
receivables and selling securities representing interests in the receivables.
The special purpose entity issues interest-bearing securities that are
collateralized by the underlying pool of finance receivables. We receive the
proceeds from the sale of the securities in exchange for the finance
receivables. The securities are typically sold at the same amount as the
principal balance of the receivables sold. We retain a residual interest
representing the right to receive, over the life of the pool of finance
receivables, the excess of the principal and interest received on the
receivables transferred to the trust over the principal and interest paid to the
holders of other interests in the securitization and servicing fees. Our life
insurance subsidiaries from time-to-time have purchased interests in the
securities of the special purpose entity which we classify as fixed maturity
securities.
We recognize a gain on the sale of finance receivables equal to the
difference between the proceeds from the sale, net of related transaction costs,
and the allocated carrying amount of the receivables sold. We allocate the
carrying amount of finance receivables between the assets sold and retained
based on their relative fair values at the date of sale. The estimated fair
value of the retained assets (interest-only securities and servicing rights) is
determined by discounting their projected future cash flows using prepayment,
default, loss, servicing cost and discount rate assumptions.
On a quarterly basis, we determine the estimated fair value of our
interest-only securities based on discounted projected future cash flows using
current assumptions. Differences between the estimated fair value and carrying
value of interest-only securities considered to be temporary are recognized as
adjustments to shareholders' equity. Declines in value are considered to be
other than temporary when the present value of estimated future cash flows
discounted at a risk free rate using appropriate assumptions is less than the
carrying value of the interest-only securities. When declines in value
considered to be other than temporary occur, the carrying value is reduced to
estimated fair value and a loss is recognized in the statement of operations.
During the first quarter of 1998, prepayments on loan contracts exceeded
expectations, and as a result, a $29.1 million reduction in the carrying value
of our interest-only securities (net of income taxes of $17.9 million) was
realized. During the second quarter of 1998, prepayments on loan contracts
continued to exceed expectations and management believes that such prepayments
will be higher than expected in future periods as well. In addition, the market
yields of publicly traded securities that are similar to our interest-only
securities increased during the second quarter, decreasing the market value of
such investments. As a result of these developments, we concluded that an
impairment in the value of the interest-only securities and servicing rights had
occurred, and a new value was determined using the current assumptions. The new
assumptions (which are summarized below) reflect the following changes from the
assumptions previously used: (i) an increase in prepayment rates; (ii) an
increase in the discount rate used to determine the present value of future cash
flows to 15 percent from 11 percent; and (iii) an increase in anticipated future
rates of default. A $350 million nonrecurring charge to reduce the carrying
value of the interest-only securities and servicing rights (net of income taxes
of $190 million) was recognized in the second quarter of 1998.
The following summarizes assumptions used to determine the estimated fair
value of interest-only securities as of June 30, 1998:
<TABLE>
<CAPTION>
Manufactured Home equity/ Consumer/
housing home improvement equipment Total
------- ---------------- --------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Interest-only securities............................ $ 471.5 $ 299.9 $ 162.6 $ 934.0
Principal balance of sold finance receivables (1)... 18,599.0 4,739.0 3,020.0 26,358.0
Weighted average customer interest rate on sold
finance receivables (1).......................... 10.35% 11.56% 10.86%
Expected weighted average constant prepayment
rate as a percentage of principal balance of sold
finance receivables (1) (2)...................... 12.00% 25.00% 22.00%
Expected nondiscounted credit losses as a
percentage of principal balance of sold
finance receivables (1) (2)...................... 6.00% 4.40% 2.00%
Weighted average discount rate (1).................. 15.00% 15.00% 15.00%
11
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
<FN>
- -------------------
(1) Excludes finance receivables sold in revolving trust securitizations.
(2) The valuation of interest-only securities is affected not only by the
projected level of prepayments of principal and net credit losses, as shown
above, but also by the projected timing of such prepayments and net credit
losses. Should the timing of projected prepayments of principal or net
credit losses differ materially from the timing projected by the Company,
such timing could have a material effect on the valuation of the
interest-only securities.
</FN>
</TABLE>
The following summarizes information with respect to the 60-days-and-over
contractual dollar delinquencies, loss experience and repossessed collateral
experience of our managed finance receivables at June 30, 1998 and 1997 and for
the six month periods then ended:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
60-days-and-over delinquencies as a percentage
of managed finance receivables at period end............................ 1.03% .90%
==== ===
Net credit losses as a percentage of average managed finance
receivables during the period........................................... 1.07% 1.01%
==== ====
Repossessed collateral during the year as a percentage of
managed finance receivables at period end............................... .92% .90%
=== ===
</TABLE>
Activity in the interest-only securities account during the six months
ended June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Balance, beginning of period................................................ $1,365.8 $ 983.5
Additions resulting from securitizations during the period............... 269.9 331.9
Investment income........................................................ 69.6 56.2
Cash received............................................................ (156.6) (117.6)
Reduction in carrying value as a result of adverse prepayment
experience............................................................. (47.0) -
Nonrecurring charge to reduce carrying value............................. (535.0) -
Change in unrealized appreciation........................................ (32.7) (52.6)
-------- --------
Balance, end of period...................................................... $ 934.0 $1,201.4
======== ========
</TABLE>
During the six months ended June 30, 1998 and 1997, the Company sold $5.4
billion and $4.4 billion, respectively, of finance receivables in various
securitized transactions and recognized gains of $272.4 million and $348.6
million, respectively.
12
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Finance receivables, summarized by type, were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Lease........................................................................ $ 418.7 $ 209.3
Commercial finance........................................................... 654.4 684.6
Revolving credit card........................................................ 404.2 166.3
Loans held for sale.......................................................... 2,094.9 930.6
-------- --------
3,572.2 1,990.8
Less allowance for doubtful accounts......................................... (24.4) (19.8)
-------- --------
Net finance receivables................................................. $3,547.8 $1,971.0
======== ========
</TABLE>
Servicing rights, retained subsequent to the sale of finance receivables,
are amortized in proportion to and over the estimated period of net servicing
income.
The activity in the servicing rights account during the six months ended
June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Balance, beginning of period............................................. $ 77.0 $30.8
Additions resulting from securitizations
during the period................................................... 36.7 34.3
Amortization.......................................................... (11.2) (6.2)
Nonrecurring charge to establish a valuation allowance................ (5.0) -
------ -----
Balance, end of period................................................... $ 97.5 $58.9
====== =====
</TABLE>
Servicing rights are evaluated for impairment on an ongoing basis,
stratified by product type and origination period. To the extent the recorded
amount exceeds the fair value, a valuation allowance is established through a
charge to earnings. Upon subsequent measurement of the fair value of these
servicing rights in future periods, if the fair value equals or exceeds the
carrying amount, any previously recorded valuation allowance would be deemed
unnecessary and, therefore, restored to earnings.
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 dilutive convertible securities, warrants and
stock options were exercised and converted into common stock. 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. During the three and six month periods ended June 30, 1998, there were
no dilutive common stock equivalents as a result of the net loss realized by the
Company during such periods. Prior period earnings per share amounts have been
restated for the Green Tree Merger. We have also restated all share and
per-share amounts for the two-for-one stock split distributed February 11, 1997.
13
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
A reconciliation of income (loss) and shares used to calculate basic and
diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
---- ----
(Dollars in millions and shares in thousands)
<S> <C> <C> <C> <C>
Income (loss):
Net income (loss) before extraordinary charge..................... $(268.2) $240.3 $(37.2) $446.3
Preferred stock dividends and charge related to induced
conversions of preferred stock.................................. 2.2 3.1 4.2 17.7
------- ------ --------- ------
Income (loss) before extraordinary charge applicable to common
ownership for basic earnings per share........................ (270.4) 237.2 $(41.4) 428.6
Effect of dilutive securities:
Preferred stock dividends....................................... - 2.2 - 4.5
-------- ------ ------- ------
Income (loss) before extraordinary charge applicable to common
ownership and assumed conversions for diluted
earnings per share............................................ $(270.4) $239.4 $(41.4) $433.1
======= ====== ====== ======
Shares:
Weighted average shares outstanding for basic
earnings per share.............................................. 310,326 314,285 309,648 309,450
Effect of dilutive securities on weighted average shares:
Stock options................................................... - 12,604 - 13,901
Employee stock plans............................................ - 2,292 - 2,185
PRIDES.......................................................... - 6,735 - 7,037
Convertible debentures.......................................... - 5,879 - 5,420
-------- ------ -------- ------
Dilutive potential common shares............................ - 27,510 - 28,543
-------- ------ -------- ------
Weighted average shares outstanding for diluted
earnings per share..................................... 310,326 341,795 309,648 337,993
======= ======= ======= =======
</TABLE>
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.
The change in unrealized gains included in comprehensive income (loss) in
the first six months of 1998 and 1997 was net of $8.6 million and $3.8 million,
respectively, of net investment losses included in net income (loss). The change
in unrealized gains included in comprehensive income (loss) in the second
quarters of 1998 and 1997 was net of $(8.6) million and $.6 million,
respectively, of net investment gains (losses) included in net income (loss).
BUSINESS SEGMENTS
As of January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). Under SFAS 131, companies are required to provide
disclosures about operating segments on the same basis used internally by a
company for evaluating the performance of its operations and the allocation of
its resources. The segment disclosure under SFAS 131 is not significantly
different from our prior disclosures because our prior disclosures reflected the
same operating data and results used by management in evaluating the performance
of our business.
14
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following table summarizes financial data by segment:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Total revenue:
Consumer and commercial finance................................... $ 307.0 $ 316.3 $ 592.8 $ 582.5
Supplemental health insurance..................................... 561.1 540.3 1,146.5 1,006.4
Annuities......................................................... 322.5 300.9 760.0 575.4
Life insurance.................................................... 357.7 268.8 728.2 495.3
Individual and group major medical insurance...................... 225.8 216.7 464.1 315.4
Other ............................................................ 65.2 33.8 132.5 67.0
-------- -------- -------- --------
$1,839.3 $1,676.8 $3,824.1 $3,042.0
======== ======== ======== ========
Income (loss) before income taxes, minority interest and extraordinary
charge:
Consumer and commercial finance................................. $ (586.6) $ 173.5 $ (484.2) $ 320.6
Supplemental health insurance................................... 106.0 101.3 244.7 183.4
Annuities....................................................... 93.7 81.3 175.7 145.9
Life insurance.................................................. 81.4 62.3 182.4 116.6
Individual and group major medical insurance.................... 24.6 10.7 43.9 20.9
Other........................................................... 19.2 14.2 39.2 28.2
Corporate....................................................... (40.0) (29.3) (82.8) (59.1)
Nonrecurring charges............................................ - (9.3) - (9.3)
---------- -------- ---------- --------
$ (301.7) $ 404.7 $ 118.9 $ 747.2
======== ======== ======== ========
</TABLE>
FINANCIAL INSTRUMENTS
We periodically use options and interest rate swaps to hedge interest rate
risk associated with our investments and borrowed capital. At June 30, 1998, we
held agreements to create a hedge that effectively converts a portion of our
fixed-rate borrowed capital into floating-rate instruments for the period during
which the agreements are outstanding. We record the difference between the
interest rates as an adjustment to interest expense. During the first six months
of 1998, interest expense was reduced by $1.5 million as a result of our
interest rate swap agreements. Such interest rate swap agreements have an
aggregate notional principal amount of $1.6 billion, mature in various years
through 2008 and have an average remaining life of 5.5 years.
Our equity-indexed annuity products provide a guaranteed base rate of
return with a higher potential return linked to the performance of a broad-based
equity index. We buy Standard & Poor's 500 Index Call Options (the "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 six months ended June 30, 1998, net investment income included
$72.0 million related to changes in the value of the S&P 500 Call Options. Such
investment income was substantially offset by amounts added to policyholder
account balances for annuities and financial products. The value of the S&P 500
Call Options was $76.6 million at June 30, 1998. 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 June 30, 1998, all of the counterparties were
rated "A" or higher by Standard & Poor's Corporation.
15
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
In conjunction with certain sales of finance receivables, the Company has
provided guarantees of approximately $1.8 billion at June 30, 1998. The Company
believes the likelihood of a significant loss from such guarantees is remote.
REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $276.8 million and $219.9 million in the first six months of 1998
and 1997, 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 $238.0 million and $201.3 million in the first six months of 1998 and
1997, 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.
CHANGES IN CORPORATE NOTES PAYABLE AND COMMERCIAL PAPER
Notes payable and commercial paper related to corporate activities (other
than those of our subsidiary, Green Tree, discussed below) of the Company were
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Interest rate 1998 1997
------------- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Bank debt............................................................ 5.93% (1) $ 475.0 $1,000.0
Leucadia Notes....................................................... 6.2% (1) 400.0 400.0
Commercial paper..................................................... 6.15% (1) 814.3 448.2
Mandatory Par Put Remarketed Securities Notes........................ 6.4% 550.0 -
Notes due 2003....................................................... 6.4% 250.0 -
Senior notes due 2003................................................ 8.125% 63.5 168.5
Senior notes due 2004................................................ 10.5% 25.0 184.9
Senior subordinated notes due 2004................................... 11.25% 8.1 10.9
Senior notes due 2005................................................ 6.8% 250.0 -
Convertible subordinated debentures due 2005......................... 6.5% 22.1 29.1
Convertible subordinated notes due 2003.............................. 6.5% 86.0 86.1
Other................................................................Various 16.8 21.3
------- --------
Total principal amount.......................................... 2,960.8 2,349.0
Unamortized net (discount) premium................................... (8.7) 5.9
-------- --------
Total........................................................... $2,952.1 $2,354.9
======== ========
<FN>
(1) Current rate at June 30, 1998.
</FN>
</TABLE>
First six months of 1998 changes in notes payable and commercial paper
On June 9, 1998, we completed the offering of $550.0 million of unsecured
6.4 percent notes due June 15, 2011 ("MOPPRS") which are putable on June 15,
2001. The put options embedded in the MOPPRS could require Conseco to repurchase
the MOPPRS at face value on June 15, 2001. Otherwise, the interest rate on the
MOPPRS will be reset at 5.587 percent plus a margin defined in the agreement for
the period remaining until final maturity on June 15, 2011. Proceeds from the
offering of approximately $546.9 million (after original issue discount,
underwriting and other associated costs) were used to repay outstanding
commercial paper.
16
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Interest is payable semi-annually on June 15 and December 15 of each year. In
addition, we received $14.9 million for the sale of a call option, related to
the reset feature described above. The MOPPRS are senior unsecured obligations
of the Company.
On June 9, 1998, we completed the offering of $250.0 million of 6.8 percent
notes ("6.8 Percent Notes") due June 15, 2005. Proceeds from the offering of
approximately $247.5 million (after underwriting and other associated costs)
were used to repay outstanding commercial paper. Interest is paid semi-annually
on June 15 and December 15 of each year. The 6.8 Percent 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
of such 6.8 Percent 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 maturity date, computed by discounting such payments, in
each case, to the redemption date on a semi-annual basis at the Redemption
Treasury Rate (as defined in the 6.8 Percent Notes), plus 25 basis points, plus
(b) accrued and unpaid interest on the principal amount thereof. The 6.8 Percent
Notes are unsecured and rank pari passu with all other unsecured and
unsubordinated obligations of Conseco.
On April 1, 1998, we announced a fixed spread tender offer for our 8.125%
Senior Notes due 2003 (the "8.125% Senior Notes"). The purchase price paid for
each 8.125% Senior Note tendered was the price per $1,000 principal amount equal
to a spread of 42 basis points over the yield to maturity of the 5.5 percent
U.S. Treasury Note due February 28, 2003, at the time the holder tendered its
8.125% Senior Note plus accrued and unpaid interest. The tender offer expired on
April 21, 1998. As a result of the tender offer, we repurchased $104.5 million
par value of the 8.125% Senior Notes for $113.6 million. Such repurchases were
funded with available cash, bank credit facilities and the issuance of
commercial paper. We recognized an extraordinary charge of $6.8 million (net of
income taxes of $3.7 million) related to such repurchases in the second quarter
of 1998. During the second quarter of 1998, we repurchased $.5 million par value
of the 8.125% Senior Notes for $.5 million in addition to the repurchases made
under the tender offer.
On February 9, 1998, we completed the offering of $250.0 million of 6.4
percent notes (the "6.4% Notes") due February 10, 2003. Proceeds from the
offering of approximately $248.0 million (after original issue discount,
underwriting 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 6.4% 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
6.4% Notes) plus 25 basis points, plus (b) accrued and unpaid interest on the
principal amount thereof. The 6.4% Notes are unsecured and rank pari passu with
all other unsecured and unsubordinated obligations of Conseco.
On June 30, 1998, commercial paper increased $375.0 million, the proceeds
of which were used to repay debt of Green Tree. Borrowings under our commercial
paper program averaged approximately $678.5 million during the first six months
of 1998. The weighted average interest rate on such borrowings was 5.77 percent
during the six month period ended June 30, 1998. Conseco's commercial paper has
maturities ranging from 1 to 108 days. However, the Company has the ability to
refinance such obligations through its bank credit facility. Maximum permitted
borrowings under our revolving credit facility are reduced by the aggregate
outstanding commercial paper of Conseco. At June 30, 1998, we could borrow up to
an additional $530 million under our revolving credit facility or commercial
paper program.
During the first quarter of 1998, we repurchased $2.8 million par value of
the 11.25 percent senior subordinated notes due 2004 for $3.2 million. We
recognized an extraordinary charge of $.2 million (net of a $.1 million tax
benefit) as a result of such repurchases. In addition, assets with a carrying
value at June 30, 1998, of $9.6 million were segregated for the purpose of
defeasing the remaining $8.1 million par value of our 11.25 percent subordinated
notes due 2004.
During the first six months of 1998, we repurchased $159.9 million par
value of our 10.5 percent senior notes due 2004 for $196.3 million. We
recognized an extraordinary charge of $18.0 million (net of a $9.7 million tax
benefit) as a result of such repurchases.
First six months of 1997 changes in notes payable and commercial paper
In the first six months of 1997, we repurchased $76.1 million par value of
the 11.25 percent senior subordinated notes due 2004 for $87.7 million. We
recognized an extraordinary charge of $4.9 million (net of a $2.6 million tax
benefit) as a result of such repurchases.
17
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
During the first six months of 1997, we repurchased $8.4 million par value
of the 10.5 percent senior notes due 2004 for $9.8 million. We recognized an
extraordinary charge of $.6 million (net of a $.3 million tax benefit) as a
result of such repurchases.
During the first six months of 1997, $65.1 million par value of convertible
subordinated debentures due 2005 were converted into 5.0 million shares of
Conseco common stock. Such convertible debentures were acquired in conjunction
with the acquisition (the "ATC Merger") of American Travellers Corporation
("ATC") in December 1996. We paid $4.4 million to induce the holders to convert
such convertible subordinated debentures. In addition, we repurchased $4.0
million par value of the convertible debentures for $12.2 million. The
extraordinary charge recognized as a result of the inducement payment and
repurchases was not significant since such amount approximated amounts reflected
in the fair value of the debentures which was recorded as a liability at the ATC
Merger date.
We instituted a commercial paper program in April 1997 to lower our
borrowing costs and improve our liquidity. Borrowings under our commercial paper
program for the period April 24, 1997 through June 30, 1997, averaged
approximately $328 million. The weighted average rate on such borrowings was 6.1
percent at June 30, 1997.
CHANGES IN CONSUMER AND COMMERCIAL FINANCE NOTES PAYABLE AND COMMERCIAL
PAPER
Notes payable and commercial paper related to consumer and commercial
financing activities of our subsidiary, Green Tree, were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Interest rate 1998 1997
------------- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Master repurchase agreements......................................... 6.65% $1,355.8 $ -
Credit facility collateralized by interest-only securities........... 7.66 700.0 -
Senior subordinated notes............................................ 10.80 213.7 263.7
Bank debt............................................................ 6.22 225.0 35.0
Medium term notes.................................................... 6.62 238.7 246.6
Commercial paper..................................................... - - 1,319.1
Other................................................................ 2.00 1.8 1.9
-------- --------
Total principal amount............................................ 2,735.0 1,866.3
Less unamortized net discount........................................ (6.2) -
-------- --------
Total............................................................. $2,728.8 $1,866.3
======== ========
</TABLE>
First six months of 1998 changes in notes payable and commercial paper
At June 30, 1998, the Company had $3.8 billion of master repurchase
agreements with various investment banking firms, subject to the availability of
eligible collateral. The master repurchase agreements generally provide for
annual terms which are extended each quarter by mutual agreement of the parties
for an additional annual term based upon the review of updated quarterly
financial information of Green Tree.
We entered into a new credit facility in February 1998, which provides for
a $700 million line of credit collateralized by our interest-only securities.
The line of credit matures on February 12, 2000, with an optional one year
extension. In addition, we issued warrants to purchase 2.5 million equivalent
shares of Conseco common stock at $24.8227 per share to the provider of the
facility subject to a maximum appreciation of $16.37 per equivalent share. The
warrants were exercised at the date of the Green Tree Merger.
During 1998, we repurchased senior subordinated notes with a par value of
$50.0 million for $54.4 million. We recognized an extraordinary charge of $2.8
million (net of a $l.6 million tax benefit) as a result of such repurchases.
18
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
We substantially restructured and repaid a portion of our bank debt during
1998. After the restructuring, the bank debt of the consumer and commercial
finance segment provides $325.0 million of financing through September 1998. We
recognized an extraordinary charge of $2.5 million (net of a $1.5 million tax
benefit) as a result of the repayment, restructuring and cancellation of a
portion of our bank debt.
During the fourth quarter of 1997 and the first quarter of 1998, Green
Tree's senior unsecured debt ratings were lowered by each of the credit rating
agencies which provide ratings on its debt. As a result of these actions, we
curtailed our issuance of commercial paper in favor of our master repurchase
agreements and bank credit line.
CHANGES IN PREFERRED STOCK
During the second quarter of 1998, 167,450 shares of Preferred Redeemable
Increased Dividend Equity Securities 7% PRIDES Convertible Preferred Stock
("PRIDES") were converted by holders of such shares into .6 million shares of
common stock.
During the first six months of 1997, 2,374,300 shares of PRIDES were
converted by holders of such shares into 8.1 million shares of common stock. We
paid $13.2 million to induce the holders to convert the PRIDES. Such payment is
reflected in the consolidated financial statements as a dividend paid to such
holders.
19
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CHANGES IN COMMON STOCK
Changes in the number of shares of common stock outstanding for the first
six months of 1998 and 1997 were as follows (shares in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period................................................................... 310,012 293,359
Stock options exercised..................................................................... 6,389 11,073
Stock warrants exercised.................................................................... 862 -
Shares issued in conjunction with mergers................................................... - 11,264
Common shares converted from convertible subordinated debentures............................ 540 4,977
Common shares converted from PRIDES......................................................... 573 8,120
Common stock acquired under option exercise and repurchase programs......................... (5,852) (18,362)
Shares returned due to recomputation of bonus............................................... (698) -
Shares issued under employee benefit and compensation plans................................. 537 1,298
------- -------
Balance, end of period......................................................................... 312,363 311,729
======= =======
</TABLE>
In the first quarter of 1998, Conseco's chief executive officer and three
of its executive vice presidents exercised outstanding options to purchase
approximately 2.4 million shares of Conseco common stock under Conseco's option
exercise program. The options exercised would otherwise have remained
exercisable until 2004. The option exercise program was created in 1994 in order
to accelerate the recording of tax benefits we derive from the exercise of the
options and to better manage our capital structure. No cash was exchanged as the
executives paid for the exercise price of the options and a portion of the
federal and state taxes thereon by tendering previously owned shares. The
Company withheld shares to cover a portion of the federal and state taxes owed
by the executives as a result of the exercise transactions. The program resulted
in the following changes to common stock and additional paid-in capital: (i) an
increase for a tax benefit of $26.6 million (net of payroll taxes incurred of
$1.1 million); (ii) an increase for the exercise price of $35.2 million; and
(iii) a decrease of $72.4 million related to shares withheld or tendered by the
executives for the exercise price and for federal and state taxes. Net of shares
withheld or tendered, we issued approximately .9 million shares of common stock
to the executives under the program. 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 1.5 million shares at a price of $48.1875 per
share (equal to the market price per share on the grant date) to replace the
shares surrendered for taxes and the exercise price.
During the first six months of 1998, we repurchased 4.4 million common
shares under our share repurchase programs for $198.8 million.
In the first quarter of 1998, .7 million shares were returned to the
Company due to the recomputation of a bonus paid to a Green Tree executive for
fiscal year 1996.
In conjunction with our announcement of the Green Tree Merger, we announced
the termination of our share repurchase program to repurchase 5 million Conseco
common shares (719,400 shares of Conseco common stock were repurchased under
such program prior to its termination).
We allocated the $271.2 million cost of the 5.9 million shares we
repurchased in 1998 in connection with the stock option exercise program and
share repurchase program to shareholders' equity accounts as follows: (i) $152.7
million to common stock and additional paid-in capital (such allocation was
based on the value we received for shares issued in our recent acquisitions);
and (ii) $118.5 million to retained earnings.
STOCK OPTION PLANS
As a result of the Green Tree Merger, all options previously issued by
Green Tree became immediately exercisable on June 30, 1998. In addition, on
March 1, 1998, certain Green Tree employee stock options were repriced to the
current market price pursuant to an option repricing program.
20
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
A summary of stock option activity and related information of the Company
(including the combined stock options of Conseco and Green Tree) for the first
six months of 1998 is presented below (shares in thousands):
<TABLE>
<CAPTION>
Number of Weighted average
shares exercise price
------ --------------
<S> <C> <C>
Outstanding at January 1, 1998............................................. 33,511 $24.78
Granted in connection with:
Traditional grants.................................................... 4,344 44.93
Option exercise program............................................... 1,502 48.19
Repricing program..................................................... 2,594 25.10
------
Total granted....................................................... 8,440 39.42
------
Exercised............................................................... (6,389) 22.37
Forfeited............................................................... (2,062) 18.29
Terminated in repricing program......................................... (2,594) 37.13
-------
Outstanding at June 30, 1998............................................... 30,906 28.67
======
</TABLE>
The following summarizes information about fixed stock options outstanding
at June 30, 1998 (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>
$ 1.56 .................... 1 .1 $ 1.56 1 $ 1.56
3.24 - 4.86.................... 829 2.9 3.37 829 3.37
5.00 - 6.91.................... 558 3.6 5.58 516 5.50
7.77 - 11.57.................... 503 4.0 10.51 257 10.48
11.79 - 16.57.................... 7,900 5.4 14.33 1,631 13.76
17.88 - 26.19.................... 5,679 8.5 24.70 1,368 22.94
27.19 - 30.41.................... 1,479 6.2 29.62 568 29.14
30.41 (Key Manager Program)........ 1,100 24.0 30.41 - -
30.73 - 45.84.................... 8,201 8.3 37.98 4,814 38.61
46.71 - 51.28.................... 4,656 9.3 49.85 131 48.40
------ ------
30,906 10,115
====== ======
</TABLE>
CHANGES IN MINORITY INTEREST
Minority interest represents the interest of investors other than Conseco
in its subsidiaries. Minority interest at June 30, 1998, included: (i)
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts with a carrying value of $1,388.8 million; and (ii) $.7 million interest
in the common stock of a subsidiary.
21
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts at June 30, 1998, 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 $ 286.7
8.70% Capital Trust Pass-through Securities ("TruPS")................. 325.0 325.0 361.3
8.796% Capital Securities............................................. 300.0 300.0 336.9
FELINE PRIDES......................................................... 503.7 488.8 534.0
-------- -------- --------
$1,403.7 $1,388.8 $1,518.9
======== ======== ========
</TABLE>
In January 1998, 74,900 FELINE PRIDES were issued for a total of $3.7
million to cover the over-allotments associated with our original offering of
such securities in December 1997.
DIRECTOR, EXECUTIVE AND SENIOR OFFICER STOCK PURCHASE PLAN
The Director, Executive and Senior Officer Stock Purchase Plan is designed
to encourage direct, long-term ownership of Conseco common stock by Board
members, executive officers and certain senior officers. Under the program, 8
million shares of Conseco common stock were purchased in 1997 and 1996 in open
market transactions with independent parties. Purchases were financed by
personal loans to the participants from a bank. Such loans are collateralized by
the Conseco common 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 on the
loans. A total of 39 directors and officers of Conseco participated in the plan.
At June 30, 1998, the bank loans guaranteed by us totaled $246.1 million, and
the loans provided by us for interest totaled $14.6 million. The common stock
that collateralizes the loans had a fair value of $352.0 million.
In July 1998, the Board of Directors expanded the program to allow for the
purchase of up to 4 million additional shares by directors, selected officers
and key employees of Conseco and its subsidiaries.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 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.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued in June
1998. SFAS 133 requires all derivative instruments to be recorded on the balance
sheet at estimated fair value. Changes in the fair value of derivative
instruments are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. SFAS 133 is effective
for year 2000. We are currently evaluating the impact the statement will have on
our financial statements, although at present, we do not believe it will have a
material effect on our financial position or results of operations.
22
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
LITIGATION
Green Tree has been served with various related lawsuits which were filed
in the United States District Court for the District of Minnesota. These
lawsuits were filed by certain former stockholders of Green Tree as purported
class actions on behalf of persons or entities who purchased common stock of
Green Tree during the alleged class periods that generally run from February
1995 to January 1998. One such action did not include class action claims. In
addition to Green Tree, certain current and former officers and directors of
Green Tree are named as defendants in one or more of the lawsuits. Green Tree
and other defendants intend to seek consolidation in the United States District
Court for the District of Minnesota of each of the lawsuits seeking class action
status. Plaintiffs in the lawsuits assert claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. In each case, plaintiffs allege that
Green Tree and the other defendants violated federal securities laws by, among
other things, making false and misleading statements about the current state and
future prospects of Green Tree (particularly with respect to prepayment
assumptions and performance of certain loan portfolios of Green Tree) which
allegedly rendered Green Tree's financial statements false and misleading. The
Company believes that the lawsuits are without merit and intends to defend such
lawsuits vigorously.
The Company and its subsidiaries are involved on an ongoing basis in
lawsuits related to its operations. Although the ultimate outcome of certain of
such matters cannot be predicted, none of such lawsuits currently pending
against the Company or its subsidiaries is expected, individually or in the
aggregate, to have a material adverse effect on the Company's consolidated
financial condition, cash flows or results of operations.
CONSOLIDATED STATEMENT OF CASH FLOWS
The following non-cash items were not reflected in the consolidated
statement of cash flows in 1998: (i) the acquisition of common stock of $35.2
million pursuant to the tender of shares under the option exercise program; (ii)
the issuance of common stock under stock option and employee benefit plans of
$15.1 million; (iii) the tax benefit of $41.8 million related to the issuance of
common stock under employee benefit plans; (iv) the conversion of $10.2 million
of PRIDES into .6 million shares of common stock; and (v) the conversion of $7.1
million par value of convertible debentures into .5 million shares of common
stock. The following non-cash items were not reflected in the consolidated
statement of cash flows in 1997: (i) the issuance of common stock valued at
$458.2 million related to the acquisition of Capitol American Financial
Corporation and the acquisition (the "PFS Merger") of Pioneer Financial
Services, Inc. ; (ii) the issuance of $185.7 million of common stock under
employee benefit plans; (iii) the tax benefit of $83.1 million related to the
issuance of common stock under employee benefit plans; (iv) the conversion of
$145.1 million of PRIDES into 8.1 million shares of common stock; and (v) the
conversion of $65.1 million par value of convertible debentures into 5.0 million
shares of common stock.
23
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting our results
of operations and significant changes in our balance sheet. Many of the changes
in 1998 and 1997 affecting our results of operations were caused by: (i) the PFS
Merger effective April 1, 1997; (ii) the acquisition (the "Colonial Penn
Purchase") of Conseco Direct Life Insurance Company (formerly Colonial Penn Life
Insurance Company and Providential Life Insurance Company) and certain other
assets (collectively referred to as "Colonial Penn"), effective September 30,
1997; (iii) the acquisition (the "WNIC Merger") of Washington National
Corporation ("WNIC"), effective December 1, 1997; and (iv) various financings
described in the notes to the consolidated financial statements included herein
and the notes to the supplemental consolidated financial statements included in
Exhibit 99.1 to Conseco's Current Report on Form 8-K dated June 30, 1998, as
amended. Such supplemental consolidated financial statements as of December 31,
1997 and 1996, and for each of the three years ended December 31, 1997, give
retroactive effect to the Green Tree Merger which was accounted for as a pooling
of interests. These transactions also caused significant changes in our balance
sheet during these periods. This discussion should be read in conjunction with
the supplemental consolidated financial statements and notes included herein and
in Exhibit 99.1 to Conseco's Current Report on Form 8-K dated June 30, 1998, as
amended.
RESULTS OF OPERATIONS
We conduct and manage our business through six segments, reflecting our
major lines of business and target markets: (i) consumer and commercial finance;
(ii) supplemental health insurance; (iii) annuities; (iv) life insurance; (v)
individual and group major medical insurance; and (vi) other.
24
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Consolidated Results and Analysis
The following table and narrative summarize the consolidated results of our
operations:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating earnings................................................ $ 238.4 $244.0 $469.4 $454.4
Net investment gains (losses), net of related costs, amortization
and taxes...................................................... (8.6) .6 (8.6) (3.8)
Nonrecurring charges, net of taxes................................ (498.0) (4.3) (498.0) (4.3)
------- ------ ------ ------
Income (loss) before extraordinary charge.................. (268.2) 240.3 (37.2) 446.3
Extraordinary charge, net of taxes................................ 13.9 2.2 30.3 5.5
-------- ------ ------ ------
Net income (loss).......................................... (282.1) 238.1 (67.5) 440.8
Less amounts applicable to preferred stock:
Charge related to induced conversions.......................... - .9 - 13.2
Preferred stock dividends...................................... 2.2 2.2 4.2 4.5
------- ------ ------ ------
Net income (loss) applicable to common stock............... $(284.3) $235.0 $(71.7) $423.1
======= ====== ====== ======
Per diluted common share:
Weighted average shares outstanding (in millions).............. 310.3 341.8 309.6 338.0
===== ===== ===== =====
Operating earnings............................................. $ .76 $ .71 $ 1.50 $1.35
Net investment gains (losses) net of related costs,
amortization and taxes....................................... (.03) - (.02) (.01)
Nonrecurring charges, net of taxes............................. (1.61) (.01) (1.61) (.01)
Charge related to induced conversion of preferred stock........ - - - (.04)
------ ----- ------ -----
Income (loss) before extraordinary charge.................. (.88) .70 (.13) 1.29
Extraordinary charge, net of taxes............................. (.04) (.01) (.10) (.02)
------ ----- ------ -----
Net income (loss).......................................... $ (.92) $ .69 $ (.23) $1.27
====== ===== ====== =====
</TABLE>
Our second quarter 1998 operating earnings were $238.4 million, or 76 cents
per diluted share, down 2.3 percent and up 7.0 percent, respectively, over the
second quarter of 1997. Operating earnings during the first six months of 1998
were $469.4 million, or $1.50 per diluted share, up 3.3 percent and 11 percent,
respectively, over the first six months of 1997. Operating earnings decreased in
the second quarter of 1998 as a result of an expected decrease in operating
earnings from the consumer and commercial finance segment due to: (i) the
deliberate strategy to reduce the total finance receivables sold and increase
our inventory of finance receivables, holding them for sale after the end of the
quarter when the supply of securitizations in the capital markets is expected to
be lower and the spreads are expected to be better; and (ii) changes in the
assumptions used to calculate the gain on sale of finance receivables which
reduced the amount of the gain as a percentage of total loans sold. Such
decreases were partially offset by increases in operating earnings from each of
the insurance segments as a result of the Colonial Penn Purchase (September 30,
1997); the WNIC Merger (December 1, 1997); and changes in the business in force.
Operating earnings increased in the first six months of 1998 as a result of: (i)
increases in operating earnings from each of our insurance segments as a result
of the PFS Merger (April 1, 1997); the Colonial Penn Purchase; the WNIC Merger;
and changes in the business in force; partially offset by (ii) the decrease in
operating earnings from the consumer and commercial finance segment due to the
factors discussed above for the second quarter of 1998. The percentage change in
operating earnings differed from the percentage change in operating earnings per
diluted share primarily because of the 9.2 percent decrease in weighted average
diluted common shares outstanding in the second quarter of
25
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
1998 and the 8.4 percent decrease in the first six months of 1998. The decrease
in weighted average diluted shares resulted principally from the fact that there
was no dilutive effect from common stock equivalents for the three and six
months ended June 30, 1998.
The net loss of $282.1 million in the second quarter of 1998, or 92 cents
per diluted share, included (i) net investment losses (net of related costs,
amortization and taxes) of $8.6 million, or 3 cents per share; (ii) an
extraordinary charge (net of taxes) of $13.9 million, or 4 cents per share,
related to early retirement of debt; and (iii) a nonrecurring charge (net of
taxes) of $498.0 million, or $1.61 per share, related to the merger related
costs incurred in conjunction with the Green Tree Merger and the charge to
reduce the value of interest-only securities and servicing rights. Net income of
$238.1 million in the second quarter of 1997, or 69 cents per diluted share,
included: (i) net investment gains (net of related costs, amortization and
taxes) of $.6 million, or nil per share; (ii) an extraordinary charge of $2.2
million, or 1 cent per share, related to early retirement of debt; and (iii) a
nonrecurring charge of $4.3 million, or 1 cent per share, related to the death
of an officer.
The net loss of $67.5 million in the first six months of 1998, or 23 cents
per diluted share, included (i) net investment losses (net of related costs,
amortization and taxes) of $8.6 million, or 2 cents per share; (ii) an
extraordinary charge (net of taxes) of $30.3 million, or 10 cents per share,
related to early retirement of debt; and (iii) a nonrecurring charge (net of
taxes) of $498.0 million, or $1.61 per share, as discussed above. Net income of
$440.8 million in the first six months of 1997, or $1.27 per share, included (i)
net investment losses (net of related costs, amortization and taxes) of $3.8
million, or 1 cent per share; (ii) a nonrecurring charge of $4.3 million, or 1
cent per share, related to the death of an officer; (iii) a charge of 4 cents
per share related to the induced conversion of preferred stock; and (iv) an
extraordinary charge of $5.5 million, or 2 cents per share, related to early
retirement of debt.
Total revenues include net investment gains of $12.3 million and $15.8
million in the second quarters of 1998 and 1997, respectively. Excluding net
investment gains, total revenues were $1,827.0 million in the second quarter of
1998, up 10 percent from $1,661.0 million in the second quarter of 1997. Total
revenues include net investment gains of $117.1 million and $20.9 million during
the first six months of 1998 and 1997, respectively. Excluding net investment
gains, total revenues were $3,707.0 million in the first six months of 1998, up
23 percent from $3,021.1 million in the first six months of 1997. Total revenues
in the 1998 periods include revenues of PFS, Colonial Penn and WNIC (such
companies were acquired in periods subsequent to the first quarter of 1997).
Total revenues in the six month period of 1997 include revenues of PFS for the
second quarter of 1997.
26
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
First Six Months of 1998 Compared with the First Six Months of 1997:
The following tables and narratives summarize the results of our operations
by business segment.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Operating income before income taxes, minority interest and
extraordinary charge:
Consumer and commercial finance.............................................. $ 101.4 $173.5 $ 203.8 $320.6
Supplemental health.......................................................... 112.0 102.9 229.7 187.2
Annuities.................................................................... 93.7 80.4 183.4 145.8
Life insurance............................................................... 81.4 60.6 181.1 118.3
Individual and group major medical........................................... 29.3 10.7 48.4 20.9
Other........................................................................ 24.7 14.2 41.1 28.5
Corporate interest and other expenses........................................ (40.0) (29.3) (82.8) (59.1)
-------- ------ ------- ------
Total consolidated operating income before income taxes, minority
interest and extraordinary charge...................................... 402.5 413.0 804.7 762.2
Net investment gains (losses), net of related costs and amortization............ (16.2) 1.0 2.2 (5.7)
Nonrecurring charges............................................................ (688.0) (9.3) (688.0) (9.3)
-------- ------ ------- ------
Income (loss) before income taxes, minority interest and extraordinary
charge................................................................. (301.7) 404.7 118.9 747.2
Income tax expense (benefit).................................................... (52.3) 150.3 117.9 276.8
-------- ------ ------- ------
Income (loss) before minority interest and extraordinary charge.......... (249.4) 254.4 1.0 470.4
Minority interest in consolidated subsidiaries:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.................................. 18.8 12.9 38.2 21.6
Dividends on preferred stock of subsidiaries................................. - 1.2 - 2.5
-------- ------ ------- ------
Income (loss) before extraordinary charge................................ (268.2) 240.3 (37.2) 446.3
Extraordinary charge on extinguishment of debt, net of taxes and
minority interest............................................................ 13.9 2.2 30.3 5.5
-------- ------ ------- ------
Net income (loss)........................................................ $ (282.1) $238.1 $ (67.5) $440.8
======== ====== ======= ======
</TABLE>
27
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Consumer and commercial finance:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Contract originations:
Manufactured housing.............................................. $1,673.9 $1,494.6 $2,878.1 $2,508.3
Home equity/home improvement...................................... 1,252.5 836.9 2,290.7 1,470.8
Consumer/retail credit............................................ 689.3 427.2 1,264.5 690.8
Commercial/equipment.............................................. 1,820.3 1,197.4 3,360.4 2,150.2
-------- -------- -------- --------
Total........................................................... $5,436.0 $3,956.1 $9,793.7 $6,820.1
======== ======== ======== ========
Sales of receivables:
Manufactured housing.............................................. $1,356.5 $1,320.0 $2,556.5 $2,370.0
Home equity/home improvement...................................... 500.1 629.3 1,450.1 1,149.4
Consumer/equipment................................................ 403.5 594.8 903.5 844.8
Commercial and retail revolving credit............................ 170.5 - 488.3 -
-------- -------- -------- --------
Total........................................................... $2,430.6 $2,544.1 $5,398.4 $4,364.2
======== ======== ======== ========
Managed receivables (at period end):
Fixed contracts................................................... $29,646.3 $22,239.0
Revolving credit.................................................. 2,655.8 1,416.3
--------- ---------
Total........................................................... $32,302.1 $23,655.3
========= =========
Net investment income:
Finance receivables............................................... $ 76.3 $ 53.7 $ 135.9 $ 96.6
Interest-only securities.......................................... 36.3 29.4 69.6 56.2
Gain on sale of finance receivables.................................. 135.2 190.5 272.4 348.6
Fee revenue and other income......................................... 59.2 42.7 114.9 81.1
------- ------ ------- -------
Total revenues.................................................. 307.0 316.3 592.8 582.5
------- ------ ------- -------
Consumer and commercial finance interest expense..................... 54.7 36.4 103.2 66.2
Other operating costs and expenses................................... 150.9 106.4 285.8 195.7
------- ------ ------- -------
Total expenses.................................................. 205.6 142.8 389.0 261.9
------- ------ ------- -------
Operating income before income taxes, minority interest
and extraordinary charge...................................... 101.4 173.5 203.8 320.6
Nonrecurring charges................................................. (688.0) - (688.0) -
------- ------ ------- ------
Income (loss) before income taxes, minority interest and
extraordinary charge.......................................... $(586.6) $173.5 $(484.2) $320.6
======= ====== ======= ======
</TABLE>
General: This segment provides financing for manufactured housing, home
equity, home improvements, consumer products and equipment and provides consumer
and commercial revolving credit. The segment's financing products include both
fixed term and revolving loans and leases. The segment also markets physical
damage and term mortgage life insurance and other credit protection relating to
the loans it services.
Contract originations in the second quarter of 1998 were $5.4 billion, up
37 percent over 1997. Contract originations in the first six months of 1998 were
$9.8 billion, up 44 percent over 1997.
28
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Manufactured housing contract originations increased $369.8 million, or 15
percent, during the first six months of 1998 over 1997. The number of contracts
originated during the 1998 period increased as well as the average contract size
reflecting an increase in land-and-home contracts and slight price increases by
the manufactured housing manufacturers.
Home equity/home improvement contract originations increased $819.9
million, or 56 percent, during the first six months of 1998 over 1997. The
increase is primarily the result of the segment's continued expansion of the
home equity retail origination network.
Consumer and retail credit originations increased $573.7 million, or 83
percent, during the first six months of 1998 over 1997. The increase reflects
the success of several direct mail campaigns as well as the development of new
relationships with retailers.
Commercial and equipment originations increased $1.2 billion, or 56
percent, during the first six months of 1998 over 1997. The increase reflects
higher production in all areas of commercial financing.
Sales of receivables occur when the segment sells finance receivables it
originates in secondary markets through securitizations. The total receivables
sold in a particular period is dependent on many factors including: (i) the
volume of recent originations; (ii) market conditions; and (iii) the
availability and cost of alternative financing. Total finance receivables sold
in the second quarter of 1998 decreased 4.5 percent from 1997. Such sales were
lower than the previous year because we increased our inventory of finance
receivables at June 30, 1998, holding them for sale after the end of the quarter
when the supply of securitizations in the capital markets is expected to be
lower and the spreads are expected to be better. Total finance receivables were
$3.5 billion at June 30, 1998, an increase of $1.6 billion over December 31,
1997. Total finance receivables sold in the first six months of 1998 were up 24
percent over 1997.
Managed receivables include finance receivables sold through
securitizations as well as finance receivables and retained interests in finance
receivables held by the Company. The total portfolio serviced by the segment
increased to $32.3 billion at June 30, 1998, a 37 percent increase over December
31, 1997.
Net investment income on finance receivables consists of interest earned on
the segment's unsold finance receivables and interest income on short-term and
other investments. Such income increased 42 percent, to $76.3 million, in the
second quarter of 1998 and increased 41 percent, to $135.9 million, in the first
six months of 1998. The increases are consistent with the increases in average
finance receivables during the 1998 periods. The weighted average yield earned
on finance receivables was 11.0 percent during the first six months of both 1998
and 1997.
Net investment income on interest-only securities represents the accretion
recognized on the interest-only securities retained when finance receivables are
sold. Such income increased 23 percent, to $36.3 million, in the second quarter
of 1998 and increased 24 percent, to $69.6 million, in the first six months of
1998. The increases are consistent with the increase in the average
interest-only securities held in the 1998 periods. The weighted average yields
earned on interest-only securities were 10.9 percent and 10.4 percent during the
first six months of 1998 and 1997, respectively.
Gain on sale of finance receivables represents the difference between the
proceeds from the sale, net of related transaction costs, and the allocated
carrying amount of the receivables sold. The allocated carrying amount is
determined by allocating the original amount of the receivables between the
portion sold and any retained interests (interest-only securities and servicing
rights), based on their relative fair values at the time of sale. Assumptions
used in calculating the estimated fair value of interest-only securities and
servicing rights are subject to volatility that could materially affect
operating results. Prepayments from competition, obligor mobility, general and
regional economic conditions and prevailing interest rates, as well as actual
losses incurred, may vary from the performance projected.
Gain on sale of finance receivables decreased 29 percent, to $135.2
million, in the second quarter of 1998 and decreased 22 percent, to $272.4
million, in the first six months of 1998. Such gain fluctuates when changes
occur in: (i) the amount of loans sold; (ii) market conditions; (iii) the amount
and type of interest retained in the receivables sold; and (iv) changes in
assumptions used to calculate the gain. Recent experience has indicated that
prepayment rates have exceeded expectations for loans sold in prior periods. In
addition, the market yields of publicly traded securities that are similar to
our interest-only securities increased during the second quarter, increasing the
market discount rate used when calculating gains. Assumptions used to determine
the gains in the 1998 periods reflect higher prepayment assumptions and higher
discount rates. Accordingly, the amount of gain as a percentage of total loans
sold has decreased. In addition, during the second quarter of 1998, we reduced
the total finance receivables sold and increased our inventory of finance
receivables as described above.
29
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Fee revenue and other income includes servicing income, commissions earned
on new insurance policies written and renewals on existing policies, as well as
other income from late fees. Such income increased 39 percent, to $59.2 million,
in the second quarter of 1998 and increased 42 percent, to $114.9 million, in
the first six months of 1998. The increase reflects: (i) the growth in the
segment's servicing portfolio on which servicing income is earned; and (ii) the
increase in net written insurance premiums consistent with the growth of the
segment's managed receivables.
Consumer and commercial finance interest expense increased 50 percent, to
$54.7 million, in the second quarter of 1998 and increased 56 percent, to $103.2
million, in the first six months of 1998. The increase primarily reflects
increased borrowings to fund loan originations, commercial revolving credit and
lease portfolio financings during the 1998 periods and our deliberate strategy
to increase our inventory of finance receivables as described above. The
weighted average interest rates on our borrowings were 7.8 percent and 8.0
percent during the first six months of 1998 and 1997, respectively.
Other operating costs and expenses include the costs associated with
servicing the segment's managed receivables and costs of originating new loans.
Such expense increased 42 percent, to $105.9 million, in the second quarter of
1998 and increased 46 percent, to $285.8 million, in the first six months of
1998. The increase reflects: (i) the growth in the segment's servicing
portfolio; and (ii) the increased volume of contracts originated.
Nonrecurring charges include: (i) merger related costs (including
investment banking, accounting, legal and regulatory fees and other costs
associated with the Green Tree Merger) of $148 million; and (ii) a charge to
reduce the value of interest-only securities and servicing rights of $540
million.
During the second quarter of 1998, prepayments on loan contracts continued
to exceed expectations and management concluded that such prepayments would
continue to be higher than expected in future periods as well. In addition, the
market yields of publicly traded securities that are similar to our
interest-only securities increased during the quarter, decreasing the market
values of such investments. As a result of these developments, we concluded an
impairment in the value of the interest-only securities and servicing rights had
occurred, and a new value was determined using current assumptions. The new
assumptions reflect the following changes from the assumptions previously used:
(i) an increase in prepayment rates; (ii) an increase in the discount rate used
to determine the present value of future cash flows to 15 percent from 11
percent; and (iii) an increase in anticipated future rates of default. A $540
million charge to reduce the carrying value of the interest-only securities and
servicing rights (before income taxes of $190 million) was recognized in the
second quarter of 1998.
30
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Supplemental health:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Premiums collected:
Medicare supplement (first-year)................................... $ 26.4 $ 23.1 $ 54.0 $ 43.3
Medicare supplement (renewal)...................................... 182.3 178.2 378.5 325.4
------ ------ -------- --------
Subtotal - Medicare supplement................................. 208.7 201.3 432.5 368.7
------ ------ -------- --------
Long-term care (first-year)........................................ 34.0 38.6 65.8 73.6
Long-term care (renewal)........................................... 143.8 126.5 290.1 245.6
------ ------ -------- --------
Subtotal - long-term care...................................... 177.8 165.1 355.9 319.2
------ ------ -------- --------
Specified disease (first-year)..................................... 10.3 11.3 21.2 22.9
Specified disease (renewal)........................................ 86.9 81.6 176.6 168.9
------ ------ -------- --------
Subtotal - specified disease................................... 97.2 92.9 197.8 191.8
------ ------ -------- --------
Total supplemental health premiums collected................... $483.7 $459.3 $ 986.2 $ 879.7
====== ====== ======== ========
Insurance policy income............................................... $493.3 $478.7 $ 985.8 $ 890.1
Net investment income................................................. 73.8 63.2 145.7 120.1
------ ------ -------- --------
Total revenues (a)............................................. 567.1 541.9 1,131.5 1,010.2
------ ------ -------- --------
Insurance policy benefits............................................. 325.1 308.0 638.5 573.9
Amortization related to operations.................................... 57.5 57.3 115.3 105.7
Interest expense on investment borrowings............................. 2.7 .9 5.6 1.3
Other operating costs and expenses.................................... 69.8 72.8 142.4 142.1
------ ------ -------- --------
Total benefits and expenses.................................... 455.1 439.0 901.8 823.0
------ ------ -------- --------
Operating income before income taxes, minority interest and
extraordinary charge......................................... 112.0 102.9 229.7 187.2
Net investment gains (losses), net of related costs................... (6.0) (1.6) 15.0 (3.8)
------ ------ -------- --------
Income before income taxes, minority interest and
extraordinary charge......................................... $106.0 $101.3 $ 244.7 $ 183.4
====== ====== ======== ========
Benefit ratios:
Medicare supplement products....................................... 67.2% 72.4% 68.5% 71.3%
Long-term care products............................................ 67.9 58.0 64.5 60.7
Specified disease products......................................... 58.9 57.0 56.8 57.7
<FN>
- --------------------
(a) Revenues exclude net investment gains (losses).
</FN>
</TABLE>
General: This segment includes Medicare supplement, long-term care and
specified disease insurance products distributed primarily through a career
agency force and professional independent producers. The segment's 1998 results
of operations are significantly affected by recent acquisitions (PFS, effective
April 1, 1997; and Colonial Penn, effective September 30, 1997). The
profitability of this segment largely depends on the overall level of sales,
persistency of in-force business, claim experience and expense management.
31
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Premiums collected by this segment in the second quarter of 1998 were
$483.7 million, up 5.3 percent over 1997. Premiums collected in the first six
months of 1998 were $986.2 million, up 12 percent over 1997. The increase is
primarily due to the recent acquisitions.
Medicare supplement policies accounted for 44 percent of this segment's
collected premiums in the first six months of 1998 compared with 42 percent in
1997. Collected premiums on Medicare supplement policies increased 3.7 percent,
to $208.7 million, in the second quarter of 1998 and increased 17 percent, to
$432.5 million, in the first six months of 1998. 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
the commission structure and underwriting criteria for these policies; (ii)
increased competition from alternative providers, including HMOs; and (iii)
reduced production in Massachusetts as a result of steps announced in the third
quarter of 1997.
Premiums collected on long-term care policies increased 7.7 percent, to
$177.8 million, in the second quarter of 1998 and increased 11 percent, to
$355.9 million, in the first six months of 1998. The increase in long-term care
premiums collected in 1998 reflects the premiums collected by the recently
acquired companies and increased premium collections from previously owned
companies.
Premiums collected on specified disease policies increased 4.6 percent, to
$97.2 million in the second quarter of 1998 and increased 3.1 percent, to $197.8
million, in the first six months of 1998.
Insurance policy income comprises premiums earned on the segment's policies
and has increased consistent with the explanations provided above for premiums
collected.
Net investment income increased 17 percent, to $73.8 million, in the second
quarter of 1998 and increased 21 percent, to $145.7 million, in the first six
months of 1998. Such investment income fluctuates when changes occur in: (i) the
amount of average invested assets supporting insurance liabilities and capital
allocated to the segment; and (ii) the yield earned on invested assets. During
the first six months of 1998, the segment's average invested assets increased to
$3.9 billion from approximately $3.2 billion in 1997, primarily as a result of
the recent acquisitions. The annualized net yield on invested assets was 7.5
percent in the first six months of 1998 and 7.6 percent in the first six months
of 1997.
Insurance policy benefits increased in the second quarter of 1998 and in
the first six months of 1998 primarily as a result of the amount of business in
force on which benefits are incurred. The Medicare supplement loss ratio (the
ratio of policy benefits to insurance policy income for Medicare supplement
policies) was 67.2 percent and 72.4 percent in the second quarters of 1998 and
1997, respectively, and 68.5 percent and 71.3 percent in the first six months of
1998 and 1997, respectively.
The long-term care loss ratio (the ratio of policy benefits to insurance
policy income for long-term care policies) increased by 9.9 percentage points,
to 67.9 percent, in the second quarter of 1998 and increased by 3.8 percentage
points, to 64.5 percent, in the first six months of 1998. This increase reflects
fluctuations in claim experience and reserve developments.
The ratio of policy benefits to insurance policy income for
specified-disease policies increased by 1.9 percentage points, to 58.9 percent,
in the second quarter of 1998 and fell by .9 percentage points, to 56.8 percent,
in the first six months of 1998. This decrease reflects fluctuations in claim
experience.
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.
The cost of policies produced represents the cost of producing new
business. This cost varies with, and is primarily related to, the production of
new business. Costs deferred may represent amounts paid in the period new
business is written (such as underwriting costs and first year commissions) or
in periods after the business is written (such as commissions paid in subsequent
years in excess of ultimate commissions paid).
Interest expense on investment borrowings was affected by changes in
investment borrowing activities during the period and the changes in interest
rates paid on such borrowings.
Other operating costs and expenses did not change significantly between
periods.
32
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Net investment gains (losses), net of related costs often fluctuate from
period to period.
33
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Annuities:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Premiums collected:
Traditional fixed (first-year)..................................... $215.9 $247.8 $ 410.8 $460.2
Traditional fixed (renewal)........................................ 18.3 22.4 34.1 43.6
------ ------ -------- ------
Subtotal - traditional fixed................................... 234.2 270.2 444.9 503.8
------ ------ -------- ------
Market value-adjusted (first-year)................................. 25.8 48.4 63.6 98.2
Market value-adjusted (renewal).................................... 2.5 4.4 5.9 8.5
------ ------ -------- ------
Subtotal - market value-adjusted............................... 28.3 52.8 69.5 106.7
------ ------ -------- ------
Equity-indexed (first-year)........................................ 221.7 80.1 373.7 141.0
Equity-indexed (renewal)........................................... 4.1 - 9.4 -
------ ------ -------- ------
Subtotal - equity-indexed...................................... 225.8 80.1 383.1 141.0
------ ------ -------- ------
Variable annuities (first-year).................................... 68.3 25.4 113.2 41.9
Variable annuities (renewal)....................................... 24.9 13.1 39.4 25.9
------ ------ -------- ------
Subtotal - variable annuities.................................. 93.2 38.5 152.6 67.8
------ ------ -------- ------
Total annuity premiums collected............................... $581.5 $441.6 $1,050.1 $819.3
====== ====== ======== ======
Insurance policy income............................................... $ 26.0 $ 25.0 $ 54.3 $ 43.7
Net investment income:
General account invested assets.................................... 262.5 241.4 532.6 474.4
Equity-indexed products based on S&P 500 Index..................... 12.3 15.4 72.0 17.5
Separate account assets............................................ 11.8 3.9 37.7 18.0
------ ------ -------- -----
Total revenues (a)............................................. 312.6 285.7 696.6 553.6
------ ------ -------- ------
Insurance policy benefits............................................. 13.1 20.8 32.6 34.6
Amounts added to policyholder account balances:
Annuity products other than those listed below..................... 136.4 132.8 277.4 269.5
Equity-indexed products based on S&P 500 Index..................... 11.2 15.4 70.9 17.5
Variable annuity products.......................................... 11.8 3.9 37.7 18.0
Amortization related to operations.................................... 24.3 21.3 48.7 48.1
Interest expense on investment borrowings............................. 9.8 3.0 20.1 4.7
Other operating costs and expenses.................................... 12.3 8.1 25.8 15.4
------ ------ -------- ------
Total benefits and expenses (a)................................ 218.9 205.3 513.2 407.8
------ ------ -------- ------
Operating income before income taxes, minority interest and
extraordinary charge......................................... 93.7 80.4 183.4 145.8
Net investment gains (losses), net of related costs and amortization.. - .9 (7.7) .1
------ ------ --------- ------
Income before income taxes, minority interest and
extraordinary charge......................................... $ 93.7 $ 81.3 $ 175.7 $145.9
====== ====== ======== ======
Weighted average gross interest spread on annuity products (b)........ 3.0% 3.2% 3.1% 3.0%
=== === === ===
34
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
<FN>
- --------------------
(a) Revenues exclude net investment gains (losses); benefits and expenses
exclude amortization related to net investment gains.
(b) Excludes variable annuity products where the credited amount is based on
investment income from segregated investments.
</FN>
</TABLE>
General: This segment includes single-premium deferred annuities ("SPDAs"),
flexible-premium deferred annuities ("FPDAs"), single-premium immediate
annuities ("SPIAs"), market value-adjusted annuities, equity-indexed annuities
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 over interest
credited on annuity deposits), the persistency of in-force business, and expense
management.
Premiums collected by this segment in the second quarter of 1998 were
$581.5 million, up 32 percent over the second quarter of 1997. Premiums
collected in the first six months of 1998 were $1,050.1 million, up 28 percent
over 1997.
Traditional fixed rate annuity products include SPDAs, FPDAs and SPIAs,
which are credited with a guaranteed rate. SPDA and FPDA policies (which make up
74 percent and 79 percent of traditional fixed rate annuity premiums collected
in the first six months of 1998 and 1997, 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 13 percent, to $234.2 million, in the second quarter of 1998 and
decreased 12 percent, to $444.9 million, in the first six months of 1998.
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 4.9 percent
and 12 percent of total annuity premiums collected during the second quarters of
1998 and 1997, respectively, and 6.6 percent and 13 percent of total annuity
premiums collected during the first six months of 1998 and 1997, respectively.
In response to consumers' desire for alternative investment products with
returns linked to equities, we introduced an equity- indexed annuity product in
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 $225.8 million in the second quarter of 1998 compared with
$80.1 million in the second quarter of 1997 and were $383.1 million in the first
six months of 1998 compared with $141.0 million in the first six months of 1997.
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
142 percent, to $93.2 million, in the second quarter of 1998 and increased 125
percent, to $152.6 million, in the first six months of 1998.
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 primarily because of increased surrender charges collected and an
increase in premiums received on policies with mortality features (changes in
the cost of insurance and expenses charged to annuity policies were not
significant). Surrender charges were $21.0 million in the second quarter of 1998
and $16.8 million in the second quarter of 1997. Such charges were $38.3 million
in the first six months of 1998 compared with $29.8 million in the first six
months of 1997. Annuity policy withdrawals were $582.8 million in the second
quarter of 1998 and $481.5 million in the second quarter of 1997. Annuity policy
withdrawals were $1,091.3 million in the first six months of 1998 compared with
$863.1 million in the first six months of 1997. The increase in policy
withdrawals and surrender charges generally corresponds to the aging and the
35
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
growth of our annuity business in force. In addition, policyholders are using
the systematic withdrawal features available in several of our annuity policies,
and policyholders are surrendering in order to invest in alternative
investments.
Net investment income on general account invested assets (excluding income
on separate account assets related to variable annuities and excluding the
income and change in the fair value of S&P 500 Call Options related to
equity-indexed products) increased 8.7 percent, to $262.5 million, in the second
quarter of 1998 and increased 12 percent, to $532.6 million, in the first six
months of 1998. This increase primarily reflects the increase in general account
invested assets acquired in conjunction with the recent acquisitions. The
segment's average invested assets increased 14 percent, to approximately $13.9
billion, in the first six months of 1998 compared with 1997, and the annualized
yield earned on average invested assets was approximately 7.7 percent and 7.8
percent in the first six months of 1998 and 1997, respectively.
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 relate solely to annuity policies that
incorporate significant mortality features. The decrease primarily reflects
favorable claim experience.
Amounts added to policyholder account balances for interest expense on
annuity products increased 2.7 percent, to $136.4 million, in the second quarter
of 1998 and increased 2.9 percent, to $277.4 million, in the first six months of
1998 primarily due to a larger block of annuity business in force in the first
six months of 1998, partially offset by a reduction in crediting rates. The
weighted average crediting rates for these annuity liabilities decreased .1
percentage point, to 4.6 percent, in the second quarter of 1998 and decreased .2
percentage points, to 4.6 percent, in the first six months of 1998.
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 changes in the balances of the cost of policies
purchased and cost of policies produced as a result of net investment gains
(losses) recognized during 1998 and 1997, partially offset by 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 and the changes in interest rates paid on such
borrowings.
Other operating costs and expenses increased in the second quarter of 1998
as well as in the first six months of 1998. The increase corresponds to the
business acquired in recent acquisitions.
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 investment gains. As a result of the sales of fixed maturity
investments, the amortization of the cost of policies purchased and the cost of
policies produced increased $9.9 million and $14.3 million in the second
quarters of 1998 and 1997, respectively, and increased $71.1 million and $21.7
million in the first six months of 1998 and 1997, respectively.
36
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Life insurance:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Premiums collected:
Universal life (first-year)........................................ $ 20.2 $ 24.6 $ 46.3 $ 49.3
Universal life (renewal)........................................... 94.9 86.0 211.3 173.9
------ ------ ------ ------
Subtotal - universal life...................................... 115.1 110.6 257.6 223.2
------ ------ ------ ------
Traditional life (first-year)...................................... 16.1 13.5 31.9 17.3
Traditional life (renewal)......................................... 85.1 43.7 166.5 79.0
------ ------ ------ ------
Subtotal - traditional life.................................... 101.2 57.2 198.4 96.3
------ ------ ------ ------
Total life premiums collected.................................. $216.3 $167.8 $456.0 $319.5
====== ====== ====== ======
Insurance policy income:
Premiums earned on traditional life products....................... $ 98.5 $ 62.6 $190.6 $100.4
Mortality charges and administrative fees.......................... 104.1 87.4 208.8 173.5
Surrender charges.................................................. 6.3 3.4 11.8 7.6
------ ------ ------ ------
Total insurance policy income.................................. 208.9 153.4 411.2 281.5
Net investment income................................................. 130.2 113.2 271.9 210.6
----- ------ ------ ------
Total revenues (a)............................................. 339.1 266.6 683.1 492.1
----- ------ ------ ------
Insurance policy benefits............................................. 154.3 116.8 302.3 202.9
Interest added to financial product policyholder account balances..... 45.8 37.8 93.2 74.8
Amortization related to operations.................................... 26.7 27.8 47.2 51.5
Interest expense on investment borrowings............................. 5.0 1.4 10.2 2.1
Other operating costs and expenses.................................... 25.9 22.2 49.1 42.5
------ ------ ------ ------
Total benefits and expenses (a)................................ 257.7 206.0 502.0 373.8
------ ------ ------ ------
Operating income before income taxes, minority interest and
extraordinary charge......................................... 81.4 60.6 181.1 118.3
Net investment gains (losses), net of related costs and amortization.. - 1.7 1.3 (1.7)
------ ------ ------ ------
Income before income taxes, minority interest and
extraordinary charge......................................... $ 81.4 $ 62.3 $182.4 $116.6
====== ====== ====== ======
<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. The segment's operations were significantly
affected by the PFS Merger effective April 1, 1997, the Colonial Penn Purchase
effective September 30, 1997, and the WNIC Merger 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.
37
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Premiums collected by this segment in the second quarter of 1998 were
$216.3 million, up 29 percent over 1997. Premiums collected in the first six
months of 1998 were $456.0 million, up 43 percent over 1997. Such increase
relates primarily to premiums collected by recently acquired companies in
periods after their acquisition.
Universal life product collected premiums increased 4.1 percent, to $115.1
million, in the second quarter of 1998 and increased 15 percent, to $257.6
million, in the first six months of 1998. Traditional life product collected
premiums increased 77 percent, to $101.2 million, in the second quarter of 1998
and increased 106 percent, to $198.4 million, in the first six months of 1998.
Insurance policy income includes: (i) premiums received on traditional life
products; (ii) the mortality charges and administrative fees earned on universal
life products; and (iii) surrender charges on terminated universal life
insurance policies. All three categories have increased primarily as a result of
recent acquisitions. 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 the
policyholders' account balances.
Net investment income increased 15 percent, to $130.2 million, in the
second quarter of 1998 and increased 29 percent, to $271.9 million, in the first
six months of 1998. Investment income fluctuates with changes in: (i) the amount
of average invested assets supporting insurance liabilities and capital
allocated to the segment; and (ii) the yield earned on invested assets. The
segment's average invested assets increased 36 percent, to approximately $7.1
billion, in the first six months of 1998, and the net yield on invested assets
decreased by .4 percentage points, to 7.6 percent. Invested assets increased
primarily as a result of the recent acquisitions.
Insurance policy benefits increased in 1997 reflecting the larger amount of
business in force on which benefits are incurred as a result of the recent
acquisitions and adverse death claim experience during the first quarter of
1998.
Interest added to financial product policyholder account balances increased
21 percent, to $45.8 million, in the second quarter of 1998 and increased 25
percent, to $93.2 million, in the first six months of 1998. 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.
Such average liabilities increased 34 percent, to $4.1 billion, in the first six
months of 1998, and the interest rate credited decreased by .3 percentage
points, to 4.5 percent, in the first six months of 1998. Universal life product
liabilities increased primarily as a result of the recent acquisitions.
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 decreased
primarily because of the decreases in the balances of the cost of policies
purchased and cost of policies produced as a result of net investment gains
recognized during 1998 and 1997, partially offset by 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 and changes in interest rates paid on such
borrowings.
Other operating costs and expenses have increased 17 percent, to $25.9
million, in the second quarter of 1998 and increased 16 percent, to $49.1
million, in the first six months of 1998. Such expenses have increased as a
result of the recent acquisitions.
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 cost of policies purchased and the cost of policies
produced. As a result of net investment gains (losses) from the sales of fixed
maturity investments, related amortization of cost of policies purchased and
cost of policies produced totaled $18.6 million and $.5 million in the second
quarters of 1998 and 1997, respectively, and totaled $43.8 million and $4.9
million in the first six months of 1998 and 1997, respectively.
38
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Individual and group major medical:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Premiums collected:
Individual (first-year)............................................ $ 24.4 $ 18.5 $ 52.4 $ 19.4
Individual (renewal)............................................... 55.3 40.0 111.9 49.5
------ ------ ------ ------
Subtotal - individual.......................................... 79.7 58.5 164.3 68.9
------ ------ ------ ------
Group (first-year)................................................. 15.3 22.7 32.5 22.7
Group (renewal).................................................... 124.9 126.4 249.7 206.8
------ ------ ------ ------
Subtotal - group............................................... 140.2 149.1 282.2 229.5
------ ------ ------ ------
Total individual and group major medical premiums collected.... $219.9 $207.6 $446.5 $298.4
====== ====== ====== ======
Insurance policy income............................................... $223.8 $213.0 $455.6 $309.4
Net investment income................................................. 6.7 3.7 13.0 6.0
------ ------ ------ ------
Total revenues (a)............................................. 230.5 216.7 468.6 315.4
------ ------ ------ ------
Insurance policy benefits............................................. 161.9 159.8 337.2 239.3
Amortization related to operations.................................... 8.4 5.8 17.4 8.8
Interest expense on investment borrowings............................. .3 .1 .6 .1
Other operating costs and expenses.................................... 30.6 40.3 65.0 46.3
------ ------ ------ ------
Total benefits and expenses.................................... 201.2 206.0 420.2 294.5
------ ------ ------ ------
Operating income before income taxes, minority interest and
extraordinary charge......................................... 29.3 10.7 48.4 20.9
Net investment losses, net of related costs........................... (4.7) - (4.5) -
------ ------ ------ ------
Income before income taxes, minority interest and
extraordinary charge......................................... $ 24.6 $ 10.7 $ 43.9 $ 20.9
====== ====== ====== ======
Benefit ratio......................................................... 73.1% 76.2% 75.1% 81.1%
==== ==== ==== ====
<FN>
- --------------------
(a) Revenues exclude net investment losses.
</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. The profitability of this business depends largely on the overall
persistency of the business in force, claim experience and expense management.
Premiums collected by this segment in the second quarter of 1998 were
$219.9 million, up 5.9 percent over the second quarter of 1997. Premiums
collected in the first six months of 1998 were $446.5 million, up 50 percent
over 1997. Over the last several years, a number of steps were taken to improve
the profitability of such business, including changes in product, price,
underwriting and agent compensation. Group premiums decreased 6.0 percent, to
$140.2 million, in the second quarter of 1998 and increased 23 percent, to
$282.2 million, in the first six months of 1998. Individual health premiums
increased to $79.7 million in the second quarter of 1998 compared with $58.5
million in the second quarter of 1997 and increased to $164.3 million in the
first six months of 1998 compared with $68.9 million in the first six months of
1997. The increase in this segment's premiums is principally a result of the PFS
Merger.
39
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Insurance policy income is comprised of 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 was $4.4 million in the second
quarter of 1998 and $2.9 million in the second quarter of 1997. Fee income was
$8.7 million in the first six months of 1998 and $7.0 million in the first six
months of 1997.
Net investment income increased 81 percent, to $6.7 million, in the second
quarter of 1998 and increased 117 percent, to $13.0 million, in the first six
months of 1998. Investment income fluctuates when changes occur in: (i) the
amount of average invested assets supporting insurance liabilities and capital
allocated to this segment; and (ii) the yield earned on invested assets. During
the first six months of 1998, the segment's average invested assets increased 97
percent, to $362 million, and the yield earned on invested assets increased from
6.6 percent to 7.2 percent.
Insurance policy benefits fluctuate in relationship to the amount of
segment business in force and the incidence of claims. The ratio of policy
benefits to insurance policy income was 75.1 percent in the first six months of
1998 and 81.1 percent in the first six months of 1997. The lower benefit ratio
reflects (i) the lower incidence of claims experienced on business written by
the acquired companies; (ii) favorable claim developments; and (iii) rate
increases on certain business.
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 recent acquisitions increased the
balances subject to amortization.
Interest expense on investment borrowings is affected by changes in
investment borrowing activities and the changes in interest rates paid on such
borrowings.
Other operating costs and expenses increased during the first six months of
1998 due to the PFS Merger. Such costs have decreased in the second quarter of
1998 compared to 1997, as a result of the cost savings achieved through
consolidation of operations of recently acquired companies.
Net investment losses, net of related costs, often fluctuate from period to
period.
40
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Other:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Premiums collected:
Other (first-year)................................................. $ 2.6 $ 2.6 $ 6.4 $ 5.6
Other (renewal).................................................... 31.1 13.7 59.7 27.1
----- ----- ------ ------
Total other premiums collected................................. $33.7 $16.3 $ 66.1 $32.7
===== ===== ====== =====
Insurance policy income............................................... $37.8 $14.9 $73.0 $30.4
Net investment income................................................. 6.9 4.1 14.6 7.5
Fee revenue and other income.......................................... 26.0 14.8 46.8 29.4
----- ----- ------ -----
Total revenues (a)............................................. 70.7 33.8 134.4 67.3
----- ----- ------ -----
Insurance policy benefits............................................. 27.0 7.8 51.2 17.8
Amortization related to operations.................................... 2.3 2.7 7.7 4.4
Interest expense on investment borrowings............................. .1 .1 .3 .1
Other operating costs and expenses.................................... 16.6 9.0 34.1 16.5
----- ----- ------ -----
Total benefits and expenses.................................... 46.0 19.6 93.3 38.8
----- ----- ------ -----
Operating income before income taxes, minority interest and
extraordinary charge......................................... 24.7 14.2 41.1 28.5
Net investment losses, net of related costs........................... (5.5) - (1.9) (.3)
----- ----- ------ -----
Income before income taxes, minority interest and
extraordinary charge......................................... $19.2 $14.2 $ 39.2 $28.2
===== ===== ====== =====
<FN>
- --------------------
(a) Revenues exclude net investment losses.
</FN>
</TABLE>
General: This segment includes: (i) various other health insurance products
that are not currently being actively marketed; and (ii) in 1998, the specialty
health insurance products of WNIC marketed to educators through career agents.
The profitability of this business depends largely on the overall persistency of
the business inforce, claim experience and expense management.
The segment also includes the fee revenue generated by our non-life
subsidiaries other than those in our consumer and commercial finance segment.
This revenue includes the investment advisory fees earned by Conseco Capital
Management, Inc. 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 in the second quarter of 1998 were $33.7
million, up 107 percent over the second quarter of 1997. Premiums collected in
the first six months of 1998 were $66.1 million, up 102 percent over the first
six months of 1997. The increase in premiums collected in 1998 primarily relates
to the WNIC Merger in December of 1997.
We do not emphasize the sale of many of the products in this segment, and
collected 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 consistent with the explanations provided above for
premiums collected.
41
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Net investment income increased 68 percent, to $6.9 million, in the second
quarter of 1998 and increased 95 percent, to $14.6 million, in the first six
months of 1998. Such investment income fluctuated primarily in relationship to
the amount of average invested assets supporting this segment's insurance
liabilities and allocated capital. During the first six months of 1998, the
segment's average invested assets increased 98 percent, to $382 million, and the
net yield on invested assets decreased .1 percentage point, to 7.6 percent.
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 to our consolidated subsidiaries. Fee
revenue and other income increased 76 percent, to $26.0 million, in the second
quarter of 1998, and increased 59 percent, to $46.8 million, in the first six
months of 1998 primarily due to other income of recently acquired companies.
Insurance policy benefits fluctuate in relationship to the amount of
segment business in force and the incidence of claims.
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.
Interest expense on investment borrowings is affected by changes in
investment borrowing activities and the changes in interest rates paid on such
borrowings.
Other operating costs and expenses fluctuated primarily as a result of
expenses of recently acquired companies.
Net investment losses, net of related costs often fluctuate from period to
period.
Other components of income before income taxes, minority interest and
extraordinary charge:
In addition to the income of the six operating segments, income before
income taxes, minority interest and extraordinary charge is affected by interest
and other corporate expenses.
Interest and other corporate expenses were $40.0 million in the second
quarter of 1998 and $29.3 million in the second quarter of 1997. Such expenses
were $82.8 million in the first six months of 1998 and $59.1 million in the
first six months of 1997. Interest expense included therein was $36.3 million in
the second quarter of 1998 and $25.5 million in the second quarter of 1997 and
$75.3 million in the first six months of 1998 and $51.3 million in the first six
months of 1997. Such expense fluctuates in relationship to the average debt
outstanding during each period and the interest rate thereon.
INSURANCE SEGMENT 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.
42
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Total premiums collected by our insurance segments were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Supplemental health:
First-year......................................................... $ 70.7 $ 73.0 $ 141.0 $ 139.8
Renewal............................................................ 413.0 386.3 845.2 739.9
-------- -------- -------- --------
Total supplemental health........................................ 483.7 459.3 986.2 879.7
-------- -------- -------- -------
Annuities:
First-year ........................................................ 531.7 401.7 961.3 741.3
Renewal............................................................ 49.8 39.9 88.8 78.0
-------- -------- -------- --------
Total annuities.................................................. 581.5 441.6 1,050.1 819.3
-------- -------- -------- --------
Life insurance:
First-year......................................................... 36.3 38.1 78.2 66.6
Renewal............................................................ 180.0 129.7 377.8 252.9
-------- -------- -------- --------
Total life insurance............................................. 216.3 167.8 456.0 319.5
-------- -------- -------- --------
Individual and group major medical:
First-year......................................................... 39.7 41.2 84.9 42.1
Renewal............................................................ 180.2 166.4 361.6 256.3
-------- -------- -------- --------
Total individual and group major medical......................... 219.9 207.6 446.5 298.4
-------- -------- -------- --------
Other:
First-year......................................................... 2.6 2.6 6.4 5.6
Renewal............................................................ 31.1 13.7 59.7 27.1
-------- -------- -------- --------
Total other...................................................... 33.7 16.3 66.1 32.7
-------- -------- -------- --------
Total:
First-year......................................................... 681.0 556.6 1,271.8 995.4
Renewal............................................................ 854.1 736.0 1,733.1 1,354.2
-------- -------- -------- --------
Total collected premiums......................................... $1,535.1 $1,292.6 $3,004.9 $2,349.6
======== ======== ======== ========
</TABLE>
43
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
Our recent acquisitions have a significant effect on premiums collected.
Total premiums collected for all currently consolidated companies for the three
months ended and six months ended June 30, 1998 and 1997 (including periods
prior to ownership by Conseco) are provided below:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Supplemental health:
First-year......................................................... $ 70.7 $ 73.6 $ 141.0 $ 153.1
Renewal............................................................ 413.0 399.6 845.2 816.0
-------- -------- -------- --------
Total supplemental health........................................ 483.7 473.2 986.2 969.1
-------- -------- -------- --------
Annuities:
First-year......................................................... 531.7 412.5 961.3 763.5
Renewal............................................................ 49.8 43.9 88.8 87.6
-------- -------- -------- --------
Total annuities.................................................. 581.5 456.4 1,050.1 851.1
-------- -------- -------- --------
Life insurance:
First-year......................................................... 36.3 51.5 78.2 104.6
Renewal............................................................ 180.0 174.1 377.8 357.8
-------- -------- -------- --------
Total life insurance............................................. 216.3 225.6 456.0 462.4
-------- -------- -------- --------
Individual and group major medical:
First-year......................................................... 39.7 41.2 84.9 80.5
Renewal............................................................ 180.2 166.4 361.6 337.5
-------- -------- -------- --------
Total individual and group major medical......................... 219.9 207.6 446.5 418.0
-------- -------- -------- --------
Other:
First-year......................................................... 2.6 4.5 6.4 9.8
Renewal............................................................ 31.1 41.9 59.7 83.6
-------- -------- -------- --------
Total other...................................................... 33.7 46.4 66.1 93.4
-------- -------- -------- --------
Total:
First-year......................................................... 681.0 583.3 1,271.8 1,111.5
Renewal............................................................ 854.1 825.9 1,733.1 1,682.5
-------- -------- -------- --------
Total collected premiums......................................... $1,535.1 $1,409.2 $3,004.9 $2,794.0
======== ======== ======== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Changes in the consolidated balance sheet between December 31, 1997 and
June 30, 1998, reflect: (i) our operating results; (ii) the nonrecurring charge
of $498.0 million (net of income taxes of $190.0 million) related to
merger-related costs and the charge to reduce the value of interest-only
securities and servicing rights; (iii) our origination and sale of finance
receivables; (iv) changes in the fair value of actively managed fixed maturity
securities and interest-only securities (after giving effect to the
aforementioned charge); and (v) various financing transactions. Financing
transactions (described in the notes to the consolidated financial statements)
include: (i) common stock repurchases; and (ii) the issuance and repayment of
notes payable and commercial paper.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"),
we record our actively managed fixed maturity investments and interest-only
securities at estimated
44
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
fair value. At June 30, 1998, the carrying value of such investments was
increased by $443.7 million as a result of the SFAS 115 adjustment, compared
with an increase of $519.6 million at December 31, 1997.
Minority interest at June 30, 1998, includes: (i) Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts with a carrying
value of $1,388.8 million; and (ii) $.7 million interest in the common stock of
a subsidiary.
The decrease in shareholders' equity in the first six months of 1998
resulted from: (i) a net loss of $67.5 million; (ii) repurchases of common stock
for $271.2 million; (iii) the decrease in net unrealized accumulated other
comprehensive income of $.3 million; and (iv) common and preferred stock
dividends of $74.6 million. These decreases were partially offset by: (i) the
issuance of common stock related to stock options and for agent and employee
benefit plans (including the tax benefit thereon) of $159.9 million; (ii) the
conversion of convertible debentures into common shares totaling $16.3 million;
and (iii) the issuance of warrants in conjunction with a financing transaction
of $7.7 million.
Dividends declared on common stock for the six months ended June 30, 1998,
were 25 cents per share. In July 1998, Conseco's Board of Directors increased
the quarterly cash dividend on the Company's common stock to 14 cents per share
from 12.5 cents per share, effective with the dividend payment to be made
October 1, 1998.
The following table summarizes certain financial ratios as of and for the
six months ended June 30, 1998, and as of and for the year ended December 31,
1997:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Dollars in millions)
<S> <C> <C>
Book value per common share:
As reported................................................................................. $15.62 $16.45
Excluding unrealized appreciation (c)....................................................... 14.99 15.88
Ratio of earnings to fixed charges:
As reported................................................................................. 1.20X 2.45X
Excluding interest on annuities and financial product policyholder account balances
and interest expense on debt related to finance receivables and other investments (a)..... 2.43X 13.00X
Ratio of earnings (excluding nonrecurring charge related to Green Tree) to fixed charges (b):
As reported................................................................................. 2.36X 2.45X
Excluding interest on annuities and financial product policyholder account balances
and interest expense on debt related to finance receivables and other investments (a)..... 10.70X 13.00X
Ratio of earnings to fixed charges, preferred dividends and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts:
As reported............................................................................... 1.08X 2.20X
Excluding interest on annuities and financial product policyholder account balances
and interest expense on debt related to finance receivables and other investments (a)... 1.36X 6.72X
Ratio of earnings (excluding nonrecurring charge related to Green Tree) to fixed charges,
preferred dividends and distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts (b):
As reported............................................................................... 2.13X 2.20X
Excluding interest on annuities and financial product policyholder account balances
and interest expense on debt related to finance receivables and other investments (a)... 6.00X 6.72X
Ratio of corporate debt to total capital (h):
As reported................................................................................. .32X .26X
Excluding unrealized appreciation (c)....................................................... .32X .27X
Ratio of corporate debt and Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts to total capital (d) (h):
As reported............................................................................... .47X .42X
Excluding unrealized appreciation (c)..................................................... .48X .43X
Rating agency ratios: (c) (e) (f) (g) (h)
Debt to total capital....................................................................... .27X .22X
Debt and preferred stock to total capital (i)............................................... .43X .38X
<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 it is recognized) and interest on
debt related to finance receivables and other investments. Such ratios are
not intended to, and do not, represent the following ratios prepared in
accordance with GAAP: the
45
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
ratio of earnings to fixed charges; and the ratio of earnings to fixed
charges, preferred dividends and distributions on Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts.
(b) These ratios are included to assist the reader in analyzing the impact of
the $688 million nonrecurring charge (before taxes) recognized in the six
month period ended June 30, 1998 related to the Green Tree Merger. Such
nonrecurring charge was comprised of $148 million of merger-related costs
(including investment banking, accounting, legal and regulatory fees) and
non-cash charges of $540 million to write down the carrying value of Green
Tree's interest-only securities and servicing rights. Such ratios are not
intended to, and do not, represent the following ratios prepared in
accordance with GAAP: the ratio earnings to fixed charges; or the ratio of
earnings to fixed charges, preferred dividends and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
(c) Excludes the effect of reporting fixed maturities at fair value.
(d) Represents the ratio of corporate debt and the Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts to the sum
of shareholders' equity, corporate debt, minority interest and
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 corporate debt to total capital to be at or
below 35 percent; and (ii) the ratio of corporate 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) Corporate debt is reduced by cash and investments held by non-life companies
other than consumer finance companies.
(g) Assumes conversion of all convertible debentures.
(h) Excludes debt of consumer and commercial finance segment used to fund
finance receivables.
(i) 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.
We believe that the diversity of the investment portfolio of our life
insurance subsidiaries and the concentration of investments in high quality
liquid securities provide sufficient liquidity to meet foreseeable cash
requirements.
Liquidity for finance operations
Our consumer and commercial finance segment requires continued access to
the capital markets for the warehousing and sale of finance receivables. To
satisfy these needs, a variety of capital resources are utilized.
Historically, the most important liquidity source for our finance segment
has been our ability to sell finance receivables in the secondary markets
through loan securitizations. Under certain securitized sales structures, we
have provided a variety of credit enhancements, which generally take the form of
corporate guarantees, but have also included bank letters of credit, surety
bonds, cash deposits or other equivalent collateral. We analyze the cash flows
unique to each transaction, as well as the marketability and projected economic
value of such transactions when choosing the appropriate structure for a
securitized loan sale. The structure of each securitized sale depends, to a
great extent, on conditions of the fixed income markets at the time of sale as
well as cost considerations and availability and effectiveness of the various
enhancement methods. During the first six months of 1998, we used a
senior/subordinated structure for each of our five manufactured home loan sales
and enhanced a portion of the subordinated certificates sold with a corporate
guarantee. During the first six months of 1998, our home equity and home
improvement loan sales included two separate but cross-collateralized loan
pools, both of which employed a senior/subordinated structure with a limited
guarantee on a portion of the subordinate certificates.
Our sale of consumer products, equipment finance and certain home equity
and home improvement loans during the first quarter of 1998 employed a
multi-class credit tranched grantor trust structure issuing fixed rate
certificates with a limited corporate guarantee on the most subordinate class.
In the second quarter of 1998, our sale of consumer products and equipment
finance loans utilized a multi-class credit tranched owner trust structure
issuing fixed rate notes and certificates with a limited corporate guarantee on
the most subordinate class. Also during the first and second quarters, we sold
$50.0 million of private-label credit card receivables and $438.3 million of
floorplan receivables through two separate revolving trusts.
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CONSECO, INC. AND SUBSIDIARIES
--------------------
Servicing fees and net interest payments collected on sold loans increased
during the six-month period ended June 30, 1998 compared with the same period in
1997. Contributing to this growth is an increase in servicing revenue we collect
on our growing servicing portfolio. Interest on unsold loans increased during
the first six months of 1998 compared with the same period in 1997 as a result
of the increase in the outstanding finance receivables.
We currently have $3.8 billion in master repurchase agreements, subject to
the availability of eligible collateral, with various investment banking firms
for the purpose of financing our contract and commercial finance loan
production. The master repurchase agreements generally provide for annual terms
which are extended each quarter by mutual agreement of the parties for an
additional annual term based upon receipt of updated quarterly financial
information. In addition, we have unsecured bank credit agreements of $325.0
million scheduled to expire on September 30, 1998. At June 30, 1998, we have
$1.4 billion outstanding under the repurchase agreements and $225.0 million of
borrowings under the unsecured bank credit agreements.
We also have a commercial paper program through which we are authorized to
issue up to $2 billion in notes of varying terms (not to exceed 270 days) to
meet our warehousing liquidity needs. This program is backed by a combination of
our bank credit agreements and master repurchase agreements referred to above.
As of June 30, 1998, no commercial paper is outstanding under this program. We
have curtailed our issuance of commercial paper in favor of master repurchase
agreements, due to recent ratings actions by credit agencies which lowered Green
Tree's senior unsecured debt ratings.
In addition, we have a $700 million line of credit secured by our
interest-only securities. This line of credit matures on February 12, 2000 with
an option to extend for an additional one year term.
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; 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.
INVESTMENTS HELD BY OUR INSURANCE SUBSIDIARIES
At June 30, 1998, the amortized cost and estimated fair value of fixed
maturity securities (all of which were actively managed) 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...................................... $ 536.2 $ 25.7 $ .1 $ 561.8
Obligations of states and political subdivisions
and foreign government obligations............................. 469.6 10.8 9.2 471.2
Public utility securities......................................... 1,867.4 61.3 26.2 1,902.5
Other corporate securities........................................ 13,242.3 372.3 116.7 13,497.9
Mortgage-backed securities........................................ 5,987.6 129.5 6.2 6,110.9
--------- ------ ------ ---------
Total fixed maturity securities ............................. $22,103.1 $599.6 $158.4 $22,544.3
========= ====== ====== =========
</TABLE>
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CONSECO, INC. AND SUBSIDIARIES
--------------------
The following table sets forth the investment ratings of fixed maturity
securities at June 30, 1998 (designated categories include securities with "+"
or "-" rating modifiers). The category assigned is the highest rating by a
nationally recognized statistical rating organization, or as to $693.4 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 securities are included in the "A" rating; Class 2,
"BBB"; Class 3, "BB" and Classes 4 to 6, "B and below."
<TABLE>
<CAPTION>
Percent of
Investment ------------------------------------
rating Fixed maturities Total investments
------ ---------------- -----------------
<S> <C> <C>
AAA................................... 31% 25%
AA.................................... 7 6
A..................................... 22 18
BBB................................... 30 23
--- --
Investment grade............... 90 72
--- --
BB.................................... 5 4
B and below........................... 5 4
--- --
Below investment grade......... 10 8
--- --
Total fixed maturities......... 100% 80%
=== ==
</TABLE>
At June 30, 1998, our below investment grade fixed maturity securities had
an amortized cost of $2,264.2 million and an estimated fair value of $2,193.2
million.
During the first six months of 1998 and 1997, we recorded $1.5 million and
$1.2 million, respectively, in writedowns of fixed maturity securities as a
result of changes in conditions which caused us to conclude that a decline in
fair value of the investments was other than temporary. At June 30, 1998, fixed
maturity securities in default as to the payment of principal or interest had an
aggregate amortized cost of $19.3 million and a carrying value of $18.9 million.
Sales of invested assets (primarily fixed maturity securities) during the
first six months of 1998 generated proceeds of $15.7 billion, and net investment
gains of $118.6 million. Sales of invested assets during the first six months of
1997 generated proceeds of $6.3 billion, and net investment gains of $22.3
million. Net investment gains in the first six months of 1997 also included $.2
million of writedowns related to mortgage loans.
At June 30, 1998, fixed maturity investments included $6.1 billion of
mortgage-backed securities (or 27 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 as 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 the annual amortization of the
premium.
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CONSECO, INC. AND SUBSIDIARIES
--------------------
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities, summarized by interest rates on the
underlying collateral at June 30, 1998:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent .................................................................. $2,532.8 $2,506.8 $2,547.0
7 percent - 8 percent............................................................... 2,707.9 2,685.3 2,753.5
8 percent - 9 percent............................................................... 485.9 484.7 496.8
9 percent and above................................................................. 300.4 310.8 313.6
-------- -------- --------
Total mortgage-backed securities............................................. $6,027.0 $5,987.6 $6,110.9
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
at June 30, 1998, summarized by type of security, were as follows (dollars in
millions):
<TABLE>
<CAPTION>
Estimated fair value
---------------------------
Percent
Amortized of fixed
Type cost Amount maturities
- ---- ---- ------ ----------
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............ $3,706.5 $3,780.7 17%
Planned amortization classes and accretion-directed bonds................. 1,714.8 1,748.5 8
Support classes........................................................... 20.9 21.9 -
Accrual (Z tranche) bonds................................................. 12.5 13.4 -
Subordinated classes ..................................................... 532.9 546.4 2
-------- -------- --
$5,987.6 $6,110.9 27%
======== ======== ==
</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 collateralized
mortgage obligations ("CMOs") 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 or 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 upon 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
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<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
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.
At June 30, 1998, the balance of mortgage loans was comprised of 97 percent
commercial loans, 2 percent residual interests in collateralized mortgage
obligations and 1 percent residential loans. Less than 1.0 percent of mortgage
loans were noncurrent (loans which are two or more scheduled payments past due)
at June 30, 1998.
At June 30, 1998, we held $60.4 million of trading securities that are
included in other invested assets.
Investment borrowings averaged approximately $1,251.5 million during the
first six months of 1998, compared with approximately $340.7 million during the
same period of 1997 and were collateralized by investment securities with fair
values approximately equal to the loan value. The weighted average interest rate
on such borrowings was 5.5 percent and 4.9 percent during the first six months
of 1998 and 1997, respectively.
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from generally accepted
accounting principles. The Company's life insurance subsidiaries reported the
following amounts to regulatory agencies at June 30, 1998, after appropriate
eliminations of intercompany accounts among such subsidiaries (dollars in
millions):
<TABLE>
<S> <C>
Statutory capital and surplus .................................. $1,589.8
Asset valuation reserve ("AVR")................................. 424.1
Interest maintenance reserve ("IMR")............................ 505.4
Portion of surplus debenture carried as a liability ............ 65.5
--------
Total........................................................ $2,584.8
========
</TABLE>
The ratio of such consolidated statutory account balances to consolidated
statutory liabilities (excluding AVR, IMR, the portion of surplus debentures
carried as a liability, liabilities from separate account business and
short-term collateralized borrowings) was 11.0 percent at June 30, 1998, and
10.8 percent at December 31, 1997.
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 $109.5 million and $127.8 million in the first six
months of 1998 and 1997, respectively, after appropriate eliminations of
intercompany amounts among such subsidiaries, but before elimination of
intercompany amounts between such subsidiaries and non-life subsidiaries and the
parent company.
The statutory capital and surplus of the insurance subsidiaries include
surplus debentures issued to the parent holding companies totaling $789.4
million. Payments of interest and principal on such debentures are generally
subject to the approval of the insurance department of the subsidiary's state of
domicile. During the first six months of 1998, our life insurance subsidiaries
made scheduled principal payments on surplus debentures of $63.7 million.
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. During the first six
months of 1998, our life insurance subsidiaries paid ordinary dividends of $38.9
million to the parent holding companies. During the remainder of 1998, the life
insurance subsidiaries may pay additional dividends of $126.2 million without
the permission of state regulatory authorities.
YEAR 2000 CONVERSION COSTS
We have initiated a corporate-wide program designed to ensure that all of
our computer systems will function properly in the year 2000. Many existing
programs were designed and developed to use only two digits to identify a year
in the date field. If not addressed, these computer applications could result in
system failures with possible adverse effects on our operations. A large number
of our employees, as well as external consultants and contract programmers, are
working on various year 2000 projects. We also have been working with our
vendors to help avoid year 2000 problems with outside software or services they
provide to us. Under our program,
50
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
we are analyzing our application systems, operating systems, hardware, networks,
EDI interfaces and infrastructure devices (such as facsimile machines and
telephone systems).
We are addressing the year 2000 issues we identify in three ways. 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.
We have incurred expenses throughout 1997 and in the first two quarters of
1998 related to this project and will continue to incur costs over the next 18
months. We currently estimate that the total costs related to our year 2000
projects will be approximately $48 million. Approximately 50 percent of these
costs have been incurred prior to June 30, 1998.
The impact of year 2000 issues will depend not only on the corrective
actions we take, but also on the way in which year 2000 issues are addressed by
governmental agencies, businesses and other third parties that provide services
or data to, or receive services or data from, the Company, or whose financial
condition or operational capability is important to the Company.
Our year 2000 projects are currently on schedule. We expect the projects
related to our life insurance subsidiaries to be completed by the end of the
year. Our finance subsidiaries are expected to be completed with their projects
in the second quarter of 1999.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
report and elsewhere (such as in other filings by Conseco or Green Tree with the
Securities and Exchange Commission, press releases, presentations by Conseco or
Green Tree or its management or oral statements) relative to markets for
Conseco's or Green Tree's products and trends in Conseco's or Green Tree'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 which 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, short-term interest rate fluctuations, stock
market performance and health care inflation, which may affect the ability of
Conseco to sell its products, the ability of Green Tree to make loans and access
capital resources, the market value of Conseco's or Green Tree's investments,
the lapse rate and profitability of policies and the level of defaults and
prepayments of loans made by Green Tree; (ii) Conseco'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, usage of health care services and other factors which may affect the
profitability of Conseco's insurance products; (v) changes in the federal income
tax laws and regulations which may affect the relative tax advantages of some of
Conseco's products; (vi) increasing competition in the sale of insurance and
annuities and in the consumer finance business; (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 Conseco's supplemental health insurance
products; (viii) the availability and terms of future acquisitions; and (ix) the
risk factors or uncertainties listed in Conseco's or Green Tree's other filings
with the Securities and Exchange Commission. In addition to the above, these
statements are subject to uncertainties related to the synergies, charges and
expenses associated with the Green Tree Merger.
ITEM 3. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The market risks the Company is exposed to and our management of such risks
are summarized in the supplemental management's discussion and analysis of
financial condition and results of operations as of December 31, 1997, included
in Exhibit 99.1 to the Company's Current Report on Form 8-K dated June 30, 1998,
as amended. During the second quarter of 1998, prepayment rates on securitized
loan contracts continued to exceed management's expectations. In addition,
market yields of publicly traded securities similar to our interest-only
securities increased. As a result of these developments, a $350 million charge
(net of income taxes of $190 million) to reduce the carrying value of
interest-only securities and servicing rights was recognized in the second
quarter of 1998. There have been no other material changes to such risks or our
management of such risks.
51
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CONSECO, INC. AND SUBSIDIARIES
--------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Green Tree has been served with various related lawsuits which were filed
in the United States District Court for the District of Minnesota. These
lawsuits were filed by certain former stockholders of Green Tree as purported
class actions on behalf of persons or entities who purchased common stock of
Green Tree during the alleged class periods that generally run from February
1995 to January 1998. One such action did not include class action claims. In
addition to Green Tree, certain current and former officers and directors of
Green Tree are named as defendants in one or more of the lawsuits. Green Tree
and other defendants intend to seek consolidation in the United States District
Court for the District of Minnesota of each of the lawsuits seeking class action
status. Plaintiffs in the lawsuits assert claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. In each case, plaintiffs allege that
Green Tree and the other defendants violated federal securities laws by, among
other things, making false and misleading statements about the current state and
future prospects of Green Tree (particularly with respect to prepayment
assumptions and performance of certain loan portfolios of Green Tree) which
allegedly rendered Green Tree's financial statements false and misleading. The
Company believes that the lawsuits are without merit and intends to defend such
lawsuits vigorously.
The Company and its subsidiaries are involved on an ongoing basis in
lawsuits related to its operations. Although the ultimate outcome of certain of
such matters cannot be predicted, none of such lawsuits currently pending
against the Company or its subsidiaries is expected, individually or in the
aggregate, to have a material adverse effect on the Company's consolidated
financial condition, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting on May 14, 1998, the shareholders elected
Stephen C. Hilbert, Ngaire E. Cuneo and M. Phil Hathaway to serve as directors
for terms ending in 2001. The results of the voting were as follows (there were
no broker non-votes):
<TABLE>
<CAPTION>
Stephen C. Ngaire E. M. Phil
Hilbert Cuneo Hathaway
------- ----- --------
<S> <C> <C> <C>
For 161,012,823 161,124,032 161,085,483
Withheld 706,768 595,559 634,108
</TABLE>
At the annual meeting, the shareholders also approved: (i) the
performance-based provisions in the proposed Employment Agreement between the
Company and Stephen C. Hilbert (there were 150,675,340 shares voted for the
plan, 10,395,819 shares voted against the plan, 648,432 abstentions and no
broker non-votes); and (ii) the Conseco Performance-Based Compensation Plan for
Executive Officers (there were 150,674,574 shares voted for the plan, 10,402,453
shares voted against the plan, 642,564 abstentions, and no broker non-votes).
At a special meeting on June 30, 1998, the shareholders approved a proposal
for the issuance of Conseco common stock pursuant to an Agreement and Plan of
Merger, dated as of April 6, 1998, as amended, by and among Conseco, Marble
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Conseco, and Green Tree Financial Corporation (there were 129,261,207 shares
voted for the proposal, 7,481,282 shares voted against the proposal, 354,347
abstentions and 28,276,532 broker non-votes).
52
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CONSECO, INC. AND SUBSIDIARIES
--------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
3.2 Amended and Restated Bylaws of Conseco, Inc.
4.25 Indenture dated as of March 15, 1992 relating to $287,500,000
of 10-1/4% Senior Subordinated Notes due June 1, 2002 of
Green Tree (incorporated by reference to Green Tree's
Registration Statement on Form S-4; File No. 33-42249).
10.1.13 Employment Agreement dated February 9, 1996 between Green
Tree and Lawrence Coss and related Noncompetition dated
February 9, 1996, as amended by the Amendment Agreement dated
April 6, 1998 (incorporated by reference to Green Tree's
Registration Statement on Form S-3: File No. 333-52233).
10.8.15 Green Tree Financial Corporation 1987 Stock Option Plan
(incorporated by reference to Green Tree's Registration
Statement on Form S-4: File No. 33-42249).
10.8.16 Green Tree Financial Corporation Key Executive Stock Bonus
Plan (incorporated by reference to Green Tree's Registration
Statement on Form S-4; File No. 33-42249).
10.8.17 Green Tree Financial Corporation Restated 1992 Supplemental
Stock Option Plan.
10.8.18 Green Tree Financial Corporation Chief Executive Cash Bonus
and Stock Option Plan and related Stock Option Agreement,
dated February 9, 1996 (incorporated by reference to Green
Tree's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996; File No. 1-08916).
10.8.19 Green Tree Financial Corporation 1996 restated Supplemental
Pension Plan dated May 15, 1996 (incorporated by reference to
Green Tree's Annual Report on Form 10-K for the year ended
December 31, 1997: File No. 1-08916).
12.1 Computation of Ratio of Earnings to Fixed Charges, Preferred
Dividends and Distributions on Company-obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts.
27.0 Financial Data Schedule
b) Reports on Form 8-K.
A report on Form 8-K dated April 6, 1998, was filed with the
Commission to report under Item 5, the announcement that a subsidiary
of Conseco had agreed to merge with Green Tree pursuant to an
Agreement and Plan of Merger dated as of April 6, 1998.
A report on Form 8-K dated June 3, 1998, was filed with the
Commission to report under Item 5, financial information related to
Green Tree.
A report on Form 8-K dated June 4, 1998, was filed with the
Commission to report under Item 5, the pricing of: (i) $550 million
of unsecured 6.4 Percent MandatOry Par Put Remarketed Securities due
June 15, 2011; and (ii) $250 million of 6.8 percent unsecured notes
due June 15, 2005.
A report on Form 8-K dated June 30, 1998, as amended, was filed with
the Commission to report under Item 2, the completion of the Green
Tree Merger and under Item 5, financial information related to Green
Tree and supplemental consolidated financial information which
reflects the retroactive effect of the Green Tree Merger accounted
for as a pooling of interests.
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CONSECO, INC. AND SUBSIDIARIES
--------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO, INC.
Dated: August 14, 1998 By: /s/ ROLLIN M. DICK
------------------
Rollin M. Dick
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
54
AMENDED AND RESTATED
BYLAWS OF CONSECO, INC.
Effective June 30, 1998
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<TABLE>
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TABLE OF CONTENTS
PAGE
<S> <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
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TABLE OF CONTENTS (continued)
PAGE
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
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TABLE OF CONTENTS (continued)
PAGE
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>
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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.
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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 Board of Directors 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.
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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.
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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
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(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.
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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 eleven (11)
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
caused by resignation, death or other incapacity, or increase in the number of
Directors shall 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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(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,
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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
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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
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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
GREEN TREE FINANCIAL CORPORATION
RESTATED 1992 SUPPLEMENTAL STOCK OPTION PLAN
1. Purpose of Plan.
This Plan shall be known as the "Green Tree Financial Corporation
Restated 1992 Supplemental Stock Option Plan" and is hereinafter referred to as
the "Plan." The purpose of the Plan is to attract and retain the services of
experienced and knowledgeable non-employee directors of Green Tree Financial
Corporation (the "Company") and to provide additional incentive for such
directors to increase their interest in the Company's long term success and
progress. Options granted under this Plan shall be non-qualified stock options
which do not qualify as Incentive Stock Options within the meaning of Section
422A of the Internal Revenue Code of 1986, as amended (the "Code").
2. Stock Subject to Plan.
Subject to the provisions of Section 11 hereof, the stock to be subject
to options under the Plan (the "Shares") shall be the Company's authorized
Common Stock, par value $0.01 per share (the "Common Stock"). Such shares will
be authorized but unissued shares. Subject to adjustment as provided in Section
11 hereof, the maximum number of shares on which options may be exercised under
this Plan shall be 400,000(1) shares. If an option under the Plan expires, or
for any reason is terminated or unexercised with respect to any Shares, such
Shares shall again be available for options thereafter granted during the term
of the Plan.
3. Administration of Plan.
The Plan shall be administered by the Board of Directors of the
Company. The Board of Directors shall have plenary authority in its discretion,
but subject to the express provisions of this Plan, to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to the Plan, and to
make all other determinations necessary or advisable for the administration of
the Plan. The Board of Directors' determinations on the foregoing matters shall
be final and conclusive.
4. Eligibility.
An "Eligible Director" shall be a director of the Company who is not
otherwise an employee of the Company or any subsidiary of the Company; provided,
however, that so long as any director of the Company is serving as a
representative of another organization and any options issued to such director
under the Plan are required to be remitted to such organization, such director
shall not be deemed to be an Eligible Director for purposes of the Plan.
5. Grant of Options.
Upon approval of the Plan by the Board of Directors, but subject to
approval of the Plan by the stockholders of the Company pursuant to Section 14
hereof, each Eligible Director who completes a full fiscal quarter of service as
a director of the Company after December 31, 1992 shall automatically be granted
on the last business day of each such quarter an option to acquire 4,000(1)
Shares under the Plan; provided, however, that no options shall be granted under
the Plan for any fiscal quarter ending after June 30, 1998.
- --------
(1)Adjusted to reflect the 1/31/93, 6/30/94 and 10/15/95 stock splits.
<PAGE>
6. Price.
The option price for all options granted under the Plan shall be the
fair market value of the Shares covered by the option at the time the option is
granted. For the purpose of the preceding sentence and for all other valuation
purposes under the Plan, the "fair market value" of the Common Stock as of any
date shall be (i) the closing price of the Common Stock on such date, as
reported on the consolidated reporting system for the New York Stock Exchange or
such other national securities exchange as is then the primary exchange for
trading in the Common Stock, or (ii) if the Common Stock is not then listed on a
national securities exchange, the last sale price or highest closing bid price
(whichever is applicable) as reported on the National Association of Securities
Dealers Automated Quotation System. If, on the date of determination of fair
market value, the Common Stock is not publicly traded, the Board of Directors
shall make a good faith attempt to determine the fair market value of the Common
Stock as required by this Section 6 and in connection therewith shall take such
action as it deems necessary or advisable.
7. Term.
Each option and all rights and obligations thereunder shall, subject to
the provisions of Section 9 herein, expire ten (10) years from the date of
granting of the option.
8. Exercise of Option.
(a) Options granted under the Plan shall not be exercisable for a
period of six months after the date of grant, or until stockholder approval of
the Plan has been obtained, whichever occurs later, but thereafter will be
exercisable in full at any time or from time to time during the term of the
option, subject to the provisions of Section 9 hereof.
(b) The exercise of any option granted hereunder shall only be
effective at such time as counsel to the Company shall have determined that the
issuance and delivery of Common Stock pursuant to such exercise will not violate
any state or federal securities or other laws. An optionee desiring to exercise
an option may be required by the Company, as a condition of the effectiveness of
any exercise of an option granted hereunder, to agree in writing that all Common
Stock to be acquired pursuant to such exercise shall be held for his or her own
account without a view to any further distribution thereof, that the
certificates for such shares shall bear an appropriate legend to that effect and
that such shares will not be transferred or disposed of except in compliance
with applicable federal and state securities laws.
(c) An optionee electing to exercise an option shall give written
notice to the Company of such election and of the number of Shares subject to
such exercise. The full purchase price of such Shares shall be tendered with
such notice of exercise. Payment shall be made to the Company either (i) in cash
(including check, bank draft or money order), or (ii) by delivering shares of
Common Stock already owned by the optionee having a fair market value equal to
the full purchase price of the Shares, or (iii) by any combination of cash and
such shares; provided, however, that an optionee shall
-2-
<PAGE>
not be entitled to tender shares of Common Stock pursuant to successive,
substantially simultaneous exercises of options granted under this or any other
stock option plan of the Company. For purposes of the preceding sentence, the
"fair market value" of such tendered shares shall be determined as provided in
Section 6 herein as of the date of exercise. Until such person has been issued
the Shares subject to such exercise, he or she shall possess no rights as a
stockholder with respect to such Shares.
9. Effect of Termination of Directorship or Death or Disability.
(a) In the event that an optionee shall cease to be an Ongoing Director
(as defined in Section 9 (d), below) for any reason other than removal for cause
due to his or her serious misconduct or his or her death or disability, such
optionee shall have the right to exercise the option at any time within seven
months after such termination of Ongoing Directorship to the extent of the full
number of Shares he or she was entitled to purchase under the option on the date
of termination, subject to the condition that no option shall be exercisable
after the expiration of the term of the option.
(b) In the event that an optionee shall be removed for cause as an
Ongoing Director by reason of his or her serious misconduct during the course of
his or her service as an Ongoing Director, the option shall be terminated as of
the date of the misconduct.
(c) If the optionee shall die while serving as an Ongoing Director or
within three months after termination of his or her Ongoing Directorship for any
reason other than removal for cause due to his or her serious misconduct, or
become disabled (as determined by the Board of Directors in its sole discretion)
while serving as an Ongoing Director and such optionee shall not have fully
exercised the option, such option may be exercised at any time within twelve
months after his or her death or disability by the personal representatives,
administrators, or, if applicable, guardian, of the optionee or by any person or
persons to whom the option is transferred by will or the applicable laws of
descent and distribution, to the extent of the full number of shares he or she
was entitled to purchase under the option on the date of death, disability, or
termination of Ongoing Directorship, if earlier, and subject to the condition
that no option shall be exercisable after the expiration of the term of the
option.
(d) As used herein, the term "Ongoing Director" means (i) a director of
the Company, (ii) a director of any corporation that controls in excess of 50%
of the voting power of the outstanding equity securities of the Company (whether
or not such Ongoing Director is a director of such corporation at the time an
option is granted to him or her under the Plan, and (iii) a director of a wholly
owned subsidiary of the Company.
-3-
<PAGE>
10. Non-Transferability.
No option granted under the Plan shall be transferable by the optionee,
otherwise than by will or the laws of descent and distribution as provided in
Section 9(c) herein. Except as provided in Section 9(c) herein with respect to
disability of the optionee, during the lifetime of an optionee the option shall
be exercisable only by such optionee.
11. Dilution or Other Adjustments.
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend (of whatever
amount), stock split or other change in the corporate structure, appropriate
adjustments in the Plan and outstanding options shall be made by the Board of
Directors. In the event of any such changes, adjustments shall include, where
appropriate, changes in the aggregate number of shares subject to the Plan, the
number of shares and the price per share subject to outstanding options in order
to prevent dilution or enlargement of option rights.
12. Amendment or Discontinuance of Plan.
The Board of Directors may amend or discontinue the Plan at any time.
However, subject to the provisions of Section 11 no amendment of the Plan shall,
without stockholder approval: (i) increase the maximum number of Shares with
respect to which options may be granted under the Plan as provided in Section 2
hereof, (ii) modify the eligibility requirements for participation in the Plan
as provided in Section 4 hereof, or (iii) change the date of grant or exercise
price of, or the number of Shares subject to, options granted or to be granted
to Eligible Directors, as provided in Sections 5 and 6 hereof. The Board of
Directors shall not alter or impair any option theretofore granted under the
Plan without the consent of the holder of the option. Notwithstanding any other
provision of the Plan or any option, without the approval of stockholders of the
Company, no such amendment shall be made that, absent such approval, would cause
the exemptions of Rule16b-3 to become unavailable with respect to the options
hereunder or with respect to the ability of the Eligible Directors to satisfy
the disinterested person requirements of Rule 16b-3 in administering any other
stock-based compensation plan of the Company (this limitation on amendments to
the Plan shall include, without limitation, a prohibition on any contemplated
amendment within six months of any prior amendment, other than to comport with
changes in the Code, the Employee Retirement Income Security Act, or the rules
thereunder).
13. Time of Granting.
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the stockholders of the Company, and no
action taken by the Board of Directors (other than the execution and delivery of
an option), shall constitute the granting of an option hereunder.
14. Effective Date and Termination of Plan.
-4-
<PAGE>
(a) The Plan was approved by the Board of Directors on March 10, 1992
and shall be approved by the stockholders of the Company within twelve (12)
months thereafter. The effective date of the Plan shall be the date of
stockholder approval. The Plan was amended by the Board of Directors of the
Company on November 22, 1997, and was subsequently amended by the Board of
Directors and the stockholder of the Company as of July 1, 1998.
(b) Unless the Plan shall have been discontinued as provided in Section
12 hereof, the Plan shall terminate on December 31, 2002. No option may be
granted after such termination, but termination of the Plan shall not, without
the consent of the optionee, alter or impair any rights or obligations under any
option theretofore granted.
(Restated as of July 1, 1998)
-5-
<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 three months ended June 30, 1998 and the year ended December 31, 1997
(Dollars in millions)
Six months
ended Year ended
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Pretax income from operations:
Net income (loss) $(67.5) $ 866.4
Add income tax expense 117.9 560.1
Add extraordinary charge on extinguishment of debt 30.3 6.9
Add minority interest 38.2 52.3
------ --------
Pretax income from operations 118.9 1,485.7
------ --------
Add fixed charges:
Interest expense on annuities and financial products 370.6 697.1
Interest expense on corporate debt, including amortization 75.3 109.4
Interest expense on consumer and commercial finance debt 102.9 160.9
Interest expense on investment borrowings 37.1 42.0
Other .3 .7
Portion of rental(1) 7.6 13.7
------ --------
Fixed charges 593.8 1,023.8
------ --------
Adjusted earnings $712.7 $2,509.5
====== ========
Ratio of earnings to fixed charges 1.20X 2.45X
===== ======
Ratio of earnings to fixed charges, excluding
interest on annuities and financial products
and interest expense on debt related to finance
receivables and other investments 2.43X 13.00X
===== ======
Ratio of earnings (excluding nonrecurring charge related
to Green Tree of $688.0 million) to fixed charges 2.36X 2.45X
===== ======
Ratio of earnings (excluding nonrecurring charge related
to Green Tree of $688.0 million) to fixed charges,
excluding interest on annuities and financial
products and interest expense of debt related to
finance receivables and other investments 10.70X 13.00X
====== ======
Fixed charges $593.8 $1,023.8
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) 6.8 40.4
Add distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts 58.4 75.4
------ --------
Fixed charges $659.0 $1,139.6
====== ========
Adjusted earnings $712.7 $2,509.5
====== ========
Ratio of earnings to fixed charges, preferred dividends
and distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts 1.08X 2.20X
===== =====
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
and interest expense on debt related to finance
receivables and other investments 1.36X 6.72X
====== =====
Ratio of earnings (excluding nonrecurring charge related
to Green Tree of $688.0 million) to fixed charges,
preferred dividends and distributions on Company-
obligated mandatorily redeemable preferred securities of
subsidiary trusts 2.13X 2.20X
===== =====
<PAGE>
Ratio of earnings (excluding nonrecurring charge related to
Green Tree of $688.0 million) to fixed charges, preferred
dividends and distributions on Company-obligated
mandatorily redeemable preferred securities of subsidiary
trusts, excluding interest on annuities and financial
products and interest expense on debt related to finance
receivables and other investments 6.00X 6.72X
===== =====
<FN>
(1) Interest portion of rental is assumed to be 33 percent.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 22,544,300
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 340,500
<MORTGAGE> 1,122,500 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 28,094,400
<CASH> 0
<RECOVER-REINSURE> 752,600
<DEFERRED-ACQUISITION> 3,557,000 <F2>
<TOTAL-ASSETS> 42,474,900
<POLICY-LOSSES> 23,628,900
<UNEARNED-PREMIUMS> 409,300
<POLICY-OTHER> 1,252,300
<POLICY-HOLDER-FUNDS> 318,800
<NOTES-PAYABLE> 5,680,900 <F3>
1,388,800
105,600
<COMMON> 2,661,200
<OTHER-SE> 2,217,400 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 42,474,900
1,979,900
<INVESTMENT-INCOME> 1,293,000
<INVESTMENT-GAINS> 117,100
<OTHER-INCOME> 434,100 <F5>
<BENEFITS> 1,841,000 <F6>
<UNDERWRITING-AMORTIZATION> 283,600 <F7>
<UNDERWRITING-OTHER> 609,700
<INCOME-PRETAX> 118,900
<INCOME-TAX> 117,900
<INCOME-CONTINUING> 1,000
<DISCONTINUED> 0
<EXTRAORDINARY> (30,300)
<CHANGES> 0
<NET-INCOME> (67,500)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $646,900 of credit-tenant loans.
<F2> Includes $2,424,100 of cost of policies purchased.
<F3> Includes $2,728,800 related to consumer and commercial finance debt.
<F4> Includes retained earnings of $2,017,100, and accumulated other
comprehensive income of $200,300.
<F5> Includes gain on loan securitizations of $272,400 and fee revenue and
other income of $161,700.
<F6> Includes insurance policy benefits of $1,361,800 and amounts added to
annuity and financial product policyholder account balances of $479,200.
<F7> Includes amortization of cost of policies purchased of $107,600,
amortization of cost of policies produced of $61,100 and amortization
related to investment gains of $114,900.
</FN>
</TABLE>
