================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] 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.
11825 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 30, 1999: 327,054,211
================================================================================
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
EXPLANATORY PARAGRAPH
This Form 10-Q/A amends the Form 10-Q filed by Conseco, Inc. on August 16,
1999, to correct the typographical error included in the captions in the chart
at the end of page 9 of the Form 10-Q. The corrected caption refers to
securitizations completed in the first six months of 1999. In accordance with
the instructions for Form 10-Q/A, Item 1 is included herein in its entirety.
<PAGE>
<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,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost: 1999 - $23,336.8;
1998 - $21,848.3)........................................................................ $22,385.5 $21,827.3
Interest-only securities at fair value (amortized cost: 1999 - $1,518.6; 1998 - $1,313.6).. 1,429.9 1,305.4
Equity securities at fair value (cost: 1999 - $456.8; 1998 - $373.0)....................... 474.4 376.4
Mortgage loans............................................................................. 1,243.4 1,130.2
Policy loans............................................................................... 672.3 685.6
Other invested assets ..................................................................... 1,129.8 1,259.8
Short-term investments..................................................................... 1,136.5 1,704.7
Assets held in separate accounts........................................................... 1,180.0 899.4
--------- ---------
Total investments...................................................................... 29,651.8 29,188.8
Accrued investment income..................................................................... 456.6 383.8
Finance receivables........................................................................... 4,011.0 3,299.5
Cost of policies purchased.................................................................... 2,453.2 2,425.2
Cost of policies produced..................................................................... 1,775.5 1,453.9
Reinsurance receivables....................................................................... 966.0 734.8
Goodwill...................................................................................... 3,906.0 3,960.2
Cash held in segregated accounts for investors................................................ 895.3 843.7
Other assets.................................................................................. 1,417.1 1,310.0
--------- ---------
Total assets........................................................................... $45,532.5 $43,599.9
========= =========
</TABLE>
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Liabilities:
Liabilities for insurance and asset accumulation products:
Interest-sensitive products.............................................................. $17,379.4 $17,229.4
Traditional products..................................................................... 6,532.2 6,391.6
Claims payable and other policyholder funds.............................................. 1,408.8 1,491.5
Unearned premiums........................................................................ 378.2 376.6
Liabilities related to separate accounts................................................. 1,180.0 899.4
Liabilities related to deposit products.................................................. 938.2 541.7
Investor payables.......................................................................... 895.3 843.7
Other liabilities.......................................................................... 1,992.2 1,980.7
Income tax liabilities..................................................................... 18.8 197.1
Investment borrowings...................................................................... 1,349.3 956.2
Notes payable and commercial paper:
Corporate................................................................................ 2,899.6 2,932.2
Finance.................................................................................. 3,103.7 2,389.3
--------- ---------
Total liabilities.................................................................... 38,075.7 36,229.4
--------- ---------
Minority interest:
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts..................................................................... 2,100.2 2,096.9
Shareholders' equity:
Preferred stock............................................................................ - 105.5
Common stock and additional paid-in capital (no par value, 1,000,000,000 shares
authorized, shares issued and outstanding: 1999 - 326,730,615;
1998 - 315,843,609)...................................................................... 2,940.5 2,736.5
Accumulated other comprehensive loss (net of applicable deferred income taxes:
1999 - $(297.4); 1998 - $(16.3))......................................................... (547.3) (28.4)
Retained earnings.......................................................................... 2,963.4 2,460.0
--------- ---------
Total shareholders' equity........................................................... 5,356.6 5,273.6
--------- ---------
Total liabilities and shareholders' equity........................................... $45,532.5 $43,599.9
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions except per share amounts)
(unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income........................................... $1,020.0 $ 989.8 $2,027.4 $1,979.9
Net investment income............................................. 709.1 599.4 1,355.5 1,266.2
Gain on sale of finance receivables............................... 226.0 127.6 425.8 271.3
Net investment gains (losses)..................................... (22.9) 12.3 (21.9) 117.1
Fee revenue and other income...................................... 121.3 88.1 232.6 167.5
-------- --------- -------- --------
Total revenues................................................ 2,053.5 1,817.2 4,019.4 3,802.0
-------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits......................................... 920.5 886.6 1,810.2 1,841.0
Interest expense.................................................. 125.5 108.9 236.1 215.3
Amortization...................................................... 153.2 147.7 304.6 351.2
Other operating costs and expenses................................ 347.2 309.8 653.9 609.7
Impairment charge................................................. - 549.4 - 549.4
Nonrecurring charges.............................................. - 148.0 - 148.0
-------- --------- -------- --------
Total benefits and expenses................................... 1,546.4 2,150.4 3,004.8 3,714.6
-------- --------- -------- --------
Income (loss) before income taxes, minority interest
and extraordinary charge ................................... 507.1 (333.2) 1,014.6 87.4
Income tax expense (benefit)......................................... 179.3 (64.3) 359.5 105.9
-------- --------- -------- --------
Income (loss) before minority interest and extraordinary
charge ..................................................... 327.8 (268.9) 655.1 (18.5)
Minority interest - distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts, net of
income taxes...................................................... 30.3 18.8 60.5 38.2
-------- --------- -------- --------
Income (loss) before extraordinary charge .................... 297.5 (287.7) 594.6 (56.7)
Extraordinary charge on extinguishment of debt, net of income
taxes............................................................. - 13.9 - 30.3
-------- --------- -------- --------
Net income (loss)............................................. 297.5 (301.6) 594.6 (87.0)
Less preferred stock dividends....................................... - 2.2 .6 4.2
-------- --------- -------- --------
Net income (loss) applicable to common stock.................. $ 297.5 $ (303.8) $ 594.0 $ (91.2)
======== ========= ======== ========
Earnings (loss) per common share:
Basic:
Weighted average shares outstanding............................. 323,576,000 310,326,000 322,111,000 309,648,000
Net income (loss) before extraordinary charge................... $.92 $(.94) $1.84 $(.19)
Extraordinary charge............................................ - .04 - .10
---- ----- ----- -----
Net income (loss)............................................. $.92 $(.98) $1.84 $(.29)
==== ===== ===== =====
Diluted:
Weighted average shares outstanding............................. 331,201,000 310,326,000 331,155,000 309,648,000
Net income (loss) before extraordinary charge................... $.90 $(.94) $1.80 $(.19)
Extraordinary charge............................................ - .04 - .10
---- ----- ----- -----
Net income (loss)............................................. $.90 $(.98) $1.80 $(.29)
==== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<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, 1999............................. $5,273.6 $105.5 $2,736.5 $ (28.4) $2,460.0
Comprehensive income, net of tax:
Net income...................................... 594.6 594.6
Change in unrealized depreciation of
investments (net of applicable income tax
benefit of $281.1)............................ (518.9) - - (518.9) -
--------
Total comprehensive income.................. 75.7
Issuance of common shares......................... 163.5 - 163.5 - -
Tax benefit related to issuance of shares under
stock option plans.............................. 24.4 - 24.4 - -
Conversion of preferred stock into common
shares.......................................... - (105.5) 105.5 - -
Cost of shares acquired........................... (89.4) - (89.4) - -
Dividends on common stock......................... (90.6) - - - (90.6)
Dividends on preferred stock...................... (.6) - - - (.6)
--------- ------- -------- ------- --------
Balance, June 30, 1999............................... $5,356.6 $ - $2,940.5 $(547.3) $2,963.4
======== ====== ======== ======= ========
Balance, January 1, 1998............................. $5,213.9 $115.8 $2,619.8 $ 200.6 $2,277.7
Comprehensive loss, net of tax:
Net loss........................................ (87.0) - - - (87.0)
Change in unrealized appreciation of
investments (net of applicable income tax
benefit of $1.9).............................. (.3) - - (.3) -
---------
Total comprehensive loss.................... (87.3)
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
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 common stock......................... (70.4) - - - (70.4)
Dividends on preferred stock...................... (4.2) - - - (4.2)
-------- ------ -------- -------- --------
Balance, June 30, 1998............................... $4,964.7 $105.6 $2,661.2 $ 200.3 $1,997.6
======== ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Six months ended
June 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................................... $ 594.6 $ (87.0)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sale of finance receivables..................................................... (425.8) (271.3)
Points and origination fees received.................................................... 243.2 110.2
Interest-only securities investment income.............................................. (91.5) (59.8)
Cash received from interest-only securities............................................. 234.1 156.6
Servicing income........................................................................ (81.1) (67.0)
Cash received from servicing activities................................................. 86.1 78.2
Amortization and depreciation........................................................... 344.2 382.3
Income taxes............................................................................ 176.7 (184.6)
Insurance liabilities................................................................... 149.3 (7.4)
Accrual and amortization of investment income........................................... (96.7) (16.0)
Deferral of cost of policies produced and purchased..................................... (386.8) (405.8)
Nonrecurring and impairment charges..................................................... - 692.7
Minority interest....................................................................... 93.0 58.4
Extraordinary charge on extinguishment of debt.......................................... - 46.9
Net investment (gains) losses........................................................... 21.9 (117.1)
Other................................................................................... (34.6) 78.6
----------- ----------
Net cash provided by operating activities before settlement of prior year taxes....... 826.6 387.9
Payment of taxes in settlement of prior years........................................... (85.1) -
------------ ----------
Net cash provided by operating activities............................................. 741.5 387.9
----------- ----------
Cash flows from investing activities:
Sales of investments...................................................................... 8,620.5 15,704.9
Maturities and redemptions of investments................................................. 598.6 734.8
Purchases of investments.................................................................. (10,687.2) (16,254.3)
Cash received from the sale of finance receivables, net of expenses....................... 6,810.3 5,299.6
Principal payments received on finance receivables........................................ 3,960.3 2,598.9
Finance receivables originated............................................................ (11,790.3) (9,434.3)
Other..................................................................................... (76.5) (87.4)
------------ ----------
Net cash used by investing activities ................................................ (2,564.3) (1,437.8)
---------- ----------
Cash flows from financing activities:
Issuance of notes payable and commercial paper............................................ 9,077.4 7,712.9
Issuance of common shares................................................................. 101.5 103.0
Issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts....................................................................... - 3.7
Payments on notes payable and commercial paper............................................ (8,438.0) (6,219.0)
Payments to repurchase equity securities.................................................. (29.5) (236.0)
Investment borrowings..................................................................... 393.1 (209.9)
Amounts received for investments in deposit products...................................... 1,746.4 1,292.6
Withdrawals from deposit products......................................................... (1,425.7) (1,410.5)
Distributions on Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts and common and preferred stock dividends.............................. (170.6) (130.1)
---------- ----------
Net cash provided by financing activities............................................. 1,254.6 906.7
---------- ----------
Net decrease in short-term investments................................................ (568.2) (143.2)
Short-term investments, beginning of period.................................................. 1,704.7 1,154.7
---------- ----------
Short-term investments, end of period........................................................ $ 1,136.5 $ 1,011.5
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following notes should be read together with the notes to the
consolidated financial statements included in the 1998 Form 10-K of Conseco,
Inc. ("we", "Conseco" or the "Company").
BASIS OF PRESENTATION
Our unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, that are necessary to present fairly
Conseco's financial position and results of operations on a basis consistent
with that of our prior audited consolidated financial statements. As permitted
by rules and regulations of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, we have condensed or omitted certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP"). We have also
reclassified certain amounts from the prior periods to conform to the 1999
presentation. Results for interim periods are not necessarily indicative of the
results that may be expected for a full year.
Conseco is a financial services holding company operating throughout the
United States. Our insurance subsidiaries develop, market and administer
supplemental health insurance, annuity, individual life insurance, individual
and group major medical insurance and other insurance products. Our finance
subsidiaries originate, purchase, sell and service consumer and commercial
finance loans. 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, to seek to achieve superior investment returns through
active asset management and to control expenses.
When we prepare 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 values for the cost of policies produced, the
cost of policies purchased, interest-only securities, servicing rights,
goodwill, liabilities for insurance and deposit products, liabilities related to
litigation, guaranty fund assessment accruals, gain on sale of finance
receivables and deferred income taxes. If our future experience differs from
these estimates and assumptions, our financial statements could be materially
affected.
Consolidation issues. Our consolidated financial statements give
retroactive effect to the merger (the "Green Tree Merger") with Green Tree
Financial Corporation ("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 therefore reflects the accounts of the Company as if the additional
shares of Conseco common stock issued in the merger had been outstanding during
all periods presented. We have eliminated intercompany transactions prior to the
merger and we have made certain reclassifications to Green Tree's financial
statements to conform to Conseco's presentation.
Our consolidated financial statements exclude 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 our fixed maturity securities into three categories: (i)
"actively managed" (which we carry at estimated fair value); (ii) "trading"
(which we carry at estimated fair value); and (iii) "held to maturity" (which we
carry at amortized cost). We held $71.2 million of trading securities at June
30, 1999, which we included in other invested assets. We held no fixed maturity
securities in the held to maturity category at June 30, 1999.
7
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Net unrealized losses on actively managed fixed maturity investments
included in shareholders' equity were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Unrealized losses on actively managed fixed maturity investments, net of
unrealized gains.................................................................... $(951.3) $(21.0)
Adjustments to cost of policies purchased and cost of policies produced................. 186.5 10.4
Deferred income tax benefit............................................................. 268.4 6.4
Other................................................................................... (2.0) (7.7)
------- ------
Net unrealized losses on actively managed fixed maturity investments............. $(498.4) $(11.9)
======= ======
</TABLE>
GREEN TREE MERGER
On June 30, 1998, we completed the Green Tree Merger. We issued a total of
128.7 million shares of Conseco common stock (including 5.0 million common
equivalent shares issued in exchange for Green Tree's outstanding options),
exchanging .9165 of a share of Conseco common stock for each share of Green Tree
common stock. The Green Tree Merger constituted a tax-free exchange and was
accounted for under the pooling of interests method. We restated all
prior-period consolidated financial statements to include Green Tree as though
it had always been a subsidiary of Conseco.
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, 1998 June 30, 1998
----------------- ----------------
(Dollars in millions)
<S> <C> <C>
Revenues:
Conseco................................................................ $1,533.1 $3,232.1
Green Tree............................................................. 284.9 570.7
Elimination of intercompany revenues................................... (.8) (.8)
-------- --------
Combined............................................................. $1,817.2 $3,802.0
======== ========
Net income (loss):
Conseco................................................................ $ 123.6 (1) $ 274.7 (1)
Green Tree (including nonrecurring charges)............................ (422.4) (2) (358.9)(2)
Elimination of intercompany net income................................. (2.8) (2.8)
-------- --------
Combined............................................................. $ (301.6) $ (87.0)
======== ========
<FN>
- --------------------
(1) Includes nonrecurring charges of $40.0 million (net of income taxes)
related to the Green Tree Merger, including investment banking, accounting,
legal and regulatory fees and other costs.
(2) Includes: (i) an impairment charge of $355.8 million (net of income taxes)
to reduce the carrying value of the interest-only securities and servicing
rights; and (ii) nonrecurring charges of $108.0 million (net of income
taxes) related to the Green Tree Merger, including investment banking,
accounting, legal and regulatory fees and other costs.
</FN>
</TABLE>
8
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
FINANCE RECEIVABLES AND INTEREST-ONLY SECURITIES
Finance receivables, summarized by type, were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Manufactured housing......................................................... $ 691.6 $ 798.8
Mortgage services............................................................ 963.0 603.5
Consumer/credit card......................................................... 731.3 587.3
Commercial................................................................... 1,680.1 1,352.9
-------- --------
4,066.0 3,342.5
Less allowance for doubtful accounts......................................... 55.0 43.0
-------- --------
Net finance receivables................................................. $4,011.0 $3,299.5
======== ========
</TABLE>
We pool and securitize substantially all of the finance receivables we
originate. In a typical securitization, we establish a special-purpose entity
for the limited purpose of purchasing the finance receivables. This
special-purpose entity issues and sells interest-bearing securities that
represent interests in the receivables, collateralized by the underlying pool of
finance receivables. We, in turn, receive the proceeds from the sale of the
securities, which are typically sold at the same amount as the principal balance
of the receivables sold. We retain a residual interest, which represents the
right to receive, over the life of the pool of receivables: (i) the excess of
the principal and interest received on the receivables transferred to the
special-purpose entity over the principal and interest paid to the holders of
other interests in the securitization; and (ii) servicing fees.
In some securitizations, we also retain certain lower-rated securities that
are senior in payment priority to the interest-only securities. Such retained
securities had a fair market value and amortized cost of $661.7 million and
$684.8 million, respectively, at June 30, 1999, and were classified as actively
managed fixed maturity securities.
During the first six months of 1999 and 1998, the Company sold $7.2 billion
and $5.4 billion, respectively, of finance receivables in various securitized
transactions and recognized gains of $425.8 million and $271.3 million,
respectively.
We record the interest-only security initially at a value representing an
allocated portion of the cost basis of the finance receivables sold. We adjust
this value to estimated fair value each quarter. We used the assumptions in the
table below to determine the initial value of the interest-only securities
related to new securitizations in the first six months of 1999. The difference
between estimated fair value and the security's book value is included in
unrealized depreciation of investments.
<TABLE>
<CAPTION>
Manufactured Home equity/ Consumer/
housing home improvement equipment Total
------- ---------------- --------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Cumulative amounts:
Interest-only securities at fair value............$ 745.1 $ 487.8 $ 197.0 $ 1,429.9
Principal balance of sold finance receivables (a). 22,356.8 9,337.6 3,852.5 35,546.9
Related to securitizations completed in the first
six months of 1999:
Weighted average stated customer interest rate
on sold finance receivables (a) (b)............ 9.5% 11.5% 10.8%
Expected weighted average annual constant
prepayment rate as a percentage of principal
balance of sold finance receivables (a) (c).... 10.7% 28.1% 18.9%
Expected nondiscounted credit losses as a
percentage of principal balance of sold
finance receivables (a) (c).................... 8.8% 3.2% 1.7%
Weighted average discount rate used for
determining the gain on sale of finance
receivables.................................... 15.0% 15.0% 15.0%
9
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
- --------------------
<FN>
(a) Excludes finance receivables sold in revolving-trust securitizations.
(b) The stated interest rate reflects reductions in rates due to collection
of points. Including such points, the effective yield on manufactured
housing finance receivables was approximately 10.4 percent in the first
six months of 1999.
(c) The valuation of interest-only securities is affected not only by the
projected level of prepayments of principal and net credit losses, but also
by the projected timing of such prepayments and net credit losses. Should
such timing differ materially from our projections, it could have a
material effect on the valuation of our interest-only securities.
</FN>
</TABLE>
We used a 14 percent weighted average interest rate to discount expected
cash flows of the interest-only securities in determining the fair value on the
balance sheet at June 30, 1999.
Credit quality was as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
60-days-and-over delinquencies as a percentage
of managed finance receivables at period end............................ 1.09% 1.03%
==== ====
Net credit losses incurred during the last twelve months as a percentage
of average managed finance receivables during the period................ 1.11% 1.09%
==== ====
Repossessed collateral inventory as a percentage of managed finance
receivables at period end............................................... 1.17% .92%
==== =====
</TABLE>
Activity in the interest-only securities account was as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Balance, beginning of period................................................ $1,305.4 $1,398.7
Additions resulting from securitizations during the period............... 347.6 312.5
Investment income........................................................ 91.5 59.8
Cash received............................................................ (234.1) (156.6)
Impairment change to reduce carrying value............................... - (544.4)
Change in unrealized depreciation charged to shareholders' equity........ (80.5) (32.7)
-------- --------
Balance, end of period...................................................... $1,429.9 $1,037.3
======== ========
</TABLE>
10
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
EARNINGS PER SHARE
A reconciliation of income 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,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in millions and shares in thousands)
<S> <C> <C> <C> <C>
Income:
Income (loss) before extraordinary charge............................. $297.5 $(287.7) $594.6 $(56.7)
Preferred stock dividends............................................. - 2.2 .6 4.2
------ ------- ------ ------
Income (loss) before extraordinary charge applicable to common
ownership for basic earnings per share............................ 297.5 (289.9) 594.0 (60.9)
Effect of dilutive securities:
Preferred stock dividends........................................... - - .6 -
------ ------- ------ ------
Income (loss) before extraordinary charge applicable to common ownership
and assumed conversions for diluted earnings per
share............................................................. $297.5 $(289.9) $594.6 $(60.9)
====== ======= ====== ======
Shares:
Weighted average shares outstanding for basic earnings per share...... 323,576 310,326 322,111 309,648
Effect of dilutive securities on weighted average shares:
Stock options....................................................... 2,552 - 3,100 -
Employee stock plans................................................ 2,031 - 2,018 -
Convertible securities.............................................. 3,042 - 3,926 -
------- ------- ------- -------
Dilutive potential common shares................................ 7,625 - 9,044 -
------- ------- ------- -------
Weighted average shares outstanding for diluted earnings
per share................................................. 331,201 310,326 331,155 309,648
======= ======= ======= =======
</TABLE>
There were no dilutive common stock equivalents during the 1998 periods
because of the net loss realized by the Company during such periods.
BUSINESS SEGMENTS
We manage our business operations through two segments: (i) finance;
and (ii) insurance and fee-based.
Finance. We provide a variety of finance products, including: consumer
loans for manufactured housing, home improvements, home equity and various
consumer products; private label credit card programs; and commercial loans such
as revolving credit agreements, asset-backed lending and equipment financing.
These products are marketed both direct to the borrower and through intermediary
channels such as dealers, vendors, contractors and retailers.
Insurance and fee-based. We provide supplemental health, annuity, life, and
individual and group major medical products to a broad spectrum of customers
through several distribution channels, including career agents, professional
independent producers and direct contact.
11
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Segment operating information was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance and fee-based segment:
Insurance policy income............................................ $1,020.0 $ 989.8 $2,027.4 $1,979.9
Net investment income.............................................. 560.0 505.0 1,082.0 1,088.3
Fee and other revenue.............................................. 33.7 26.0 62.4 46.8
Net investment gains (losses)...................................... (22.9) 12.3 (21.9) 117.1
-------- -------- -------- --------
Total insurance and fee-based segment revenues................... 1,590.8 1,533.1 3,149.9 3,232.1
-------- -------- -------- --------
Finance segment:
Net investment income.............................................. 153.9 95.2 283.2 178.7
Gain on sale of finance receivables................................ 226.0 127.6 425.8 271.3
Fee revenue and other income....................................... 87.6 62.1 170.2 120.7
-------- -------- -------- --------
Total finance segment revenues................................... 467.5 284.9 879.2 570.7
-------- -------- -------- --------
Eliminations......................................................... (4.8) (.8) (9.7) (.8)
-------- -------- -------- --------
Total revenues................................................. 2,053.5 1,817.2 4,019.4 3,802.0
-------- -------- -------- --------
Expenses:
Insurance and fee-based segment:
Insurance policy benefits.......................................... 920.5 886.6 1,810.2 1,841.0
Amortization....................................................... 152.4 147.7 303.0 351.2
Interest expense................................................... 16.6 18.2 28.4 37.1
Other operating costs and expenses................................. 163.9 155.5 317.8 316.7
-------- -------- -------- --------
Total insurance and fee-based segment expenses................... 1,253.4 1,208.0 2,459.4 2,546.0
-------- -------- -------- --------
Finance segment:
Interest expense................................................... 69.6 55.2 126.2 103.7
Other operating costs and expenses................................. 172.5 150.6 322.4 285.5
Impairment charge.................................................. - 549.4 - 549.4
Nonrecurring charges............................................... - 148.0 - 148.0
--------- -------- -------- --------
Total finance segment expenses................................... 242.1 903.2 448.6 1,086.6
-------- -------- -------- --------
Not allocated to segments:
Interest expense................................................... 44.1 36.3 91.2 75.3
Other operating cost and expenses.................................. 11.6 3.7 15.3 7.5
-------- -------- -------- --------
Total expenses not allocated to segments......................... 55.7 40.0 106.5 82.8
-------- -------- -------- --------
Eliminations......................................................... (4.8) (.8) (9.7) (.8)
-------- -------- -------- --------
Total expenses................................................. 1,546.4 2,150.4 3,004.8 3,714.6
-------- -------- -------- --------
Income (loss) before income taxes, minority interest and extraordinary
charge:
Insurance operations............................................... 337.4 325.1 690.5 686.1
Finance operations................................................. 225.4 (618.3) 430.6 (515.9)
Corporate interest and other expenses.............................. (55.7) (40.0) (106.5) (82.8)
-------- -------- -------- --------
Income (loss) before income taxes, minority interest and
extraordinary charge......................................... $ 507.1 $ (333.2) $1,014.6 $ 87.4
======== ======== ======== ========
</TABLE>
12
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
FINANCIAL INSTRUMENTS
Our equity-indexed annuity products provide a guaranteed base rate of
return and a higher potential return linked to the performance of the Standard &
Poor's 500 Index ("S&P 500 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 these products. The values of these options fluctuate in
relation to changes in policyholder account balances for these annuities. We
reflect changes in the value of these options in net investment income. During
the six months of 1999 and 1998, net investment income included $84.4 million
and $72.0 million, respectively, related to these changes. Such investment
income was substantially offset by increases to policyholder account balances.
The value of the S&P 500 Call Options was $165.1 million at June 30, 1999. We
classify such instruments as other invested assets. We defer the premiums paid
to purchase the S&P 500 Call Options and amortize them to investment income over
their terms. Such amortization was $43.4 million and $18.6 million during the
first six months of 1999 and 1998, respectively.
For investment purposes, we entered into various interest-rate swap
agreements having an aggregate notional principal amount of $2.0 billion at June
30, 1999. The agreements effectively exchange a fixed rate of interest on the
notional amount for a floating rate. The agreements mature in various years
through 2008 and have an average remaining life of 4.2 years (the average call
date is 2.2 years). We mark such agreements to market each quarter, with the
related gain (loss) classified as investment income in the consolidated
statement of operations. At June 30, 1999, our interest-rate swap agreements had
a fair value of $12.4 million.
If the counterparties of these financial instruments fail to 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, 1999, all of the counterparties were rated
"A" or higher by Standard & Poor's Corporation.
In conjunction with certain sales of finance receivables, we provided
guarantees aggregating approximately $1.7 billion at June 30, 1999. We believe
the likelihood of a significant loss from such guarantees is remote.
REINSURANCE
The cost of reinsurance ceded totaled $232.7 million and $276.8 million in
the first six months of 1999 and 1998, respectively. We deducted this cost from
insurance policy income. Conseco is contingently liable for claims reinsured if
the assuming company is unable to pay. Reinsurance recoveries netted against
insurance policy benefits totaled $229.1 million and $238.0 million in the first
six months of 1999 and 1998, respectively.
13
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CORPORATE NOTES PAYABLE AND COMMERCIAL PAPER
Corporate notes payable and commercial paper (together with interest rates
as of June 30, 1999) were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Commercial paper (5.39%)............................................................ $ 763.0 $ 784.4
Bank credit facilities (5.39%)...................................................... 86.6 372.3
Notes payable (5.6%)............................................................... 400.0 400.0
6.4% notes due 2001................................................................. 550.0 550.0
6.4% notes due 2003................................................................. 250.0 250.0
6.5% convertible subordinated notes due 2003........................................ 86.0 86.0
6.8% senior notes due 2005.......................................................... 250.0 250.0
7.6% senior notes due 2001.......................................................... 275.0 -
7.875% notes due 2000............................................................... 150.0 150.0
8.125% senior notes due 2003........................................................ 63.5 63.5
10.5% senior notes due 2004......................................................... 24.5 24.5
Other............................................................................... 12.1 13.5
-------- --------
Total principal amount......................................................... 2,910.7 2,944.2
Less unamortized net discount....................................................... 11.1 12.0
-------- --------
Total.......................................................................... $2,899.6 $2,932.2
======== ========
</TABLE>
Our current bank credit facilities allow us to borrow up to $2.5 billion,
of which $1.5 billion may be borrowed until 2003 and $1.0 billion may be
borrowed until September 1999. Actual borrowings at June 30, 1999, totaled
$1,250.0 million (of which $1,163.4 million was used to finance the funding of
finance receivables and is classified as finance notes payable - See "Changes in
Finance Notes Payable"). The credit facility requires us to maintain various
financial ratios, as defined in the agreement, including: (i) a debt-to-total
capitalization ratio less than .45:1 (such ratio was .36:1 at June 30, 1999);
and (ii) an interest coverage ratio greater than 2.0:1 during the period October
1, 1998 through September 30, 1999, greater than 2.25:1 for the period October
1, 1999 through September 30, 2001 and greater than 2.50:1 thereafter (such
ratio was 4.89:1 for the period ended June 30, 1999). Our unsecured bank credit
facilities are used to support our commercial paper program.
In June 1999, the Company issued $275.0 million of senior notes. Such notes
are due June 21, 2001 and bear interest at 7.6 percent. The net proceeds were
used to reduce amounts outstanding under our bank credit facilities and
commercial paper program.
Borrowings under our commercial paper program averaged approximately
$1,069.2 million during the first six months of 1999, at a weighted average
interest rate of 5.14 percent.
14
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CHANGES IN FINANCE NOTES PAYABLE
Notes payable (together with interest rates as of June 30, 1999) related to
our financing activities were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Bank credit facilities (5.39%)...................................................... $1,163.4 $ 877.7
Master repurchase agreements due on various dates in 1999
and 2000 (6.35%)................................................................. 1,009.1 780.6
Credit facility collateralized by retained interests in securitizations
due 2000 (7.16%)................................................................. 500.0 300.0
10.25% senior subordinated notes due 2002........................................... 193.6 194.0
Medium term notes due October 1999 to April 2003 (6.58%)............................ 238.7 238.7
Other............................................................................... 3.2 3.2
-------- --------
Total principal amount........................................................... 3,108.0 2,394.2
Less unamortized net discount....................................................... 4.3 4.9
-------- --------
Total............................................................................ $3,103.7 $2,389.3
======== ========
</TABLE>
As of June 30, 1999, we had $5.0 billion of master repurchase agreement
capacity (of which $1,009.1 million was outstanding at June 30, 1999) with
various investment banking firms, subject to the availability of eligible
collateral. The agreements generally provide for one-year terms, which can be
extended each quarter by mutual agreement of the parties for an additional year,
based upon the financial performance of our finance segment.
CHANGES IN PREFERRED STOCK
In February 1999, we redeemed all $105.5 million (carrying value) of
outstanding shares of Preferred Redeemable Increased Dividend Equity Securities,
7% PRIDES Convertible Preferred Stock ("PRIDES") in exchange for 5.9 million
shares of Conseco common stock.
CHANGES IN COMMON STOCK
Changes in the number of shares of common stock outstanding were as follows
(shares in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period................................................................... 315,844 310,012
Stock options exercised..................................................................... 4,718 6,389
Stock warrants exercised.................................................................... - 862
Issuance of shares.......................................................................... 3,115 -
Common shares converted from convertible subordinated debentures............................ - 540
Common shares converted from PRIDES......................................................... 5,904 573
Common stock acquired under option exercise and repurchase programs......................... (2,900) (5,989)
Shares issued under employee benefit and compensation plans................................. 50 674
Shares returned by former executive due to recomputation of bonus........................... - (698)
------- -------
Balance, end of period......................................................................... 326,731 312,363
======= =======
</TABLE>
15
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
On June 30, 1999, we sold 3.1 million shares of our common stock to an
unaffiliated party (the "Buyer") at the then-current market value of $29.0625
per share. Proceeds from the sale of $89.4 million (net of issuance costs of
$1.1 million) were used to repay certain indebtedness of the Company.
Simultaneous with the issuance of the common stock, we entered into a forward
transaction with the Buyer to be settled at $29.0625 per share on or before
December 15, 1999, in a method of our choosing (i.e., we may select cash
settlement, transfer of net shares to or from the Buyer, or transfer of net cash
to or from the Buyer). In the interim, we will make payments to the Buyer
equivalent to a total fixed return of LIBOR plus 65 basis points for the length
of time the forward transaction is outstanding.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, ("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 to
be recorded each period either in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, on the type of hedge transaction. We are required to
implement the provisions of SFAS 133 for the year 2001. We are currently
evaluating the impact of SFAS 133. At present, we believe it will not have a
material effect on either our consolidated financial position or our results of
operations.
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 as purported class actions on behalf of persons or entities
who purchased common stock or options 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 have obtained an order
from the United States District Court for the District of Minnesota
consolidating the lawsuits seeking class action status into two actions: one
which pertains to a purported class of common stockholders and the other which
pertains to a purported class of stock option traders. 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
ultimate outcome of these lawsuits cannot be predicted with certainty. Green
Tree has filed motions, which are pending, to dismiss these lawsuits.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in lawsuits related to their operations. Although the ultimate outcome of
certain of such matters cannot be predicted, such lawsuits currently pending
against the Company or its subsidiaries are not 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.
16
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
The following disclosures supplement our consolidated statement of cash
flows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Non-cash items not reflected in the consolidated statement of cash flows:
Issuance of common stock under stock option and employee benefit plans........................ $ 2.1 $ 3.3
Tax benefit related to the issuance of common stock under employee benefit plans.............. 24.4 41.8
Conversion of debt and preferred stock into common stock...................................... 105.5 26.5
Shares returned by former executive due to recomputation of bonus............................. - 23.4
Issuance of stock warrants in conjunction with financing transaction.......................... - 7.7
</TABLE>
17
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
--------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO, INC.
Dated: September 10, 1999 By: /s/ ROLLIN M. DICK
------------------
Rollin M. Dick
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
18
